UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 20172018

Commission File Number 1-8787

 

 

 

American International Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

13-2592361

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

175 Water Street, New York, New York

10038

(Address of principal executive offices)

(Zip Code)

 

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

________________

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

(Do not check if a

smaller reporting company)

 

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

 

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

 

As of October 30, 2017,29, 2018, there were 898,959,371884,648,470 shares outstanding of the registrant’s common stock.

  

 

 


 

AMERICAN INTERNATIONAL GROUP, INC.

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

September 30, 20172018

Table of Contents

FORM 10-Q

 

Item Number
Description
Page
Part I — Financial Information
 

ITEM 1

Condensed Consolidated Financial Statements

2

 

Note 1.

Basis of Presentation

79

 

Note 2.

Summary of Significant Accounting Policies

810

 

Note 3.

Segment Information

1114

 

Note 4.4

Held-for-Sale ClassificationBusiness Combination

1317

 

Note 5.

Fair Value Measurements

1418

 

Note 6.

Investments

3236

 

Note 7.

Lending Activities

4145

 

Note 8.

Variable Interest Entities

4347

 

Note 9.

Derivatives and Hedge Accounting

4448

 

Note 10.

Insurance Liabilities

4953

 

Note 11.

Contingencies, Commitments and Guarantees

5256

 

Note 12.

Equity

5558

 

Note 13.

Earnings Per Share

5963

 

Note 14.  

Employee Benefits

6064

 

Note 15.

Income Taxes

6165

 

Note 16.

Information Provided in Connection with Outstanding Debt and Preference Shares

6470

 

Note 17.

Subsequent Events

6976

ITEM 2

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

  

 

Operations

7077

 

·        Cautionary Statement Regarding Forward-Looking Information

7077

 

·        Use of Non-GAAP Measures

7380

 

·        Critical Accounting Estimates

7582

 

·        Executive Summary

7683

 

·        Consolidated Results of Operations

8793

 

·        Business Segment Operations

92100

 

·        Investments

131136

 

·        Insurance Reserves

144149

 

·        Liquidity and Capital Resources

156163

 

·        Enterprise Risk Management

168175

 

·        Regulatory Environment

173182

 

·        Glossary

180183

 

·        Acronyms

183186

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

184187

ITEM 4

Controls and Procedures

184187

Part II — Other Information
 

ITEM 1

Legal Proceedings

185188

ITEM 1A

Risk Factors

185188

ITEM 2

Unregistered Sales of Equity Securities and Use of Proceeds

185188

ITEM 4

Mine Safety Disclosures

185188

ITEM 5

Other Information

189

ITEM 6

Exhibits

186190

Signatures
187191

AIG | Third Quarter 20172018 Form 10-Q          1


TABLE OF CONTENTS 

 

 

 

Part I – Financial Information

Item 1. | Financial Statements

American International Group, Inc.

Condensed Consolidated Balance Sheets (unaudited)

September 30,

December 31,

September 30,

December 31,

(in millions, except for share data)

 

2017

 

2016

 

2018

 

2017

Assets:

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

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

$

237,771

$

241,537

Bonds available for sale, at fair value (amortized cost: 2018 - $228,047; 2017 - $225,461)

$

232,720

$

238,992

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

 

12,653

 

13,998

 

11,420

 

12,772

Equity Securities:

 

 

 

 

 

 

 

 

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

 

1,707

 

2,078

Common and preferred stock available for sale, at fair value (cost: 2017 - $1,305)

 

-

 

1,708

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

 

538

 

482

 

1,443

 

589

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

 

36,089

 

33,240

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

 

22,590

 

24,538

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

 

9,775

 

12,302

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

 

41,878

 

37,023

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

 

19,739

 

20,822

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

 

 

 

 

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

 

8,863

 

10,386

Total investments

 

321,123

 

328,175

 

316,063

 

322,292

 

 

 

 

 

 

 

 

Cash

 

2,433

 

1,868

 

2,741

 

2,362

Accrued investment income

 

2,416

 

2,495

 

2,524

 

2,356

Premiums and other receivables, net of allowance

 

11,156

 

10,465

 

12,238

 

10,248

Reinsurance assets, net of allowance

 

34,429

 

21,901

 

37,178

 

33,024

Deferred income taxes

 

20,954

 

21,332

 

15,088

 

14,033

Deferred policy acquisition costs

 

10,938

 

11,042

 

12,683

 

10,994

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

 

 

 

 

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

 

10,324

 

10,815

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

 

 

 

 

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

 

13,300

 

10,194

Separate account assets, at fair value

 

89,300

 

82,972

 

93,045

 

92,798

Assets held for sale

 

-

 

7,199

Total assets

$

503,073

$

498,264

$

504,860

$

498,301

Liabilities:

 

 

 

 

 

 

 

 

Liability for unpaid losses and loss adjustment expenses

$

80,087

$

77,077

$

81,959

$

78,393

Unearned premiums

 

20,135

 

19,634

 

20,829

 

19,030

Future policy benefits for life and accident and health insurance contracts

 

44,055

 

42,204

 

44,374

 

45,432

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

 

134,514

 

132,216

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

 

3,678

 

3,989

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

 

27,253

 

26,296

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

 

31,039

 

30,912

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

 

140,491

 

135,602

Other policyholder funds

 

3,738

 

3,648

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

 

26,653

 

26,050

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

 

34,594

 

31,640

Separate account liabilities

 

89,300

 

82,972

 

93,045

 

92,798

Liabilities held for sale

 

-

 

6,106

Total liabilities

 

430,061

 

421,406

 

445,683

 

432,593

Contingencies, commitments and guarantees (See Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIG shareholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

2016 - 1,906,671,492

 

4,766

 

4,766

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

 

(47,602)

 

(41,471)

Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2018 - 1,906,671,492 and

 

 

 

 

2017 - 1,906,671,492

 

4,766

 

4,766

Treasury stock, at cost; 2018 - 1,022,023,965 shares; 2017 - 1,007,626,835 shares of common stock

 

(48,401)

 

(47,595)

Additional paid-in capital

 

80,976

 

81,064

 

81,008

 

81,078

Retained earnings

 

28,389

 

28,711

 

21,749

 

21,457

Accumulated other comprehensive income

 

5,939

 

3,230

Accumulated other comprehensive income (loss)

 

(536)

 

5,465

Total AIG shareholders’ equity

 

72,468

 

76,300

 

58,586

 

65,171

Non-redeemable noncontrolling interests

 

544

 

558

 

591

 

537

Total equity

 

73,012

 

76,858

 

59,177

 

65,708

Total liabilities and equity

$

503,073

$

498,264

$

504,860

$

498,301

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

2AIG | Third Quarter 20172018 Form 10-Q2 


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Income (Loss) (unaudited)

 

Three Months Ended

 

Nine Months Ended

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

(dollars in millions, except per share data)

 

 

2017

 

2016

 

 

2017

 

2016

 

 

2018

 

2017

 

 

2018

 

2017

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

 

$

8,063

 

$

8,581

 

$

23,459

 

$

26,138

 

$

7,668

 

$

8,063

 

$

22,150

 

$

23,459

Policy fees

 

 

728

 

 

646

 

 

2,177

 

 

2,029

 

 

530

 

 

728

 

 

2,057

 

 

2,177

Net investment income

 

 

3,416

 

 

3,783

 

 

10,715

 

 

10,479

 

 

3,396

 

 

3,416

 

 

9,722

 

 

10,715

Net realized capital losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(66)

 

 

(58)

 

 

(138)

 

 

(332)

 

 

(13)

 

 

(66)

 

 

(116)

 

 

(138)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

fixed maturity securities recognized in Other comprehensive income

 

 

(8)

 

 

(14)

 

 

(57)

 

 

(36)

fixed maturity securities recognized in Other comprehensive income (loss)

 

 

(22)

 

 

(8)

 

 

(42)

 

 

(57)

Net other-than-temporary impairments on available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities recognized in net income (loss)

 

 

(74)

 

 

(72)

 

 

(195)

 

 

(368)

 

 

(35)

 

 

(74)

 

 

(158)

 

 

(195)

Other realized capital losses

 

 

(848)

 

 

(693)

 

 

(911)

 

 

(461)

 

 

(476)

 

 

(848)

 

 

(207)

 

 

(911)

Total net realized capital losses

 

 

(922)

 

 

(765)

 

 

(1,106)

 

 

(829)

 

 

(511)

 

 

(922)

 

 

(365)

 

 

(1,106)

Other income

 

 

466

 

 

609

 

 

1,640

 

 

1,540

 

 

403

 

 

466

 

 

1,265

 

 

1,640

Total revenues

 

 

11,751

 

 

12,854

 

 

36,885

 

 

39,357

 

 

11,486

 

 

11,751

 

 

34,829

 

 

36,885

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

 

10,322

 

 

7,489

 

 

22,653

 

 

20,748

 

 

8,312

 

 

10,322

 

 

19,484

 

 

22,653

Interest credited to policyholder account balances

 

 

867

 

 

887

 

 

2,683

 

 

2,798

 

 

933

 

 

867

 

 

2,784

 

 

2,683

Amortization of deferred policy acquisition costs

 

 

912

 

 

1,018

 

 

3,135

 

 

3,625

 

 

1,118

 

 

912

 

 

3,813

 

 

3,135

General operating and other expenses

 

 

2,149

 

 

2,536

 

 

6,774

 

 

8,125

 

 

2,325

 

 

2,149

 

 

6,919

 

 

6,774

Interest expense

 

 

290

 

 

329

 

 

880

 

 

955

 

 

326

 

 

290

 

 

902

 

 

880

(Gain) loss on extinguishment of debt

 

 

1

 

 

(14)

 

 

(4)

 

 

76

 

 

1

 

 

1

 

 

10

 

 

(4)

Net (gain) loss on sale of divested businesses

 

 

13

 

 

(128)

 

 

173

 

 

(351)

 

 

(2)

 

 

13

 

 

(35)

 

 

173

Total benefits, losses and expenses

 

 

14,554

 

 

12,117

 

 

36,294

 

 

35,976

 

 

13,013

 

 

14,554

 

 

33,877

 

 

36,294

Income (loss) from continuing operations before

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income tax expense (benefit)

 

(2,803)

 

 

737

 

 

591

 

 

3,381

 

(1,527)

 

 

(2,803)

 

 

952

 

 

591

Income tax expense (benefit)

 

 

(1,091)

 

 

304

 

 

(18)

 

 

1,170

 

 

(307)

 

 

(1,091)

 

 

291

 

 

(18)

Income (loss) from continuing operations

 

 

(1,712)

 

 

433

 

 

609

 

 

2,211

 

 

(1,220)

 

 

(1,712)

 

 

661

 

 

609

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

 

(1)

 

 

3

 

 

7

 

 

(54)

 

(39)

 

 

(1)

 

 

(40)

 

 

7

Net income (loss)

 

 

(1,713)

 

 

436

 

 

616

 

 

2,157

 

 

(1,259)

 

 

(1,713)

 

 

621

 

 

616

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

26

 

 

(26)

 

 

40

 

 

(35)

 

-

 

 

26

 

 

5

 

 

40

Net income (loss) attributable to AIG

 

$

(1,739)

 

$

462

 

$

576

 

$

2,192

 

$

(1,259)

 

$

(1,739)

 

$

616

 

$

576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(1.91)

 

$

0.43

 

$

0.60

 

$

2.02

 

$

(1.37)

 

$

(1.91)

 

$

0.72

 

$

0.60

Income (loss) from discontinued operations

 

$

-

 

$

-

 

$

0.01

 

$

(0.05)

 

$

(0.04)

 

$

-

 

$

(0.04)

 

$

0.01

Net income (loss) attributable to AIG

 

$

(1.91)

 

$

0.43

 

$

0.61

 

$

1.97

 

$

(1.41)

 

$

(1.91)

 

$

0.68

 

$

0.61

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(1.91)

 

$

0.42

 

$

0.59

 

$

1.97

 

$

(1.37)

 

$

(1.91)

 

$

0.71

 

$

0.59

Income (loss) from discontinued operations

 

$

-

 

$

-

 

$

0.01

 

$

(0.05)

 

$

(0.04)

 

$

-

 

$

(0.04)

 

$

0.01

Net income (loss) attributable to AIG

 

$

(1.91)

 

$

0.42

 

$

0.60

 

$

1.92

 

$

(1.41)

 

$

(1.91)

 

$

0.67

 

$

0.60

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

908,667,044

 

1,071,295,892

 

 

938,130,832

 

1,113,650,878

 

 

895,237,359

 

908,667,044

 

 

902,081,555

 

938,130,832

Diluted

 

 

908,667,044

 

1,102,400,770

 

 

961,295,946

 

1,142,700,207

 

 

895,237,359

 

908,667,044

 

 

916,818,269

 

961,295,946

Dividends declared per common share

 

$

0.32

 

$

0.32

 

$

0.96

 

$

0.96

 

$

0.32

 

$

0.32

 

$

0.96

 

$

0.96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

 

 

AIG | Third Quarter 20172018 Form 10-Q          3


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

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

 

Three Months Ended

 

Nine Months Ended

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

September 30,

 

September 30,

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

2018

 

 

2017

 

 

2018

 

 

2017

Net income (loss)

 

$

(1,713)

 

$

436

 

$

616

 

$

2,157

 

$

(1,259)

 

$

(1,713)

 

$

621

 

$

616

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

which other-than-temporary credit impairments were taken

 

 

97

 

 

217

 

 

330

 

 

(110)

 

 

107

 

 

97

 

 

(1,089)

 

 

330

Change in unrealized appreciation of all other investments

 

 

492

 

 

466

 

 

1,840

 

 

6,302

Change in unrealized appreciation (depreciation) of all other investments

 

 

(758)

 

 

492

 

 

(4,222)

 

 

1,840

Change in foreign currency translation adjustments

 

 

325

 

 

111

 

 

447

 

 

332

 

 

(129)

 

 

325

 

 

(181)

 

 

447

Change in retirement plan liabilities adjustment

 

 

63

 

 

4

 

 

92

 

 

(4)

 

 

14

 

 

63

 

 

66

 

 

92

Other comprehensive income

 

 

977

 

 

798

 

 

2,709

 

 

6,520

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

 

 

 

 

 

 

 

 

 

 

 

 

own credit risk

 

 

-

 

 

-

 

 

1

 

 

-

Other comprehensive income (loss)

 

 

(766)

 

 

977

 

 

(5,425)

 

 

2,709

Comprehensive income (loss)

 

 

(736)

 

 

1,234

 

 

3,325

 

 

8,677

 

 

(2,025)

 

 

(736)

 

 

(4,804)

 

 

3,325

Comprehensive income (loss) attributable to noncontrolling interests

 

 

26

 

 

(26)

 

 

40

 

 

(35)

Comprehensive income attributable to noncontrolling interests

 

 

-

 

 

26

 

 

5

 

 

40

Comprehensive income (loss) attributable to AIG

 

$

(762)

 

$

1,260

 

$

3,285

 

$

8,712

 

$

(2,025)

 

$

(762)

 

$

(4,809)

 

$

3,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

4AIG | Third Quarter 20172018 Form 10-Q4 


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

Condensed Consolidated Statements of Equity (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total AIG

 

redeemable

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Share-

 

Non-

 

 

 

 

Common

 

Treasury

 

Paid-in

 

Retained

Comprehensive

 

holders'

 

controlling

 

Total

(in millions)

 

Stock

 

Stock

 

Capital

 

Earnings

 

Income

 

Equity

 

Interests

 

Equity

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(41,471)

$

81,064

$

28,711

$

3,230

$

76,300

$

558

$

76,858

Common stock issued under stock plans

 

-

 

140

 

(304)

 

-

 

-

 

(164)

 

-

 

(164)

Purchase of common stock

 

-

 

(6,275)

 

-

 

-

 

-

 

(6,275)

 

-

 

(6,275)

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

576

 

-

 

576

 

40

 

616

Dividends

 

-

 

-

 

-

 

(884)

 

-

 

(884)

 

-

 

(884)

Other comprehensive income

 

-

 

-

 

-

 

-

 

2,709

 

2,709

 

-

 

2,709

Current and deferred income taxes

 

-

 

-

 

(4)

 

-

 

-

 

(4)

 

-

 

(4)

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

78

 

78

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

13

 

13

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(131)

 

(131)

Other

 

-

 

4

 

220

 

(14)

 

-

 

210

 

(14)

 

196

Balance, end of period

$

4,766

$

(47,602)

$

80,976

$

28,389

$

5,939

$

72,468

$

544

$

73,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(30,098)

$

81,510

$

30,943

$

2,537

$

89,658

$

552

$

90,210

Common stock issued under stock plans

 

-

 

86

 

(173)

 

-

 

-

 

(87)

 

-

 

(87)

Purchase of common stock

 

-

 

(8,506)

 

-

 

-

 

-

 

(8,506)

 

-

 

(8,506)

Net income (loss) attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

2,192

 

-

 

2,192

 

(35)

 

2,157

Dividends

 

-

 

-

 

-

 

(1,051)

 

-

 

(1,051)

 

-

 

(1,051)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

6,520

 

6,520

 

-

 

6,520

Current and deferred income taxes

 

-

 

-

 

19

 

-

 

-

 

19

 

-

 

19

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

9

 

9

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

4

 

4

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(31)

 

(31)

Other

 

-

 

-

 

(75)

 

(7)

 

-

 

(82)

 

3

 

(79)

Balance, end of period

$

4,766

$

(38,518)

$

81,281

$

32,077

$

9,057

$

88,663

$

502

$

89,165

See accompanying Notes to Condensed Consolidated Financial Statements.(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total AIG

 

redeemable

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Share-

 

Non-

 

 

 

 

Common

 

Treasury

 

Paid-in

 

Retained

Comprehensive

 

holders'

 

controlling

 

Total

(in millions)

 

Stock

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Equity

 

Interests

 

Equity

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

$

4,766

$

(48,052)

$

80,924

$

23,318

$

230

$

61,186

$

611

$

61,797

Cumulative effect of change in accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

principle, net of tax

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Common stock issued under stock plans

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Purchase of common stock

 

-

 

(348)

 

-

 

-

 

-

 

(348)

 

-

 

(348)

Net income (loss) attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

(1,259)

 

-

 

(1,259)

 

-

 

(1,259)

Dividends

 

-

 

-

 

-

 

(283)

 

-

 

(283)

 

-

 

(283)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

(766)

 

(766)

 

-

 

(766)

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

1

 

1

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

18

 

18

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(38)

 

(38)

Other

 

-

 

(1)

 

84

 

(27)

 

-

 

56

 

(1)

 

55

Balance, end of period

$

4,766

$

(48,401)

$

81,008

$

21,749

$

(536)

$

58,586

$

591

$

59,177

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(47,595)

$

81,078

$

21,457

$

5,465

$

65,171

$

537

$

65,708

Cumulative effect of change in accounting

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

principle, net of tax

 

-

 

-

 

-

 

568

 

(576)

 

(8)

 

-

 

(8)

Common stock issued under stock plans

 

-

 

187

 

(337)

 

-

 

-

 

(150)

 

-

 

(150)

Purchase of common stock

 

-

 

(994)

 

-

 

-

 

-

 

(994)

 

-

 

(994)

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

616

 

-

 

616

 

5

 

621

Dividends

 

-

 

-

 

-

 

(858)

 

-

 

(858)

 

-

 

(858)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

(5,425)

 

(5,425)

 

-

 

(5,425)

Current and deferred income taxes

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

99

 

99

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

21

 

21

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(65)

 

(65)

Other

 

-

 

1

 

267

 

(34)

 

-

 

234

 

(6)

 

228

Balance, end of period

$

4,766

$

(48,401)

$

81,008

$

21,749

$

(536)

$

58,586

$

591

$

59,177

AIG | Third Quarter 20172018 Form 10-Q          5


TABLE OF CONTENTS 

 

 

 

American International Group, Inc.

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

 

Nine Months Ended September 30,

(in millions)

 

2017

 

2016

Cash flows from operating activities:

 

 

 

 

Net income

$

616

$

2,157

(Income) loss from discontinued operations

 

(7)

 

54

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

 

 

 

 

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

 

 

 

 

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

 

(404)

 

(1,125)

Net (gain) loss on sale of divested businesses

 

173

 

(351)

(Gains) losses on extinguishment of debt

 

(4)

 

76

Unrealized losses in earnings - net

 

251

 

1,396

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

 

(338)

 

50

Depreciation and other amortization

 

2,806

 

2,814

Impairments of assets

 

669

 

872

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

4,448

 

700

Premiums and other receivables and payables - net

 

300

 

347

Reinsurance assets and funds held under reinsurance treaties

 

(12,705)

 

(1,234)

Capitalization of deferred policy acquisition costs

 

(3,593)

 

(3,598)

Current and deferred income taxes - net

 

(508)

 

962

Other, net

 

(899)

 

(1,367)

Total adjustments

 

(9,804)

 

(458)

Net cash provided by (used in) operating activities

 

(9,195)

 

1,753

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale securities

 

27,733

 

22,077

Other securities

 

2,647

 

3,367

Other invested assets

 

4,396

 

5,255

Divested businesses, net

 

605

 

-

Maturities of fixed maturity securities available for sale

 

22,126

 

18,210

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

 

3,932

 

4,435

Purchases of:

 

 

 

 

Available for sale securities

 

(38,717)

 

(42,572)

Other securities

 

(355)

 

(557)

Other invested assets

 

(2,359)

 

(2,472)

Mortgage and other loans receivable

 

(6,517)

 

(7,784)

Net change in restricted cash

 

(23)

 

(49)

Net change in short-term investments

 

2,815

 

(855)

Other, net

 

(1,509)

 

1,270

Net cash provided by investing activities

 

14,774

 

325

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

13,164

 

13,584

Policyholder contract withdrawals

 

(11,363)

 

(9,986)

Issuance of long-term debt

 

2,405

 

11,430

Repayments of long-term debt

 

(2,751)

 

(7,683)

Purchase of common stock

 

(6,275)

 

(8,506)

Dividends paid

 

(884)

 

(1,051)

Other, net

 

578

 

915

Net cash used in financing activities

 

(5,126)

 

(1,297)

Effect of exchange rate changes on cash

 

(21)

 

88

Net increase in cash

 

432

 

869

Cash at beginning of year

 

1,868

 

1,629

Change in cash of businesses held for sale

 

133

 

-

Cash at end of period

$

2,433

$

2,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total AIG

 

redeemable

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Share-

 

Non-

 

 

 

 

Common

 

Treasury

 

Paid-in

 

Retained

Comprehensive

 

holders'

 

controlling

 

Total

(in millions)

 

Stock

 

Stock

 

Capital

 

Earnings

 

Income

 

Equity

 

Interests

 

Equity

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

$

4,766

$

(47,329)

$

80,913

$

30,420

$

4,962

$

73,732

$

592

$

74,324

Common stock issued under stock plans

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Purchase of common stock

 

-

 

(275)

 

-

 

-

 

-

 

(275)

 

-

 

(275)

Net income (loss) attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

(1,739)

 

-

 

(1,739)

 

26

 

(1,713)

Dividends

 

-

 

-

 

-

 

(287)

 

-

 

(287)

 

-

 

(287)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

977

 

977

 

-

 

977

Current and deferred income taxes

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

32

 

32

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(1)

 

(1)

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(49)

 

(49)

Other

 

-

 

2

 

63

 

(5)

 

-

 

60

 

(56)

 

4

Balance, end of period

$

4,766

$

(47,602)

$

80,976

$

28,389

$

5,939

$

72,468

$

544

$

73,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of year

$

4,766

$

(41,471)

$

81,064

$

28,711

$

3,230

$

76,300

$

558

$

76,858

Common stock issued under stock plans

 

-

 

140

 

(304)

 

-

 

-

 

(164)

 

-

 

(164)

Purchase of common stock

 

-

 

(6,275)

 

-

 

-

 

-

 

(6,275)

 

-

 

(6,275)

Net income attributable to AIG or

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

576

 

-

 

576

 

40

 

616

Dividends

 

-

 

-

 

-

 

(884)

 

-

 

(884)

 

-

 

(884)

Other comprehensive income (loss)

 

-

 

-

 

-

 

-

 

2,709

 

2,709

 

-

 

2,709

Current and deferred income taxes

 

-

 

-

 

(4)

 

-

 

-

 

(4)

 

-

 

(4)

Net increase due to acquisitions and consolidations

 

-

 

-

 

-

 

-

 

-

 

-

 

78

 

78

Contributions from noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

13

 

13

Distributions to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

(131)

 

(131)

Other

 

-

 

4

 

220

 

(14)

 

-

 

210

 

(14)

 

196

Balance, end of period

$

4,766

$

(47,602)

$

80,976

$

28,389

$

5,939

$

72,468

$

544

$

73,012

 

 

 

 

 

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

1,046

$

1,009

Taxes

$

490

$

208

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

2,494

$

2,691

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

6AIG | Third Quarter 20172018 Form 10-Q6 


TABLE OF CONTENTS

American International Group, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)

 

Nine Months Ended September 30,

(in millions)

 

2018

 

2017

Cash flows from operating activities:

 

 

 

 

Net income

$

621

$

616

(Income) loss from discontinued operations

 

40

 

(7)

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

 

 

 

 

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

 

 

 

 

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

 

(71)

 

(404)

Net (gain) loss on sale of divested businesses

 

(35)

 

173

(Gains) losses on extinguishment of debt

 

10

 

(4)

Unrealized losses in earnings - net

 

601

 

251

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

 

141

 

(16)

Depreciation and other amortization

 

3,813

 

2,806

Impairments of assets

 

269

 

669

Changes in operating assets and liabilities:

 

 

 

 

Insurance reserves

 

96

 

4,448

Premiums and other receivables and payables - net

 

968

 

300

Reinsurance assets and funds held under reinsurance treaties

 

(2,057)

 

(12,705)

Capitalization of deferred policy acquisition costs

 

(4,366)

 

(3,593)

Current and deferred income taxes - net

 

224

 

(508)

Other, net

 

(292)

 

(888)

Total adjustments

 

(699)

 

(9,471)

Net cash used in operating activities

 

(38)

 

(8,862)

Cash flows from investing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Sales or distributions of:

 

 

 

 

Available for sale securities

 

18,103

 

27,733

Other securities

 

3,258

 

2,647

Other invested assets

 

3,799

 

4,074

Divested businesses, net

 

10

 

605

Maturities of fixed maturity securities available for sale

 

18,305

 

22,126

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

 

3,068

 

3,932

Purchases of:

 

 

 

 

Available for sale securities

 

(32,807)

 

(38,717)

Other securities

 

(940)

 

(355)

Other invested assets

 

(2,263)

 

(2,359)

Mortgage and other loans receivable

 

(7,918)

 

(6,517)

Acquisition of businesses, net of cash and restricted cash acquired

 

(5,052)

 

-

Net change in short-term investments

 

2,411

 

2,815

Other, net

 

(891)

 

(1,509)

Net cash provided by (used in) investing activities

 

(917)

 

14,475

Cash flows from financing activities:

 

 

 

 

Proceeds from (payments for)

 

 

 

 

Policyholder contract deposits

 

18,150

 

13,164

Policyholder contract withdrawals

 

(13,004)

 

(11,363)

Issuance of long-term debt

 

4,059

 

2,405

Repayments of long-term debt

 

(2,788)

 

(2,751)

Purchase of common stock

 

(994)

 

(6,275)

Dividends paid

 

(858)

 

(884)

Other, net

 

(3,232)

 

578

Net cash provided by (used in) financing activities

 

1,333

 

(5,126)

Effect of exchange rate changes on cash and restricted cash

 

8

 

(22)

Net increase in cash and restricted cash

 

386

 

465

Cash and restricted cash at beginning of year

 

2,737

 

2,107

Change in cash of businesses held for sale

 

-

 

133

Cash and restricted cash at end of period

$

3,123

$

2,705

AIG | Third Quarter 2018 Form 10-Q7


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American International Group, Inc.

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

Supplementary Disclosure of Condensed Consolidated Cash Flow Information

 

Nine Months Ended September 30,

 

 

2018

 

2017

Cash

$

2,741

$

2,433

Restricted cash included in Short-term investments*

 

28

 

53

Restricted cash included in Other assets*

 

354

 

219

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

$

3,123

$

2,705

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

1,018

$

1,046

Taxes

$

67

$

490

Non-cash investing/financing activities:

 

 

 

 

Interest credited to policyholder contract deposits included in financing activities

$

2,525

$

2,494

 

 

 

 

 

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

See accompanying Notes to Condensed Consolidated Financial Statements.

8AIG | Third Quarter 2018 Form 10-Q


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

 

1. Basis of Presentation

American International Group, Inc. (AIG) is a leading global insurance organization serving customers in more than 80 countries and jurisdictions. AIG companies serve commercial and individual customers through one of the most extensive worldwide property‑casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG Common Stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange (NYSE: AIG) and the Tokyo Stock Exchange. Unless the context indicates otherwise, the terms “AIG,” “we,” “us” or “our” mean American International Group, Inc. and its consolidated subsidiaries and the term “AIG Parent” means American International Group, Inc. and not any of its consolidated subsidiaries.

These unaudited Condensed Consolidated Financial Statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) and should be read in conjunction with the audited Consolidated Financial Statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 20162017 (the 20162017 Annual Report). The condensed consolidated financial information as of December 31, 20162017 included herein has been derived from the audited Consolidated Financial Statements in the 20162017 Annual Report.

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

Interim-period operating results may not be indicative of the operating results for a full year. We evaluated the need to recognize or disclose events that occurred subsequent to September 30, 20172018 and prior to the issuance of these Condensed Consolidated Financial Statements.

Use of Estimates

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

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

reinsurance assets;

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

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

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

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

allowances for loan losses;

liability for legal contingencies;

fair value measurements of certain financial assets and liabilities; and

income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset;asset and provisional estimates associated with the Tax Act.

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

reinsurance assets;

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

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

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

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

liability for legal contingencies; and

fair value measurements of certain financial assets and liabilities.

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

AIG | Third Quarter 20172018 Form 10-Q          79


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ITEM 1 |  Notes to Condensed Consolidated Financial Statements (unaudited) |  2. Summary of Significant Accounting Policies1. Basis of Presentation

 

Acquisition of Validus

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

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

OUT OF PERIOD ADJUSTMENTS

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

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

2. Summary of Significant Accounting Policies

Accounting Standards Adopted During 2017

Derivative Contract Novations

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

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

Contingent Put and Call Options in Debt Instruments

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

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

Simplifying the Transition to the Equity Method of Accounting

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

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

Interest Held through Related Parties that are under Common Control

In October 2016, the FASB issued an accounting standard that amends the consolidation analysis for a reporting entity that is the single decision maker of a variable interest entity (VIE).  The new guidance will require the decision maker’s evaluation of its interests held through related parties that are under common control on a proportionate basis (rather than in their entirety) when determining whether it is the primary beneficiary of that VIE.  The amendment does not change the characteristics of a primary beneficiary.

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

Future Application of Accounting Standards2018

Revenue Recognition

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

We have developed an implementation plan to adopt thisadopted the standard using the modified retrospective approach on its required effective date of January 1, 2018.  Our analysis of revenues indicatesindicated that substantially all of our revenues arewere from sources excluded from the scope of the standard.  For those revenue sources within the scope of the standard, we do not expectthere were no material changes in the timing or measurement of revenues based upon our current interpretation of the guidance.  We continue to refine our assessment of the impacts this standard is expected to have on our applicable revenue sources, financial statements and related disclosures.  However, asAs substantially all of our revenue sources arewere excluded from the scope of the standard, we do not expect the adoption of the standard todid not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosuresdisclosures.

AIG | Third Quarter 2017 Form 10-Q8


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

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued an accounting standard that will requirerequires equity investments that do not follow the equity method of accounting or are not subject to consolidation to be measured at fair value with changes in fair value recognized in earnings, while financial liabilities for which fair value option accounting has been elected, changes in fair value due to instrument-specific credit risk will beare presented separately in other comprehensive income. The standard allows the election to record equity investments without readily determinable fair values at cost, less impairment, adjusted for subsequent observable price changes with changes in the carrying value of the equity investments recorded in earnings. The standard also updates certain fair value disclosure requirements for financial instruments carried at amortized cost.

We will adoptadopted the standard on its effective date of January 1, 2018 using the modified retrospective approach. The impact of the adoption is primarily related to the reclassification of unrealized gains of equity securities resulting in a net decrease to beginning Accumulated other comprehensive income and a corresponding net increase to beginning Retained earnings of $824 million.   

Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued an accounting standard that addresses diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide clarity on the treatment of eight specifically defined types of cash inflows and outflows.

We adopted the standard retrospectively on its effective date of January 1, 2018. The standard addresses presentation in the statement of cash flows only and did not have a material impact on our reported consolidated financial condition, results of operations or required disclosures.  

10AIG | Third Quarter 2018 Form 10-Q


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

Intra-Entity Transfers of Assets Other than Inventory

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

We adopted the standard on its effective date of January 1, 2018 using a modified retrospective approach.  The adoption of this standard did not have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Restricted Cash

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

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

Gains and Losses from the Derecognition of Nonfinancial Assets

In February 2017, the FASB issued an accounting standard that clarifies the scope of the derecognition guidance for the sale, transfer and derecognition of non-financial assets to noncustomers that aligns with the new revenue recognition principles.  The standard also adds new accounting for partial sales of nonfinancial assets (including real estate) that requires an entity to derecognize a nonfinancial asset when it 1) ceases to have a controlling financial interest in the legal entity that holds the asset based on the consolidation model and 2) transfers control of the asset based on the revenue recognition model.

We adopted this standard on its effective date of January 1, 2018 under the modified retrospective approach. Based on our evaluation, the standard did not have a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Improving the Presentation of Net Periodic Pension and Postretirement Benefit Cost

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

We adopted this standard on its effective date of January 1, 2018. Based on our initial review, substantially all of our assets and liabilities are not withinThe standard primarily addresses the scopepresentation of the standard. We do not expectservice cost component of net periodic benefit costs in the adoption ofincome statement. AIG’s U.S. pension plans are frozen and no longer accrue benefits, which are reflected as service costs. Therefore, the standard todid not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Modification of Share-Based Payment Awards

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

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

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued an accounting standard that allows the optional reclassification of stranded tax effects within accumulated other comprehensive income to retained earnings that arise due to the enactment of the Tax Cuts and Jobs Act of 2017 (Tax Act). The amount of the reclassification would reflect the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Tax Act and other income tax effects of the Tax Act on items remaining in accumulated other comprehensive income.

We adopted the standard effective January 1, 2018. The impact of the adoption of the standard resulted in an increase to beginning Accumulated other comprehensive income and a corresponding decrease to beginning Retained earnings of $248 million. For more information on the adoption of the Tax Act, see Note 15.

AIG | Third Quarter 2018 Form 10-Q11


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

Future Application of Accounting Standards

Leases

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

We plan to adopt the standard on its effective date, of January 1, 2019, using the additional (and optional) transition method and recognizing a modified retrospective approach upon adoption.cumulative-effect adjustment to the opening balance of retained earnings, at the adoption date. We are currently quantifying the expected recognition on our balance sheet for a right to use asset and a lease liability as required by the standard. We do not expect the impact of the standard to have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.

Financial Instruments - Credit Losses

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

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

Classification of Certain Cash Receipts and Cash Payments

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

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

Intra-Entity Transfers of Assets Other than Inventory

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

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

AIG | Third Quarter 2017 Form 10-Q9


TABLE OF CONTENTS

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

Restricted Cash

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

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

Clarifying the Definition of a Business

In January 2017, the FASB issued an accounting standard that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The new standard will require an entity to evaluate if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar assets; if so, the set of transferred assets and activities is not a business.  At a minimum, a set must include an input and a substantive process that together significantly contribute to the ability to create output. 

The standard is effective on January 1, 2018, with early adoption permitted.  We are evaluating the timing of adoption and are assessing the impact of the standard on our reported consolidated financial condition, results of operations and cash flows.  Because the standard requires prospective adoption, the impact is dependent on future acquisitions, dispositions and those entities that we consolidate due to obtaining a controlling financial interest.

Simplifying the Test for Goodwill Impairment

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

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

Gains and Losses from the Derecognition of Nonfinancial Assets

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

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

Improving the Presentation of Net Periodic Pension and Postretirement Benefit Cost

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

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

AIG | Third Quarter 2017 Form 10-Q10


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

Premium Amortization on Purchased Callable Debt Securities

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

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

Modification of Share-Based Payment Awards

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

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

Derivatives and Hedging

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

The standard is effective on January 1, 2019, with early adoption permitted. We will adopt the standard on its effective date. The standard’s impact is immaterial to our reported consolidated financial condition, results of operations, cash flows and required disclosures.          

12AIG | Third Quarter 2018 Form 10-Q


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

Targeted Improvements to the Accounting for Long-Duration Contracts

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

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

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

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

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

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

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

 

AIG | Third Quarter 2018 Form 10-Q13


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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.

We report our results of operationsresources, as follows:follows.

·General Insurance

CommercialGeneral Insurance business is presented as two operating segments:

-·North America— consists of insurance businesses in the United States, Canada and Bermuda.This also includes the results of Validus Reinsurance, Ltd. and Western World Insurance Group, Inc. as of the acquisition date.

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

Results are presented before internal reinsurance transactions.  North America and International operating segments consist of the following products:

–     Commercial Lines — consists of Liability, and Financial Lines,

- Property and Special RisksRisks.

–     Personal Insurance — consists of Personal Lines and Accident and Health.

·Life and RetirementConsumer Insurance

Life and Retirement business is presented as four operating segments:

-    Individual Retirement

-    Group Retirement

-    Life Insurance

-    Personal Insurance

·       The Individual Retirement — consists of fixed annuities, fixed index annuities, variable annuities and retail mutual funds.

·Group Retirement — consists of group mutual funds, group fixed annuities, group variable annuities, individual annuity and investment products, financial planning and advisory services.

·Life Insurance — primary products in the U.S. include term life and universal life insurance. International operations include distribution of life and health products in the UK and Ireland.

·Institutional Markets — consists of stable value wrap products, structured settlement and pension risk transfer annuities, corporate- and bank-owned life insurance and guaranteed investment contracts (GICs).

Other Operations

Other Operations category consists of:

-    Institutional Markets

-    ·Income from assets held by AIG Parent and other corporate subsidiariessubsidiaries.

-    ·General operating expenses not attributable to specific reporting segmentssegments.

-    ·Interest expenseexpense.

-    United Guaranty Corporation (United Guaranty) ·BlackboardThe sale of this business was completeda subsidiary focused on December 31, 2016 delivering commercial insurance solutions using digital technology, data analytics and automation.

-    AIG ·Fuji Life Insurance Company, Ltd. (Fuji Life) consists of term insurance, life insurance, endowment policies and annuities. The sale of this business was completed on April 30, 2017

·2017.The Legacy Portfolio segment consists of:

-    Legacy Property and Casualty Run-Off Insurance Lines

-    Legacy Life Insurance Run-Off Lines

-    Legacy Investments

14AIG | Third Quarter 20172018 Form 10-Q11


TABLE OF CONTENTS 

 

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

 

Legacy Portfolio

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

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

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

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

We evaluate segment performance based on operatingadjusted revenues and adjusted pre-tax operating income (loss). OperatingAdjusted revenues and adjusted pre-tax operating income (loss) are derived by excluding certain items from total revenues and net income (loss) attributable to AIG, respectively. See the table below forFor the items excluded from operatingadjusted revenues and adjusted pre-tax operating income (loss). see the table below.

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

Three Months Ended September 30,

2017

 

2016

2018

 

2017

 

 

 

Pre-Tax

 

 

 

 

Pre-Tax

 

 

 

Adjusted

 

 

 

 

Adjusted

 

Total

 

Operating

 

Total

 

Operating

 

Adjusted

 

Pre-tax

 

Adjusted

 

Pre-tax

(in millions)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

Liability and Financial Lines

$

2,848

$

(257)

 

$

3,379

$

948

Property and Special Risks

 

1,744

 

(2,605)

 

 

2,037

 

(263)

Total Commercial Insurance

 

4,592

 

(2,862)

 

 

5,416

 

685

Consumer Insurance

 

 

 

 

 

 

 

 

 

General Insurance

 

 

 

 

 

 

 

 

North America

$

4,129

$

(160)

 

$

3,634

$

(2,193)

International

 

3,853

 

(665)

 

 

3,867

 

(740)

Total General Insurance

 

7,982

 

(825)

 

 

7,501

 

(2,933)

Life and Retirement

 

 

 

 

 

 

 

 

 

Individual Retirement

 

1,343

 

718

 

 

1,380

 

920

 

1,335

 

393

 

 

1,343

 

718

Group Retirement

 

702

 

249

 

 

717

 

214

 

718

 

242

 

 

702

 

249

Life Insurance

 

1,000

 

112

 

 

921

 

(54)

 

809

 

16

 

 

1,000

 

112

Personal Insurance

 

2,909

 

(71)

 

 

2,991

 

148

Total Consumer Insurance

 

5,954

 

1,008

 

 

6,009

 

1,228

Institutional Markets

 

284

 

62

 

 

1,091

 

79

Total Life and Retirement

 

3,146

 

713

 

 

4,136

 

1,158

Other Operations

 

1,218

 

(287)

 

 

1,003

 

(164)

 

135

 

(417)

 

 

127

 

(366)

Legacy Portfolio

 

1,013

 

286

 

 

1,312

 

(99)

 

814

 

84

 

 

1,013

 

286

AIG Consolidation and elimination

 

(119)

 

(1)

 

 

(144)

 

(6)

 

(42)

 

29

 

 

(119)

 

(1)

Total AIG Consolidated revenues and pre-tax operating income

 

12,658

 

(1,856)

 

 

13,596

 

1,644

Reconciling Items from revenues and pre-tax operating income to

 

 

 

 

 

 

 

 

 

revenues and pre-tax income (loss):

 

 

 

 

 

 

 

 

 

Total AIG Consolidated adjusted revenues and adjusted pre-tax income

 

12,035

 

(416)

 

 

12,658

 

(1,856)

Reconciling Items to revenues and pre-tax income:

 

 

 

 

 

 

 

 

 

Changes in fair value of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

living benefits

 

26

 

26

 

 

17

 

17

 

(5)

 

(14)

 

 

26

 

26

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net realized capital gains

 

-

 

84

 

 

-

 

(67)

 

-

 

76

 

 

-

 

84

Other income (expense) - net

 

(4)

 

-

 

 

(12)

 

-

Gain (Loss) on extinguishment of debt

 

-

 

(1)

 

 

-

 

(1)

Net realized capital losses*

 

(540)

 

(524)

 

 

(922)

 

(922)

Income (loss) from divested businesses

 

-

 

2

 

 

-

 

(13)

Non-operating litigation reserves and settlements

 

-

 

(5)

 

 

1

 

-

(Unfavorable) favorable prior year development and related amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

changes ceded under retroactive reinsurance agreements

 

-

 

7

 

 

-

 

3

 

-

 

(605)

 

 

-

 

7

Gain (Loss) on extinguishment of debt

 

-

 

(1)

 

 

-

 

14

Net realized capital losses

 

(922)

 

(922)

 

 

(765)

 

(765)

Gain (loss) from divested businesses

 

-

 

(13)

 

 

-

 

128

Non-operating litigation reserves and settlements

 

1

 

-

 

 

1

 

5

Net loss reserve discount (benefit) charge

 

-

 

(48)

 

 

-

 

(32)

Net loss reserve discount benefit (charge)

 

-

 

86

 

 

-

 

(48)

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

 

-

 

(49)

 

 

-

 

-

 

-

 

-

 

 

-

 

(49)

Integration and transaction costs associated with acquired businesses

 

-

 

(91)

 

 

-

 

-

Restructuring and other costs

 

-

 

(31)

 

 

-

 

(210)

 

-

 

(35)

 

 

-

 

(31)

Other

 

(12)

 

-

 

 

5

 

-

Revenues and Pre-tax income (loss)

$

11,751

$

(2,803)

 

$

12,854

$

737

$

11,486

$

(1,527)

 

$

11,751

$

(2,803)

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

2017

 

2016

 

 

 

Pre-Tax

 

 

 

 

Pre-Tax

 

Total

 

Operating

 

Total

 

Operating

(in millions)

 

 Revenues 

 

Income (Loss)

 

 Revenues 

 

Income (Loss)

Commercial Insurance

 

 

 

 

 

 

 

 

Liability and Financial Lines

$

8,443

$

903

 

$

10,118

$

2,332

Property and Special Risks

 

5,365

 

(2,200)

 

 

6,140

 

(44)

Total Commercial Insurance

 

13,808

 

(1,297)

 

 

16,258

 

2,288

AIG | Third Quarter 20172018 Form 10-Q          1215


TABLE OF CONTENTS 

 

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

 

Consumer Insurance

 

 

 

 

 

 

 

 

 

Individual Retirement

 

4,099

 

1,815

 

 

4,382

 

1,727

Group Retirement

 

2,116

 

758

 

 

2,053

 

670

Life Insurance

 

3,043

 

272

 

 

2,862

 

(27)

Personal Insurance

 

8,618

 

471

 

 

8,735

 

510

      Total Consumer Insurance

 

17,876

 

3,316

 

 

18,032

 

2,880

Other Operations

 

3,207

 

(835)

 

 

3,015

 

(565)

Legacy Portfolio

 

3,235

 

1,059

 

 

3,003

 

(94)

AIG Consolidation and elimination

 

(237)

 

75

 

 

(406)

 

-

Total AIG Consolidated revenues and pre-tax operating income

 

37,889

 

2,318

 

 

39,902

 

4,509

Reconciling Items from revenues and pre-tax operating income to

 

 

 

 

 

 

 

 

 

revenues and pre-tax income:

 

 

 

 

 

 

 

 

 

Changes in fair value of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

 

living benefits

 

117

 

117

 

 

270

 

270

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

 

 

 

 

 

 

 

 

 

net realized capital gains

 

-

 

195

 

 

-

 

(91)

(Unfavorable) favorable prior year development and related amortization

 

 

 

 

 

 

 

 

 

changes ceded under retroactive reinsurance agreements

 

-

 

(258)

 

 

-

 

15

Gain (Loss) on extinguishment of debt

 

-

 

4

 

 

-

 

(76)

Net realized capital losses

 

(1,106)

 

(1,106)

 

 

(829)

 

(829)

Gain (loss) from divested businesses

 

-

 

(173)

 

 

-

 

351

Non-operating litigation reserves and settlements

 

17

 

86

 

 

42

 

43

Net loss reserve discount (benefit) charge

 

-

 

(283)

 

 

-

 

(323)

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

 

-

 

(50)

 

 

-

 

-

Restructuring and other costs

 

-

 

(259)

 

 

-

 

(488)

Other

 

(32)

 

-

 

 

(28)

 

-

Revenues and Pre-tax income

$

36,885

$

591

 

$

39,357

$

3,381

4. Held-For-Sale Classification

Nine Months Ended September 30,

2018

 

2017

 

 

 

 

Adjusted

 

 

 

 

Adjusted

 

 

Adjusted

 

Pre-Tax

 

 

Adjusted

 

Pre-Tax

(in millions)

 

 Revenues 

 

Income (Loss)

 

 

 Revenues 

 

Income (Loss)

General Insurance

 

 

 

 

 

 

 

 

 

North America

$

10,895

$

567

 

$

11,145

$

(644)

International

 

11,758

 

(314)

 

 

11,315

 

(182)

      Total General Insurance

 

22,653

 

253

 

 

22,460

 

(826)

Life and Retirement

 

 

 

 

 

 

 

 

 

Individual Retirement

 

4,062

 

1,354

 

 

4,099

 

1,815

Group Retirement

 

2,209

 

774

 

 

2,116

 

758

Life Insurance

 

2,962

 

243

 

 

3,043

 

272

Institutional Markets

 

838

 

196

 

 

1,946

 

204

      Total Life and Retirement

 

10,071

 

2,567

 

 

11,204

 

3,049

Other Operations

 

454

 

(1,133)

 

 

1,227

 

(1,039)

Legacy Portfolio

 

2,431

 

363

 

 

3,235

 

1,059

AIG Consolidation and elimination

 

(214)

 

28

 

 

(237)

 

75

Total AIG Consolidated adjusted revenues and adjusted pre-tax income

 

35,395

 

2,078

 

 

37,889

 

2,318

Reconciling Items to revenues and pre-tax income:

 

 

 

 

 

 

 

 

 

Changes in fair value of securities used to hedge guaranteed

 

 

 

 

 

 

 

 

 

living benefits

 

(109)

 

(127)

 

 

117

 

117

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

 

 

 

 

 

 

 

 

 

net realized capital gains

 

-

 

46

 

 

-

 

195

Other income (expense) - net

 

(29)

 

-

 

 

(32)

 

-

Gain (Loss) on extinguishment of debt

 

-

 

(10)

 

 

-

 

4

Net realized capital losses*

 

(430)

 

(388)

 

 

(1,106)

 

(1,106)

Income (loss) from divested businesses

 

-

 

35

 

 

-

 

(173)

Non-operating litigation reserves and settlements

 

2

 

(30)

 

 

17

 

86

(Unfavorable) favorable prior year development and related amortization

 

 

 

 

 

 

 

 

 

changes ceded under retroactive reinsurance agreements

 

-

 

(607)

 

 

-

 

(258)

Net loss reserve discount benefit (charge)

 

-

 

305

 

 

-

 

(283)

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

 

-

 

-

 

 

-

 

(50)

Integration and transaction costs associated with acquired businesses

 

-

 

(91)

 

 

-

 

-

Restructuring and other costs

 

-

 

(259)

 

 

-

 

(259)

Revenues and Pre-tax income

$

34,829

$

952

 

$

36,885

$

591

Held-For-Sale Classification*   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.

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

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

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

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

16AIG | Third Quarter 20172018 Form 10-Q13


TABLE OF CONTENTS 

 

ITEM 1 |  Notes to Condensed Consolidated Financial Statements (unaudited) |  4. Held-For-Sale ClassificationBusiness Combination

4. Business Combination

On July 18, 2018, we completed the purchase of a 100 percent voting interest in Validus, a leading provider of reinsurance, primary insurance, and asset management services, for $5.5 billion in cash. This transaction was made with the intent to strengthen our global General Insurance business by expanding our current product portfolio through additional distribution channels and advancing the tools available to enhance underwriting. The impact of the acquisition on Total revenues, Net income (loss), and Net income (loss) attributable to AIG was $756 million, $(105) million, and $(105) million, respectively, for both the three- and nine-month periods ended September 30, 2018. Integration and transaction costs associated with the acquisition of Validus were $91 million for both the three- and nine-month periods ending September 30, 2018 and are included in General operating and other expenses in our Consolidated Statement of Income.

As part of the purchase, we guaranteed 6,000 issued and outstanding 5.875% Non-Cumulative Preference Shares, Series A  (the Series A Preference Shares) and 10,000 issued and outstanding 5.800% Non-Cumulative Preference Shares, Series B (together with the Series A Preference Shares, the Preference Shares).  On September 27, 2018, we provided notice to the preference shareholders that on October 30, 2018 (the Redemption Date), we will redeem all of the Preference Shares at a redemption price of $26,000 per Preference Share, plus all declared and unpaid dividends, if any, up to, but excluding, the Redemption Date.  Accordingly, as of September 30, 2018, the Preference Shares are included within Other liabilities on our Condensed Consolidated Balance Sheet. 

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

In addition, Validus participates in the market for insurance-linked securities (ILS) primarily through AlphaCat Managers, Ltd (AlphaCat Manager). AlphaCat Manager is an asset manager primarily for third party investors and in connection with the issuance of ILS invests in AlphaCat funds which are considered variable interest entities (VIEs). ILS are financial instruments for which the values are determined based on insurance losses caused primarily by natural catastrophes such as major earthquakes and hurricanes. We report the investment in AlphaCat funds, which approximated $128 million at September 30, 2018, in Other Invested Assets in the Condensed Consolidated Balance Sheet.

The following table summarizes the estimated provisional fair values of major classes of identifiable assets acquired and liabilities assumed as of July 18, 2018:

(in millions)

 

July 18, 2018

Identifiable net assets:

 

 

Investments

$

6,613

Cash

 

330

Premiums and other receivables

 

2,130

Reinsurance assets

 

1,692

Value of business acquired*

 

298

Deferred income taxes

 

63

Other assets, including restricted cash of $93

 

1,008

Liability for unpaid claims and claims adjustment expense

 

(4,138)

Unearned premiums

 

(2,083)

Long-term debt

 

(1,106)

Other liabilities

 

(913)

Preference shares

 

(416)

Total identifiable net assets acquired

 

3,478

Cash consideration paid

 

5,475

Goodwill recognized from acquisition

$

1,997

*    Reported in Deferred policy acquisition costs in the Condensed Consolidated Balance Sheet.

AIG | Third Quarter 2018 Form 10-Q17


TABLE OF CONTENTS

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

 

The following unaudited summarized pro forma consolidated income statement information assumes that the acquisition of Validus occurred as of January 1, 2017. The pro forma amounts are for comparative purposes only and may not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable period and may not be indicative of the results that will be attained in the future.

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2018

 

2017*

 

 

2018*

 

2017*

Total revenues

$

11,486

$

12,418

 

$

36,028

$

38,752

Net income (loss)

 

(1,259)

 

(1,958)

 

 

576

 

571

Net income (loss) attributable to AIG

 

(1,259)

 

(1,984)

 

 

571

 

531

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to AIG

 

(1.41)

 

(2.18)

 

 

0.63

 

0.57

Diluted:

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to AIG

 

(1.41)

 

(2.18)

 

 

0.62

 

0.55

* 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.

The following table summarizespresents details of the components ofidentified intangible assets and liabilities held-for-sale onacquired:

 

 

 

 

Estimated Weighted

(in millions, except years)

 

Fair Value

 

Average Useful Life

Definite lived intangibles

 

 

 

 

Value of distribution network acquired(a)(b)

$

444

 

15 years

Value of business acquired(c)

 

298

 

2 years

Indefinite lived intangibles(a)

 

 

 

 

Syndicate capacity

 

193

 

 

Other

 

75

 

 

Total

$

1,010

 

 

(a) Reported in Other assets in the Condensed Consolidated Balance Sheets at December 31, 2016*:Sheet.

 

December 31,

(in millions)

 

2016

Assets:

 

 

   Fixed maturity securities

$

6,045

   Equity securities

 

149

   Mortgage and other loans receivable, net

 

137

   Other invested assets

 

2

   Short-term investments

 

130

   Cash

 

133

Accrued investment income

 

21

   Premiums and other receivables, net of allowance

 

351

Reinsurance assets, net of allowance

 

8

   Deferred policy acquisition costs

 

471

   Other assets

 

273

Assets of businesses held for sale

 

7,720

Less: Loss Accrual

 

(521)

Total assets held for sale

$

7,199

Liabilities:

 

 

   Liability for unpaid losses and loss adjustment expenses

$

402

   Unearned premiums

 

297

Future policy benefits for life and accident and health insurance contracts

 

4,579

Other policyholder funds

 

378

   Other liabilities

 

450

Total liabilities held for sale

$

6,106

*    Excludes net intercompany assets(b) Amortization is reported in General operating and other expenses in the Condensed Consolidated Statement of $384 million at December 31, 2016, that are eliminatedIncome (Loss).

(c) Reported in consolidation.Deferred policy acquisition costs in the Condensed Consolidated Balance Sheet and Amortization of deferred policy acquisition costs in the Condensed Consolidated Statement of Income (Loss).

 

 

5. Fair Value Measurements

Fair Value Measurements on a Recurring Basis

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

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

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

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

18AIG | Third Quarter 2018 Form 10-Q


TABLE OF CONTENTS

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.

AIG | Third Quarter 2017 Form 10-Q14


TABLE OF CONTENTS

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

September 30, 2017

 

  

 

  

 

  

Counterparty

Cash

 

September 30, 2018

 

  

 

  

 

  

Counterparty

Cash

 

(in millions)

 

 Level 1

 

Level 2

 

Level 3

 

Netting(b)

Collateral

 

Total

 

 Level 1

 

Level 2

 

Level 3

 

Netting(a)

Collateral

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

1

$

2,383

$

-

$

-

$

-

$

2,384

$

9

$

3,084

$

-

$

-

$

-

$

3,093

Obligations of states, municipalities and political subdivisions

 

-

 

16,460

 

2,371

 

-

 

-

 

18,831

 

-

 

14,516

 

1,996

 

-

 

-

 

16,512

Non-U.S. governments

 

56

 

15,526

 

11

 

-

 

-

 

15,593

 

19

 

15,196

 

4

 

-

 

-

 

15,219

Corporate debt

 

-

 

132,475

 

1,210

 

-

 

-

 

133,685

 

-

 

130,942

 

942

 

-

 

-

 

131,884

RMBS

 

-

 

21,095

 

16,414

 

-

 

-

 

37,509

 

-

 

20,365

 

14,861

 

-

 

-

 

35,226

CMBS

 

-

 

12,853

 

665

 

-

 

-

 

13,518

 

-

 

11,990

 

701

 

-

 

-

 

12,691

CDO/ABS

 

-

 

7,837

 

8,414

 

-

 

-

 

16,251

 

-

 

9,263

 

8,832

 

-

 

-

 

18,095

Total bonds available for sale

 

57

 

208,629

 

29,085

 

-

 

-

 

237,771

 

28

 

205,356

 

27,336

 

-

 

-

 

232,720

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

33

 

2,796

 

-

 

-

 

-

 

2,829

 

96

 

2,538

 

-

 

-

 

-

 

2,634

Non-U.S. governments

 

-

 

55

 

-

 

-

 

-

 

55

 

-

 

49

 

-

 

-

 

-

 

49

Corporate debt

 

-

 

1,844

 

18

 

-

 

-

 

1,862

 

-

 

1,707

 

-

 

-

 

-

 

1,707

RMBS

 

-

 

426

 

1,443

 

-

 

-

 

1,869

 

-

 

311

 

1,349

 

-

 

-

 

1,660

CMBS

 

-

 

491

 

65

 

-

 

-

 

556

 

-

 

328

 

73

 

-

 

-

 

401

CDO/ABS

 

-

 

648

 

4,834

 

-

 

-

 

5,482

 

-

 

511

 

4,458

 

-

 

-

 

4,969

Total other bond securities

 

33

 

6,260

 

6,360

 

-

 

-

 

12,653

 

96

 

5,444

 

5,880

 

-

 

-

 

11,420

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

1,051

 

-

 

5

 

-

 

-

 

1,056

Preferred stock

 

18

 

559

 

-

 

-

 

-

 

577

Mutual funds

 

74

 

-

 

-

 

-

 

-

 

74

Total equity securities available for sale

 

1,143

 

559

 

5

 

-

 

-

 

1,707

Other equity securities

 

538

 

-

 

-

 

-

 

-

 

538

Other equity securities(b)

 

1,400

 

18

 

25

 

-

 

-

 

1,443

Mortgage and other loans receivable

 

-

 

-

 

5

 

-

 

-

 

5

 

-

 

-

 

-

 

-

 

-

 

-

Other invested assets(a)

 

-

 

1

 

259

 

-

 

-

 

260

Other invested assets(c)

 

-

 

603

 

398

 

-

 

-

 

1,001

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

2

 

2,252

 

-

 

-

 

-

 

2,254

 

-

 

2,505

 

-

 

-

 

-

 

2,505

Foreign exchange contracts

 

-

 

867

 

-

 

-

 

-

 

867

 

-

 

927

 

-

 

-

 

-

 

927

Equity contracts

 

191

 

209

 

69

 

-

 

-

 

469

 

16

 

220

 

104

 

-

 

-

 

340

Credit contracts

 

-

 

-

 

1

 

-

 

-

 

1

 

-

 

-

 

1

 

-

 

-

 

1

Other contracts

 

-

 

2

 

21

 

-

 

-

 

23

 

-

 

-

 

15

 

-

 

-

 

15

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(1,390)

 

(1,324)

 

(2,714)

 

-

 

-

 

-

 

(1,874)

 

(964)

 

(2,838)

Total derivative assets

 

193

 

3,330

 

91

 

(1,390)

 

(1,324)

 

900

 

16

 

3,652

 

120

 

(1,874)

 

(964)

 

950

Short-term investments

 

2,247

 

356

 

-

 

-

 

-

 

2,603

 

2,513

 

1,120

 

-

 

-

 

-

 

3,633

Separate account assets

 

84,239

 

5,061

 

-

 

-

 

-

 

89,300

 

88,092

 

4,953

 

-

 

-

 

-

 

93,045

Total

$

88,450

$

224,196

$

35,805

$

(1,390)

$

(1,324)

$

345,737

$

92,145

$

221,146

$

33,759

$

(1,874)

$

(964)

$

344,212

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

14

$

3,974

$

-

$

-

$

3,988

$

-

$

-

$

3,376

$

-

$

-

$

3,376

Other policyholder funds

 

-

 

-

 

-

 

-

 

-

 

-

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

2,228

 

26

 

-

 

-

 

2,254

 

1

 

2,106

 

12

 

-

 

-

 

2,119

Foreign exchange contracts

 

-

 

1,298

 

3

 

-

 

-

 

1,301

 

-

 

1,082

 

5

 

-

 

-

 

1,087

Equity contracts

 

56

 

3

 

-

 

-

 

-

 

59

 

2

 

2

 

1

 

-

 

-

 

5

Credit contracts

 

-

 

4

 

274

 

-

 

-

 

278

 

-

 

15

 

237

 

-

 

-

 

252

Other contracts

 

-

 

-

 

5

 

-

 

-

 

5

 

-

 

-

 

3

 

-

 

-

 

3

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(1,390)

 

(1,395)

 

(2,785)

 

-

 

-

 

-

 

(1,874)

 

(290)

 

(2,164)

Total derivative liabilities

 

56

 

3,533

 

308

 

(1,390)

 

(1,395)

 

1,112

 

3

 

3,205

 

258

 

(1,874)

 

(290)

 

1,302

Long-term debt

 

-

 

2,995

 

3

 

-

 

-

 

2,998

 

-

 

2,311

 

-

 

-

 

-

 

2,311

Other liabilities

 

75

 

33

 

-

 

-

 

-

 

108

 

165

 

24

 

-

 

-

 

-

 

189

Total

$

131

$

6,575

$

4,285

$

(1,390)

$

(1,395)

$

8,206

$

168

$

5,540

$

3,634

$

(1,874)

$

(290)

$

7,178

AIG | Third Quarter 20172018 Form 10-Q          1519


TABLE OF CONTENTS 

 

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

 

December 31, 2016

 

  

 

  

 

  

Counterparty

Cash

 

December 31, 2017

 

  

 

  

 

  

Counterparty

Cash

 

(in millions)

 

 Level 1

 

Level 2

 

Level 3

 

Netting(b)

Collateral

 

Total

 

 Level 1

 

Level 2

 

Level 3

 

Netting(a)

 

Collateral

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

63

$

1,929

$

-

$

-

$

-

$

1,992

$

201

$

2,455

$

-

$

-

$

-

$

2,656

Obligations of states, municipalities and political subdivisions

 

-

 

22,732

 

2,040

 

-

 

-

 

24,772

 

-

 

16,240

 

2,404

 

-

 

-

 

18,644

Non-U.S. governments

 

52

 

14,466

 

17

 

-

 

-

 

14,535

 

20

 

15,631

 

8

 

-

 

-

 

15,659

Corporate debt

 

-

 

131,047

 

1,133

 

-

 

-

 

132,180

 

-

 

133,003

 

1,173

 

-

 

-

 

134,176

RMBS

 

-

 

20,468

 

16,906

 

-

 

-

 

37,374

 

-

 

21,098

 

16,136

 

-

 

-

 

37,234

CMBS

 

-

 

12,231

 

2,040

 

-

 

-

 

14,271

 

-

 

13,217

 

624

 

-

 

-

 

13,841

CDO/ABS

 

-

 

8,578

 

7,835

 

-

 

-

 

16,413

 

-

 

8,131

 

8,651

 

-

 

-

 

16,782

Total bonds available for sale

 

115

 

211,451

 

29,971

 

-

 

-

 

241,537

 

221

 

209,775

 

28,996

 

-

 

-

 

238,992

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

-

 

2,939

 

-

 

-

 

-

 

2,939

 

238

 

2,564

 

-

 

-

 

-

 

2,802

Non-U.S. governments

 

-

 

51

 

-

 

-

 

-

 

51

 

-

 

57

 

-

 

-

 

-

 

57

Corporate debt

 

-

 

1,755

 

17

 

-

 

-

 

1,772

 

-

 

1,891

 

18

 

-

 

-

 

1,909

RMBS

 

-

 

420

 

1,605

 

-

 

-

 

2,025

 

-

 

421

 

1,464

 

-

 

-

 

1,885

CMBS

 

-

 

448

 

155

 

-

 

-

 

603

 

-

 

485

 

74

 

-

 

-

 

559

CDO/ABS

 

-

 

905

 

5,703

 

-

 

-

 

6,608

 

-

 

604

 

4,956

 

-

 

-

 

5,560

Total other bond securities

 

-

 

6,518

 

7,480

 

-

 

-

 

13,998

 

238

 

6,022

 

6,512

 

-

 

-

 

12,772

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

1,056

 

9

 

-

 

-

 

-

 

1,065

 

1,061

 

-

 

-

 

-

 

-

 

1,061

Preferred stock

 

752

 

-

 

-

 

-

 

-

 

752

 

18

 

515

 

-

 

-

 

-

 

533

Mutual funds

 

260

 

1

 

-

 

-

 

-

 

261

 

110

 

4

 

-

 

-

 

-

 

114

Total equity securities available for sale

 

2,068

 

10

 

-

 

-

 

-

 

2,078

 

1,189

 

519

 

-

 

-

 

-

 

1,708

Other equity securities

 

482

 

-

 

-

 

-

 

-

 

482

 

589

 

-

 

-

 

-

 

-

 

589

Mortgage and other loans receivable

 

-

 

-

 

11

 

-

 

-

 

11

 

-

 

-

 

5

 

-

 

-

 

5

Other invested assets(a)(c)

 

-

 

1

 

204

 

-

 

-

 

205

 

-

 

1

 

250

 

-

 

-

 

251

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

2,328

 

-

 

-

 

-

 

2,328

 

1

 

2,170

 

-

 

-

 

-

 

2,171

Foreign exchange contracts

 

-

 

1,320

 

-

 

-

 

-

 

1,320

 

-

 

827

 

4

 

-

 

-

 

831

Equity contracts

 

188

 

59

 

58

 

-

 

-

 

305

 

188

 

252

 

82

 

-

 

-

 

522

Credit contracts

 

-

 

-

 

2

 

-

 

-

 

2

 

-

 

-

 

1

 

-

 

-

 

1

Other contracts

 

-

 

6

 

16

 

-

 

-

 

22

 

-

 

-

 

20

 

-

 

-

 

20

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(1,265)

 

(903)

 

(2,168)

 

-

 

-

 

-

 

(1,464)

 

(1,159)

 

(2,623)

Total derivative assets

 

188

 

3,713

 

76

 

(1,265)

 

(903)

 

1,809

 

189

 

3,249

 

107

 

(1,464)

 

(1,159)

 

922

Short-term investments

 

2,660

 

681

 

-

 

-

 

-

 

3,341

 

2,078

 

537

 

-

 

-

 

-

 

2,615

Separate account assets

 

77,318

 

5,654

 

-

 

-

 

-

 

82,972

 

87,141

 

5,657

 

-

 

-

 

-

 

92,798

Total

$

82,831

$

228,028

$

37,742

$

(1,265)

$

(903)

$

346,433

$

91,645

$

225,760

$

35,870

$

(1,464)

$

(1,159)

$

350,652

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

25

$

3,033

$

-

$

-

$

3,058

$

-

$

14

$

4,136

$

-

$

-

$

4,150

Other policyholder funds

 

5

 

-

 

-

 

-

 

-

 

5

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

-

 

3,039

 

38

 

-

 

-

 

3,077

 

2

 

2,176

 

22

 

-

 

-

 

2,200

Foreign exchange contracts

 

-

 

1,358

 

11

 

-

 

-

 

1,369

 

-

 

1,241

 

4

 

-

 

-

 

1,245

Equity contracts

 

12

 

7

 

-

 

-

 

-

 

19

 

2

 

19

 

-

 

-

 

-

 

21

Credit contracts

 

-

 

-

 

331

 

-

 

-

 

331

 

-

 

14

 

263

 

-

 

-

 

277

Other contracts

 

-

 

1

 

5

 

-

 

-

 

6

 

-

 

-

 

5

 

-

 

-

 

5

Counterparty netting and cash collateral

 

-

 

-

 

-

 

(1,265)

 

(1,521)

 

(2,786)

 

-

 

-

 

-

 

(1,464)

 

(1,249)

 

(2,713)

Total derivative liabilities

 

12

 

4,405

 

385

 

(1,265)

 

(1,521)

 

2,016

 

4

 

3,450

 

294

 

(1,464)

 

(1,249)

 

1,035

Long-term debt

 

-

 

3,357

 

71

 

-

 

-

 

3,428

 

-

 

2,888

 

-

 

-

 

-

 

2,888

Other liabilities

 

46

 

43

 

-

 

-

 

-

 

89

Total

$

17

$

7,787

$

3,489

$

(1,265)

$

(1,521)

$

8,507

$

50

$

6,395

$

4,430

$

(1,464)

$

(1,249)

$

8,162

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

(b)  As a result of the adoption of the Recognition and Measurement of Financial Assets and Financial Liabilities standard on January 1, 2018 (Financial Instruments Recognition and Measurement Standard), equity securities are no longer classified and accounted for as available for sale securities.

(c)  Excludes investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent), which totaled $6.2$5.1 billion and $6.7$6.0 billion as of September 30, 20172018 and December 31, 2016,2017, respectively.

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

 

 

20AIG | Third Quarter 20172018 Form 10-Q16 


TABLE OF CONTENTS 

 

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

 

Transfers of Level 1 and Level 2 Assets and Liabilities

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

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

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

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

AIG | Third Quarter 20172018 Form 10-Q          1721


TABLE OF CONTENTS 

 

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

 

Changes in Level 3 Recurring Fair Value Measurements  

The following tables present changes during the three- and nine-month periods ended September 30, 20172018 and 20162017 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities in the Condensed Consolidated Balance Sheets at September 30, 20172018 and 20162017:

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Realized and

 

 

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Realized and

 

 

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

Reclassified

 

  

 

(Losses) Included

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

 

 

  

 

(Losses) Included

 

Fair Value

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

to Assets

 

Fair Value

 

in Income on

 

Fair Value

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

 

 

Fair Value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

 

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

Acquisition

 

of Period

 

at End of Period

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,285

$

2

$

38

$

52

$

-

$

(6)

$

-

$

2,371

$

-

$

2,056

$

-

$

(37)

$

(46)

$

54

$

(31)

 

$

-

$

1,996

$

-

Non-U.S. governments

 

12

 

(5)

 

4

 

-

 

-

 

-

 

-

 

11

 

-

 

-

 

-

 

(1)

 

1

 

4

 

-

 

-

 

4

 

-

Corporate debt

 

932

 

5

 

(2)

 

(53)

 

449

 

(121)

 

-

 

1,210

 

-

 

884

 

7

 

(10)

 

(28)

 

133

 

(44)

 

-

 

942

 

-

RMBS

 

16,393

 

253

 

495

 

(731)

 

11

 

(7)

 

-

 

16,414

 

-

 

15,377

 

213

 

5

 

(725)

 

-

 

(16)

 

7

 

14,861

 

-

CMBS

 

735

 

2

 

5

 

(77)

 

-

 

-

 

-

 

665

 

-

 

605

 

14

 

(14)

 

31

 

64

 

-

 

1

 

701

 

-

CDO/ABS

 

8,605

 

8

 

(12)

 

(166)

 

-

 

(21)

 

-

 

8,414

 

-

 

6,856

 

15

 

(31)

 

320

 

1,508

 

-

 

164

 

8,832

 

-

Total bonds available for sale

 

28,962

 

265

 

528

 

(975)

 

460

 

(155)

 

-

 

29,085

 

-

 

25,778

 

249

 

(88)

 

(447)

 

1,763

 

(91)

 

172

 

27,336

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

28

 

1

 

-

 

-

 

-

 

(11)

 

-

 

18

 

-

 

18

 

-

 

-

 

(18)

 

-

 

-

 

-

 

-

 

(2)

RMBS

 

1,510

 

63

 

-

 

(130)

 

-

 

-

 

-

 

1,443

 

49

 

1,338

 

18

 

-

 

(57)

 

50

 

-

 

-

 

1,349

 

(29)

CMBS

 

66

 

2

 

-

 

42

 

-

 

(45)

 

-

 

65

 

3

 

71

 

(2)

 

-

 

-

 

4

 

-

 

-

 

73

 

(2)

CDO/ABS

 

5,234

 

111

 

-

 

(505)

 

-

 

(6)

 

-

 

4,834

 

(34)

 

4,641

 

76

 

-

 

(267)

 

-

 

-

 

8

 

4,458

 

(6)

Total other bond securities

 

6,838

 

177

 

-

 

(593)

 

-

 

(62)

 

-

 

6,360

 

18

 

6,068

 

92

 

-

 

(342)

 

54

 

-

 

8

 

5,880

 

(39)

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

7

 

-

 

-

 

(2)

 

-

 

-

 

-

 

5

 

-

Total equity securities available for sale

 

7

 

-

 

-

 

(2)

 

-

 

-

 

-

 

5

 

-

Other equity securities

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Other equity securities(a)

 

-

 

1

 

-

 

24

 

-

 

-

 

-

 

25

 

-

Mortgage and other loans receivable

 

5

 

-

 

-

 

-

 

-

 

-

 

-

 

5

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Other invested assets

 

225

 

-

 

(2)

 

36

 

-

 

-

 

-

 

259

 

(3)

 

399

 

-

 

-

 

(1)

 

-

 

-

 

-

 

398

 

-

Total

$

36,037

$

442

$

526

$

(1,534)

$

460

$

(217)

$

-

$

35,714

$

15

$

32,245

$

342

$

(88)

$

(766)

$

1,817

$

(91)

 

$

180

$

33,639

$

(39)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

  

 

Realized and

 

 

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Realized and

 

 

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

Reclassified

 

  

 

(Losses) Included

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

 

 

  

 

(Losses) Included

 

Fair Value

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

to Liabilities

 

Fair Value

 

in Income on

 

Fair Value

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

 

 

Fair Value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

 

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

Acquisition

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

3,518

$

299

$

-

$

157

$

-

$

-

$

-

$

3,974

$

1

$

3,534

$

(242)

$

-

$

84

$

-

$

-

 

$

-

$

3,376

$

179

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

30

 

(2)

 

-

 

(2)

 

-

 

-

 

-

 

26

 

1

 

14

 

(1)

 

-

 

(1)

 

-

 

-

 

-

 

12

 

1

Foreign exchange contracts

 

7

 

-

 

-

 

(4)

 

-

 

-

 

-

 

3

 

-

 

5

 

2

 

-

 

(2)

 

-

 

-

 

-

 

5

 

(5)

Equity contracts

 

(63)

 

(11)

 

-

 

5

 

-

 

-

 

-

 

(69)

 

8

 

(79)

 

(12)

 

-

 

(12)

 

-

 

-

 

-

 

(103)

 

10

Credit contracts

 

293

 

(19)

 

-

 

(1)

 

-

 

-

 

-

 

273

 

19

 

246

 

(9)

 

-

 

(1)

 

-

 

-

 

-

 

236

 

10

Other contracts

 

(16)

 

(19)

 

-

 

19

 

-

 

-

 

-

 

(16)

 

12

 

(10)

 

(19)

 

-

 

17

 

-

 

-

 

-

 

(12)

 

14

Total derivative liabilities, net(a)

 

251

 

(51)

 

-

 

17

 

-

 

-

 

-

 

217

 

40

Long-term debt(b)

 

61

 

2

 

-

 

(60)

 

-

 

-

 

-

 

3

 

4

Total derivative liabilities, net(b)

 

176

 

(39)

 

-

 

1

 

-

 

-

 

-

 

138

 

30

Long-term debt(c)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Total

$

3,830

$

250

$

-

$

114

$

-

$

-

$

-

$

4,194

$

45

$

3,710

$

(281)

$

-

$

85

$

-

$

-

 

$

-

$

3,514

$

209

22AIG | Third Quarter 20172018 Form 10-Q18 


TABLE OF CONTENTS 

 

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

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

Reclassified

 

  

 

(Losses) Included

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

 

 

  

 

(Losses) Included

 

Fair Value

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

to Assets

 

Fair Value

 

in Income on

 

Fair Value

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

 

 

Fair Value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

 

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

Acquisition

 

of Period

 

at End of Period

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,040

$

3

$

123

$

221

$

8

$

(24)

$

-

$

2,371

$

-

$

2,404

$

1

$

(152)

$

(144)

$

54

$

(167)

 

$

-

$

1,996

$

-

Non-U.S. governments

 

17

 

(5)

 

5

 

(6)

 

-

 

-

 

-

 

11

 

-

 

8

 

(5)

 

5

 

(3)

 

4

 

(5)

 

-

 

4

 

-

Corporate debt

 

1,133

 

6

 

(2)

 

(219)

 

655

 

(363)

 

-

 

1,210

 

-

 

1,173

 

(58)

 

(7)

 

(174)

 

701

 

(693)

 

-

 

942

 

-

RMBS

 

16,906

 

806

 

992

 

(2,270)

 

19

 

(39)

 

-

 

16,414

 

-

 

16,136

 

632

 

5

 

(1,877)

 

8

 

(50)

 

7

 

14,861

 

-

CMBS

 

2,040

 

25

 

12

 

(699)

 

-

 

(713)

 

-

 

665

 

-

 

624

 

18

 

(35)

 

1

 

111

 

(19)

 

1

 

701

 

-

CDO/ABS

 

7,835

 

(14)

 

168

 

478

 

-

 

(53)

 

-

 

8,414

 

-

 

8,651

 

31

 

(116)

 

(334)

 

1,508

 

(1,072)

 

164

 

8,832

 

-

Total bonds available for sale

 

29,971

 

821

 

1,298

 

(2,495)

 

682

 

(1,192)

 

-

 

29,085

 

-

 

28,996

 

619

 

(300)

 

(2,531)

 

2,386

 

(2,006)

 

172

 

27,336

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

17

 

2

 

-

 

10

 

-

 

(11)

 

-

 

18

 

1

 

18

 

-

 

-

 

(18)

 

-

 

-

 

-

 

-

 

(1)

RMBS

 

1,605

 

184

 

-

 

(313)

 

-

 

(33)

 

-

 

1,443

 

116

 

1,464

 

73

 

-

 

(238)

 

50

 

-

 

-

 

1,349

 

124

CMBS

 

155

 

4

 

-

 

24

 

-

 

(118)

 

-

 

65

 

6

 

74

 

(5)

 

-

 

(1)

 

5

 

-

 

-

 

73

 

2

CDO/ABS

 

5,703

 

459

 

-

 

(1,322)

 

-

 

(6)

 

-

 

4,834

 

91

 

4,956

 

283

 

-

 

(780)

 

-

 

(9)

 

8

 

4,458

 

201

Total other bond securities

 

7,480

 

649

 

-

 

(1,601)

 

-

 

(168)

 

-

 

6,360

 

214

 

6,512

 

351

 

-

 

(1,037)

 

55

 

(9)

 

8

 

5,880

 

326

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

-

 

-

 

-

 

6

 

-

 

(1)

 

-

 

5

 

-

Total equity securities available for sale

 

-

 

-

 

-

 

6

 

-

 

(1)

 

-

 

5

 

-

Other equity securities

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Other equity securities(a)

 

-

 

(2)

 

-

 

27

 

-

 

-

 

-

 

25

 

-

Mortgage and other loans receivable

 

11

 

-

 

-

 

(6)

 

-

 

-

 

-

 

5

 

-

 

5

 

-

 

-

 

(5)

 

-

 

-

 

-

 

-

 

-

Other invested assets

 

204

 

3

 

(5)

 

58

 

-

 

(1)

 

-

 

259

 

1

 

250

 

52

 

1

 

95

 

-

 

-

 

-

 

398

 

56

Total

$

37,666

$

1,473

$

1,293

$

(4,038)

$

682

$

(1,362)

$

-

$

35,714

$

215

$

35,763

$

1,020

$

(299)

$

(3,451)

$

2,441

$

(2,015)

 

$

180

$

33,639

$

382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

Reclassified

 

  

 

(Losses) Included

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

  

 

 

 

  

 

(Losses) Included

 

Fair Value

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

to Liabilities

 

Fair Value

 

in Income on

 

Fair Value

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

 

 

Fair Value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

 

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

Acquisition

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

3,033

$

594

$

-

$

347

$

-

$

-

$

-

$

3,974

$

3

$

4,136

$

(986)

$

-

$

226

$

-

$

-

 

$

-

$

3,376

$

1,081

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

38

 

(3)

 

-

 

(9)

 

-

 

-

 

-

 

26

 

3

 

22

 

(5)

 

-

 

(5)

 

-

 

-

 

-

 

12

 

5

Foreign exchange contracts

 

11

 

1

 

-

 

(9)

 

-

 

-

 

-

 

3

 

(1)

 

-

 

(2)

 

-

 

7

 

-

 

-

 

-

 

5

 

(5)

Equity contracts

 

(58)

 

(26)

 

-

 

15

 

-

 

-

 

-

 

(69)

 

22

 

(82)

 

(3)

 

-

 

(20)

 

-

 

2

 

-

 

(103)

 

2

Credit contracts

 

329

 

(55)

 

-

 

(1)

 

-

 

-

 

-

 

273

 

53

 

262

 

(23)

 

-

 

(3)

 

-

 

-

 

-

 

236

 

23

Other contracts

 

(11)

 

(58)

 

-

 

56

 

(3)

 

-

 

-

 

(16)

 

57

 

(15)

 

(51)

 

-

 

54

 

-

 

-

 

-

 

(12)

 

42

Total derivative liabilities, net(a)

 

309

 

(141)

 

-

 

52

 

(3)

 

-

 

-

 

217

 

134

Long-term debt(b)

 

71

 

16

 

-

 

(84)

 

-

 

-

 

-

 

3

 

-

Total derivative liabilities, net(b)

 

187

 

(84)

 

-

 

33

 

-

 

2

 

-

 

138

 

67

Long-term debt(c)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Total

$

3,413

$

469

$

-

$

315

$

(3)

$

-

$

-

$

4,194

$

137

$

4,323

$

(1,070)

$

-

$

259

$

-

$

2

 

$

-

$

3,514

$

1,148

AIG | Third Quarter 20172018 Form 10-Q          1923


TABLE OF CONTENTS 

 

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

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

Reclassified

 

  

 

(Losses) Included

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

  

 

(Losses) Included

 

Fair value

 

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

to Assets

 

Fair value

 

in Income on

 

Fair Value

 

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

Fair Value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

of Period

 

at End of Period

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,313

$

1

$

(5)

$

58

$

2

$

(78)

$

-

$

2,291

$

-

$

2,285

$

2

$

38

$

52

$

-

$

(6)

$

2,371

$

-

Non-U.S. governments

 

28

 

(3)

 

(9)

 

3

 

-

 

-

 

-

 

19

 

-

 

12

 

(5)

 

4

 

-

 

-

 

-

 

11

 

-

Corporate debt

 

836

 

(4)

 

7

 

(6)

 

267

 

(82)

 

(1)

 

1,017

 

-

 

932

 

5

 

(2)

 

(53)

 

449

 

(121)

 

1,210

 

-

RMBS

 

16,779

 

255

 

304

 

(165)

 

36

 

-

 

-

 

17,209

 

-

 

16,393

 

253

 

495

 

(731)

 

11

 

(7)

 

16,414

 

-

CMBS

 

2,295

 

12

 

(5)

 

(1)

 

2

 

(32)

 

(6)

 

2,265

 

-

 

735

 

2

 

5

 

(77)

 

-

 

-

 

665

 

-

CDO/ABS

 

7,075

 

7

 

16

 

728

 

-

 

-

 

(81)

 

7,745

 

-

 

8,605

 

8

 

(12)

 

(166)

 

-

 

(21)

 

8,414

 

-

Total bonds available for sale

 

29,326

 

268

 

308

 

617

 

307

 

(192)

 

(88)

 

30,546

 

-

 

28,962

 

265

 

528

 

(975)

 

460

 

(155)

 

29,085

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

18

 

1

 

-

 

-

 

-

 

-

 

-

 

19

 

-

 

28

 

1

 

-

 

-

 

-

 

(11)

 

18

 

-

RMBS

 

1,486

 

30

 

-

 

(120)

 

-

 

-

 

-

 

1,396

 

12

 

1,510

 

63

 

-

 

(130)

 

-

 

-

 

1,443

 

49

CMBS

 

168

 

6

 

-

 

(15)

 

-

 

-

 

-

 

159

 

4

 

66

 

2

 

-

 

42

 

-

 

(45)

 

65

 

3

CDO/ABS

 

6,312

 

175

 

-

 

(506)

 

-

 

-

 

-

 

5,981

 

-

 

5,234

 

111

 

-

 

(505)

 

-

 

(6)

 

4,834

 

(34)

Total other bond securities

 

7,984

 

212

 

-

 

(641)

 

-

 

-

 

-

 

7,555

 

16

 

6,838

 

177

 

-

 

(593)

 

-

 

(62)

 

6,360

 

18

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

7

 

-

 

-

 

(2)

 

-

 

-

 

5

 

-

Total equity securities available for sale

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

7

 

-

 

-

 

(2)

 

-

 

-

 

5

 

-

Other equity securities

 

14

 

-

 

-

 

(14)

 

-

 

-

 

-

 

-

 

-

Mortgage and other loans receivable

 

11

 

-

 

-

 

-

 

-

 

-

 

-

 

11

 

-

 

5

 

-

 

-

 

-

 

-

 

-

 

5

 

-

Other invested assets

 

241

 

(4)

 

1

 

18

 

-

 

-

 

-

 

256

 

-

 

225

 

-

 

(2)

 

36

 

-

 

-

 

259

 

(3)

Total

$

37,576

$

476

$

309

$

(20)

$

307

$

(192)

$

(88)

$

38,368

$

16

$

36,037

$

442

$

526

$

(1,534)

$

460

$

(217)

$

35,714

$

15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

  

 

Unrealized Gains

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

  

 

(Losses) Included

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

Reclassified

 

  

 

(Losses) Included

 

Fair Value

 

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

Fair Value

 

in Income on

 

Fair value

 

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

to Liabilities

 

Fair value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

End

 

Instruments Held

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

 

of Period

 

in Income

 

Income (Loss)

 

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

(in millions)

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

3,990

$

65

$

-

$

(33)

$

-

$

-

$

-

$

4,022

$

1

$

3,518

$

299

$

-

$

157

$

-

$

-

$

3,974

$

(220)

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

46

 

(3)

 

-

 

9

 

-

 

-

 

-

 

52

 

4

 

30

 

(2)

 

-

 

(2)

 

-

 

-

 

26

 

1

Foreign exchange contracts

 

9

 

1

 

-

 

(1)

 

-

 

-

 

-

 

9

 

(1)

 

7

 

-

 

-

 

(4)

 

-

 

-

 

3

 

-

Equity contracts

 

(52)

 

(5)

 

-

 

3

 

-

 

-

 

-

 

(54)

 

5

 

(63)

 

(11)

 

-

 

5

 

-

 

-

 

(69)

 

8

Credit contracts

 

373

 

(36)

 

-

 

7

 

-

 

1

 

-

 

345

 

28

 

293

 

(19)

 

-

 

(1)

 

-

 

-

 

273

 

19

Other contracts

 

102

 

(16)

 

-

 

4

 

-

 

-

 

-

 

90

 

33

 

(16)

 

(19)

 

-

 

19

 

-

 

-

 

(16)

 

12

Total derivatives liabilities, net(a)

 

478

 

(59)

 

-

 

22

 

-

 

1

 

-

 

442

 

69

Long-term debt(b)

 

67

 

3

 

-

 

-

 

-

 

-

 

-

 

70

 

-

Other liabilities

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(3)

Total derivative liabilities, net(b)

 

251

 

(51)

 

-

 

17

 

-

 

-

 

217

 

40

Long-term debt(c)

 

61

 

2

 

-

 

(60)

 

-

 

-

 

3

 

4

Total

$

4,535

$

9

$

-

$

(11)

$

-

$

1

$

-

$

4,534

$

67

$

3,830

$

250

$

-

$

114

$

-

$

-

$

4,194

$

(176)

24AIG | Third Quarter 20172018 Form 10-Q20 


TABLE OF CONTENTS 

 

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

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

Reclassified

 

  

 

(Losses) Included

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

  

 

(Losses) Included

 

Fair value

 

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

to Assets

 

Fair value

 

in Income on

 

Fair Value

 

Gains (Losses)

 

Other

 

Sales,

 

Gross

 

Gross

 

Fair Value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

of Period

 

at End of Period

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

2,124

$

3

$

189

$

51

$

2

$

(78)

$

-

$

2,291

$

-

$

2,040

$

3

$

123

$

221

$

8

$

(24)

$

2,371

$

-

Non-U.S. governments

 

32

 

(3)

 

(11)

 

5

 

-

 

(4)

 

-

 

19

 

-

 

17

 

(5)

 

5

 

(6)

 

-

 

-

 

11

 

-

Corporate debt

 

1,370

 

(1)

 

(10)

 

(42)

 

581

 

(880)

 

(1)

 

1,017

 

-

 

1,133

 

6

 

(2)

 

(219)

 

655

 

(363)

 

1,210

 

-

RMBS

 

16,537

 

734

 

(55)

 

(337)

 

330

 

-

 

-

 

17,209

 

-

 

16,906

 

806

 

992

 

(2,270)

 

19

 

(39)

 

16,414

 

-

CMBS

 

2,585

 

70

 

(83)

 

(169)

 

2

 

(134)

 

(6)

 

2,265

 

-

 

2,040

 

25

 

12

 

(699)

 

-

 

(713)

 

665

 

-

CDO/ABS

 

6,169

 

27

 

59

 

1,548

 

23

 

-

 

(81)

 

7,745

 

-

 

7,835

 

(14)

 

168

 

478

 

-

 

(53)

 

8,414

 

-

Total bonds available for sale

 

28,817

 

830

 

89

 

1,056

 

938

 

(1,096)

 

(88)

 

30,546

 

-

 

29,971

 

821

 

1,298

 

(2,495)

 

682

 

(1,192)

 

29,085

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

17

 

3

 

-

 

(1)

 

-

 

-

 

-

 

19

 

3

 

17

 

2

 

-

 

10

 

-

 

(11)

 

18

 

1

RMBS

 

1,581

 

7

 

-

 

(174)

 

-

 

(18)

 

-

 

1,396

 

(48)

 

1,605

 

184

 

-

 

(313)

 

-

 

(33)

 

1,443

 

116

CMBS

 

193

 

4

 

-

 

(38)

 

-

 

-

 

-

 

159

 

14

 

155

 

4

 

-

 

24

 

-

 

(118)

 

65

 

6

CDO/ABS

 

7,055

 

151

 

-

 

(1,225)

 

65

 

(65)

 

-

 

5,981

 

(378)

 

5,703

 

459

 

-

 

(1,322)

 

-

 

(6)

 

4,834

 

91

Total other bond securities

 

8,846

 

165

 

-

 

(1,438)

 

65

 

(83)

 

-

 

7,555

 

(409)

 

7,480

 

649

 

-

 

(1,601)

 

-

 

(168)

 

6,360

 

214

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

6

 

-

 

(1)

 

5

 

-

Total equity securities available for sale

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

6

 

-

 

(1)

 

5

 

-

Other equity securities

 

14

 

-

 

-

 

(14)

 

-

 

-

 

-

 

-

 

-

Mortgage and other loans receivable

 

11

 

-

 

-

 

-

 

-

 

-

 

-

 

11

 

-

 

11

 

-

 

-

 

(6)

 

-

 

-

 

5

 

-

Other invested assets

 

332

 

(5)

 

2

 

(19)

 

-

 

(54)

 

-

 

256

 

(2)

 

204

 

3

 

(5)

 

58

 

-

 

(1)

 

259

 

1

Total

$

38,020

$

990

$

91

$

(415)

$

1,003

$

(1,233)

$

(88)

$

38,368

$

(411)

$

37,666

$

1,473

$

1,293

$

(4,038)

$

682

$

(1,362)

$

35,714

$

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Net

 

  

 

  

 

  

 

  

 

 

 

  

 

Changes in

 

  

 

Net

 

  

 

  

 

  

 

  

 

  

 

Changes in

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

 

 

  

 

Unrealized Gains

 

  

 

Realized and

 

  

 

  

 

  

 

  

 

  

 

Unrealized Gains

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

Reclassified

 

  

 

(Losses) Included

 

  

 

Unrealized

 

 

 

Purchases,

 

  

 

 

 

  

 

(Losses) Included

 

Fair value

 

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

to Liabilities

 

Fair value

 

in Income on

 

Fair Value

 

(Gains) Losses

 

Other

 

Sales,

 

Gross

 

Gross

 

Fair Value

 

in Income on

 

Beginning

 

Included

 

Comprehensive

 

Issues and

 

Transfers

 

Transfers

 

Held

 

End

 

Instruments Held

 

Beginning

 

Included

 

Comprehensive

 

Issuances and

 

Transfers

 

Transfers

 

End

 

Instruments Held

(in millions)

 

of Period

 

in Income

 

Income (Loss)

 

Settlements, Net

 

In

 

Out

 

for Sale

 

of Period

 

at End of Period

 

of Period

 

in Income

 

Income (Loss)

Settlements, Net

 

In

 

Out

 

of Period

 

at End of Period

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

2,289

$

1,508

$

-

$

225

$

-

$

-

$

-

$

4,022

$

38

$

3,033

$

594

$

-

$

347

$

-

$

-

$

3,974

$

(405)

Derivative liabilities, net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

50

 

4

 

-

 

(2)

 

-

 

-

 

-

 

52

 

(5)

 

38

 

(3)

 

-

 

(9)

 

-

 

-

 

26

 

3

Foreign exchange contracts

 

7

 

3

 

-

 

(1)

 

-

 

-

 

-

 

9

 

(2)

 

11

 

1

 

-

 

(9)

 

-

 

-

 

3

 

(1)

Equity contracts

 

(54)

 

(5)

 

-

 

5

 

-

 

-

 

-

 

(54)

 

5

 

(58)

 

(26)

 

-

 

15

 

-

 

-

 

(69)

 

22

Credit contracts

 

505

 

(70)

 

-

 

(91)

 

-

 

1

 

-

 

345

 

56

 

329

 

(55)

 

-

 

(1)

 

-

 

-

 

273

 

53

Other contracts

 

48

 

14

 

-

 

28

 

-

 

-

 

-

 

90

 

3

 

(11)

 

(58)

 

-

 

56

 

(3)

 

-

 

(16)

 

57

Total derivatives liabilities, net(a)

 

556

 

(54)

 

-

 

(61)

 

-

 

1

 

-

 

442

 

57

Long-term debt(b)

 

183

 

3

 

-

 

(3)

 

-

 

(113)

 

-

 

70

 

-

Total derivative liabilities, net(b)

 

309

 

(141)

 

-

 

52

 

(3)

 

-

 

217

 

134

Long-term debt(c)

 

71

 

16

 

-

 

(84)

 

-

 

-

 

3

 

-

Total

$

3,028

$

1,457

$

-

$

161

$

-

$

(112)

$

-

$

4,534

$

95

$

3,413

$

469

$

-

$

315

$

(3)

$

-

$

4,194

$

(271)

(a)  As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and accounted for as available for sale securities.

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

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

AIG | Third Quarter 20172018 Form 10-Q          2125


TABLE OF CONTENTS 

 

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

 

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

 

Net

 

Net Realized

 

 

 

 

 

Net

 

Net Realized

 

 

 

 

 

Investment

 

Capital

 

Other

 

 

 

Investment

 

Capital

 

Other

 

 

(in millions)

 

Income

Gains (Losses)

 

Income

 

Total

 

Income

Gains (Losses)

 

Income

 

Total

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Bonds available for sale

$

249

$

-

$

-

$

249

Other bond securities

 

35

 

1

 

56

 

92

Other equity securities

 

1

 

-

 

-

 

1

Other invested assets

 

-

 

-

 

-

 

-

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Bonds available for sale

$

731

$

(112)

$

-

$

619

Other bond securities

 

92

 

(3)

 

262

 

351

Other equity securities

 

(2)

 

-

 

-

 

(2)

Other invested assets

 

57

 

-

 

(5)

 

52

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale

$

257

$

8

$

-

$

265

$

257

$

8

$

-

$

265

Other bond securities

 

87

 

(2)

 

92

 

177

 

87

 

(2)

 

92

 

177

Other invested assets

 

2

 

1

 

(3)

 

-

 

2

 

1

 

(3)

 

-

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale

$

849

$

(28)

$

-

$

821

$

849

$

(28)

$

-

$

821

Other bond securities

 

259

 

-

 

390

 

649

 

259

 

-

 

390

 

649

Other invested assets

 

5

 

(1)

 

(1)

 

3

 

5

 

(1)

 

(1)

 

3

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

Bonds available for sale

$

294

$

(27)

$

1

$

268

Other bond securities

 

37

 

13

 

162

 

212

Other invested assets

 

5

 

(3)

 

(6)

 

(4)

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

Bonds available for sale

$

883

$

(56)

$

3

$

830

Other bond securities

 

29

 

45

 

91

 

165

Other invested assets

 

2

 

29

 

(36)

 

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

Net Realized

 

 

 

 

 

Net

 

Net Realized

 

 

 

 

 

Investment

 

Capital

 

Other

 

 

 

Investment

 

Capital

 

Other

 

 

(in millions)

 

Income

Gains (Losses)

 

Income

 

Total

 

Income

(Gains) Losses

 

Income

 

Total

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

(242)

$

-

$

(242)

Derivative liabilities, net

 

-

 

(1)

 

(38)

 

(39)

Long-term debt

 

-

 

-

 

-

 

-

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

(986)

$

-

$

(986)

Derivative liabilities, net

 

-

 

(3)

 

(81)

 

(84)

Long-term debt

 

-

 

-

 

-

 

-

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

299

$

-

$

299

$

-

$

299

$

-

$

299

Derivative liabilities, net

 

-

 

(5)

 

(46)

 

(51)

 

-

 

(5)

 

(46)

 

(51)

Long-term debt

 

-

 

-

 

2

 

2

 

-

 

-

 

2

 

2

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

594

$

-

$

594

$

-

$

594

$

-

$

594

Derivative liabilities, net

 

-

 

(13)

 

(128)

 

(141)

 

-

 

(13)

 

(128)

 

(141)

Long-term debt

 

-

 

-

 

16

 

16

 

-

 

-

 

16

 

16

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

65

$

-

$

65

Derivative liabilities, net

 

-

 

(5)

 

(54)

 

(59)

Long-term debt

 

-

 

-

 

3

 

3

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

1,508

$

-

$

1,508

Derivative liabilities, net

 

-

 

(1)

 

(53)

 

(54)

Long-term debt

 

-

 

-

 

3

 

3

26AIG | Third Quarter 20172018 Form 10-Q22 


TABLE OF CONTENTS 

 

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

 

The following table presents the gross components of purchases, sales, issuesissuances and settlements, net, shown above, for the three- and nine-month periods ended September 30, 20172018 and 20162017 related to Level 3 assets and liabilities in the Condensed Consolidated Balance Sheets:

 

 

 

 

 

 

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Sales, Issues and

 

(in millions)

 

Purchases

 

Sales

 

Settlements

 

Settlements, Net(a)

 

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

56

$

-

$

(4)

$

52

 

Non-U.S. governments

 

7

 

-

 

(7)

 

-

 

Corporate debt

 

6

 

(5)

 

(54)

 

(53)

 

RMBS

 

194

 

(16)

 

(909)

 

(731)

 

CMBS

 

-

 

(17)

 

(60)

 

(77)

 

CDO/ABS

 

402

 

(136)

 

(432)

 

(166)

 

Total bonds available for sale

 

665

 

(174)

 

(1,466)

 

(975)

 

Other bond securities:

 

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

-

 

-

 

RMBS

 

-

 

(51)

 

(79)

 

(130)

 

CMBS

 

42

 

-

 

-

 

42

 

CDO/ABS

 

-

 

(57)

 

(448)

 

(505)

 

Total other bond securities

 

42

 

(108)

 

(527)

 

(593)

 

Equity securities available for sale

 

4

 

-

 

(6)

 

(2)

 

Other equity securities

 

-

 

-

 

-

 

-

 

Other invested assets

 

46

 

(9)

 

(1)

 

36

 

Total assets

$

757

$

(291)

$

(2,000)

$

(1,534)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

79

$

78

$

157

 

Derivative liabilities, net

 

-

 

-

 

17

 

17

 

Long-term debt(b)

 

-

 

-

 

(60)

 

(60)

 

Total liabilities

$

-

$

79

$

35

$

114

 

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

98

$

-

$

(40)

$

58

 

Non-U.S. governments

 

7

 

-

 

(4)

 

3

 

Corporate debt

 

-

 

-

 

(6)

 

(6)

 

RMBS

 

754

 

(23)

 

(896)

 

(165)

 

CMBS

 

50

 

(24)

 

(27)

 

(1)

 

CDO/ABS

 

902

 

(22)

 

(152)

 

728

 

Total bonds available for sale

 

1,811

 

(69)

 

(1,125)

 

617

 

Other bond securities:

 

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

-

 

-

 

RMBS

 

12

 

(74)

 

(58)

 

(120)

 

CMBS

 

-

 

(14)

 

(1)

 

(15)

 

CDO/ABS

 

-

 

(340)

 

(166)

 

(506)

 

Total other bond securities

 

12

 

(428)

 

(225)

 

(641)

 

Equity securities available for sale

 

-

 

-

 

-

 

-

 

Other equity securities

 

-

 

-

 

(14)

 

(14)

 

Other invested assets

 

21

 

-

 

(3)

 

18

 

Total assets

$

1,844

$

(497)

$

(1,367)

$

(20)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

95

$

(128)

$

(33)

 

Derivative liabilities, net

 

(2)

 

-

 

24

 

22

 

Long-term debt(b)

 

-

 

-

 

-

 

-

 

Total liabilities

$

(2)

$

95

$

(104)

$

(11)

 

 

 

 

 

 

 

Issuances

 

Purchases, Sales,

 

 

 

 

 

 

 

and

 

Issuances and

 

(in millions)

 

Purchases

 

Sales

 

Settlements(a)

 

Settlements, Net(a)

 

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

-

$

(8)

$

(38)

$

(46)

 

Non-U.S. governments

 

-

 

-

 

1

 

1

 

Corporate debt

 

25

 

-

 

(53)

 

(28)

 

RMBS

 

123

 

(2)

 

(846)

 

(725)

 

CMBS

 

58

 

(2)

 

(25)

 

31

 

CDO/ABS

 

394

 

(49)

 

(25)

 

320

 

Total bonds available for sale

 

600

 

(61)

 

(986)

 

(447)

 

Other bond securities:

 

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

(18)

 

(18)

 

RMBS

 

-

 

-

 

(57)

 

(57)

 

CMBS

 

-

 

-

 

-

 

-

 

CDO/ABS

 

-

 

-

 

(267)

 

(267)

 

Total other bond securities

 

-

 

-

 

(342)

 

(342)

 

Other equity securities

 

24

 

-

 

-

 

24

 

Other invested assets

 

-

 

-

 

(1)

 

(1)

 

Total assets

$

624

$

(61)

$

(1,329)

$

(766)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

148

$

(64)

$

84

 

Derivative liabilities, net

 

(18)

 

-

 

19

 

1

 

Long-term debt(b)

 

-

 

-

 

-

 

-

 

Total liabilities

$

(18)

$

148

$

(45)

$

85

 

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

56

$

-

$

(4)

$

52

 

Non-U.S. governments

 

7

 

-

 

(7)

 

-

 

Corporate debt

 

6

 

(5)

 

(54)

 

(53)

 

RMBS

 

194

 

(16)

 

(909)

 

(731)

 

CMBS

 

-

 

(17)

 

(60)

 

(77)

 

CDO/ABS

 

402

 

(136)

 

(432)

 

(166)

 

Total bonds available for sale

 

665

 

(174)

 

(1,466)

 

(975)

 

Other bond securities:

 

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

-

 

-

 

RMBS

 

-

 

(51)

 

(79)

 

(130)

 

CMBS

 

42

 

-

 

-

 

42

 

CDO/ABS

 

-

 

(57)

 

(448)

 

(505)

 

Total other bond securities

 

42

 

(108)

 

(527)

 

(593)

 

Equity securities available for sale

 

4

 

-

 

(6)

 

(2)

 

Other equity securities

 

-

 

-

 

-

 

-

 

Mortgage and other loans receivable

 

-

 

-

 

-

 

-

 

Other invested assets

 

46

 

(9)

 

(1)

 

36

 

Total assets

$

757

$

(291)

$

(2,000)

$

(1,534)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

79

$

78

$

157

 

Derivative liabilities, net

 

-

 

-

 

17

 

17

 

Long-term debt(b)

 

-

 

-

 

(60)

 

(60)

 

Total liabilities

$

-

$

79

$

35

$

114

AIG | Third Quarter 20172018 Form 10-Q          2327


TABLE OF CONTENTS 

 

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

 

 

 

 

 

 

 

 

 

 

Purchases,

 

 

 

 

 

 

 

 

 

Sales, Issues and

 

(in millions)

 

Purchases

 

Sales

 

Settlements

 

Settlements, Net(a)

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

279

$

(16)

$

(42)

$

221

 

Non-U.S. governments

 

7

 

(1)

 

(12)

 

(6)

 

Corporate debt

 

36

 

(59)

 

(196)

 

(219)

 

RMBS

 

834

 

(260)

 

(2,844)

 

(2,270)

 

CMBS

 

39

 

(128)

 

(610)

 

(699)

 

CDO/ABS

 

1,609

 

(136)

 

(995)

 

478

 

Total bonds available for sale

 

2,804

 

(600)

 

(4,699)

 

(2,495)

 

Other bond securities:

 

 

 

 

 

 

 

 

 

Corporate debt

 

11

 

-

 

(1)

 

10

 

RMBS

 

112

 

(218)

 

(207)

 

(313)

 

CMBS

 

42

 

(11)

 

(7)

 

24

 

CDO/ABS

 

-

 

(65)

 

(1,257)

 

(1,322)

 

Total other bond securities

 

165

 

(294)

 

(1,472)

 

(1,601)

 

Equity securities available for sale

 

12

 

-

 

(6)

 

6

 

Other equity securities

 

-

 

-

 

-

 

-

 

Mortgage and other loans receivable

 

-

 

(6)

 

-

 

(6)

 

Other invested assets

 

89

 

(11)

 

(20)

 

58

 

Total assets

$

3,070

$

(911)

$

(6,197)

$

(4,038)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

231

$

116

$

347

 

Derivative liabilities, net

 

-

 

-

 

52

 

52

 

Long-term debt(b)

 

-

 

-

 

(84)

 

(84)

 

Total liabilities

$

-

$

231

$

84

$

315

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

144

$

(7)

$

(86)

$

51

 

Non-U.S. governments

 

10

 

-

 

(5)

 

5

 

Corporate debt

 

29

 

(25)

 

(46)

 

(42)

 

RMBS

 

2,297

 

(81)

 

(2,553)

 

(337)

 

CMBS

 

156

 

(82)

 

(243)

 

(169)

 

CDO/ABS

 

2,053

 

(33)

 

(472)

 

1,548

 

Total bonds available for sale

 

4,689

 

(228)

 

(3,405)

 

1,056

 

Other bond securities:

 

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

(1)

 

(1)

 

RMBS

 

101

 

(100)

 

(175)

 

(174)

 

CMBS

 

53

 

(85)

 

(6)

 

(38)

 

CDO/ABS

 

69

 

(376)

 

(918)

 

(1,225)

 

Total other bond securities

 

223

 

(561)

 

(1,100)

 

(1,438)

 

Equity securities available for sale

 

-

 

-

 

-

 

-

 

Other equity securities

 

14

 

-

 

(28)

 

(14)

 

Other invested assets

 

39

 

(2)

 

(56)

 

(19)

 

Total assets

$

4,965

$

(791)

$

(4,589)

$

(415)

 

Liabilities:

 

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

365

$

(140)

$

225

 

Derivative liabilities, net

 

(5)

 

-

 

(56)

 

(61)

 

Long-term debt(b)

 

-

 

-

 

(3)

 

(3)

 

Total liabilities

$

(5)

$

365

$

(199)

$

161

 

 

 

 

 

 

Issuances

 

Purchases, Sales,

 

 

 

 

 

 

and

 

Issuances and

(in millions)

 

Purchases

 

Sales

 

Settlements(a)

 

Settlements, Net(a)

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

24

$

(8)

$

(160)

$

(144)

Non-U.S. governments

 

2

 

-

 

(5)

 

(3)

Corporate debt

 

280

 

(216)

 

(238)

 

(174)

RMBS

 

630

 

(12)

 

(2,495)

 

(1,877)

CMBS

 

70

 

(2)

 

(67)

 

1

CDO/ABS

 

1,364

 

(962)

 

(736)

 

(334)

Total bonds available for sale

 

2,370

 

(1,200)

 

(3,701)

 

(2,531)

Other bond securities:

 

 

 

 

 

 

 

 

Corporate debt

 

-

 

-

 

(18)

 

(18)

RMBS

 

1

 

(34)

 

(205)

 

(238)

CMBS

 

-

 

-

 

(1)

 

(1)

CDO/ABS

 

-

 

(4)

 

(776)

 

(780)

Total other bond securities

 

1

 

(38)

 

(1,000)

 

(1,037)

Other equity securities

 

27

 

-

 

-

 

27

Mortgage and other loans receivable

 

-

 

(5)

 

-

 

(5)

Other invested assets

 

153

 

(29)

 

(29)

 

95

Total assets

$

2,551

$

(1,272)

$

(4,730)

$

(3,451)

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

391

$

(165)

$

226

Derivative liabilities, net

 

(37)

 

-

 

70

 

33

Long-term debt(b)

 

-

 

-

 

-

 

-

Total liabilities

$

(37)

$

391

$

(95)

$

259

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political subdivisions

$

279

$

(16)

$

(42)

$

221

Non-U.S. governments

 

7

 

(1)

 

(12)

 

(6)

Corporate debt

 

36

 

(59)

 

(196)

 

(219)

RMBS

 

834

 

(260)

 

(2,844)

 

(2,270)

CMBS

 

39

 

(128)

 

(610)

 

(699)

CDO/ABS

 

1,609

 

(136)

 

(995)

 

478

Total bonds available for sale

 

2,804

 

(600)

 

(4,699)

 

(2,495)

Other bond securities:

 

 

 

 

 

 

 

 

Corporate debt

 

11

 

-

 

(1)

 

10

RMBS

 

112

 

(218)

 

(207)

 

(313)

CMBS

 

42

 

(11)

 

(7)

 

24

CDO/ABS

 

-

 

(65)

 

(1,257)

 

(1,322)

Total other bond securities

 

165

 

(294)

 

(1,472)

 

(1,601)

Equity securities available for sale

 

12

 

-

 

(6)

 

6

Other equity securities

 

-

 

-

 

-

 

-

Mortgage and other loans receivable

 

-

 

(6)

 

-

 

(6)

Other invested assets

 

89

 

(11)

 

(20)

 

58

Total assets

$

3,070

$

(911)

$

(6,197)

$

(4,038)

Liabilities:

 

 

 

 

 

 

 

 

Policyholder contract deposits

$

-

$

231

$

116

$

347

Derivative liabilities, net

 

-

 

-

 

52

 

52

Long-term debt(b)

 

-

 

-

 

(84)

 

(84)

Total liabilities

$

-

$

231

$

84

$

315

(a)  There were no issuances during the three- and nine-month periods ended September 30, 20172018 and 2016,2017, respectively.

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

28AIG | Third Quarter 20172018 Form 10-Q24 


TABLE OF CONTENTS 

 

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

 

Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at September 30, 20172018 and 20162017 may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities).

Transfers of Level 3 Assets and Liabilities

We record transfers of assets and liabilities into or out of Level 3 classification at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. The Net realized and unrealized gains (losses) included in income or Other comprehensive income (loss) as shown in the table above excludedexcludes $17 million and $41 million of net gains related to assets and liabilities transferred into Level 3 during the three- and nine-month periods ended September 30, 2018, respectively, and includes $2 million and $(20) million of net gains (losses) related to assets and liabilities transferred out of Level 3 in the three- and nine-month periods ended September 30, 2018, respectively.

The Net realized and unrealized gains (losses) included in income or Other comprehensive income (loss) as shown in the table above excludes $49 million and $57 million of net losses related to assets and liabilities transferred into Level 3 during the three- and nine-month periods ended September 30, 2017, respectively, and includedincludes $32 million and $38 million of net losses related to assets and liabilities transferred out of Level 3 during the three- and nine-month periods ended September 30, 2017, respectively.

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

Transfers of Level 3 Assets

During the three- and nine-month periods ended September 30, 20172018 and 2016,2017, transfers into Level 3 assets primarily included certain investments in private placement corporate debt, RMBS, CMBS and CDO/ABS. Transfers of private placement corporate debt and certain ABS into Level 3 assets were primarily the result of limited market pricing information that required us to determine fair value for these securities based on inputs that are adjusted to better reflect our own assumptions regarding the characteristics of a specific security or associated market liquidity.  The transfers of investments in RMBS, CMBS and CDO and certain ABS into Level 3 assets were due to decreases in market transparency and liquidity for individual security types.

During the three- and nine-month periodsand nine-month periods ended September 30, 20172018 and 20162017, transfers out of Level 3 assets primarily included private placement and other corporate debt, CMBS, RMBS, CDO/ABS and certain investments in municipal securities. Transfers of certain investments in municipal securities, corporate debt, RMBS, CMBS and CDO/ABS out of Level 3 assets were based on consideration of market liquidity as well as related transparency of pricing and associated observable inputs for these investments. Transfers of certain investments in private placement corporate debt and certain ABS out of Level 3 assets were primarily the result of using observable pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market.

Transfers of Level 3 Liabilities

There were no significant transfers of derivative or other liabilities into or out of Level 3 for the three- and nine-month periods ended September 30, 20172018 and 20162017.

AIG | Third Quarter 20172018 Form 10-Q          2529


TABLE OF CONTENTS 

 

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

 

Quantitative Information about LevelQUANTITATIVE INFORMATION ABOUT LEVEL 3 Fair Value MeasurementsFAIR 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

 

 

 

Fair Value at

 

 

 

September 30,

Valuation

 

Range

September 30,

Valuation

 

Range

(in millions)

2017

Technique

Unobservable Input(b)

(Weighted Average)

2018

Technique

Unobservable Input(b)

(Weighted Average)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

1,578

Discounted cash flow

Yield

3.71% - 4.49% (4.10%)

$

1,439

Discounted cash flow

Yield

4.04% - 4.81% (4.42%)

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

430

Discounted cash flow

Yield

4.18% - 4.52% (4.35%)

 

727

Discounted cash flow

Yield

3.55% - 15.26% (9.40%)

 

 

 

 

 

 

 

 

 

 

RMBS(a)

 

16,472

Discounted cash flow

Constant prepayment rate

2.54% - 11.06% (6.80%)

 

14,257

Discounted cash flow

Constant prepayment rate

4.51% - 13.02% (8.76%)

 

 

 

Loss severity

47.05% - 79.54% (62.97%)

 

 

 

Loss severity

39.83% - 73.69% (56.76%)

 

 

 

Constant default rate

3.21% - 7.87% (5.54%)

 

 

 

Constant default rate

2.69% - 7.58% (5.14%)

 

 

 

Yield

2.27% - 4.88% (3.58%)

 

 

 

Yield

3.17% - 5.38% (4.28%)

 

 

 

 

 

 

 

 

 

 

CDO/ABS(a)

 

5,086

Discounted cash flow

Yield

3.26% - 4.99% (4.12%)

 

4,792

Discounted cash flow

Yield

4.09% - 5.38% (4.74%)

 

 

 

 

 

 

 

 

 

 

CMBS

 

488

Discounted cash flow

Yield

1.86% - 9.12% (5.49%)

 

461

Discounted cash flow

Yield

3.09% - 7.20% (5.15%)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Embedded derivatives within

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guaranteed minimum withdrawal benefits (GMWB)

 

2,104

Discounted cash flow

Equity volatility

5.00% - 40.00%

 

1,046

Discounted cash flow

Equity volatility

6.15% - 48.35%

 

 

 

Base lapse rate

0.35% - 14.00%

 

 

 

Base lapse rate

0.16% - 12.60%

 

 

 

Dynamic lapse multiplier

30.00% - 170.00%

 

 

 

Dynamic lapse multiplier

20.00% - 180.00%

 

 

 

Mortality multiplier(c)

40.00% - 153.00%

 

 

 

Mortality multiplier(c)

40.00% - 153.00%

 

 

 

Utilization

100.00%

 

 

 

Utilization

90.00% - 100.00%

 

 

 

Equity / interest-rate correlation

20.00% - 40.00%

 

 

 

Equity / interest-rate correlation

20.00% - 40.00%

 

 

 

 

 

 

 

 

 

 

Index Annuities

 

1,375

Discounted cash flow

Lapse rate

0.50% - 40.00%

 

1,890

Discounted cash flow

Lapse rate

0.50% - 40.00%

 

 

 

Mortality multiplier(c)

42.00% - 162.00%

 

 

 

Mortality multiplier(c)

42.00% - 162.00%

 

 

 

 

 

 

 

 

Option Budget

1.00% - 3.00%

 

 

 

 

 

Indexed Life

 

477

Discounted cash flow

Base lapse rate

2.00% to 19.00%

 

414

Discounted cash flow

Base lapse rate

0.00% - 13.00%

 

 

 

Mortality rate

0.00% to 40.00%

 

 

 

Mortality rate

0.00% - 100.00%

30AIG | Third Quarter 20172018 Form 10-Q26 


TABLE OF CONTENTS 

 

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)

 

2016

Technique

Unobservable Input(b)

(Weighted Average)

 

2017

Technique

Unobservable Input(b)

(Weighted Average)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities

 

 

 

 

 

 

 

 

 

 

and political subdivisions

$

1,248

Discounted cash flow

Yield

4.12% - 4.91% (4.52%)

$

1,620

Discounted cash flow

Yield

 3.55% - 4.32% (3.94%)

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

498

Discounted cash flow

Yield

3.41% - 6.38% (4.90%)

 

1,086

Discounted cash flow

Yield

3.26% - 12.22% (7.74%)

 

 

 

 

 

 

 

 

 

 

RMBS(a)

 

17,412

Discounted cash flow

Constant prepayment rate

3.95% - 6.54% (5.25%)

 

16,156

Discounted cash flow

Constant prepayment rate

 3.97% - 13.42% (8.69%)

 

 

 

Loss severity

47.51% - 80.98% (64.24%)

 

 

 

Loss severity

 43.15% - 77.15% (60.15%)

 

 

 

Constant default rate

3.28% - 8.64% (5.96%)

 

 

 

Constant default rate

 3.31% - 8.30% (5.80%)

 

 

 

Yield

3.28% - 5.87% (4.57%)

 

 

 

Yield

 2.73% - 5.19% (3.96%)

 

 

 

 

 

 

 

 

 

 

CDO/ABS(a)

 

4,368

Discounted cash flow

Yield

3.67% - 5.85% (4.76%)

 

5,254

Discounted cash flow

Yield

3.38% - 4.78% (4.08%)

 

 

 

 

 

 

 

 

 

 

CMBS

 

1,511

Discounted cash flow

Yield

0.48% - 10.21% (5.34%)

 

487

Discounted cash flow

Yield

2.22% - 7.77% (4.99%)

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Embedded derivatives within

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GMWB

 

1,777

Discounted cash flow

Equity volatility

13.00% - 50.00%

 

1,994

Discounted cash flow

Equity volatility

 6.45% - 51.25%

 

 

 

Base lapse rate

0.50% - 20.00%

 

 

 

Base lapse rate

 0.35% - 14.00%

 

 

 

Dynamic lapse multiplier

30.00% - 170.00%

 

 

 

Dynamic lapse multiplier

 30.00% - 170.00%

 

 

 

Mortality multiplier(c)

42.00% - 161.00%

 

 

 

Mortality multiplier(c)

 40.00% - 153.00%

 

 

 

Utilization

100.00%

 

 

 

Utilization

90.00% - 100.00%

 

 

 

Equity / interest-rate correlation

20.00% - 40.00%

 

 

 

Equity / interest-rate correlation

 20.00% - 40.00%

 

 

 

 

 

 

 

 

 

 

Index Annuities

 

859

Discounted cash flow

Lapse rate

1.00% - 66.00%

 

1,603

Discounted cash flow

Lapse rate

 0.50% - 40.00%

 

 

 

Mortality multiplier(c)

101.00% - 103.00%

 

 

 

Mortality multiplier(c)

 42.00% - 162.00%

 

 

 

 

 

 

 

 

Option Budget

 1.00% - 4.00%

 

 

 

 

 

Indexed Life

 

381

Discounted cash flow

Base lapse rate

2.00% - 19.00%

 

515

Discounted cash flow

Base lapse rate

 2.00% - 19.00%

 

 

 

Mortality rate

0.00% - 40.00%

 

 

 

Mortality rate

 0.00% - 40.00%

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

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

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

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

Sensitivity to Changes in Unobservable Inputs

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

AIG | Third Quarter 20172018 Form 10-Q          2731


TABLE OF CONTENTS 

 

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

 

Obligations of States, Municipalities and Political Subdivisions

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

Corporate Debt

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

RMBS and CDO/ABS

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

CMBS

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

Embedded derivatives within Policyholder contract deposits

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

      Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. Increases in assumed volatility will generally increase the fair value of both the projected cash flows from rider fees as well as the projected cash flows related to benefit payments.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, but in certain scenarios, increases in assumed lapse rates may increase the fair value of the liability.amounts.

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

Utilization assumptions estimate the timing when policyholders with a GMWB will elect to utilize their benefit and begin taking withdrawals. The assumptions may vary by the type of guarantee, tax-qualified status, the contract’s withdrawal history and the

32AIG | Third Quarter 20172018 Form 10-Q28 


TABLE OF CONTENTS 

 

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

 

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

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

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

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

 

September 30, 2017

 

December 31, 2016

 

September 30, 2018

 

December 31, 2017

 

 

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

 

 

 

 

 

 

 

 

 

Investment Category*

 

 

 

 

 

 

 

 

 

Private equity funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leveraged buyout

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

$

1,310

$

761

 

$

1,424

$

750

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

$

700

$

646

 

$

1,243

$

706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate /

Infrastructure

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

 

226

 

185

 

258

 

208

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

 

185

 

84

 

210

 

187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Venture capital

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

 

127

 

44

 

137

 

31

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

 

102

 

113

 

134

 

73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distressed

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

 

119

 

43

 

123

 

44

Growth Equity

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

 

306

 

35

 

215

 

73

 

 

 

 

 

 

 

 

 

Mezzanine

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

 

220

 

107

 

171

 

135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

Includes multi-strategy, mezzanine and other strategies

 

400

 

237

 

312

 

215

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

 

624

 

324

 

155

 

53

Total private equity funds

Total private equity funds

 

2,182

 

1,270

 

2,254

 

1,248

Total private equity funds

 

2,137

 

1,309

 

2,128

 

1,227

Hedge funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Event-driven

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

 

1,228

 

-

 

1,453

 

9

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

 

888

 

-

 

1,128

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-short

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

 

1,317

 

-

 

1,429

 

-

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

 

993

 

-

 

1,233

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Macro

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

 

1,016

 

-

 

992

 

-

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

 

871

 

-

 

1,011

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distressed

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

 

278

 

7

 

416

 

8

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

 

44

 

8

 

266

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

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

 

222

 

4

 

197

 

14

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

 

210

 

1

 

231

 

4

Total hedge funds

 

 

4,061

 

11

 

4,487

 

31

 

 

3,006

 

9

 

3,869

 

12

Total

 

$

6,243

$

1,281

 

$

6,741

$

1,279

 

$

5,143

$

1,318

 

$

5,997

$

1,239

*  Beginning in the third quarter of 2018, Growth Equity and Mezzanine private equity fund categories are shown separately. Prior periods were revised to conform to the current period presentation.

AIG | Third Quarter 20172018 Form 10-Q          2933


TABLE OF CONTENTS 

 

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

 

Private equity fund investments included above are not redeemable, because distributions from the funds will be received when underlying investments of the funds are liquidated. Private equity funds are generally expected to have 10-year lives at their inception, but these lives may be extended at the fund manager’s discretion, typically in one or two-year increments. At September 30, 2017,2018, assuming average original expected lives of 10 years for the funds, 6217 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, 1740 percent between four and six years and 2143 percent between seven and 10 years.

The hedge fund investments included above, which are carried at fair value, are generally redeemable monthly (21(34 percent), quarterly (45(34 percent), semi-annually (11(9 percent) and annually (23 percent), with redemption notices ranging from one day to 180 days. At September 30, 2017,2018, investments representing approximately 4952 percent of the total fair value of these hedge fund investments had partial contractual redemption restrictions. These partial redemption restrictions are generally related to one or more investments held in the hedge funds that the fund manager deemed to be illiquid. The majority of these contractual restrictions, which may have been put in place at the fund’s inception or thereafter, have pre-defined end dates. The majority of these restrictions are generally expected to be lifted by the end of 2018.  

Fair Value Option

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

Gain (Loss) Three Months Ended September 30,

Gain (Loss) Nine Months Ended September 30,

Gain (Loss) Three Months Ended September 30,

Gain (Loss) Nine Months Ended September 30,

(in millions)

 

2017

 

2016

 

2017

 

2016

 

2018

 

2017

 

2018

 

2017

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bond and equity securities

$

289

$

331

$

1,088

$

629

$

122

$

289

$

274

$

1,088

Alternative Investments(a)

 

129

 

154

 

406

 

(60)

Alternative investments(a)

 

131

 

129

 

355

 

406

Other, including Short-term investments

 

1

 

-

 

1

 

-

 

-

 

1

 

-

 

1

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt(b)

 

(18)

 

8

 

(66)

 

(239)

 

6

 

(18)

 

74

 

(66)

Other liabilities

 

(1)

 

-

 

(2)

 

-

 

-

 

(1)

 

-

 

(2)

Total gain

$

400

$

493

$

1,427

$

330

$

259

$

400

$

703

$

1,427

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

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

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

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. An unrealized gain of $1 million was recognized in Other Comprehensive Income for the nine-month period ended September 30, 2018. There was no material unrealized gain or loss recognized in Other Comprehensive Income for the three-month period ended September 30, 2018.

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

September 30, 2017

 

December 31, 2016

September 30, 2018

 

December 31, 2017

 

 

Outstanding

 

 

 

 

 

Outstanding

 

 

 

 

Outstanding

 

 

 

 

 

Outstanding

 

 

(in millions)

Fair Value

Principal Amount

Difference

 

Fair Value

Principal Amount

Difference

Fair Value

Principal Amount

Difference

 

Fair Value

Principal Amount

Difference

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage and other loans receivable

$

5

$

5

$

-

 

$

11

$

8

$

3

$

-

$

-

$

-

 

$

5

$

5

$

-

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt*

$

2,998

$

2,353

$

645

 

$

3,428

$

2,628

$

800

$

2,311

$

1,798

$

513

 

$

2,888

$

2,280

$

608

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

34AIG | Third Quarter 20172018 Form 10-Q30 


TABLE OF CONTENTS 

 

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

Assets at Fair Value

 

Impairment Charges(a)

Non-Recurring Basis

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

Non-Recurring Basis

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 Level 1

  Level 2

  Level 3

 

  Total

 

 

2017

 

2016

 

 

2017

 

2016

 Level 1

  Level 2

  Level 3

 

  Total

 

 

2018

 

2017

 

 

2018

 

2017

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

$

-

$

-

$

62

$

62

 

$

26

$

27

 

$

76

$

58

Investments in life settlements

 

-

 

-

 

1,759

 

1,759

 

273

 

80

 

 

360

 

329

Other assets*

 

-

 

-

 

-

 

-

 

 

-

 

2

 

 

35

 

11

Total

$

-

$

-

$

1,821

$

1,821

 

$

299

$

109

 

$

471

$

398

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

$

-

$

-

$

364

$

364

 

 

 

 

 

 

 

 

 

 

$

-

$

-

$

344

$

344

 

$

-

$

26

 

$

89

$

76

Investments in life settlements

 

-

 

-

 

736

 

736

 

 

 

 

 

 

 

 

 

 

 

-

 

-

 

-

 

-

 

-

 

273

 

 

-

 

360

Other assets

 

-

 

-

 

2

 

2

 

 

 

 

 

 

 

 

 

 

 

-

 

-

 

2

 

2

 

 

34

 

-

 

 

35

 

35

Total

$

-

$

-

$

1,102

$

1,102

 

 

 

 

 

 

 

 

 

 

$

-

$

-

$

346

$

346

 

$

34

$

299

 

$

124

$

471

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other investments

$

-

$

-

$

55

$

55

 

 

 

 

 

 

 

 

 

 

Investments in life settlements

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

Other assets

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

Total

$

-

$

-

$

55

$

55

 

 

 

 

 

 

 

 

 

 

*(a)  Impairments includein the nine-month period ended September 30, 2017 included $35 million related to otherOther assets of $179 million that were sold during the three-month period ended June 30, 2017.

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

Estimated Fair Value

 

Carrying

(in millions)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Value

September 30, 2017

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage and other loans receivable

$

-

$

155

$

36,750

$

36,905

$

36,084

$

-

$

108

$

41,060

$

41,168

$

41,878

Other invested assets

 

-

 

665

 

6

 

671

 

661

 

-

 

771

 

6

 

777

 

773

Short-term investments

 

-

 

7,172

 

-

 

7,172

 

7,172

 

-

 

5,230

 

-

 

5,230

 

5,230

Cash

 

2,433

 

-

 

-

 

2,433

 

2,433

 

2,741

 

-

 

-

 

2,741

 

2,741

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits associated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

with investment-type contracts

 

-

 

353

 

123,656

 

124,009

 

114,070

 

-

 

349

 

122,487

 

122,836

 

119,493

Other liabilities

 

-

 

4,896

 

-

 

4,896

 

4,896

 

-

 

1,465

 

1

 

1,466

 

1,466

Long-term debt

 

-

 

23,687

 

3,486

 

27,173

 

28,041

 

-

 

24,147

 

8,221

 

32,368

 

32,283

December 31, 2016

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage and other loans receivable

$

-

$

161

$

33,575

$

33,736

$

33,229

$

-

$

117

$

37,644

$

37,761

$

37,018

Other invested assets

 

-

 

955

 

2,053

 

3,008

 

3,474

 

-

 

590

 

6

 

596

 

593

Short-term investments

 

-

 

8,961

 

-

 

8,961

 

8,961

 

-

 

7,771

 

-

 

7,771

 

7,771

Cash

 

1,868

 

-

 

-

 

1,868

 

1,868

 

2,362

 

-

 

-

 

2,362

 

2,362

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits associated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

with investment-type contracts

 

-

 

382

 

121,742

 

122,124

 

112,705

 

-

 

387

 

121,809

 

122,196

 

114,326

Other liabilities

 

-

 

4,196

 

-

 

4,196

 

4,196

 

-

 

4,494

 

-

 

4,494

 

4,494

Long-term debt

 

-

 

23,117

 

3,333

 

26,450

 

27,484

 

-

 

23,930

 

4,313

 

28,243

 

28,752

AIG | Third Quarter 20172018 Form 10-Q          3135


TABLE OF CONTENTS 

 

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

 

6. Investments

Securities Available for Sale

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

 

 

 

 

 

 

 

 

 

Other-Than-

 

 

 

 

 

 

 

 

 

Other-Than-

 

Amortized

 

Gross

 

Gross

 

 

 

Temporary

 

Amortized

 

Gross

 

Gross

 

 

 

Temporary

 

Cost or

 

Unrealized

 

Unrealized

 

Fair

 

Impairments

 

Cost or

 

Unrealized

 

Unrealized

 

Fair

 

Impairments

(in millions)

 

Cost

 

Gains

 

Losses

 

Value

 

in AOCI(a)

 

Cost

 

Gains

 

Losses

 

Value

 

in AOCI(b)

September 30, 2017

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

2,252

$

152

$

(20)

$

2,384

$

-

$

3,069

$

101

$

(77)

$

3,093

$

-

Obligations of states, municipalities and political subdivisions

 

17,637

 

1,235

 

(41)

 

18,831

 

-

 

16,030

 

632

 

(150)

 

16,512

 

4

Non-U.S. governments

 

14,885

 

808

 

(100)

 

15,593

 

-

 

15,021

 

478

 

(280)

 

15,219

 

-

Corporate debt

 

126,014

 

8,519

 

(848)

 

133,685

 

10

 

130,263

 

4,302

 

(2,681)

 

131,884

 

(11)

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

34,270

 

3,421

 

(182)

 

37,509

 

1,737

 

32,825

 

2,961

 

(560)

 

35,226

 

1,330

CMBS

 

13,154

 

456

 

(92)

 

13,518

 

52

 

12,821

 

182

 

(312)

 

12,691

 

28

CDO/ABS

 

15,931

 

374

 

(54)

 

16,251

 

29

 

18,018

 

189

 

(112)

 

18,095

 

17

Total mortgage-backed, asset-backed and collateralized

 

63,355

 

4,251

 

(328)

 

67,278

 

1,818

 

63,664

 

3,332

 

(984)

 

66,012

 

1,375

Total bonds available for sale(b)

 

224,143

 

14,965

 

(1,337)

 

237,771

 

1,828

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

Common stock

 

708

 

357

 

(9)

 

1,056

 

-

Preferred stock

 

504

 

73

 

-

 

577

 

-

Mutual funds

 

62

 

12

 

-

 

74

 

-

Total equity securities available for sale

 

1,274

 

442

 

(9)

 

1,707

 

-

Total

$

225,417

$

15,407

$

(1,346)

$

239,478

$

1,828

December 31, 2016

 

 

 

 

 

 

 

 

 

 

Total bonds available for sale(c)

 

228,047

 

8,845

 

(4,172)

 

232,720

 

1,368

December 31, 2017

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

1,870

$

148

$

(26)

$

1,992

$

-

$

2,532

$

160

$

(36)

$

2,656

$

-

Obligations of states, municipalities and political subdivisions

 

24,025

 

1,001

 

(254)

 

24,772

 

-

 

17,377

 

1,297

 

(30)

 

18,644

 

-

Non-U.S. governments

 

14,018

 

773

 

(256)

 

14,535

 

-

 

15,059

 

717

 

(117)

 

15,659

 

-

Corporate debt

 

126,648

 

7,271

 

(1,739)

 

132,180

 

(31)

 

126,310

 

8,666

 

(800)

 

134,176

 

17

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

35,311

 

2,541

 

(478)

 

37,374

 

1,212

 

34,181

 

3,273

 

(220)

 

37,234

 

1,568

CMBS

 

14,054

 

409

 

(192)

 

14,271

 

45

 

13,538

 

408

 

(105)

 

13,841

 

42

CDO/ABS

 

16,315

 

278

 

(180)

 

16,413

 

39

 

16,464

 

370

 

(52)

 

16,782

 

29

Total mortgage-backed, asset-backed and collateralized

 

65,680

 

3,228

 

(850)

 

68,058

 

1,296

 

64,183

 

4,051

 

(377)

 

67,857

 

1,639

Total bonds available for sale(b)

 

232,241

 

12,421

 

(3,125)

 

241,537

 

1,265

Total bonds available for sale(c)

 

225,461

 

14,891

 

(1,360)

 

238,992

 

1,656

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

708

 

369

 

(12)

 

1,065

 

-

 

703

 

379

 

(21)

 

1,061

 

-

Preferred stock

 

748

 

4

 

-

 

752

 

-

 

504

 

29

 

-

 

533

 

-

Mutual funds

 

241

 

23

 

(3)

 

261

 

-

 

98

 

16

 

-

 

114

 

-

Total equity securities available for sale

 

1,697

 

396

 

(15)

 

2,078

 

-

 

1,305

 

424

 

(21)

 

1,708

 

-

Total

$

233,938

$

12,817

$

(3,140)

$

243,615

$

1,265

$

226,766

$

15,315

$

(1,381)

$

240,700

$

1,656

(a)  As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and accounted for as available for sale securities.

(b)  Represents the amount of other-than-temporary impairments recognized in Accumulated other comprehensive income.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 September 30, 20172018 and December 31, 2016,2017, bonds available for sale held by us that were below investment grade or not rated totaled $31.2$30.6 billion and $33.6$31.5 billion, respectively.

36AIG | Third Quarter 20172018 Form 10-Q32 


TABLE OF CONTENTS 

 

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

 

Securities Available for Sale in a Loss Position

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

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

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

1,406

$

61

 

$

364

$

16

 

$

1,770

$

77

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

3,475

 

98

 

743

 

52

 

 

4,218

 

150

Non-U.S. governments

 

5,079

 

172

 

1,821

 

108

 

 

6,900

 

280

Corporate debt

 

52,590

 

1,947

 

9,929

 

734

 

 

62,519

 

2,681

RMBS

 

7,930

 

245

 

4,706

 

315

 

 

12,636

 

560

CMBS

 

5,062

 

146

 

2,626

 

166

 

 

7,688

 

312

CDO/ABS

 

7,483

 

79

 

1,061

 

33

 

 

8,544

 

112

Total bonds available for sale

$

83,025

$

2,748

 

$

21,250

$

1,424

 

$

104,275

$

4,172

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

766

$

10

 

$

237

$

10

 

$

1,003

$

20

$

770

$

23

 

$

332

$

13

 

$

1,102

$

36

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

871

 

9

 

638

 

32

 

 

1,509

 

41

 

586

 

6

 

646

 

24

 

 

1,232

 

30

Non-U.S. governments

 

2,354

 

17

 

793

 

83

 

 

3,147

 

100

 

3,511

 

54

 

857

 

63

 

 

4,368

 

117

Corporate debt

 

13,155

 

272

 

7,984

 

576

 

 

21,139

 

848

 

15,578

 

453

 

7,291

 

347

 

 

22,869

 

800

RMBS

 

5,861

 

99

 

2,287

 

83

 

 

8,148

 

182

 

6,212

 

99

 

3,790

 

121

 

 

10,002

 

220

CMBS

 

2,663

 

37

 

1,173

 

55

 

 

3,836

 

92

 

3,408

 

46

 

1,389

 

59

 

 

4,797

 

105

CDO/ABS

 

1,864

 

24

 

755

 

30

 

 

2,619

 

54

 

1,455

 

24

 

822

 

28

 

 

2,277

 

52

Total bonds available for sale

 

27,534

 

468

 

13,867

 

869

 

 

41,401

 

1,337

 

31,520

 

705

 

15,127

 

655

 

 

46,647

 

1,360

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

149

 

9

 

1

 

-

 

 

150

 

9

 

136

 

21

 

-

 

-

 

 

136

 

21

Mutual funds

 

6

 

-

 

-

 

-

 

 

6

 

-

 

1

 

-

 

-

 

-

 

 

1

 

-

Total equity securities available for sale

 

155

 

9

 

1

 

-

 

 

156

 

9

 

137

 

21

 

-

 

-

 

 

137

 

21

Total

$

27,689

$

477

 

$

13,868

$

869

 

$

41,557

$

1,346

$

31,657

$

726

 

$

15,127

$

655

 

$

46,784

$

1,381

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

720

$

26

 

$

-

$

-

 

$

720

$

26

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

 

5,814

 

221

 

231

 

33

 

 

6,045

 

254

Non-U.S. governments

 

3,865

 

162

 

489

 

94

 

 

4,354

 

256

Corporate debt

 

28,184

 

1,013

 

6,080

 

726

 

 

34,264

 

1,739

RMBS

 

8,794

 

252

 

4,045

 

226

 

 

12,839

 

478

CMBS

 

4,469

 

152

 

479

 

40

 

 

4,948

 

192

CDO/ABS

 

5,362

 

102

 

1,961

 

78

 

 

7,323

 

180

Total bonds available for sale

 

57,208

 

1,928

 

13,285

 

1,197

 

 

70,493

 

3,125

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

125

 

12

 

-

 

-

 

 

125

 

12

Mutual funds

 

64

 

3

 

-

 

-

 

 

64

 

3

Total equity securities available for sale

 

189

 

15

 

-

 

-

 

 

189

 

15

Total

$

57,397

$

1,943

 

$

13,285

$

1,197

 

$

70,682

$

3,140

AIG | Third Quarter 2017 Form 10-Q33


TABLE OF CONTENTS(a)  As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and accounted for as available for sale securities.

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

At September 30, 2017,2018, we held 6,115 and 7516,950 individual fixed maturity and equity securities respectively, that were in an unrealized loss position, of which 1,721 and three3,008 individual fixed maturity and equity securities respectively, were in a continuous unrealized loss position for 12 months or more. We did not recognize the unrealized losses in earnings on these fixed maturity securities at September 30, 20172018 because we neither intend to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. For fixed maturity securities with significant declines, we performed fundamental credit analyses on a security-by-security basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry analyst reports and forecasts and other available market data.

AIG | Third Quarter 2018 Form 10-Q37


TABLE OF CONTENTS

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

Contractual Maturities of Fixed Maturity Securities Available for Sale

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

Total Fixed Maturity Securities

 

Fixed Maturity Securities in a Loss

Total Fixed Maturity Securities

 

Fixed Maturity Securities in a Loss

Available for Sale

 

Position Available for Sale

Available for Sale

 

Position Available for Sale

(in millions)

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

 

Amortized Cost

 

Fair Value

September 30, 2017

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

Due in one year or less

$

8,929

$

9,129

 

$

1,400

$

1,386

$

8,421

$

8,559

 

$

2,043

$

2,032

Due after one year through five years

 

47,237

 

49,651

 

5,260

 

5,134

 

48,626

 

49,416

 

16,406

 

16,042

Due after five years through ten years

 

41,576

 

43,101

 

8,841

 

8,474

 

42,674

 

42,475

 

26,927

 

25,844

Due after ten years

 

63,046

 

68,612

 

12,306

 

11,804

 

64,662

 

66,258

 

33,219

 

31,489

Mortgage-backed, asset-backed and collateralized

 

63,355

 

67,278

 

14,931

 

14,603

 

63,664

 

66,012

 

29,852

 

28,868

Total

$

224,143

$

237,771

 

$

42,738

$

41,401

$

228,047

$

232,720

 

$

108,447

$

104,275

December 31, 2016

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

Due in one year or less

$

7,796

$

7,994

 

$

604

$

581

$

7,932

$

8,071

 

$

1,526

$

1,515

Due after one year through five years

 

49,200

 

51,958

 

6,002

 

5,841

 

47,179

 

49,093

 

7,764

 

7,571

Due after five years through ten years

 

43,308

 

44,226

 

16,045

 

15,332

 

42,617

 

43,944

 

11,559

 

11,143

Due after ten years

 

66,257

 

69,301

 

25,007

 

23,629

 

63,550

 

70,027

 

9,705

 

9,342

Mortgage-backed, asset-backed and collateralized

 

65,680

 

68,058

 

25,960

 

25,110

 

64,183

 

67,857

 

17,453

 

17,076

Total

$

232,241

$

241,537

 

$

73,618

$

70,493

$

225,461

$

238,992

 

$

48,007

$

46,647

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended September 30,

Nine Months Ended September 30,

 

2017

 

2016

2017

 

2016

 

2018

 

2017

2018

 

2017

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

 

Gross

Realized

Realized

Realized

Realized

Realized

Realized

Realized

Realized

Realized

Realized

Realized

(in millions)

 

Gains

 

Losses

 

Gains

 

Losses

 

Gains

 

Losses

 

Gains

Losses

 

Gains

 

Losses

 

Gains

 

Losses

 

Gains

 

Losses

 

Gains

 

Losses

Fixed maturity securities

$

93

$

39

$

189

$

54

$

637

$

263

 

$

593

$

696

$

82

$

71

$

93

$

39

$

252

$

244

$

637

$

263

Equity securities

 

6

 

2

 

54

 

1

 

106

 

20

 

 

1,066

 

15

 

-

 

-

 

6

 

2

 

16

 

-

 

106

 

20

Total

$

99

$

41

$

243

$

55

$

743

$

283

 

$

1,659

$

711

$

82

$

71

$

99

$

41

$

268

$

244

$

743

$

283

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

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

38AIG | Third Quarter 20172018 Form 10-Q34 


TABLE OF CONTENTS 

 

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

 

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

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

Other Securities Measured at Fair Value

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

 

September 30, 2017

 

 

 

December 31, 2016

 

 

September 30, 2018

 

 

 

December 31, 2017

 

 

Fair

Percent

 

 

Fair

Percent

 

 

Fair

Percent

 

 

Fair

Percent

 

(in millions)

 

Value

 of Total

 

 

Value

 of Total

 

 

Value

 of Total

 

 

Value

 of Total

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

$

2,829

22

%

 

$

2,939

20

%

$

2,634

21

%

 

$

2,802

21

%

Obligations of states, municipalities and political subdivisions

 

-

-

 

 

 

-

-

 

Non-U.S. governments

 

55

-

 

 

 

51

-

 

 

49

-

 

 

 

57

1

 

Corporate debt

 

1,862

14

 

 

 

1,772

12

 

 

1,707

13

 

 

 

1,909

14

 

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

1,869

14

 

 

 

2,025

14

 

 

1,660

13

 

 

 

1,885

14

 

CMBS

 

556

4

 

 

 

603

4

 

 

401

3

 

 

 

559

4

 

CDO/ABS and other collateralized*

 

5,482

42

 

 

 

6,608

47

 

 

4,969

39

 

 

 

5,560

42

 

Total mortgage-backed, asset-backed and collateralized

 

7,907

60

 

 

 

9,236

65

 

 

7,030

55

 

 

 

8,004

60

 

Total fixed maturity securities

 

12,653

96

 

 

 

13,998

97

 

 

11,420

89

 

 

 

12,772

96

 

Equity securities

 

538

4

 

 

 

482

3

 

 

1,443

11

 

 

 

589

4

 

Total

$

13,191

100

%

 

$

14,480

100

%

$

12,863

100

%

 

$

13,361

100

%

*    Includes $270$186 million and $421$251 million of U.S. government agency-backed ABS at September 30, 20172018 and December 31, 2016,2017, respectively.

Other Invested Assets

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

 

September 30,

 

December 31,

 

September 30,

 

December 31,

(in millions)

 

2017

 

2016

 

2018

 

2017

Alternative investments(a) (b)

$

12,042

$

13,379

$

9,655

$

11,308

Investment real estate(c)

 

7,465

 

6,900

 

8,819

 

8,258

Aircraft asset investments(d)

 

218

 

321

Investments in life settlements

 

1,759

 

2,516

All other investments

 

1,106

 

1,422

 

1,265

 

1,256

Total

$

22,590

$

24,538

$

19,739

$

20,822

(a)  At September 30, 2017, includes2018, included hedge funds of $6.3$4.6 billion, private equity funds of $5.2$4.6 billion, and affordable housing partnerships of $558$434 million. At December 31, 2016, includes2017, included hedge funds of $7.2$5.8 billion, private equity funds of $5.5$5.0 billion, and affordable housing partnerships of $625$543 million.

(b)  Approximately 45At September 30, 2018, approximately 52 percent and 3221 percent of our hedge fund portfolio is available for redemption in 20172018 and 2018,2019, respectively, an additional 17the remaining 27 percent will be available for redemption between 20192020 and 2024.2027.

(c)  Net of accumulated depreciation of $510$553 million and $451$515 million inat September 30, 20172018 and December 31, 2016,2017, respectively.

Net Investment Income

(d)  ConsistsThe following table presents the components of investmentsNet investment income:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2018

 

2017

 

 

2018

 

2017

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

$

2,629

$

2,552

 

$

7,775

$

7,826

Other fixed maturity securities

 

60

 

145

 

 

29

 

500

Equity securities(a)

 

(21)

 

5

 

 

(50)

 

22

Interest on mortgage and other loans

 

455

 

414

 

 

1,352

 

1,206

Alternative investments(b)

 

329

 

355

 

 

837

 

1,174

Real estate

 

72

 

51

 

 

133

 

131

Other investments

 

(13)

 

30

 

 

11

 

246

Total investment income

 

3,511

 

3,552

 

 

10,087

 

11,105

Investment expenses

 

115

 

136

 

 

365

 

390

Net investment income

$

3,396

$

3,416

 

$

9,722

$

10,715

(a)  Upon the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, the change in aircraft equipment heldfair value of all equity securities is included in a consolidated trust.Net investment income.

AIG | Third Quarter 20172018 Form 10-Q          3539


TABLE OF CONTENTS 

 

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

 

Net Investment Income

The following table presents the components of Net investment income:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Fixed maturity securities, including short-term investments

$

2,697

$

2,935

 

$

8,326

$

8,863

Equity securities

 

5

 

25

 

 

22

 

(19)

Interest on mortgage and other loans

 

414

 

379

 

 

1,206

 

1,144

Alternative investments*

 

355

 

365

 

 

1,174

 

309

Real estate

 

51

 

37

 

 

131

 

125

Other investments

 

30

 

157

 

 

246

 

395

Total investment income

 

3,552

 

3,898

 

 

11,105

 

10,817

Investment expenses

 

136

 

115

 

 

390

 

338

Net investment income

$

3,416

$

3,783

 

$

10,715

$

10,479

*(b)  Includes income from hedge funds, private equity funds and affordable housing partnerships. Hedge funds for which we elected the fair value option are recorded as of the balance sheet date. Other hedge funds are generally reported on a one-month lag, while private equity funds are generally reported on a one-quarter lag.

Net Realized Capital Gains and Losses

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

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

 

2016

 

2018

 

2017

 

 

2018

 

 

2017

Sales of fixed maturity securities

$

54

$

135

 

$

374

 

$

(103)

$

11

$

54

 

$

8

 

$

374

Sales of equity securities

 

4

 

53

 

 

86

 

 

1,051

 

-

 

4

 

 

16

 

 

86

Other-than-temporary impairments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severity

 

-

 

(10)

 

 

(2)

 

 

(15)

 

-

 

-

 

 

-

 

 

(2)

Change in intent

 

(1)

 

(2)

 

 

(9)

 

 

(35)

 

(3)

 

(1)

 

 

(52)

 

 

(9)

Foreign currency declines

 

(1)

 

(7)

 

 

(11)

 

 

(14)

 

(1)

 

(1)

 

 

(13)

 

 

(11)

Issuer-specific credit events

 

(85)

 

(77)

 

 

(197)

 

 

(303)

 

(30)

 

(85)

 

 

(92)

 

 

(197)

Adverse projected cash flows

 

(1)

 

(6)

 

 

(4)

 

 

(47)

 

(1)

 

(1)

 

 

(1)

 

 

(4)

Provision for loan losses

 

(38)

 

8

 

 

(56)

 

 

8

 

(23)

 

(38)

 

 

(73)

 

 

(56)

Foreign exchange transactions

 

66

 

(639)

 

 

299

 

 

(1,197)

 

(21)

 

66

 

 

(155)

 

 

299

Variable annuity embedded derivatives, net of related hedges

 

(430)

 

(309)

 

 

(1,023)

 

 

(482)

 

(185)

 

(430)

 

 

(2)

 

 

(1,023)

All other derivatives and hedge accounting

 

(136)

 

83

 

 

(217)

 

 

353

 

(1)

 

(136)

 

 

149

 

 

(217)

Impairments on investments in life settlements

 

(273)

 

(80)

 

 

(360)

 

 

(329)

 

-

 

(273)

 

 

-

 

 

(360)

Other*

 

(81)

 

86

 

 

14

 

 

284

Loss on sale of private equity funds

 

(311)

 

-

 

 

(311)

 

 

-

Other

 

54

 

(81)

 

 

161

 

 

14

Net realized capital losses

$

(922)

$

(765)

 

$

(1,106)

 

$

(829)

$

(511)

$

(922)

 

$

(365)

 

$

(1,106)

*    Includes $107 million of realized gains due to a purchase price adjustment on the sale of Class B shares of Prudential Financial, Inc. for the nine months ended September 30, 2016.

Change in Unrealized Appreciation (Depreciation) of Investments

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

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

 

2018

 

2017

 

 

2018

 

2017

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities

$

1,059

$

1,595

 

$

4,332

$

11,957

$

(920)

$

1,059

 

$

(8,858)

$

4,332

Equity securities(a)

 

9

 

(19)

 

 

52

 

(1,159)

 

-

 

9

 

 

-

 

52

Other investments

 

10

 

(29)

 

 

(127)

 

(243)

 

(31)

 

10

 

 

(59)

 

(127)

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

$

1,078

$

1,547

 

$

4,257

$

10,555

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

$

(951)

$

1,078

 

$

(8,917)

$

4,257

*(a)  As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and accounted for as available for sale securities.

(b)  Excludes net unrealized losses attributable to businesses held for sale.

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

 

Three Months Ended

 

Nine Months Ended

 

September 30, 2018

 

September 30, 2018

 

 

 

 

Other

 

 

 

 

 

 

Other

 

 

 

 

 

Invested

 

 

 

 

 

Invested

 

 

(in millions)

 

Equities

 

Assets

 

Total

 

 

Equities

 

Assets

 

Total

Net gains and losses recognized during the period on equity securities

$

(13)

$

183

$

170

 

$

(41)

$

497

$

456

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

 

 

 

 

 

 

 

 

 

 

 

 

 

securities sold during the period

 

28

 

18

 

46

 

 

34

 

45

 

79

Unrealized gains and losses recognized during the reporting

 

 

 

 

 

 

 

 

 

 

 

 

 

period on equity securities still held at the reporting date

$

(41)

$

165

$

124

 

$

(75)

$

452

$

377

40AIG | Third Quarter 20172018 Form 10-Q36 


TABLE OF CONTENTS 

 

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

 

Evaluating Investments for Other-Than-Temporary Impairments

For a discussion of our policy for evaluating investments for other-than-temporary impairments see Note 6 to the Consolidated Financial Statements in the 20162017 Annual Report.

Credit Impairments

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

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

 

2018

 

2017

 

 

2018

 

2017

Balance, beginning of period

$

762

$

1,298

 

$

1,098

$

1,747

$

188

$

762

 

$

526

$

1,098

Increases due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit impairments on new securities subject to impairment losses

 

58

 

23

 

 

116

 

146

 

15

 

58

 

 

32

 

116

Additional credit impairments on previously impaired securities

 

12

 

37

 

 

49

 

166

 

16

 

12

 

 

61

 

49

Reductions due to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit impaired securities fully disposed of for which there was no

 

 

 

 

 

 

 

 

 

Credit impaired securities fully disposed for which there was no

 

 

 

 

 

 

 

 

 

prior intent or requirement to sell

 

(44)

 

(39)

 

 

(99)

 

(282)

 

(12)

 

(44)

 

 

(143)

 

(99)

Accretion on securities previously impaired due to credit*

 

(147)

 

(187)

 

 

(523)

 

(645)

 

(164)

 

(147)

 

 

(433)

 

(523)

Impairments on securities reclassified to Assets held for sale

 

-

 

(2)

 

 

-

 

(2)

Balance, end of period

$

641

$

1,130

 

$

641

$

1,130

$

43

$

641

 

$

43

$

641

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

Purchased Credit Impaired (PCI) Securities

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

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

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

(in millions)

At Date of Acquisition

At Date of Acquisition

Contractually required payments (principal and interest)

$

36,228

$

36,640

Cash flows expected to be collected*

 

29,649

 

30,077

Recorded investment in acquired securities

 

19,944

 

20,294

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

 

AIG | Third Quarter 20172018 Form 10-Q          3741


TABLE OF CONTENTS 

 

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

 

(in millions)

September 30, 2017

December 31, 2016

September 30, 2018

December 31, 2017

Outstanding principal balance

$

14,977

$

16,728

$

13,060

$

14,718

Amortized cost

 

10,636

 

11,987

 

9,087

 

10,492

Fair value

 

12,470

 

12,922

 

10,941

 

12,293

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

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30,

September 30,

(in millions)

 

2017

 

2016

 

2017

 

2016

 

2018

 

2017

 

2018

 

2017

Balance, beginning of period

$

7,465

$

7,043

$

7,498

$

6,846

$

7,461

$

7,465

$

7,501

$

7,498

Newly purchased PCI securities

 

16

 

177

 

117

 

628

 

5

 

16

 

32

 

117

Disposals

 

-

 

-

 

(18)

 

-

 

-

 

-

 

-

 

(18)

Accretion

 

(193)

 

(214)

 

(609)

 

(637)

 

(176)

 

(193)

 

(553)

 

(609)

Effect of changes in interest rate indices

 

(74)

 

(196)

 

(188)

 

(435)

 

15

 

(74)

 

189

 

(188)

Net reclassification from (to) non-accretable difference,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

including effects of prepayments

 

172

 

158

 

586

 

566

 

93

 

172

 

229

 

586

Balance, end of period

$

7,386

$

6,968

$

7,386

$

6,968

$

7,398

$

7,386

$

7,398

$

7,386

Pledged Investments

Secured Financing and Similar Arrangements

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

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

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

(in millions)

 

September 30, 2017

 

December 31, 2016

 

September 30, 2018

 

December 31, 2017

Fixed maturity securities available for sale

$

2,988

$

2,389

$

1,247

$

2,911

Other bond securities, at fair value

$

1,869

$

1,799

$

136

$

1,585

At September 30, 20172018 and December 31, 2016,2017, amounts borrowed under repurchase and securities lending agreements totaled $4.91.5 billion and $4.24.5 billion, respectively.

42AIG | Third Quarter 20172018 Form 10-Q38 


TABLE OF CONTENTS 

 

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

 

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

Remaining Contractual Maturity of the Agreements

Remaining Contractual Maturity of the Agreements

(in millions)

Overnight and Continuous

 

up to 30 days

 

31 - 90 days

 

91 - 364 days

 

365 days or greater

 

Total

Overnight and Continuous

 

up to 30 days

 

31 - 90 days

 

91 - 364 days

 

365 days or greater

 

Total

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. governments

$

-

$

40

$

-

$

-

$

-

$

40

$

-

$

79

$

-

$

-

$

-

$

79

Corporate debt

 

-

 

17

 

44

 

11

 

-

 

72

 

-

 

110

 

1

 

-

 

-

 

111

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

33

 

-

 

-

 

-

 

-

 

33

 

24

 

-

 

-

 

-

 

-

 

24

Non-U.S. governments

 

-

 

-

 

-

 

55

 

-

 

55

 

-

 

3

 

-

 

-

 

-

 

3

Corporate debt

 

-

 

422

 

1,089

 

270

 

-

 

1,781

 

-

 

55

 

54

 

-

 

-

 

109

Total

$

33

$

479

$

1,133

$

336

$

-

$

1,981

$

24

$

247

$

55

$

-

$

-

$

326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. governments

$

-

$

7

$

19

$

-

$

-

$

26

Corporate debt

 

-

 

13

 

35

 

-

 

-

 

48

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

44

 

-

 

-

 

-

 

-

 

44

Non-U.S. governments

$

-

$

-

$

-

$

51

$

-

$

51

 

-

 

-

 

11

 

-

 

-

 

11

Corporate debt

 

-

 

163

 

860

 

725

 

-

 

1,748

 

-

 

387

 

1,065

 

-

 

-

 

1,452

Total

$

-

$

163

$

860

$

776

$

-

$

1,799

$

44

$

407

$

1,130

$

-

$

-

$

1,581

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

Remaining Contractual Maturity of the Agreements

Remaining Contractual Maturity of the Agreements

(in millions)

 

Overnight and Continuous

 

up to 30 days

 

31 - 90 days

 

91 - 364 days

 

365 days or greater

 

Total

 

Overnight and Continuous

 

up to 30 days

 

31 - 90 days

 

91 - 364 days

 

365 days or greater

 

Total

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

$

-

$

-

$

-

$

-

$

-

$

-

Non-U.S. governments

 

-

 

68

 

-

 

-

 

-

 

68

$

-

$

-

$

82

$

22

$

-

$

104

Corporate debt

 

-

 

704

 

1,608

 

496

 

-

 

2,808

 

-

 

378

 

467

 

108

 

-

 

953

CMBS

 

-

 

-

 

-

 

-

 

-

 

-

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. governments

 

-

 

-

 

-

 

-

 

-

 

-

Corporate debt

 

-

 

-

 

-

 

-

 

-

 

-

Total

$

-

$

772

$

1,608

$

496

$

-

$

2,876

$

-

$

378

$

549

$

130

$

-

$

1,057

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities and political

 

 

 

 

 

 

 

 

 

 

 

 

subdivisions

$

-

$

21

$

-

$

-

$

-

$

21

Non-U.S. governments

 

-

 

-

 

50

 

-

 

-

 

50

$

-

$

-

$

18

$

-

$

-

$

18

Corporate debt

 

-

 

791

 

1,466

 

-

 

-

 

2,257

 

-

 

588

 

2,231

 

-

 

-

 

2,819

CMBS

 

-

 

-

 

61

 

-

 

-

 

61

Other bond securities:

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. governments

 

-

 

-

 

22

 

-

 

-

 

22

Corporate debt

 

-

 

-

 

56

 

-

 

-

 

56

Total

$

-

$

812

$

1,577

$

-

$

-

$

2,389

$

-

$

588

$

2,327

$

-

$

-

$

2,915

AIG | Third Quarter 20172018 Form 10-Q          3943


TABLE OF CONTENTS 

 

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

 

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

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

(in millions)

 

September 30, 2017

 

December 31, 2016

 

September 30, 2018

 

December 31, 2017

Securities collateral pledged to us

$

2,054

$

1,434

$

1,324

$

2,227

Amount sold or repledged by us

$

80

$

11

$

164

$

46

At September 30, 2018 and December 31, 2017, amounts loaned under reverse repurchase agreements totaled $1.3 billion and $2.2 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.

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 $7.9 billion and $4.9 billion at both September 30, 20172018 and December 31, 2016.2017, respectively.

Other Pledges and Restrictions

Certain of our subsidiaries are members of Federal Home Loan Banks (FHLBs) and such membership requires the members to own stock in these FHLBs. We owned an aggregate of $103$205 million and $114$93 million of stock in FHLBs at September 30, 20172018 and December 31, 2016,2017, respectively. In addition, our subsidiaries have pledged securities available for sale and residential loans associated with advancesborrowings and funding agreements from FHLB,FHLBs, with a fair value of $2.9$4.2 billion and $223 million,$2.0 billion, respectively, at September 30, 20172018 and $3.4$2.7 billion and $17$471 million, respectively, at December 31, 2016, associated with advances from the FHLBs.2017.

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 $2.1$1.7 billion and $2.2$2.0 billion at September 30, 20172018 and December 31, 2016,2017, 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 $411$155 million and $523$255 million, comprised of bonds available for sale and short term investments at September 30, 20172018 and December 31, 2016,2017, respectively.

 

44AIG | Third Quarter 20172018 Form 10-Q40 


TABLE OF CONTENTS 

 

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

 

7. Lending Activities 

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

September 30,

 

December 31,

September 30,

 

December 31,

(in millions)

 

2017

 

2016

 

2018

 

2017

Commercial mortgages*

$

27,930

$

25,042

$

32,082

$

28,596

Residential mortgages

 

4,991

 

3,828

 

6,530

 

5,398

Life insurance policy loans

 

2,301

 

2,367

 

2,178

 

2,295

Commercial loans, other loans and notes receivable

 

1,212

 

2,300

 

1,467

 

1,056

Total mortgage and other loans receivable

 

36,434

 

33,537

 

42,257

 

37,345

Allowance for credit losses

 

(345)

 

(297)

 

(379)

 

(322)

Mortgage and other loans receivable, net

$

36,089

$

33,240

$

41,878

$

37,023

*    Commercial mortgages primarily represent loans for apartments, offices apartments and retail properties, with exposures in New York and California representing the largest geographic concentrations (aggregating approximately 22 percent and 1211 percent, respectively, at September 30, 2017,2018, and 2423 percent and 12 percent, respectively, at December 31, 2016)2017).

Credit Quality of Commercial Mortgages

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

Debt Service Coverage Ratios(a)

Debt Service Coverage Ratios(a)

(in millions)

 

>1.20X

 

1.00X - 1.20X

 

<1.00X

 

Total

 

>1.20X

 

1.00X - 1.20X

 

<1.00X

 

Total

September 30, 2017

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

Loan-to-Value Ratios(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 65%

$

17,040

$

1,960

$

355

$

19,355

$

17,986

$

2,508

$

239

$

20,733

65% to 75%

 

5,466

 

418

 

205

 

6,089

 

9,115

 

302

 

258

 

9,675

76% to 80%

 

672

 

54

 

53

 

779

 

831

 

8

 

15

 

854

Greater than 80%

 

1,189

 

437

 

81

 

1,707

 

572

 

106

 

142

 

820

Total commercial mortgages

$

24,367

$

2,869

$

694

$

27,930

$

28,504

$

2,924

$

654

$

32,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

Loan-to-Value Ratios(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 65%

$

13,998

$

1,694

$

232

$

15,924

$

18,000

$

1,525

$

351

$

19,876

65% to 75%

 

5,946

 

575

 

62

 

6,583

 

6,038

 

193

 

184

 

6,415

76% to 80%

 

1,246

 

174

 

47

 

1,467

 

569

 

40

 

-

 

609

Greater than 80%

 

471

 

392

 

205

 

1,068

 

1,416

 

206

 

74

 

1,696

Total commercial mortgages

$

21,661

$

2,835

$

546

$

25,042

$

26,023

$

1,964

$

609

$

28,596

(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 1.8X1.9X and 1.9X2.1X at September 30, 20172018 and December 31, 2016,2017, respectively.

(b)  The loan-to-value ratio compares the current unpaid principal balance of the loan to the estimated fair value of the underlying property collateralizing the loan. Our weighted average loan-to-value ratio was 58 percent and 57 percent at both September 30, 2017,2018, and December 31, 2016.2017, respectively.

AIG | Third Quarter 20172018 Form 10-Q          4145


TABLE OF CONTENTS 

 

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

 

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

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

of

 

Class

 

 

of

 

of

 

Class

 

 

of

 

(dollars in millions)

Loans

 

Apartments

 

Offices

 

Retail

Industrial

 

Hotel

 

Others

 

Total(c)

Total $

 

Loans

 

Apartments

 

Offices

 

Retail

Industrial

 

Hotel

 

Others

 

Total(c)

Total $

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Performance

Indicator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In good standing

770

 

$

7,274

$

8,642

$

5,367

$

2,147

$

2,391

$

2,002

$

27,823

100

%

763

 

$

10,393

$

9,257

$

5,333

$

3,002

$

2,531

$

1,422

$

31,938

100

%

Restructured(a)

3

 

 

-

 

15

 

4

 

-

 

16

 

-

 

35

-

 

4

 

 

-

 

113

 

-

 

15

 

16

 

-

 

144

-

 

90 days or less delinquent

1

 

 

-

 

14

 

-

 

-

 

-

 

-

 

14

-

 

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

>90 days delinquent or in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

process of foreclosure

2

 

 

-

 

40

 

18

 

-

 

-

 

-

 

58

-

 

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

Total(b)

776

 

$

7,274

$

8,711

$

5,389

$

2,147

$

2,407

$

2,002

$

27,930

100

%

767

 

$

10,393

$

9,370

$

5,333

$

3,017

$

2,547

$

1,422

$

32,082

100

%

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific

 

 

$

-

$

3

$

31

$

-

$

1

$

-

$

35

-

%

 

 

$

-

$

2

$

-

$

-

$

1

$

-

$

3

-

%

General

 

 

 

61

 

93

 

36

 

8

 

14

 

17

 

229

1

 

 

 

 

106

 

96

 

46

 

12

 

19

 

14

 

293

1

 

Total allowance for credit losses

 

 

$

61

$

96

$

67

$

8

$

15

$

17

$

264

1

%

 

 

$

106

$

98

$

46

$

12

$

20

$

14

$

296

1

%

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Performance

Indicator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit Quality Performance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indicator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In good standing

784

 

$

6,005

$

7,830

$

5,179

$

1,898

$

2,373

$

1,589

$

24,874

99

%

778

 

$

8,163

$

8,585

$

5,338

$

2,023

$

2,373

$

1,960

$

28,442

99

%

Restructured(a)

4

 

 

-

 

134

 

18

 

-

 

16

 

-

 

168

1

 

5

 

 

-

 

115

 

23

 

-

 

16

 

-

 

154

1

 

90 days or less delinquent

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

>90 days delinquent or in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

process of foreclosure

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

-

 

Total(b)

788

 

$

6,005

$

7,964

$

5,197

$

1,898

$

2,389

$

1,589

$

25,042

100

%

783

 

$

8,163

$

8,700

$

5,361

$

2,023

$

2,389

$

1,960

$

28,596

100

%

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific

 

 

$

-

$

3

$

1

$

6

$

1

$

-

$

11

-

%

 

 

$

-

$

3

$

1

$

-

$

1

$

-

$

5

-

%

General

 

 

 

35

 

72

 

41

 

7

 

13

 

15

 

183

1

 

 

 

 

72

 

94

 

37

 

6

 

15

 

18

 

242

1

 

Total allowance for credit losses

 

 

$

35

$

75

$

42

$

13

$

14

$

15

$

194

1

%

 

 

$

72

$

97

$

38

$

6

$

16

$

18

$

247

1

%

(a)  Loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. For additional discussion of troubled debt restructurings see Note 7 to the Consolidated Financial Statements in the 20162017 Annual Report.

(b)  Does not reflect allowance for credit losses.

(c)  99.7 percent of theOur commercial mortgages held at such respective dates weremortgage loan portfolio is current as to payments of principal and interest.interest, for both periods presented.  There were no significant amounts of nonperforming commercial mortgages (defined as those loans where payment of contractual principal or interest is more than 90 days past due) during any of the periods presented.     

Allowance for Credit Losses

For a discussion of our accounting policy for evaluating Mortgage and other loans receivable for impairment see Note 7 to the Consolidated Financial Statements in the 20162017 Annual Report

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

 

 

 

2017

 

2016

 

 

 

2018

 

2017

Nine Months Ended September 30,

 

 

 

 

 

 

 

Commercial

 

Other

 

 

 

 

Commercial

 

Other

 

 

 

 

 

 

 

 

 

Commercial

 

Other

 

 

 

 

Commercial

 

Other

 

 

(in millions)

 

 

 

 

 

 

 

Mortgages

 

Loans

 

Total

 

 

Mortgages

 

Loans

 

Total

 

 

 

 

 

 

 

Mortgages

 

Loans

 

Total

 

 

Mortgages

 

Loans

 

Total

Allowance, beginning of year

 

 

 

 

 

 

$

194

$

103

$

297

 

$

171

$

137

$

308

 

 

 

 

 

 

$

247

$

75

$

322

 

$

194

$

103

$

297

Loans charged off

 

 

 

 

 

 

 

(5)

 

(2)

 

(7)

 

 

(13)

 

(2)

 

(15)

 

 

 

 

 

 

 

(17)

 

-

 

(17)

 

 

(5)

 

(2)

 

(7)

Recoveries of loans previously charged off

Recoveries of loans previously charged off

 

 

 

 

 

 

-

 

-

 

-

 

 

11

 

-

 

11

Recoveries of loans previously charged off

 

 

 

 

 

 

-

 

-

 

-

 

 

-

 

-

 

-

Net charge-offs

 

 

 

 

 

 

 

(5)

 

(2)

 

(7)

 

 

(2)

 

(2)

 

(4)

 

 

 

 

 

 

 

(17)

 

-

 

(17)

 

 

(5)

 

(2)

 

(7)

Provision for loan losses

 

 

 

 

 

 

 

75

 

(20)

 

55

 

 

20

 

(25)

 

(5)

 

 

 

 

 

 

 

66

 

8

 

74

 

 

75

 

(20)

 

55

Other

 

 

 

 

 

 

 

-

 

-

 

-

 

 

-

 

-

 

-

 

 

 

 

 

 

 

-

 

-

 

-

 

 

-

 

-

 

-

Allowance, end of period

 

 

 

 

 

 

$

 264 *

$

81

$

345

 

$

 189 *

$

110

$

299

 

 

 

 

 

 

$

 296 *

$

83

$

379

 

$

 264 *

$

81

$

345

*    Of the total allowance, $35$3 million and $11$35 million relate to individually assessed credit losses on $342$25 million and $292$342 million of commercial mortgages at September 30, 20172018 and 2016,2017, respectively.

46AIG | Third Quarter 20172018 Form 10-Q42 


TABLE OF CONTENTS 

 

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

 

During the nine-month periodperiods ended September 30, 2018 and 2017, loans with a carrying value of $15 million and $25 million, respectively, were modified in troubled debt restructurings.  Loans that had been modified in troubled debt restructurings during the nine-month period ended September 30, 2016 have been fully paid off.      

 

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:

(in millions)

 

Real Estate and Investment Entities(d)

 

Securitization Vehicles(e)

 

Structured Investment

Vehicle

 

Affordable Housing Partnerships

 

Other

 

Total

 

Real Estate and Investment Entities(d)

 

Securitization Vehicles(e)

 

Affordable Housing Partnerships

 

Other

 

Total

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale

$

-

$

10,144

$

-

$

-

$

-

$

10,144

$

-

$

8,130

$

-

$

-

$

8,130

Other bond securities

 

-

 

4,427

 

-

 

-

 

4

 

4,431

 

-

 

4,010

 

-

 

2

 

4,012

Mortgage and other loans receivable

 

-

 

1,641

 

-

 

-

 

-

 

1,641

 

-

 

3,424

 

-

 

-

 

3,424

Other invested assets

 

1,047

 

218

 

-

 

3,050

 

25

 

4,340

 

1,696

 

-

 

3,231

 

25

 

4,952

Other (a)

 

358

 

1,196

 

4

 

463

 

83

 

2,104

 

259

 

1,448

 

428

 

82

 

2,217

Total assets(b)

$

1,405

$

17,626

$

4

$

3,513

$

112

$

22,660

$

1,955

$

17,012

$

3,659

$

109

$

22,735

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

$

465

$

1,099

$

3

$

1,861

$

5

$

3,433

$

785

$

2,858

$

1,922

$

5

$

5,570

Other (c)

 

112

 

137

 

-

 

209

 

27

 

485

 

138

 

126

 

172

 

23

 

459

Total liabilities

$

577

$

1,236

$

3

$

2,070

$

32

$

3,918

$

923

$

2,984

$

2,094

$

28

$

6,029

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds available for sale

$

-

$

10,233

$

-

$

-

$

-

$

10,233

$

-

$

9,632

$

-

$

-

$

9,632

Other bond securities

 

-

 

4,858

 

266

 

-

 

5

 

5,129

 

-

 

4,518

 

-

 

3

 

4,521

Mortgage and other loans receivable

 

1

 

1,442

 

-

 

-

 

104

 

1,547

 

-

 

2,290

 

-

 

-

 

2,290

Other invested assets

 

1,052

 

321

 

-

 

2,821

 

28

 

4,222

 

1,365

 

206

 

3,087

 

25

 

4,683

Other (a)

 

365

 

1,104

 

50

 

384

 

92

 

1,995

 

302

 

1,481

 

350

 

85

 

2,218

Total assets(b)

$

1,418

$

17,958

$

316

$

3,205

$

229

$

23,126

$

1,667

$

18,127

$

3,437

$

113

$

23,344

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

$

444

$

771

$

56

$

1,696

$

6

$

2,973

$

680

$

1,624

$

1,825

$

5

$

4,134

Other(c)

 

224

 

203

 

1

 

211

 

38

 

677

 

144

 

244

 

181

 

26

 

595

Total liabilities

$

668

$

974

$

57

$

1,907

$

44

$

3,650

$

824

$

1,868

$

2,006

$

31

$

4,729

(a)  Comprised primarily of Short-term investments and Other assets at September 30, 20172018 and December 31, 2016.2017.

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

(c)  Comprised primarily of Other liabilities at September 30, 20172018 and December 31, 2016.2017.

(d)  At September 30, 20172018 and December 31, 2016,2017, off-balance sheet exposure primarily consisting of commitments to real estate and investment entities was $98.6$227 million and $106$86 million, respectively.

(e)  At September 30, 2018 and December 31, 2017, $16.1 billion and $17.6 billion, respectively, of the total assets of consolidated securitization vehicles were owed to AIG Parent or its subsidiaries.

AIG | Third Quarter 20172018 Form 10-Q          4347


TABLE OF CONTENTS 

 

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

 

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

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

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

September 30, 2017

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

Real estate and investment entities(a)

$

378,378

$

9,876

$

2,019

 

$

11,895

$

322,117

$

7,902

$

1,994

 

$

9,896

Affordable housing partnerships

 

4,549

 

736

 

-

 

 

736

 

4,116

 

606

 

-

 

 

606

Other

 

2,882

 

277

 

1,189

(c)

 

1,466

 

2,705

 

260

 

1,222

(c)

 

1,482

Total

$

385,809

$

10,889

$

3,208

 

$

14,097

$

328,938

$

8,768

$

3,216

 

$

11,984

December 31, 2016

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

Real estate and investment entities(a)

$

409,087

$

11,015

$

2,115

 

$

13,130

$

380,030

$

9,253

$

2,043

 

$

11,296

Affordable housing partnerships

 

4,709

 

785

 

-

 

 

785

 

4,468

 

725

 

-

 

 

725

Other

 

2,869

 

314

 

1,045

(c)

 

1,359

 

2,703

 

254

 

1,205

(c)

 

1,459

Total

$

416,665

$

12,114

$

3,160

 

$

15,274

$

387,201

$

10,232

$

3,248

 

$

13,480

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

(b)  At September 30, 20172018 and December 31, 2016,2017, $10.58.5 billion and $11.7$9.8 billion, respectively, of our total unconsolidated VIE assets were recorded as Other invested assets.

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

For additional information on VIEs see Note 10 to the Consolidated Financial Statements in the 20162017 Annual Report.                         

 

9. Derivatives and Hedge Accounting

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

For a discussion of our accounting policies and procedures regarding derivatives and hedge accounting see Note 11 to the Consolidated Financial Statements in the 20162017 Annual Report.  

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

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

48AIG | Third Quarter 20172018 Form 10-Q44 


TABLE OF CONTENTS 

 

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

 

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

September 30, 2017

 

December 31, 2016

September 30, 2018

 

December 31, 2017

Gross Derivative Assets

 

Gross Derivative Liabilities

 

Gross Derivative Assets

 

Gross Derivative Liabilities

Gross Derivative Assets

 

Gross Derivative Liabilities

 

Gross Derivative Assets

 

Gross Derivative Liabilities

 

Notional

 

Fair

 

 

Notional

 

Fair

 

 

Notional

 

Fair

 

 

Notional

 

Fair

 

Notional

 

Fair

 

 

Notional

 

Fair

 

 

Notional

 

Fair

 

 

Notional

 

Fair

(in millions)

 

Amount

 

Value

 

Amount

 

Value

 

 

Amount

 

Value

 

 

Amount

 

Value

 

Amount

 

Value

 

Amount

 

Value

 

 

Amount

 

Value

 

 

Amount

 

Value

Derivatives designated as

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

hedging instruments:(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

$

290

$

1

 

$

615

$

9

 

$

175

$

-

 

$

782

$

11

$

75

$

1

 

$

811

$

23

 

$

-

$

-

 

$

838

$

15

Foreign exchange contracts

 

2,634

 

198

 

4,546

 

289

 

3,527

 

385

 

 

2,602

 

184

 

4,323

 

241

 

4,173

 

269

 

2,823

 

173

 

 

4,783

 

350

Equity contracts

 

-

 

-

 

143

 

3

 

-

 

-

 

 

113

 

7

 

-

 

-

 

-

 

-

 

-

 

-

 

 

159

 

19

Derivatives not designated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

as hedging instruments:(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

49,801

 

2,253

 

33,303

 

2,245

 

51,030

 

2,328

 

 

44,211

 

3,066

 

36,841

 

2,504

 

27,131

 

2,096

 

37,751

 

2,171

 

 

26,461

 

2,185

Foreign exchange contracts

 

6,143

 

669

 

10,763

 

1,012

 

9,468

 

935

 

 

7,674

 

1,185

 

8,877

 

686

 

8,282

 

818

 

6,305

 

658

 

 

11,093

 

895

Equity contracts

 

14,340

 

469

 

8,224

 

56

 

14,060

 

305

 

 

8,633

 

12

 

18,826

 

340

 

1,585

 

5

 

19,975

 

522

 

 

1,130

 

2

Credit contracts(b)

 

3

 

1

 

975

 

278

 

4

 

2

 

 

861

 

331

 

3

 

1

 

1,418

 

252

 

4

 

1

 

 

1,365

 

277

Other contracts(c)

 

38,031

 

23

 

61

 

5

 

37,633

 

22

 

 

62

 

6

 

38,292

 

15

 

60

 

3

 

39,829

 

20

 

 

59

 

5

Total derivatives, gross

$

111,242

$

3,614

 

$

58,630

$

3,897

 

$

115,897

$

3,977

 

$

64,938

$

4,802

$

107,237

$

3,788

 

$

43,460

$

3,466

 

$

106,687

$

3,545

 

$

45,888

$

3,748

Counterparty netting(d)

 

 

 

(1,390)

 

 

 

(1,390)

 

 

 

(1,265)

 

 

 

 

(1,265)

 

 

 

(1,874)

 

 

 

(1,874)

 

 

 

(1,464)

 

 

 

 

(1,464)

Cash collateral(e)

 

 

 

(1,324)

 

 

 

(1,395)

 

 

 

(903)

 

 

 

 

(1,521)

 

 

 

(964)

 

 

 

(290)

 

 

 

(1,159)

 

 

 

 

(1,249)

Total derivatives on condensed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

consolidated balance sheets(f)

 

 

$

900

 

 

$

1,112

 

 

$

1,809

 

 

 

$

2,016

 

 

$

950

 

 

$

1,302

 

 

$

922

 

 

 

$

1,035

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

(b)  As of September 30, 20172018 and December 31, 20162017, included CDSs on super senior multi-sector CDOs with a net notional amount of $716$616 million and $801$685 million (fair value liability of $263$232 million and $308$254 million), respectively. The expected weighted average maturity as of September 30, 2017 is six years. Because of long-term maturities of the CDSs in the portfolio, we are unable to make reasonable estimates of the periods during which any payments would be made. However, the net notional amount represents the maximum exposure to loss on the portfolio. As of September 30, 20172018 and December 31, 2016,2017, 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 Embeddedembedded derivatives. Derivative instrument assets and liabilities are recorded in Other Assets and Liabilities, respectively.  Fair value of assets related to bifurcated Embeddedembedded derivatives was zero at both September 30, 20172018 and December 31, 2016.2017. Fair value of liabilities related to bifurcated Embeddedembedded derivatives was $4.0$3.4 billion and $3.1$4.1 billion, respectively, at September 30, 20172018 and December 31, 2016.2017. A bifurcated Embeddedembedded 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.   

AIG | Third Quarter 2018 Form 10-Q49


TABLE OF CONTENTS

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

Collateral

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

AIG | Third Quarter 2017 Form 10-Q45


TABLE OF CONTENTS

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

Collateral posted by us to third parties for derivative transactions was $3.1$2.0 billion and $4.5$2.9 billion at September 30, 20172018 and December 31, 2016,2017, respectively. In the case of collateral posted under derivative transactions that are not subject to clearing, this collateral can generally be repledged or resold by the counterparties. Collateral provided to us from third parties for derivative transactions was $1.3$1.2 billion and $1.5$1.3 billion at September 30, 20172018 and December 31, 2016,2017, respectively. In the case of collateral provided to us under derivative transactions that are not subject to clearing, we generally can repledge or resell collateral.

Offsetting

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

Hedge Accounting

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

We use foreign currency denominated debt and cross-currency swaps as hedging instruments in net investment hedge relationships to mitigate the foreign exchange risk associated with our non-U.S. dollar functional currency foreign subsidiaries. For net investment hedge relationships where issued debt is used as a hedging instrument, we assess the hedge effectiveness and measure the amount of ineffectiveness based on changes in spot rates. For net investment hedge relationships that use derivatives as hedging instruments, we assess hedge effectiveness and measure hedge ineffectiveness using changes in forward rates.  For the three- and nine-month periods ended September 30, 2017,2018, we recognized lossesa gain of $39$28 million and $87$27 million, respectively, and for the three- and nine-month periods ended September 30, 2016,2017, we recognized a gainlosses of $1$39 million and a loss of $8$87 million, respectively, included in Change in foreign currency translation adjustment in Other comprehensive income related to the net investment hedge relationships.

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

50AIG | Third Quarter 20172018 Form 10-Q46 


TABLE OF CONTENTS 

 

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

 

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

Gains/(Losses) Recognized in Earnings for:

 

Including Gains/(Losses) Attributable to:

Gains/(Losses) Recognized in Earnings for:

 

Including Gains/(Losses) Attributable to:

Hedging

Hedged

 

Hedge

Excluded

 

 

Hedging

Hedged

 

Hedge

Excluded

 

 

(in millions)

Derivatives(a)

Items

 

Ineffectiveness

Components

Other(b)

Derivatives(a)

Items

 

Ineffectiveness

Components

Other(b)

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

(1)

$

1

 

$

-

$

-

$

-

$

(1)

$

1

 

$

-

$

-

$

-

Other income

 

-

 

-

 

 

-

 

-

 

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(157)

 

142

 

 

-

 

(15)

 

-

 

(11)

 

16

 

 

-

 

5

 

-

Other income

 

-

 

-

 

 

-

 

-

 

-

 

-

 

-

 

 

-

 

-

 

-

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(3)

 

2

 

 

-

 

(1)

 

-

 

-

 

-

 

 

-

 

-

 

-

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

(1)

$

1

 

$

-

$

-

$

-

$

(1)

$

1

 

$

-

$

-

$

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(157)

 

142

 

 

-

 

(15)

 

-

Other income

 

-

 

3

 

 

-

 

-

 

3

 

-

 

-

 

 

-

 

-

 

-

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(3)

 

2

 

 

-

 

(1)

 

-

Nine Months Ended September 30, 2018

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

(9)

$

10

 

$

1

$

-

$

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(10)

 

(34)

 

 

-

 

(44)

 

-

 

184

 

(175)

 

 

-

 

9

 

-

Other income

 

-

 

3

 

 

-

 

-

 

3

 

-

 

-

 

 

-

 

-

 

-

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

8

 

(9)

 

 

-

 

(1)

 

-

 

-

 

-

 

 

-

 

-

 

-

Nine Months Ended September 30, 2017

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

1

$

(1)

 

$

-

$

-

$

-

$

1

$

(1)

 

$

-

$

-

$

-

Other income

 

-

 

-

 

 

-

 

-

 

-

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(318)

 

332

 

 

-

 

14

 

-

 

(318)

 

332

 

 

-

 

14

 

-

Other income

 

-

 

4

 

 

-

 

-

 

4

 

-

 

4

 

 

-

 

-

 

4

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

(29)

 

26

 

 

-

 

(3)

 

-

 

(29)

 

26

 

 

-

 

(3)

 

-

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

$

-

$

(6)

 

$

-

$

-

$

(6)

Other income

 

-

 

10

 

 

-

 

-

 

10

Foreign exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

413

 

(443)

 

 

-

 

(30)

 

-

Other income

 

-

 

15

 

 

-

 

-

 

15

Equity contracts:

 

 

 

 

 

 

 

 

 

 

 

Realized capital gains/(losses)

 

28

 

(28)

 

 

-

 

-

 

-

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

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

AIG | Third Quarter 20172018 Form 10-Q          4751


TABLE OF CONTENTS 

 

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

 

Derivatives Not Designated as Hedging Instruments

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

Gains (Losses) Recognized in Earnings

Gains (Losses) Recognized in Earnings

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

 

2018

 

2017

 

 

2018

 

2017

By Derivative Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

$

(18)

$

91

 

$

81

$

1,464

$

(270)

$

(18)

 

$

(892)

$

81

Foreign exchange contracts

 

(98)

 

49

 

 

(220)

 

203

 

43

 

(98)

 

 

295

 

(220)

Equity contracts

 

(233)

 

(317)

 

 

(723)

 

(589)

 

(199)

 

(233)

 

 

(386)

 

(723)

Commodity contracts

 

-

 

-

 

 

-

 

-

Credit contracts

 

19

 

36

 

 

55

 

70

 

6

 

19

 

 

18

 

55

Other contracts

 

19

 

22

 

 

55

 

58

 

18

 

19

 

 

52

 

55

Embedded derivatives

 

(213)

 

30

 

 

(326)

 

(1,255)

 

229

 

(213)

 

 

1,164

 

(326)

Total

$

(524)

$

(89)

 

$

(1,078)

$

(49)

$

(173)

$

(524)

 

$

251

$

(1,078)

By Classification:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policy fees

$

20

$

20

 

$

59

$

60

$

17

$

20

 

$

51

$

59

Net investment income

 

(3)

 

2

 

 

(10)

 

14

 

-

 

(3)

 

 

(3)

 

(10)

Net realized capital losses

 

(550)

 

(181)

 

 

(1,250)

 

(93)

Other income (losses)

 

8

 

69

 

 

121

 

(43)

Net realized capital gains (losses)

 

(223)

 

(550)

 

 

133

 

(1,250)

Other income

 

35

 

8

 

 

76

 

121

Policyholder benefits and claims incurred

 

1

 

1

 

 

2

 

13

 

(2)

 

1

 

 

(6)

 

2

Total

$

(524)

$

(89)

 

$

(1,078)

$

(49)

$

(173)

$

(524)

 

$

251

$

(1,078)

Credit Risk-Related Contingent Features

The aggregate fair value of our derivative instruments that contained credit risk-related contingent features and that were in a net liability position at September 30, 2017 and December 31, 2016, was approximately $2.0 billion and $3.0 billion, respectively. The aggregate fair value of assets posted as collateral under these contracts at September 30, 2017 and December 31, 2016, was approximately $2.8 billion and $4.0 billion, respectively.

We estimate that at September 30, 2017,2018, 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 $95$49 million.

Additional collateral postings upon downgrade are estimated based on the factors The aggregate fair value of our derivatives that were in the individual collateral posting provisionsa net liability position and that contain such credit risk-related contingencies which can be triggered below our long-term senior debt ratings of the CSA with each counterpartyBBB+ or Baa1 was approximately $421 million and current exposure as of$572 million at September 30, 2017. Factors considered in estimating the termination payments upon downgrade include current market conditions2018 and the termsDecember 31, 2017, respectively. The aggregate fair value of the respective CSA provisions. Our estimates are also based on the assumption that counterparties will terminate based on their net exposure to us. The actual termination payments could differ from our estimates given market conditionsassets posted as collateral under these contracts at the time of downgradeSeptember 30, 2018 and the level of uncertainty in estimating both the number of counterparties who may elect to exercise their right to terminateDecember 31, 2017, was approximately $466 million and the payment that may be triggered in connection with any such exercise.$676 million, respectively.                 

Hybrid Securities with Embedded Credit Derivatives

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

We elect to account for our investments in these hybrid securities with embedded written credit derivatives at fair value, with changes in fair value recognized in Net investment income and Other income. Our investments in these hybrid securities are reported as Other bond securities in the Condensed Consolidated Balance Sheets. The fair values of these hybrid securities were $4.2$4.0 billion and $4.8$4.4 billion at September 30, 20172018 and December 31, 2016,2017, respectively. These securities have par amounts of $9.3$8.6 billion and $10.1$9.1 billion at September 30, 20172018 and December 31, 2016,2017, respectively, and have remaining stated maturity dates that extend to 2052.

 

52AIG | Third Quarter 20172018 Form 10-Q48 


TABLE OF CONTENTS 

 

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

 

10. Insurance Liabilities

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

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

Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.4$12.1 billion and $12.8$12.6 billion at September 30, 20172018 and December 31, 2016,2017, respectively. These recoverable amounts are related to certain policies with high deductibles (in excess of high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements, each referred to generically as “deductibles”), primarily for U.S. commercial casualty business. With respect to the deductible portion of the claim, we manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim.  Thus, these recoverable amounts represent a credit exposure to us. At September 30, 20172018 and December 31, 2016,2017, we held collateral of approximately $9.5$9.3 billion and $9.7$9.5 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and funded trust agreements.

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

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

 

2018

 

2017

 

 

2018

 

2017

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

$

76,422

$

74,143

 

$

77,077

$

74,942

$

76,713

$

76,422

 

$

78,393

$

77,077

Reinsurance recoverable

 

(27,660)

 

(14,520)

 

 

(15,532)

 

(14,339)

 

(27,406)

 

(27,660)

 

 

(26,708)

 

(15,532)

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

 

48,762

 

59,623

 

 

61,545

 

60,603

 

49,307

 

48,762

 

 

51,685

 

61,545

Foreign exchange effect

 

330

 

(147)

 

 

688

 

53

Dispositions(a)

 

-

 

-

 

 

-

 

-

Retroactive reinsurance adjustment (net of discount)(b)

 

22

 

-

 

 

(11,438)

 

-

Total

 

49,114

 

59,476

 

 

50,795

 

60,656

Losses and loss adjustment expenses incurred:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

7,511

 

4,960

 

 

16,021

 

14,896

 

6,670

 

7,511

 

 

15,800

 

16,021

Prior years, excluding discount and amortization of deferred gain

 

901

 

274

 

 

1,354

 

214

 

949

 

901

 

 

884

 

1,354

Prior years, discount charge (benefit)

 

48

 

32

 

 

283

 

323

 

3

 

48

 

 

(174)

 

283

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

 

(75)

 

-

 

 

(195)

 

-

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

 

(175)

 

(75)

 

 

(283)

 

(195)

Total losses and loss adjustment expenses incurred

 

8,385

 

5,266

 

 

17,463

 

15,433

 

7,447

 

8,385

 

 

16,227

 

17,463

Losses and loss adjustment expenses paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current year

 

(1,634)

 

(1,948)

 

 

(3,342)

 

(3,945)

 

(1,791)

 

(1,634)

 

 

(3,289)

 

(3,342)

Prior years

 

(3,395)

 

(3,779)

 

 

(12,438)

 

(13,129)

 

(4,526)

 

(3,395)

 

 

(14,312)

 

(12,438)

Total losses and loss adjustment expenses paid

 

(5,029)

 

(5,727)

 

 

(15,780)

 

(17,074)

 

(6,317)

 

(5,029)

 

 

(17,601)

 

(15,780)

Other changes:

 

 

 

 

 

 

 

 

 

Foreign exchange effect

 

(236)

 

330

 

 

(393)

 

688

Acquisitions(b)

 

3,020

 

-

 

 

3,020

 

-

Retroactive reinsurance adjustment (net of discount)(c)

 

(464)

 

22

 

 

(181)

 

(11,438)

Reclassified to liabilities held for sale(d)

 

8

 

(1,060)

 

 

-

 

(1,060)

 

-

 

8

 

 

-

 

-

Total other changes

 

2,320

 

360

 

 

2,446

 

(10,750)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net liability for unpaid losses and loss adjustment expenses

 

52,478

 

57,955

 

 

52,478

 

57,955

 

52,757

 

52,478

 

 

52,757

 

52,478

Reinsurance recoverable

 

27,609

 

14,501

 

 

27,609

 

14,501

 

29,202

 

27,609

 

 

29,202

 

27,609

Total

$

80,087

$

72,456

 

$

80,087

$

72,456

$

81,959

$

80,087

 

$

81,959

$

80,087

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

(b)  Includes discount on retroactive reinsurance in the amount of $53$9 million and $1.5 billion for the three- and nine-month periods ended September 30, 2017, respectively.

(c)  Includes $6 million and $11 million for the 2011 retroactive reinsurance agreement with NICO covering U.S. asbestos exposures for the three-three-month periods ended September 30, 2018 and 2017, respectively, and $22 million and $11 million for the nine-month periods ended September 30, 2018 and 2017, respectively.

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

(c)  Includes discount on retroactive reinsurance of $46 million and $(53) million for the three-month periods ended September 30, 2018 and 2017, respectively, and $154 million and $1.5 billion for the nine-month periods ended September 30, 2018 and 2017, respectively.

AIG | Third Quarter 20172018 Form 10-Q          4953


TABLE OF CONTENTS 

 

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

 

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

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

On June 14, 2017, a catastrophic fire occurred at Grenfell Tower, a 24-story residential housing block in London, UK, resulting in damage The total paid claims subject to the property and loss of lives. Asagreement as of September 30, 2017, our net exposure to loss on this event was not estimable as2018 were below the forensic investigation was incomplete and the list of potential insureds (and any potential liability) was unclear. There may also be other policyholders involved as the matter evolves.attachment point.                

Discounting of Loss Reserves

At September 30, 2017,2018, the loss reserves reflect a net loss reserve discount of $1.8$2.0 billion, including tabular and non-tabular calculations based upon the following assumptions:

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

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

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

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

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

The discount consists of $491$622 million of tabular discount and $1.3$1.4 billion of non-tabular discount for workers’ compensation. During the nine-month periods ended September 30, 2018 and 2017, and 2016, the chargebenefit/(charge) from changes in discount of $283$305 million and $321$(283) million, respectively, were recorded as part of the policyholder benefits and losses incurred in the Condensed Consolidated Statement of Income.

ForThe following table presents the nine-month period ended September 30, 2017, the discount on workers’ compensation reserves decreased by $1.5 billion due to the impactcomponents of the adverse development reinsurance agreement with NICO.

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

 

September 30, 2018

 

December 31, 2017

 

North

 

 

 

 

 

North

 

 

 

 

 

America

 

 

 

 

 

America

 

 

 

 

 

Commercial

 

Legacy

 

 

 

Commercial

 

Legacy

 

 

(in millions)

Insurance

 

Portfolio

 

Total

 

Insurance

 

Portfolio

 

Total

U.S. workers' compensation

$

2,733

$

955

$

3,688

 

$

2,465

$

918

$

3,383

Retroactive reinsurance

 

(1,693)

 

-

 

(1,693)

 

 

(1,539)

 

-

 

(1,539)

Total reserve discount*

$

1,040

$

955

$

1,995

 

$

926

$

918

$

1,844

During*   Excludes $182 million and $173 million of discount related to certain long tail liabilities in the nine-month period endedUnited Kingdom at September 30, 2016, the forward yield curve component of the discount rates decreased reflecting a decline in U.S. Treasury rates which resulted in a $295 million decrease in the loss reserve discount.

2018 and December 31, 2017, respectively.

54AIG | Third Quarter 20172018 Form 10-Q50 


TABLE OF CONTENTS 

 

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

 

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

 

September 30, 2017

 

December 31, 2016

 

 

Legacy Portfolio

 

 

 

 

Legacy Portfolio

 

 

 

U.S. Liability

- Property and

 

 

 

U.S. Liability

- Property and

 

 

 

and

Casualty run-off

 

 

 

and

Casualty run-off

 

 

(in millions)

Financial Lines

Insurance Lines

 

Total

 

Financial Lines

Insurance Lines

 

Total

U.S. workers' compensation

$

2,376

$

911

$

3,287

 

$

2,583

$

987

$

3,570

Retroactive reinsurance

 

(1,494)

 

-

 

(1,494)

 

 

-

 

-

 

-

Total reserve discount*

$

882

$

911

$

1,793

 

$

2,583

$

987

$

3,570

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

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

Three Months Ended September 30,

2017

 

2016

2018

 

2017

 

 

Legacy Portfolio

 

 

 

 

 

Legacy Portfolio

 

 

North

 

 

 

 

 

North

 

 

 

 

U.S. Liability

- Property and

 

 

 

U.S. Liability

- Property and

 

 

America

 

 

 

 

 

America

 

 

 

 

and

Casualty run-off

 

 

 

and

Casualty run-off

 

 

Commercial

 

Legacy

 

 

 

Commercial

 

Legacy

 

 

(in millions)

Financial Lines

Insurance Lines

 

Total

 

Financial Lines

Insurance Lines

 

Total

Insurance

 

Portfolio

 

Total

 

Insurance

 

Portfolio

 

Total

Current accident year

$

33

$

-

$

33

 

$

37

$

-

$

37

$

89

$

-

$

89

 

$

33

$

-

$

33

Accretion and other adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to prior year discount

 

(100)

 

25

 

(75)

 

 

(43)

 

(12)

 

(55)

 

(7)

 

(12)

 

(19)

 

 

(100)

 

25

 

(75)

Effect of interest rate changes

 

(7)

 

1

 

(6)

 

 

(11)

 

(3)

 

(14)

 

13

 

3

 

16

 

 

(7)

 

1

 

(6)

Net reserve discount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

benefit (charge)

 

(74)

 

26

 

(48)

 

 

(17)

 

(15)

 

(32)

 

95

 

(9)

 

86

 

 

(74)

 

26

 

(48)

Change in discount on loss reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ceded under retroactive reinsurance(a)

 

53

 

-

 

53

 

 

-

 

-

 

-

ceded under retroactive reinsurance

 

(46)

 

-

 

(46)

 

 

53

 

-

 

53

Net change in total reserve

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

discount(b)(a)

$

(21)

$

26

$

5

 

$

(17)

$

(15)

$

(32)

$

49

$

(9)

$

40

 

$

(21)

$

26

$

5

Comprised of:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Workers' compensation

$

(21)

$

26

$

5

 

$

(17)

$

(15)

$

(32)

Asbestos

$

-

$

-

$

-

 

$

-

$

-

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

2017

 

2016

2018

 

2017

 

 

Legacy Portfolio

 

 

 

 

 

Legacy Portfolio

 

 

North

 

 

 

 

 

North

 

 

 

 

U.S. Liability

- Property and

 

 

 

U.S. Liability

- Property and

 

 

America

 

 

 

 

 

America

 

 

 

 

and

Casualty run-off

 

 

 

and

Casualty run-off

 

 

Commercial

 

Legacy

 

 

 

Commercial

 

Legacy

 

 

(in millions)

Financial Lines

Insurance Lines

 

Total

 

Financial Lines

Insurance Lines

 

Total

Insurance

 

Portfolio

 

Total

 

Insurance

 

Portfolio

 

Total

Current accident year

$

94

$

-

$

94

 

$

118

$

-

$

118

$

131

$

-

$

131

 

$

94

$

-

$

94

Accretion and other adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to prior year discount

 

(205)

 

(34)

 

(239)

 

 

(104)

 

(42)

 

(146)

 

(95)

 

(42)

 

(137)

 

 

(205)

 

(34)

 

(239)

Effect of interest rate changes

 

(96)

 

(42)

 

(138)

 

 

(196)

 

(99)

 

(295)

 

232

 

79

 

311

 

 

(96)

 

(42)

 

(138)

Net reserve discount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

benefit (charge)

 

(207)

 

(76)

 

(283)

 

 

(182)

 

(141)

 

(323)

 

268

 

37

 

305

 

 

(207)

 

(76)

 

(283)

Change in discount on loss reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ceded under retroactive reinsurance

 

(1,494)

 

-

 

(1,494)

 

 

-

 

-

 

-

 

(154)

 

-

 

(154)

 

 

(1,494)

 

-

 

(1,494)

Net change in total reserve

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

discount(c)

$

(1,701)

$

(76)

$

(1,777)

 

$

(182)

$

(141)

$

(323)

Comprised of:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Workers' compensation

$

(1,701)

$

(76)

$

(1,777)

 

$

(182)

$

(139)

$

(321)

Asbestos

$

-

$

-

$

-

 

$

-

$

(2)

$

(2)

discount(b)

$

114

$

37

$

151

 

$

(1,701)

$

(76)

$

(1,777)

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

(b)  Excludes $12 million and $(18) million and $4 million of discount related to certain long tail liabilities in the United Kingdom for the three-month periodperiods ended September 30, 2018 and 2017, and 2016, respectively.

(c)(b)  Excludes $10 million and $20 million and $(16) million of discount related to certain long tail liabilities in the United Kingdom for the nine-month periods ended September 30, 2018 and 2017, respectively.

During the nine-month period ended September 30, 2018 effective interest rates increased due to an increase in the forward yield curve component of the discount rates reflecting an increase in U.S. Treasury rates along with changes in payout pattern assumptions. This resulted in an increase in the loss reserve discount by $311 million in the nine-month period ended September 30, 2018.

During the nine-month period ended September 30, 2017 and 2016, respectively.effective interest rates decreased due to a decrease in the forward yield curve component of the discount rates reflecting a decrease in U.S. Treasury rates along with changes in payout pattern assumptions. This resulted in a decrease in the loss reserve discount by $138 million in the nine-month period ended September 30, 2017.

 

AIG | Third Quarter 20172018 Form 10-Q          5155


TABLE OF CONTENTS 

 

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

 

11. Contingencies, Commitments and Guarantees

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

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

Legal Contingencies

Overview.   In the normal course of business, AIG and our subsidiaries are, like others in the insurance and financial services industries in general, subject to regulatory and government investigations and actions, and litigation including claimsand 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.damages or other penalties.  Many of these matters are also highly complex and seek recovery on behalf of a class or similarly large number of plaintiffs.  It is therefore inherently difficult to predict the size or scope of potential future losses arising from these matters.  In our insurance and reinsurance operations, litigation arising from claims settlement activities isand 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.  However,Separate and apart from the potential for increasing jury awardsforegoing matters involving insurance and settlements makes it difficult to assess the ultimate outcome of such litigation.reinsurance coverage, AIG, is alsoour subsidiaries and their respective officers and directors are subject to derivative, class action and other claims asserteda variety of additional types of legal proceedings brought by its shareholdersholders of AIG securities, customers, employees and others, alleging, among other things, breach of contractual or fiduciary duties, by its directors and officersbad faith and violations of insurance laws and regulations, as well as federal and state securities laws.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 caseamount 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 may be discussed below, that any derivative action broughtsuch charges are likely to have a material adverse effect on behalfour financial position or results of AIG, any recovery would accrue to the benefit of AIG.operation.

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

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

AIG, AIG Financial Products Corp. and related subsidiaries (collectively AIGFP), and certain directors and officers of AIG, AIGFP and other AIG subsidiaries have been named in various actions relatingWe are party to our exposure to the U.S. residential subprime mortgage market, unrealized market valuation losses on AIGFP’s super senior credit default swap portfolio, losses and liquidity constraints relating to our securities lending program and related disclosure and other matters (Subprime Exposure Issues).

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

In 2014, lead plaintiff, AIG and AIG’s outside auditor accepted mediators’ proposals to settle the Consolidated 2008 Securities Litigation against all defendants. On October 22, 2014, AIG paid the settlement amount of $960 million. On March 20, 2015, the Court issued an Order and Final Judgment approving the class settlement and dismissing the action with prejudice, and the AIG settlement became final on June 29, 2015.

Individual Securities Litigations.Between November 18, 2011 and February 9, 2015, eleven separate, though similar, securities actions (Individual Securities Litigations) were filed in or transferredFor additional information see Note 15 to the SDNY, asserting claims substantially similar to those in theCondensed Consolidated 2008 Securities Litigation against AIG and certain directors and officers of AIG and AIGFP. Two of the actions were voluntarily dismissed. On September 10, 2015, the SDNY granted AIG’s motion to dismiss some of the claims in the Individual Securities Litigations in whole or in part. AIG has settled eight of the nine remaining actions. The remaining Individual Securities Litigation pending in the SDNY was brought by a series of institutional investor funds. After the court’s decision granting AIG’s motion to dismiss plaintiff’s claims in part, the claims in the remaining action are limited to a claim under Section 10(b) of the Exchange Act for allegedly materially false and misleading statements in AIG’s public disclosures from February 8, 2008 to September 16, 2008 relating to, among other things, the Subprime Exposure Issues. On January 17, 2017, AIG filed a motion for summary judgment to dismiss the vast majority of the institutional investor funds’ remaining claimsFinancial Statements.                              

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

56AIG | Third Quarter 20172018 Form 10-Q52 


TABLE OF CONTENTS

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

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

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

Starr International Litigation

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

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

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

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

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

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

On October 6, 2017, SICO filed a petition for writ of certiorari with the United States Supreme Court.

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

AIG | Third Quarter 2017 Form 10-Q53


TABLE OF CONTENTS 

 

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

 

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

Other Commitments

In the normal course of business, we enter into commitments to invest in limited partnerships, private equity funds and hedge funds and to purchase and develop real estate in the U.S. and abroad. These commitments totaled $3.1$3.6 billion at September 30, 2017.2018.

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 AIGFPAIG Financial Products Corp. and related subsidiaries (collectively AIGFP) and of AIG Markets arising from transactions entered into by AIG Markets.

In connection with AIGFP’s business activities, AIGFP has issued, in a limited number of transactions, standby letters of credit or similar facilities to equity investors of structured leasing transactions in an amount equal to the termination value owing to the equity investor by the lessee in the event of a lessee default (the equity termination value). The total amount outstanding at September 30, 20172018 was $139$85 million. In those transactions, AIGFP has agreed to pay such amount if the lessee fails to pay. The amount payable by AIGFP is, in certain cases, partially offset by amounts payable under other instruments typically equal to the present value of scheduled payments to be made by AIGFP. In the event that AIGFP is required to make a payment to the equity investor, the lessee is unconditionally obligated to reimburse AIGFP. To the extent that the equity investor is paid the equity termination value from the standby letter of credit and/or other sources, including payments by the lessee, AIGFP takes an assignment of the equity investor’s rights under the lease of the underlying property. Because the obligations of the lessee under the lease transactions are generally economically defeased, lessee bankruptcy is the most likely circumstance in which AIGFP would be required to pay without reimbursement.

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

Asset Dispositions

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

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

Other

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

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

·       For additional disclosures about guarantees of outstanding debt and Preference Shares of Validus and outstanding debt of AIG Life Holdings, Inc. (AIGLH), see Note 16 to the Condensed Consolidated Financial Statements.

AIG | Third Quarter 20172018 Form 10-Q          5457


TABLE OF CONTENTS

 

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

 

12. Equity

Shares Outstanding

The following table presents a rollforward of outstanding shares:

Nine Months Ended September 30, 2017

Common

Treasury

Common Stock

Nine Months Ended September 30, 2018

Common

Treasury

Common Stock

Stock Issued

Stock

Outstanding

Stock Issued

Stock

Outstanding

Shares, beginning of year

1,906,671,492

(911,335,651)

995,335,841

1,906,671,492

(1,007,626,835)

899,044,657

Shares issued

-

3,221,892

3,221,892

-

4,055,727

4,055,727

Shares repurchased

-

(99,677,646)

(99,677,646)

-

(18,452,857)

(18,452,857)

Shares, end of period

1,906,671,492

(1,007,791,405)

898,880,087

1,906,671,492

(1,022,023,965)

884,647,527

Dividends

Dividends are payable on AIG Common Stock only when, as and if declared by our Board of Directors in its discretion, from funds legally available for this purpose. In considering whether to pay a dividend on or purchase shares of AIG Common Stock, our Board of Directors considers a number of factors, including, but not limited to: the capital resources available to support our insurance operations and business strategies, AIG’s funding capacity and capital resources in comparison to internal benchmarks, expectations for capital generation, rating agency expectations for capital, regulatory standards for capital and capital distributions, and such other factors as our Board of Directors may deem relevant.

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

 

 

 

 

Dividends Paid

Record Date

Payment Date

 

 

Per Share

September 15, 2017

September 29, 2017

 

$

0.32

June 14, 2017

June 28, 2017

 

 

0.32

March 15, 2017

March 29, 2017

 

 

0.32

 

 

 

 

 

September 15, 2016

September 29, 2016

 

 

0.32

June 13, 2016

June 27, 2016

 

 

0.32

March 14, 2016

March 28, 2016

 

 

0.32

 

 

 

 

 

Dividends Paid

Declaration Date

Record Date

Payment Date

 

 

Per Share

August 2, 2018

September 17, 2018

September 28, 2018

 

$

0.32

May 2, 2018

June 14, 2018

June 28, 2018

 

 

0.32

February 8, 2018

March 15, 2018

March 29, 2018

 

 

0.32

August 2, 2017

September 15, 2017

September 29, 2017

 

 

0.32

May 3, 2017

June 14, 2017

June 28, 2017

 

 

0.32

February 14, 2017

March 15, 2017

March 29, 2017

 

 

0.32

For a discussion of restrictions on payments of dividends to AIG Parent by its subsidiaries see Note 19 to the Consolidated Financial Statements in the 20162017 Annual Report

Repurchase of AIG Common Stock

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

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

(in millions)

 

2017

 

2016

 

2018

 

2017

Aggregate repurchases of common stock

$

6,275

$

8,506

$

994

$

6,275

Total number of common shares repurchased

 

100

 

153

 

18

 

100

Aggregate repurchases of warrants

$

3

$

263

$

6

$

3

Total number of warrants repurchased*

 

-

 

15

 

-

 

-

*    For the nine-month periodperiods ended September 30, 2018 and 2017, we repurchased 366,253 and 185,000 warrants to purchase shares of AIG Common Stock.Stock, respectively.  

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 May 3, 2017, our Board of Directors authorized an additional increase of $2.5 billion to its previous share repurchase authorization. As of September 30, 2017,2018, approximately $2.2$1.3 billion remained under our share repurchase authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants). Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans.

58AIG | Third Quarter 20172018 Form 10-Q55


TABLE OF CONTENTS

 

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

 

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 repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors.

Accumulated Other Comprehensive Income

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

 

Unrealized Appreciation

 

 

 

 

 

 

 

 

 

Unrealized Appreciation

 

 

 

 

 

 

 

Fair Value of

 

 

 

(Depreciation) of Fixed

 

Unrealized

 

 

 

 

 

 

 

(Depreciation) of Fixed

 

Unrealized

 

 

 

 

 

Liabilities Under

 

 

 

Maturity Securities on

 

Appreciation

 

Foreign

 

Retirement

 

 

 

Maturity Securities on

 

Appreciation

 

Foreign

 

Retirement

 

Fair Value Option

 

 

 

Which Other-Than-

 

(Depreciation)

 

Currency

 

Plan

 

 

 

Which Other-Than-

 

(Depreciation)

 

Currency

 

Plan

 

Attributable to

 

 

 

Temporary Credit

 

of All Other

 

Translation

 

Liabilities

 

 

 

Temporary Credit

 

of All Other

 

Translation

 

Liabilities

 

Changes in

 

 

(in millions)

 

Impairments Were Taken

 

Investments

 

Adjustments

 

Adjustment

 

Total

 

Impairments Were Taken

 

Investments

 

Adjustments

 

Adjustment

 

Own Credit Risk

 

Total

Balance, December 31, 2016, net of tax

$

426

$

6,405

$

(2,629)

$

(972)

$

3,230

Change in unrealized appreciation of investments

 

564

 

3,693

 

-

 

-

 

4,257

Change in deferred policy acquisition costs adjustment and other*

 

(56)

 

(1,269)

 

-

 

-

 

(1,325)

Balance, June 30, 2018, net of tax

$

(234)

$

3,944

$

(2,426)

$

(1,062)

$

8

$

230

Cumulative effect of change in

 

 

 

 

 

 

 

 

 

 

 

 

accounting principles

 

-

 

-

 

-

 

-

 

-

 

-

Change in unrealized appreciation (depreciation)

 

 

 

 

 

 

 

 

 

 

 

 

of investments

 

350

 

(1,301)

 

-

 

-

 

-

 

(951)

Change in deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

adjustment and other

 

(205)

 

216

 

-

 

-

 

-

 

11

Change in future policy benefits

 

-

 

(425)

 

-

 

-

 

(425)

 

-

 

340

 

-

 

-

 

-

 

340

Change in foreign currency translation adjustments

 

-

 

-

 

474

 

-

 

474

 

-

 

-

 

(131)

 

-

 

-

 

(131)

Change in net actuarial loss

 

-

 

-

 

-

 

134

 

134

 

-

 

-

 

-

 

16

 

-

 

16

Change in prior service cost

 

-

 

-

 

-

 

6

 

6

 

-

 

-

 

-

 

-

 

-

 

-

Change in deferred tax liability

 

(178)

 

(159)

 

(27)

 

(48)

 

(412)

Total other comprehensive income

 

330

 

1,840

 

447

 

92

 

2,709

Change in deferred tax asset (liability)

 

(38)

 

(13)

 

2

 

(2)

 

-

 

(51)

Change in fair value of liabilities under fair value

 

 

 

 

 

 

 

 

 

 

 

 

option attributable to changes in own credit risk

 

-

 

-

 

-

 

-

 

-

 

-

Total other comprehensive income (loss)

 

107

 

(758)

 

(129)

 

14

 

-

 

(766)

Noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Balance, September 30, 2017, net of tax

$

756

$

8,245

$

(2,182)

$

(880)

$

5,939

Balance, September 30, 2018, net of tax

$

(127)

$

3,186

$

(2,555)

$

(1,048)

$

8

$

(536)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015, net of tax

$

696

$

5,566

$

(2,879)

$

(846)

$

2,537

Change in unrealized appreciation (depreciation) of investments

 

(318)

 

10,873

 

-

 

-

 

10,555

Change in deferred policy acquisition costs adjustment and other

 

(40)

 

(887)

 

-

 

-

 

(927)

Balance, December 31, 2017, net of tax

$

793

$

7,693

$

(2,090)

$

(931)

$

-

$

5,465

Cumulative effect of change in

 

 

 

 

 

 

 

 

 

 

 

 

accounting principles

 

169

 

(285)

 

(284)

 

(183)

 

7

 

(576)

Change in unrealized depreciation of investments

 

(1,258)

 

(7,659)

 

-

 

-

 

-

 

(8,917)

Change in deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

adjustment and other

 

(91)

 

1,121

 

-

 

-

 

-

 

1,030

Change in future policy benefits

 

-

 

(2,099)

 

-

 

-

 

(2,099)

 

-

 

1,464

 

-

 

-

 

-

 

1,464

Change in foreign currency translation adjustments

 

-

 

-

 

179

 

-

 

179

 

-

 

-

 

(154)

 

-

 

-

 

(154)

Change in net actuarial loss

 

-

 

-

 

-

 

13

 

13

 

-

 

-

 

-

 

54

 

-

 

54

Change in prior service credit

 

-

 

-

 

-

 

(20)

 

(20)

 

-

 

-

 

-

 

(2)

 

-

 

(2)

Change in deferred tax asset (liability)

 

248

 

(1,585)

 

153

 

3

 

(1,181)

 

260

 

852

 

(27)

 

14

 

-

 

1,099

Change in fair value of liabilities under fair value

 

 

 

 

 

 

 

 

 

 

 

 

option attributable to changes in own credit risk

 

-

 

-

 

-

 

-

 

1

 

1

Total other comprehensive income (loss)

 

(110)

 

6,302

 

332

 

(4)

 

6,520

 

(1,089)

 

(4,222)

 

(181)

 

66

 

1

 

(5,425)

Noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Balance, September 30, 2016, net of tax

$

586

$

11,868

$

(2,547)

$

(850)

$

9,057

Balance, September 30, 2018, net of tax

$

(127)

$

3,186

$

(2,555)

$

(1,048)

$

8

$

(536)

AIG | Third Quarter 2018 Form 10-Q59


TABLE OF CONTENTS

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

 

 

Unrealized Appreciation

 

 

 

 

 

 

 

Fair Value of

 

 

 

 

(Depreciation) of Fixed

 

Unrealized

 

 

 

 

 

Liabilities Under

 

 

 

 

Maturity Securities on

 

Appreciation

 

Foreign

 

Retirement

 

Fair Value Option

 

 

 

 

Which Other-Than-

 

(Depreciation)

 

Currency

 

Plan

 

Attributable to

 

 

 

 

Temporary Credit

 

of All Other

 

Translation

 

Liabilities

 

Changes in

 

 

(in millions)

 

Impairments Were Taken

 

Investments

 

Adjustments

 

Adjustment

 

Own Credit Risk

 

Total

Balance, June 30, 2017, net of tax

$

659

$

7,753

$

(2,507)

$

(943)

$

-

$

4,962

Change in unrealized appreciation of investments

 

223

 

855

 

-

 

-

 

-

 

1,078

Change in deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

adjustment and other

 

(73)

 

(271)

 

-

 

-

 

-

 

(344)

Change in future policy benefits

 

-

 

114

 

-

 

-

 

-

 

114

Change in foreign currency translation adjustments

 

-

 

-

 

328

 

-

 

-

 

328

Change in net actuarial loss

 

-

 

-

 

-

 

96

 

-

 

96

Change in prior service cost

 

-

 

-

 

-

 

-

 

-

 

-

Change in deferred tax liability

 

(53)

 

(206)

 

(3)

 

(33)

 

-

 

(295)

Total other comprehensive income

 

97

 

492

 

325

 

63

 

-

 

977

Noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

Balance, September 30, 2017, net of tax

$

756

$

8,245

$

(2,182)

$

(880)

$

-

$

5,939

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016, net of tax

$

426

$

6,405

$

(2,629)

$

(972)

$

-

$

3,230

Change in unrealized appreciation of investments

 

564

 

3,693

 

-

 

-

 

-

 

4,257

Change in deferred policy acquisition costs

 

 

 

 

 

 

 

 

 

 

 

 

adjustment and other*

 

(56)

 

(1,269)

 

-

 

-

 

-

 

(1,325)

Change in future policy benefits

 

-

 

(425)

 

-

 

-

 

-

 

(425)

Change in foreign currency translation adjustments

 

-

 

-

 

474

 

-

 

-

 

474

Change in net actuarial loss

 

-

 

-

 

-

 

134

 

-

 

134

Change in prior service cost

 

-

 

-

 

-

 

6

 

-

 

6

Change in deferred tax liability

 

(178)

 

(159)

 

(27)

 

(48)

 

-

 

(412)

Total other comprehensive income

 

330

 

1,840

 

447

 

92

 

-

 

2,709

Noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

Balance, September 30, 2017, net of tax

$

756

$

8,245

$

(2,182)

$

(880)

$

-

$

5,939

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

 

 

60AIG | Third Quarter 20172018 Form 10-Q56 


TABLE OF CONTENTS

 

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

 

The following table presents the other comprehensive income reclassification adjustments for the three- and nine-month periods ended September 30, 20172018 and 2016,2017, respectively:

 

Unrealized Appreciation

 

 

 

 

 

 

 

 

 

Unrealized Appreciation

 

 

 

 

 

 

 

 

 

 

 

(Depreciation) of Fixed

 

 

 

 

 

 

 

 

 

(Depreciation) of Fixed

 

 

 

 

 

 

 

Fair Value of

 

 

 

Maturity Securities on

 

Unrealized

 

 

 

 

 

 

 

Maturity Investments

 

Unrealized

 

 

 

 

 

Liabilities Under

 

 

 

Which Other-Than-

 

Appreciation

 

Foreign

 

Retirement

 

 

 

on Which Other-Than-

 

Appreciation

 

Foreign

 

Retirement

 

Fair Value Option

 

 

 

Temporary Credit

 

(Depreciation)

 

Currency

 

Plan

 

 

 

Temporary Credit

 

(Depreciation)

 

Currency

 

Plan

 

Attributable to

 

 

 

Impairments Were

 

of All Other

 

Translation

 

Liabilities

 

 

 

Impairments Were

 

of All Other

 

Translation

 

Liabilities

 

Changes in

 

 

(in millions)

 

Taken

 

Investments

 

Adjustment

 

Adjustment

 

Total

 

Recognized

 

Investments

 

Adjustments

 

Adjustment

 

Own Credit Risk

 

Total

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

146

$

(705)

$

(131)

$

7

$

-

$

(683)

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

1

 

40

 

-

 

(9)

 

-

 

32

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

145

 

(745)

 

(131)

 

16

 

-

 

(715)

Less: Income tax expense (benefit)

 

38

 

13

 

(2)

 

2

 

-

 

51

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

107

$

(758)

$

(129)

$

14

$

-

$

(766)

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

160

$

831

$

328

$

38

$

1,357

$

160

$

831

$

328

$

38

$

-

$

1,357

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

10

 

133

 

-

 

(58)

 

85

 

10

 

133

 

-

 

(58)

 

-

 

85

Total other comprehensive income,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense

 

150

 

698

 

328

 

96

 

1,272

 

150

 

698

 

328

 

96

 

-

 

1,272

Less: Income tax expense

 

53

 

206

 

3

 

33

 

295

 

53

 

206

 

3

 

33

 

-

 

295

Total other comprehensive income,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense

$

97

$

492

$

325

$

63

$

977

$

97

$

492

$

325

$

63

$

-

$

977

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

147

$

816

$

21

$

(8)

$

976

$

(1,344)

$

(5,055)

$

(154)

$

26

$

1

$

(6,526)

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

6

 

163

 

-

 

(3)

 

166

 

5

 

19

 

-

 

(26)

 

-

 

(2)

Total other comprehensive income,

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

141

 

653

 

21

 

(5)

 

810

 

(1,349)

 

(5,074)

 

(154)

 

52

 

1

 

(6,524)

Less: Income tax expense (benefit)

 

(76)

 

187

 

(90)

 

(9)

 

12

 

(260)

 

(852)

 

27

 

(14)

 

-

 

(1,099)

Total other comprehensive income,

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

217

$

466

$

111

$

4

$

798

$

(1,089)

$

(4,222)

$

(181)

$

66

$

1

$

(5,425)

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

553

$

2,610

$

474

$

62

$

3,699

$

553

$

2,610

$

474

$

62

$

-

$

3,699

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

included in net income

 

45

 

611

 

-

 

(78)

 

578

 

45

 

611

 

-

 

(78)

 

-

 

578

Total other comprehensive income,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

before income tax expense

 

508

 

1,999

 

474

 

140

 

3,121

 

508

 

1,999

 

474

 

140

 

-

 

3,121

Less: Income tax expense

 

178

 

159

 

27

 

48

 

412

 

178

 

159

 

27

 

48

 

-

 

412

Total other comprehensive income,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense

$

330

$

1,840

$

447

$

92

$

2,709

$

330

$

1,840

$

447

$

92

$

-

$

2,709

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Unrealized change arising during period

$

(252)

$

8,733

$

179

$

(18)

$

8,642

Less: Reclassification adjustments

 

 

 

 

 

 

 

 

 

 

included in net income

 

106

 

846

 

-

 

(11)

 

941

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

before income tax expense (benefit)

 

(358)

 

7,887

 

179

 

(7)

 

7,701

Less: Income tax expense (benefit)

 

(248)

 

1,585

 

(153)

 

(3)

 

1,181

Total other comprehensive income (loss),

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

$

(110)

$

6,302

$

332

$

(4)

$

6,520

AIG | Third Quarter 20172018 Form 10-Q          5761


TABLE OF CONTENTS

 

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

 

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

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Condensed Consolidated Statements of Income

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Condensed Consolidated Statements of Income

Three Months Ended September 30,

Three Months Ended September 30,

(in millions)

 

2017

2016

 

2018

2017

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

$

10

$

6

 

 

Other realized capital gains

 

$

1

$

10

 

 

Other realized capital gains

Total

 

 

10

 

6

 

 

 

 

 

1

 

10

 

 

 

Unrealized appreciation (depreciation) of all other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

48

 

182

 

 

Other realized capital gains

 

 

10

 

48

 

 

Other realized capital gains

Deferred acquisition costs adjustment

 

 

85

 

(19)

 

 

Amortization of deferred policy acquisition costs

 

 

30

 

85

 

 

Amortization of deferred policy acquisition costs

Future policy benefits

 

 

-

 

-

 

 

Policyholder benefits and losses incurred

 

 

-

 

-

 

 

Policyholder benefits and losses incurred

Total

 

 

133

 

163

 

 

 

 

 

40

 

133

 

 

 

Change in retirement plan liabilities adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior - service credit

 

 

-

 

4

 

 

*

Prior-service credit

 

 

-

 

-

 

 

*

Actuarial losses

 

 

(58)

 

(7)

 

 

*

 

 

(9)

 

(58)

 

 

*

Total

 

 

(58)

 

(3)

 

 

 

 

 

(9)

 

(58)

 

 

 

Total reclassifications for the period

 

$

85

$

166

 

 

 

 

$

32

$

85

 

 

 

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Condensed Consolidated Statements of Income

Amount Reclassified from Accumulated Other Comprehensive Income

Affected Line Item in the Condensed Consolidated Statements of Income

Nine Months Ended September 30,

Nine Months Ended September 30,

(in millions)

 

2017

2016

 

2018

2017

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

$

45

$

106

 

 

Other realized capital gains

 

$

5

$

45

 

 

Other realized capital gains

Total

 

 

45

 

106

 

 

 

 

 

5

 

45

 

 

 

Unrealized appreciation (depreciation) of all other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

 

415

 

843

 

 

Other realized capital gains

 

 

19

 

415

 

 

Other realized capital gains

Deferred acquisition costs adjustment

 

 

196

 

3

 

 

Amortization of deferred policy acquisition costs

 

 

-

 

196

 

 

Amortization of deferred policy acquisition costs

Future policy benefits

 

 

-

 

-

 

 

Policyholder benefits and losses incurred

 

 

-

 

-

 

 

Policyholder benefits and losses incurred

Total

 

 

611

 

846

 

 

 

 

 

19

 

611

 

 

 

Change in retirement plan liabilities adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior - service credit

 

 

1

 

13

 

 

*

Prior-service credit

 

 

1

 

1

 

 

*

Actuarial losses

 

 

(79)

 

(24)

 

 

*

 

 

(27)

 

(79)

 

 

*

Total

 

 

(78)

 

(11)

 

 

-

 

 

(26)

 

(78)

 

 

 

Total reclassifications for the period

 

$

578

$

941

 

 

-

 

$

(2)

$

578

 

 

 

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

 

62AIG | Third Quarter 20172018 Form 10-Q58 


TABLE OF CONTENTS 

 

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

 

13. Earnings Per Share (EPS)

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

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

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(dollars in millions, except per share data)

 

2017

 

2016

 

 

2017

 

2016

 

2018

 

2017

 

2018

 

2017

Numerator for EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(1,712)

$

433

 

$

609

$

2,211

$

(1,220)

$

(1,712)

 

$

661

$

609

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

 

26

 

(26)

 

 

40

 

(35)

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

 

(1,738)

 

459

 

 

569

 

2,246

Less: Net income from continuing operations attributable to noncontrolling interests

 

-

 

26

 

5

 

40

Income (loss) attributable to AIG common shareholders

 

 

 

 

 

 

 

 

from continuing operations

 

(1,220)

 

(1,738)

 

656

 

569

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

 

(1)

 

3

 

 

7

 

(54)

 

(39)

 

(1)

 

(40)

 

7

Net income (loss) attributable to AIG common shareholders

$

(1,739)

$

462

 

$

576

$

2,192

$

(1,259)

$

(1,739)

 

$

616

$

576

Denominator for EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

908,667,044

 

1,071,295,892

 

 

938,130,832

 

1,113,650,878

Weighted average shares outstanding — basic

 

895,237,359

 

908,667,044

 

 

902,081,555

 

938,130,832

Dilutive shares

 

-

 

31,104,878

 

 

23,165,114

 

29,049,329

 

-

 

-

 

14,736,714

 

23,165,114

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

 

908,667,044

 

1,102,400,770

 

 

961,295,946

 

1,142,700,207

Income per common share attributable to AIG:

 

 

 

 

 

 

 

 

 

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

 

895,237,359

 

908,667,044

 

916,818,269

 

961,295,946

Income (loss) per common share attributable to AIG:

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(1.91)

$

0.43

 

$

0.60

$

2.02

$

(1.37)

$

(1.91)

 

$

0.72

$

0.60

Income (loss) from discontinued operations

$

-

$

-

 

$

0.01

$

(0.05)

$

(0.04)

$

-

 

$

(0.04)

$

0.01

Income (loss) attributable to AIG

$

(1.91)

$

0.43

 

$

0.61

$

1.97

$

(1.41)

$

(1.91)

 

$

0.68

$

0.61

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

(1.91)

$

0.42

 

$

0.59

$

1.97

$

(1.37)

$

(1.91)

 

$

0.71

$

0.59

Income (loss) from discontinued operations

$

-

$

-

 

$

0.01

$

(0.05)

$

(0.04)

$

-

 

$

(0.04)

$

0.01

Income (loss) attributable to AIG

$

(1.91)

$

0.42

 

$

0.60

$

1.92

$

(1.41)

$

(1.91)

 

$

0.67

$

0.60

(a)Shares in the diluted EPS calculation represent basic shares for the three-month periodperiods ended September 30, 2018 and 2017 due to the net losslosses in that period.those periods. The shares excluded from the calculation were 13,538,168 and 22,459,868 shares.shares, respectively.

(b)Dilutive shares includeincluded our share‑based employee compensation plans and a weighted average portion of the warrants issued to AIG shareholders as part of AIG’s recapitalization in January 2011. The number of shares excluded from diluted shares outstanding was 5.8 million and 4.7 million for the three- and nine-month periods ended September 30, 2018, respectively, and 2.4 million and 2.0 million for the three- and nine-month periods ended September 30, 2017, respectively, and 0.1 million and 0.2 million for the three- and nine-month periods ended September 30, 2016, respectively, because the effect of including those shares in the calculation would have been anti-dilutive.

AIG | Third Quarter 20172018 Form 10-Q          5963


TABLE OF CONTENTS 

 

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

 

14. Employee Benefits

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

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

Pension

 

Postretirement

Pension

 

Postretirement

 

U.S.

 

Non-U.S.

 

 

 

 

U.S.

 

Non-U.S.

 

 

 

U.S.

 

Non-U.S.

 

 

 

 

U.S.

 

Non-U.S.

 

 

(in millions)

 

Plans

 

Plans

 

Total

 

 

Plans

 

Plans

 

Total

 

Plans

 

Plans

 

Total

 

 

Plans

 

Plans

 

Total

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

-

$

6

$

6

 

$

-

$

-

$

-

Interest cost

 

41

 

4

 

45

 

 

1

 

1

 

2

Expected return on assets

 

(72)

 

(6)

 

(78)

 

 

-

 

-

 

-

Amortization of prior service cost

 

-

 

-

 

-

 

 

-

 

-

 

-

Amortization of net loss

 

7

 

2

 

9

 

 

-

 

-

 

-

Net periodic benefit cost (credit)

$

(24)

$

6

$

(18)

 

$

1

$

1

$

2

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

(5)

$

7

$

2

 

$

-

$

1

$

1

$

(5)

$

7

$

2

 

$

-

$

1

$

1

Interest cost

 

41

 

4

 

45

 

 

2

 

1

 

3

 

41

 

4

 

45

 

 

2

 

1

 

3

Expected return on assets

 

(66)

 

(6)

 

(72)

 

 

-

 

-

 

-

 

(66)

 

(6)

 

(72)

 

 

-

 

-

 

-

Amortization of prior service credit

 

-

 

-

 

-

 

 

-

 

-

 

-

Amortization of net (gain) loss

 

6

 

3

 

9

 

 

-

 

-

 

-

Amortization of prior service cost

 

-

 

-

 

-

 

 

-

 

-

 

-

Amortization of net loss

 

6

 

3

 

9

 

 

-

 

-

 

-

Curtailment gain

 

-

 

(5)

 

(5)

 

 

-

 

-

 

-

 

-

 

(5)

 

(5)

 

 

-

 

-

 

-

Settlement (Credit)/Charges

 

50

 

-

 

50

 

 

-

 

-

 

-

Settlement charges

 

50

 

-

 

50

 

 

-

 

-

 

-

Net periodic benefit cost

$

26

$

3

$

29

 

$

2

$

2

$

4

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

4

$

17

$

21

 

$

1

$

1

$

2

Interest cost

 

122

 

12

 

134

 

 

4

 

2

 

6

Expected return on assets

 

(213)

 

(19)

 

(232)

 

 

-

 

-

 

-

Amortization of prior service cost (credit)

 

-

 

1

 

1

 

 

(1)

 

(1)

 

(2)

Amortization of net loss

 

21

 

6

 

27

 

 

-

 

-

 

-

Net periodic benefit cost (credit)

$

26

$

3

$

29

 

$

2

$

2

$

4

$

(66)

$

17

$

(49)

 

$

4

$

2

$

6

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

6

$

8

$

14

 

$

1

$

-

$

1

$

8

$

23

$

31

 

$

1

$

2

$

3

Interest cost

 

45

 

5

 

50

 

 

2

 

-

 

2

 

126

 

12

 

138

 

 

5

 

3

 

8

Expected return on assets

 

(72)

 

(7)

 

(79)

 

 

-

 

-

 

-

 

(194)

 

(18)

 

(212)

 

 

-

 

-

 

-

Amortization of prior service credit

 

-

 

-

 

-

 

 

(2)

 

-

 

(2)

 

-

 

-

 

-

 

 

(1)

 

-

 

(1)

Amortization of net loss

 

7

 

2

 

9

 

 

(1)

 

1

 

-

 

20

 

9

 

29

 

 

-

 

-

 

-

Curtailment gain

 

-

 

(2)

 

(2)

 

 

-

 

-

 

-

 

-

 

(5)

 

(5)

 

 

-

 

-

 

-

Settlement (Credit)/Charges

 

-

 

-

 

-

 

 

-

 

-

 

-

Net periodic benefit cost (credit)

$

(14)

$

6

$

(8)

 

$

-

$

1

$

1

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

8

$

23

$

31

 

$

1

$

2

$

3

Interest cost

 

126

 

12

 

138

 

 

5

 

3

 

8

Expected return on assets

 

(194)

 

(18)

 

(212)

 

 

-

 

-

 

-

Amortization of prior service credit

 

-

 

-

 

-

 

 

(1)

 

-

 

(1)

Amortization of net (gain) loss

 

20

 

9

 

29

 

 

-

 

-

 

-

Curtailment gain

 

-

 

(5)

 

(5)

 

 

-

 

-

 

-

Settlement (Credit)/Charges

 

50

 

-

 

50

 

 

-

 

-

 

-

Net periodic benefit cost (credit)

$

10

$

21

$

31

 

$

5

$

5

$

10

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

$

15

$

23

$

38

 

$

2

$

2

$

4

Interest cost

 

136

 

15

 

151

 

 

5

 

2

 

7

Expected return on assets

 

(219)

 

(20)

 

(239)

 

 

-

 

-

 

-

Amortization of prior service credit

 

-

 

-

 

-

 

 

(7)

 

-

 

(7)

Amortization of net loss

 

19

 

6

 

25

 

 

(1)

 

1

 

-

Curtailment gain

 

-

 

(5)

 

(5)

 

 

-

 

-

 

-

Settlement (Credit)/Charges

 

-

 

-

 

-

 

 

-

 

-

 

-

Net periodic benefit cost (credit)

$

(49)

$

19

$

(30)

 

$

(1)

$

5

$

4

Settlement charges

 

50

 

-

 

50

 

 

-

 

-

 

-

Net periodic benefit cost

$

10

$

21

$

31

 

$

5

$

5

$

10

For the nine-month period ended September 30, 2018, we did not make any contributions to the U.S. AIG Retirement Plan.

64AIG | Third Quarter 20172018 Form 10-Q60 


TABLE OF CONTENTS 

 

ITEM 1 |  Notes to Condensed Consolidated Financial Statements (unaudited) |  14. Employee Benefits15. Income Taxes

15. Income Taxes

U.S. Tax Reform Overview

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

During December 2017, the SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 addressed situations where accounting for certain income tax effects of the Tax Act under ASC 740 may be incomplete upon issuance of an entity’s financial statements and provides a one-year measurement period from the enactment date to complete the accounting under ASC 740. In accordance with SAB 118, a company was required to reflect the following:

Income tax effects of those aspects of the Tax Act for which accounting under ASC 740 is complete

Provisional estimate of income tax effects of the Tax Act to the extent accounting is incomplete but a reasonable estimate is determinable  

If a provisional estimate cannot be determined, ASC 740 should still be applied on the basis of tax law provisions that were in effect immediately before the enactment of the Tax Act.

At December 31, 2017, we originally recorded a provisional estimate of income tax effects of the Tax Act of $6.7 billion, including a tax charge of $6.7 billion attributable to the reduction in the U.S. corporate income tax rate and tax benefit of $38 million related to the deemed repatriation tax. Our provisional estimate of $6.7 billion was based in part on a reasonable estimate of the effects of the statutory income tax rate reduction on existing deferred tax balances and of certain provisions of the Tax Act. We recently filed our 2017 consolidated U.S. income tax return and have substantially completed our review of the primary impact of the Tax Act provisions on our deferred taxes. As a result, we consider the accounting for the effects of the rate change on deferred tax balances to be complete and no material measurement period changes were recorded for this item. As further guidance is issued by the U.S. tax authority, any resulting changes in our estimates will be treated in accordance with the relevant accounting guidance.

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 formal guidance from the U.S. tax authority is still pending. 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. 

Tax effects for which a reasonable estimate can be determined 

Deemed Repatriation Tax

The Tax Act requires companies to pay a one-time transition tax, net of tax credits, related to applicable foreign taxes paid, on previously untaxed current and accumulated earnings and profits (E&P) of certain of our foreign subsidiaries.  We were able to reasonably estimate the deemed repatriation tax and originally recorded a provisional estimated tax benefit of $38 million at December 31, 2017. We have completed our review of post-1986 E&P computations of our foreign affiliates. Incorporating additional IRS guidance issued with respect to the deemed repatriation tax, as well as the relevant basis adjustments, we recognized a measurement period tax charge of $62 million. The effect of deemed repatriation tax, which has now been determined to be complete, resulted in a liability of $24 million.

AIG | Third Quarter 2018 Form 10-Q65


TABLE OF CONTENTS

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

 

Other Provisions

The Tax Act modified computations of insurance reserves for both life and general insurance companies.  For life insurance companies, tax reserves are now computed with reference to NAIC reserves.  For general insurance companies, the nine-monthTax Act extends the discount period for certain long-tail lines of business from 10 years to 24 years and increases the discount rate, replacing the applicable federal rate for a higher-yield corporate bond rate, and eliminates the election allowing companies to use their historical loss payment patterns for loss reserve discounting.  Adjustments related to the differences in insurance reserves balances computed under the old tax law versus the Tax Act have to be taken into income over eight years by both life and general insurance companies. Accordingly, these changes give rise to new deferred tax liabilities. At December 31, 2017, we recorded a provisional estimate of $1.9 billion with respect to such deferred tax liabilities. This increase in deferred tax liabilities was offset by an increase in the deferred tax asset related to insurance reserves as a result of applying the new provisions of the Tax Act. As ofSeptember 30, 2018, these estimates remain provisional.

Provisions Impacting Projections of Taxable Income and Valuation Allowance Considerations

Certain provisions of the Tax Act impact our projections of future taxable income used in analyzing realizability of our U.S. tax attribute deferred tax asset.  As discussed above, there are specific insurance industry provisions, including changes in computations of insurance reserves, amortization of specified policy acquisition expenses, and treatment of separate account dividends received deduction. Provisional estimates have been included in our future taxable income projections for these insurance industry specific provisions to reflect application of the new tax law.

Because we have made provisional estimates related to the impact of certain aspects of the Tax Act on our future taxable income, corresponding determination of the need for a valuation allowance is also provisional. While we have substantively completed our review of the primary impact of the Tax Act provisions on our deferred tax balances, we are still analyzing the complex interplay of the new tax rules with the rules governing the utilization of our tax attributes. We expect to finalize this analysis and to complete our accounting within the prescribed measurement period. Accordingly, as of September 30, 2018, these estimates remain provisional.

Tax effects for which no estimate can be determined

At December 31, 2017, our accounting for the following elements of the Tax Act was incomplete and we continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before enactment of the Tax Act.

The Tax Act may affect the results in certain investments and partnerships in which we are a non-controlling interest owner. At December 31, 2017, the information needed to determine a provisional estimate was not currently available (such as for interest deduction limitations in those entities and the changed definition of a U.S. Shareholder), and accordingly, no provisional estimates were recorded. We have since completed our review of these investments and partnerships. As of September 30, 2018, we consider the accounting for this item to be complete and no measurement period change was recorded.

At December 31, 2017, due to minimal formal guidance issued from state and local jurisdictions, provisional estimates were not recorded for the impact of any state and local corporate income tax implications of the Tax Act.  Guidance from state and local jurisdictions has varied and most have not formally passed law specific to the treatment of the Tax Act. While we have not identified any material impact at this point in time, we continue to review any guidance issued by those states that have passed tax legislation related to the Tax Act and continue to work through the state and local corporate income tax implications of the Tax Act.  We expect further guidance throughout 2018, and the impact, if any, will be recorded when the related guidance is issued. If new law or guidance is issued beyond this period, any further change will be reflected in the period in which the new law is enacted under relevant accounting guidance.    

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued an accounting standard that allows the optional reclassification of stranded tax effects within accumulated other comprehensive income (AOCI) that arise due to the enactment of the Tax Act to retained earnings. We elected to early adopt the standard for the three-month period ended March 31, 2018. As a result of adopting this standard, we reclassified $248 million from AOCI to retained earnings. The amount reclassified includes stranded effects related to the change in the U.S. federal corporate income tax rate on the gross temporary differences and related valuation allowances. As of September 30, 2017, we contributed $310 million to2018, the U.S. AIG Retirement Plan.

The lump sum benefit payments through September 30, 2017 exceeded the annual service cost and interest cost componentseffect of the pension expense resultingTax Act on gross temporary differences related to AOCI is complete, and no additional reclassification adjustments were recorded. 

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 settlement loss asportion of September 30, 2017. 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.

66AIG | Third Quarter 2018 Form 10-Q


TABLE OF CONTENTS

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

Interim Tax Calculation Method

We use the estimated annual effective tax rate method in computing our interim tax provision. Certain items, including those deemed to be unusual, infrequent or that cannot be reliably estimated, are excluded from the estimated annual effective tax rate. In these cases, the actual tax expense or benefit is reported in the same period as the related item.  Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions.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 September 30, 2017, 2018, the annual effective tax rate includes the tax effects of significant catastrophe losses recognized in the third quarter of 2017. 2018. 

Interim Tax Expense (Benefit)

For the three-month period ended September 30, 2018, the effective tax rate on loss from continuing operations was 20.1 percent. The effective tax rate on loss from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, additional U.S. taxes imposed on income of our foreign subsidiaries under international provisions of the Tax Act, valuation allowance activity related to certain foreign subsidiaries and 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. As noted above, we also recorded a measurement period tax charge of $62 million related to the effects of the deemed repatriation tax.

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

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

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

ForAs a result of the three-month period ended September 30, 2016,Tax Act, the effectivemajority 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 rateupon repatriation. Notwithstanding the changes, U.S. tax on income from continuing operations was 41.2 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to foreign exchange losses incurred by ourgain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent, partially offset by tax benefits associated with tax exempt interest income and reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities.  

earnings. For the nine-month period ended September 30, 2016, the effective tax rate on income from continuing operations was 34.6 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax benefits associated2018, we consider our foreign earnings with tax exempt interest income, the impact of an agreement reached with the IRS relatedrespect to certain tax issues under auditoperations in Canada, South Africa, the Far East, Latin America, Bermuda as well as the European, Asia Pacific and reclassifications from accumulated other comprehensive incomeMiddle East regions to income from continuingbe indefinitely reinvested.  These earnings relate to ongoing operations related to the disposaland have been reinvested in active business operations. Deferred taxes, if necessary, have been provided on earnings of available for sale securities, partially offset by a tax charge and related interest associated with increases in uncertain tax positions related to cross border financing transactions and foreign exchange losses incurred by our foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent.

non-U.S. affiliates whose earnings are not indefinitely reinvested.

AIG | Third Quarter 20172018 Form 10-Q          6167


TABLE OF CONTENTS 

 

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;

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

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

In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the utilization of the net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction.  Under U.S. tax law, a company generally must use its net operating loss carryforwards before it can use its foreign tax credit carryforwards, even though the carryforward period for the foreign tax credit is shorter than for the net operating loss.  Our U.S. federal consolidated income tax group includes both life companies and non-life companies.  While the U.S. taxable income of our non-life companies can be offset by theour net operating loss carryforwards, only a portion (no more than 35 percent) of the U.S. taxable income of our life companies can be offset by those net operating loss carryforwards.  The remaining tax liability of our life companies can be offset by the foreign tax credit carryforwards.  Accordingly, we utilize both the net operating loss and foreign tax credit carryforwards concurrently which enables us to realize our tax attributes prior to expiration. As of September 30, 2017,2018, based on all available evidence, it is more likely than not that the U.S. net operating loss and foreign tax credit carryforwards will be utilized prior to expiration and, thus, no valuation allowance has been established.

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

For the three- and nine-month periods ended September 30, 2017,2018, recent changes in market conditions, including rising interest rate fluctuations,rates, impacted the unrealized tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in a 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 JuneSeptember 30, 2017,2018, based on all available evidence, we concluded that thea valuation allowance should be released. Asestablished on a result, forportion of the six-month perioddeferred tax asset related to unrealized losses that are not more-likely-than-not to be realized. For both the three- and nine-month periods ended JuneSeptember 30, 2017, 2018, we released $468 established $149 million of valuation allowance associated with the unrealized tax losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, all of which was allocated to other comprehensive income. As of September 30, 2017, we continue to be in an overall unrealized tax gain position with respect to the U.S. Life Insurance Companies’ available for sale securities portfolio and thus concluded no valuation allowance is necessary in the U.S. Life Insurance Companies’ available for sale securities portfolio.

For the three- and nine-month periods ended September 30, 2017,2018, recent changes in market conditions, including rising interest rate fluctuations,rates, impacted the unrealized tax gains and losses in the U.S. Non-Life Companies’ available for sale securities portfolio, resulting in a decrease to the deferred tax liability related to net unrealized tax capital gains.  As of June 30, 2017, based on all available evidence, we concluded that the valuation allowance should be released. As a result, for the six-month period ended June 30, 2017, we released $260 million of valuation allowance associated with 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. As of September 30, 2017,2018, we continue to be in an overall unrealized tax gain position with respect to the U.S. Non-Life Companies’ available for sale securities portfolio and thus concluded no valuation allowance is necessary in the U.S. Non-Life Companies’ available for sale securities portfolio.

For the three- and nine-month periods ended September 30, 2018, we recognized net increases of $5 million and $42 million, respectively, in our deferred tax asset valuation allowance associated with certain foreign subsidiaries and state jurisdictions, primarily attributable to current year activity.

68AIG | Third Quarter 20172018 Form 10-Q62 


TABLE OF CONTENTS 

 

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

 

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

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

Tax Examinations and Litigation

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

In January 2018, the parties reached non-binding agreements in principle on issues presented in the dispute and are currently reviewing the computations reflecting the settlement terms. The resolution is not final and is subject to various reviews. The litigation has been stayed pending the outcome of the review process. We can provide no assurance regarding the outcome of any such litigation or whether binding compromised settlements with the parties will vigorously defend our position and continue toultimately be reached. We currently believe that we have adequate reserves for any liabilitythe potential liabilities that couldmay result from these government actions. We continue to monitor legal and other developments in this area, including recent decisions affecting other taxpayers, and evaluate their effect, if any, on our position.matters.

Accounting for Uncertainty in Income Taxes

At both September 30, 20172018 and December 31, 2016,2017, our unrecognized tax benefits, excluding interest and penalties were $4.6 billion and $4.5 billion, respectively. The nine-month period ended$4.7 billion. At September 30, 2017 reflects increases in unrecognized tax benefits associated with the impact of settlement discussions with the IRS related to certain open tax issues. At both September 30, 20172018 and December 31, 2016,2017, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $0.1 billion.$45 million and $28 million, respectively.  Accordingly, at both September 30, 20172018 and December 31, 2016,2017, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.5 billion and $4.4 billion, respectively.$4.7 billion.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense.  At September 30, 20172018 and December 31, 2016,2017, we had accrued liabilities of $1.3$2.2 billion and $1.2$2.0 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the nine-month periods ended September 30, 2018 and 2017, and 2016, we accrued expense (benefit) of $102$148 million and $(16)$102 million, respectively, for the payment of interest and penalties.

We regularly evaluate adjustments proposed by taxing authorities. At September 30, 2017, such proposed adjustments would not have resulted in a material change to our consolidated financial condition, although it is possible that the effect could be material to our consolidated results of operations for an individual reporting period. Althoughbelieve it is reasonably possible that a change in the balance ofour unrecognized tax benefits may occurcould decrease within the next 12 months based onby as much as $3.9 billion, principally as a result of potential resolutions or settlements of prior years’ tax items. The prior years’ tax items include unrecognized tax benefits related to the information currently available, we do not expect any changedeductibility of certain expenses and matters related to be material to our consolidated financial condition.cross border financing transactions.                              

AIG | Third Quarter 20172018 Form 10-Q          6369


TABLE OF CONTENTS 

 

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

 

16. Information Provided in Connection with Outstanding Debt and Preference Shares

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 and Preference Shares of Validus and all outstanding debt of AIGLH.

Condensed Consolidating Balance Sheets

 

American

 

  

 

 ��

 

  

 

  

 

American

 

  

 

  

 

  

 

  

 

  

 

International

 

  

 

  

Reclassifications

 

  

 

International

 

Validus

 

  

 

  

 

Reclassifications

 

  

 

Group, Inc.

 

  

 

Other

 

and

Consolidated

 

Group, Inc.

 

Holdings,

 

  

 

Other

 

and

Consolidated

(in millions)

(As Guarantor)

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

(As Guarantor)

 

Ltd.

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

September 30, 2017

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 $  

2,675

 $  

-

 $  

10,659

 $  

(3,559)

 $  

9,775

Other investments(a)

 

5,796

 

-

 

305,552

 

-

 

311,348

Short-term investments(a)

 $  

1,459

 $  

2

 $  

-

 $  

9,150

 $  

(1,748)

 $  

8,863

Other investments(b)

 

4,016

 

13

 

-

 

303,171

 

-

 

307,200

Total investments

 

8,471

 

-

 

316,211

 

(3,559)

 

321,123

 

5,475

 

15

 

-

 

312,321

 

(1,748)

 

316,063

Cash

 

3

 

2

 

2,428

 

-

 

2,433

 

3

 

66

 

3

 

2,669

 

-

 

2,741

Loans to subsidiaries(b)

 

35,014

 

-

 

574

 

(35,588)

 

-

Investment in consolidated subsidiaries(b)

 

43,014

 

31,323

 

-

 

(74,337)

 

-

Other assets, including deferred income taxes

 

21,483

 

251

 

160,018

 

(2,235)

 

179,517

Assets held for sale

 

-

 

-

 

-

 

-

 

-

Loans to subsidiaries(c)

 

34,713

 

-

 

-

 

572

 

(35,285)

 

-

Investment in consolidated subsidiaries(c)

 

36,727

 

4,120

 

27,038

 

-

 

(67,885)

 

-

Other assets, including deferred income taxes(d)

 

15,996

 

2,289

 

170

 

169,420

 

(1,819)

 

186,056

Total assets

 $  

107,985

 $  

31,576

 $  

479,231

 $  

(115,719)

 $  

503,073

 $  

92,914

 $  

6,490

 $  

27,211

 $  

484,982

 $  

(106,737)

 $  

504,860

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance liabilities

 $  

-

 $  

-

 $  

282,469

 $  

-

 $  

282,469

 $  

-

 $  

-

 $  

-

 $  

291,391

 $  

-

 $  

291,391

Long-term debt

 

21,480

 

642

 

8,917

 

-

 

31,039

 

22,459

 

710

 

643

 

10,782

 

-

 

34,594

Other liabilities, including intercompany balances(a)

 

13,463

 

184

 

108,873

 

(5,967)

 

116,553

Loans from subsidiaries(b)

 

574

 

-

 

35,014

 

(35,588)

 

-

Liabilities held for sale

 

-

 

-

 

-

 

-

 

-

Other liabilities, including intercompany balances(b)

 

11,296

 

416

 

132

 

111,419

 

(3,565)

 

119,698

Loans from subsidiaries(c)

 

573

 

-

 

-

 

34,713

 

(35,286)

 

-

Total liabilities

 

35,517

 

826

 

435,273

 

(41,555)

 

430,061

 

34,328

 

1,126

 

775

 

448,305

 

(38,851)

 

445,683

Total AIG shareholders’ equity

 

72,468

 

30,750

 

43,414

 

(74,164)

 

72,468

 

58,586

 

5,364

 

26,436

 

36,086

 

(67,886)

 

58,586

Non-redeemable noncontrolling interests

 

-

 

-

 

544

 

-

 

544

 

-

 

-

 

-

 

591

 

-

 

591

Total equity

 

72,468

 

30,750

 

43,958

 

(74,164)

 

73,012

 

58,586

 

5,364

 

26,436

 

36,677

 

(67,886)

 

59,177

Total liabilities and equity

 $  

107,985

 $  

31,576

 $  

479,231

 $  

(115,719)

 $  

503,073

 $  

92,914

 $  

6,490

 $  

27,211

 $  

484,982

 $  

(106,737)

 $  

504,860

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

$

4,424

$

-

$

13,218

$

(5,340)

$

12,302

Other investments(a)

 

7,154

 

-

 

308,719

 

-

 

315,873

Short-term investments(a)

$

2,541

$

-

$

-

$

11,559

$

(3,714)

$

10,386

Other investments(b)

 

6,004

 

-

 

-

 

305,902

 

-

 

311,906

Total investments

 

11,578

 

-

 

321,937

 

(5,340)

 

328,175

 

8,545

 

-

 

-

 

317,461

 

(3,714)

 

322,292

Cash

 

2

 

34

 

1,832

 

-

 

1,868

 

3

 

-

 

20

 

2,339

 

-

 

2,362

Loans to subsidiaries(b)

 

34,692

 

-

 

576

 

(35,268)

 

-

Investment in consolidated subsidiaries(b)

 

42,582

 

27,309

 

-

 

(69,891)

 

-

Other assets, including deferred income taxes

 

24,099

 

239

 

140,743

 

(4,059)

 

161,022

Assets held for sale

 

-

 

-

 

7,199

 

-

 

7,199

Loans to subsidiaries(c)

 

35,004

 

-

 

-

 

517

 

(35,521)

 

-

Investment in consolidated subsidiaries(c)

 

40,135

 

-

 

30,359

 

-

 

(70,494)

 

-

Other assets, including deferred income taxes(d)

 

16,016

 

-

 

170

 

159,594

 

(2,133)

 

173,647

Total assets

$

112,953

$

27,582

$

472,287

$

(114,558)

$

498,264

$

99,703

$

-

$

30,549

$

479,911

$

(111,862)

$

498,301

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance liabilities

$

-

$

-

$

275,120

$

-

$

275,120

$

-

$

-

$

-

$

282,105

$

-

$

282,105

Long-term debt

 

21,405

 

642

 

8,865

 

-

 

30,912

 

21,557

 

-

 

642

 

9,441

 

-

 

31,640

Other liabilities, including intercompany balances(a)

 

14,671

 

194

 

103,975

 

(9,572)

 

109,268

Loans from subsidiaries(b)

 

577

 

-

 

34,691

 

(35,268)

 

-

Liabilities held for sale

 

-

 

-

 

6,106

 

-

 

6,106

Other liabilities, including intercompany balances(b)

 

12,458

 

-

 

143

 

112,275

 

(6,028)

 

118,848

Loans from subsidiaries(c)

 

517

 

-

 

-

 

35,004

 

(35,521)

 

-

Total liabilities

 

36,653

 

836

 

428,757

 

(44,840)

 

421,406

 

34,532

 

-

 

785

 

438,825

 

(41,549)

 

432,593

Total AIG shareholders’ equity

 

76,300

 

26,746

 

42,972

 

(69,718)

 

76,300

 

65,171

 

-

 

29,764

 

40,549

 

(70,313)

 

65,171

Non-redeemable noncontrolling interests

 

-

 

-

 

558

 

-

 

558

 

-

 

-

 

-

 

537

 

-

 

537

Total equity

 

76,300

 

26,746

 

43,530

 

(69,718)

 

76,858

 

65,171

 

-

 

29,764

 

41,086

 

(70,313)

 

65,708

Total liabilities and equity

$

112,953

$

27,582

$

472,287

$

(114,558)

$

498,264

$

99,703

$

-

$

30,549

$

479,911

$

(111,862)

$

498,301

(a)  At September 30, 2018, includes restricted cash of $1 million and $27 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively. At December 31, 2017, includes restricted cash of $4 million and $54 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.

(b)(c)  Eliminated in consolidation.

(d)  At September 30, 2018, includes restricted cash of $1 million and $353 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively. At December 31, 2017, includes restricted cash of $1 million and $316 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries, respectively.

70AIG | Third Quarter 20172018 Form 10-Q64 


TABLE OF CONTENTS 

 

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

 

Condensed Consolidating Statements of Income

 

 

 

 

 

 

 

 

 

 

 

American

 

  

 

  

 

  

 

  

 

American

 

  

 

  

 

  

 

  

 

  

 

International

 

  

 

  

 

Reclassifications

 

  

 

International

 

Validus

 

  

 

  

 

Reclassifications

 

  

 

Group, Inc.

 

  

 

Other

 

and

 

Consolidated

 

Group, Inc.

 

Holdings,

 

  

 

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

 

(As Guarantor)

 

Ltd.

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

(989)

$

(93)

$

1,316

$

-

$

(234)

$

-

Other income

 

183

 

23

 

1

 

11,412

 

(133)

 

11,486

Total revenues

 

(806)

 

(70)

 

1,317

 

11,412

 

(367)

 

11,486

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

244

 

10

 

12

 

63

 

(3)

 

326

Loss on extinguishment of debt

 

-

 

-

 

-

 

1

 

-

 

1

Other expenses

 

132

 

2

 

1

 

12,513

 

38

 

12,686

Total expenses

 

376

 

12

 

13

 

12,577

 

35

 

13,013

Income (loss) from continuing operations before income

 

 

 

 

 

 

 

 

 

 

 

 

tax expense (benefit)

 

(1,182)

 

(82)

 

1,304

 

(1,165)

 

(402)

 

(1,527)

Income tax expense (benefit)

 

38

 

-

 

(2)

 

(343)

 

-

 

(307)

Income (loss) from continuing operations

 

(1,220)

 

(82)

 

1,306

 

(822)

 

(402)

 

(1,220)

Loss from discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 

net of income taxes

 

(39)

 

-

 

-

 

-

 

-

 

(39)

Net income (loss)

 

(1,259)

 

(82)

 

1,306

 

(822)

 

(402)

 

(1,259)

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

attributable to noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

Net income (loss) attributable to AIG

$

(1,259)

$

(82)

$

1,306

$

(822)

$

(402)

$

(1,259)

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

(2,098)

$

1,138

$

-

$

960

$

-

$

(2,098)

$

-

$

1,138

$

-

$

960

$

-

Other income

 

225

 

-

 

11,455

 

71

 

11,751

 

225

 

-

 

-

 

11,455

 

71

 

11,751

Total revenues

 

(1,873)

 

1,138

 

11,455

 

1,031

 

11,751

 

(1,873)

 

-

 

1,138

 

11,455

 

1,031

 

11,751

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

236

 

12

 

44

 

(2)

 

290

 

236

 

-

 

12

 

44

 

(2)

 

290

(Gain) loss on extinguishment of debt

 

2

 

-

 

(1)

 

-

 

1

 

2

 

-

 

-

 

(1)

 

-

 

1

Other expenses

 

177

 

1

 

14,154

 

(69)

 

14,263

 

177

 

-

 

1

 

14,154

 

(69)

 

14,263

Total expenses

 

415

 

13

 

14,197

 

(71)

 

14,554

 

415

 

-

 

13

 

14,197

 

(71)

 

14,554

Income (loss) from continuing operations before income tax

 

 

 

 

 

 

 

 

 

 

benefit

 

(2,288)

 

1,125

 

(2,742)

 

1,102

 

(2,803)

Income (loss) from continuing operations before income

 

 

 

 

 

 

 

 

 

 

 

 

tax benefit

 

(2,288)

 

-

 

1,125

 

(2,742)

 

1,102

 

(2,803)

Income tax benefit

 

(549)

 

(4)

 

(538)

 

-

 

(1,091)

 

(549)

 

-

 

(4)

 

(538)

 

-

 

(1,091)

Income (loss) from continuing operations

 

(1,739)

 

1,129

 

(2,204)

 

1,102

 

(1,712)

 

(1,739)

 

-

 

1,129

 

(2,204)

 

1,102

 

(1,712)

Loss from discontinued operations, net of income taxes

 

-

 

-

 

(1)

 

-

 

(1)

Loss from discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 

net of income taxes

 

-

 

-

 

-

 

(1)

 

-

 

(1)

Net income (loss)

 

(1,739)

 

1,129

 

(2,205)

 

1,102

 

(1,713)

 

(1,739)

 

-

 

1,129

 

(2,205)

 

1,102

 

(1,713)

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

26

 

-

 

26

Net income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

attributable to noncontrolling interests

 

-

 

-

 

-

 

26

 

-

 

26

Net income (loss) attributable to AIG

$

(1,739)

$

1,129

$

(2,231)

$

1,102

$

(1,739)

$

(1,739)

$

-

$

1,129

$

(2,231)

$

1,102

$

(1,739)

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

1,002

$

528

$

-

$

(1,530)

$

-

Other income

 

145

 

-

 

12,952

 

(243)

 

12,854

Total revenues

 

1,147

 

528

 

12,952

 

(1,773)

 

12,854

Expenses:

 

 

 

 

 

 

 

 

 

 

Interest expense

 

249

 

12

 

69

 

(1)

 

329

Gain on extinguishment of debt

 

-

 

-

 

(14)

 

-

 

(14)

Other expenses

 

238

 

1

 

11,821

 

(258)

 

11,802

Total expenses

 

487

 

13

 

11,876

 

(259)

 

12,117

Income (loss) from continuing operations before income tax

 

 

 

 

 

 

 

 

 

 

expense (benefit)

 

660

 

515

 

1,076

 

(1,514)

 

737

Income tax expense (benefit)

 

197

 

(4)

 

111

 

-

 

304

Income (loss) from continuing operations

 

463

 

519

 

965

 

(1,514)

 

433

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

 

(1)

 

-

 

4

 

-

 

3

Net income (loss)

 

462

 

519

 

969

 

(1,514)

 

436

Less:

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

(26)

 

-

 

(26)

Net income (loss) attributable to AIG

$

462

$

519

$

995

$

(1,514)

$

462

AIG | Third Quarter 20172018 Form 10-Q          6571


TABLE OF CONTENTS 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

American

 

  

 

  

 

  

 

  

 

American

 

  

 

  

 

  

 

  

 

  

 

International

 

  

 

  

 

Reclassifications

 

  

 

International

 

Validus

 

  

 

  

 

Reclassifications

 

  

 

Group, Inc.

 

  

 

Other

 

and

 

Consolidated

 

Group, Inc.

 

Holdings,

 

  

 

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

 

(As Guarantor)

 

Ltd.

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

889

$

(93)

$

2,497

$

-

$

(3,293)

$

-

Other income

 

750

 

23

 

1

 

34,103

 

(48)

 

34,829

Total revenues

 

1,639

 

(70)

 

2,498

 

34,103

 

(3,341)

 

34,829

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

710

 

10

 

37

 

154

 

(9)

 

902

Loss on extinguishment of debt

 

-

 

-

 

-

 

10

 

-

 

10

Other expenses

 

643

 

2

 

2

 

32,357

 

(39)

 

32,965

Total expenses

 

1,353

 

12

 

39

 

32,521

 

(48)

 

33,877

Income (loss) from continuing operations before income

 

 

 

 

 

 

 

 

 

 

 

 

tax expense (benefit)

 

286

 

(82)

 

2,459

 

1,582

 

(3,293)

 

952

Income tax expense (benefit)

 

(370)

 

-

 

-

 

661

 

-

 

291

Income (loss) from continuing operations

 

656

 

(82)

 

2,459

 

921

 

(3,293)

 

661

Loss from discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 

net of income taxes

 

(40)

 

-

 

-

 

-

 

-

 

(40)

Net income (loss)

 

616

 

(82)

 

2,459

 

921

 

(3,293)

 

621

Less:

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

attributable to noncontrolling interests

 

-

 

-

 

-

 

5

 

-

 

5

Net income (loss) attributable to AIG

$

616

$

(82)

$

2,459

$

916

$

(3,293)

$

616

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

794

$

2,553

$

-

$

(3,347)

$

-

$

794

$

-

$

2,553

$

-

$

(3,347)

$

-

Other income

 

653

 

-

 

36,085

 

147

 

36,885

 

653

 

-

 

-

 

36,085

 

147

 

36,885

Total revenues

 

1,447

 

2,553

 

36,085

 

(3,200)

 

36,885

 

1,447

 

-

 

2,553

 

36,085

 

(3,200)

 

36,885

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

719

 

37

 

129

 

(5)

 

880

 

719

 

-

 

37

 

129

 

(5)

 

880

(Gain) loss on extinguishment of debt

 

2

 

-

 

(6)

 

-

 

(4)

 

2

 

-

 

-

 

(6)

 

-

 

(4)

Other expenses

 

693

 

2

 

34,865

 

(142)

 

35,418

 

693

 

-

 

2

 

34,865

 

(142)

 

35,418

Total expenses

 

1,414

 

39

 

34,988

 

(147)

 

36,294

 

1,414

 

-

 

39

 

34,988

 

(147)

 

36,294

Income (loss) from continuing operations before income tax

 

 

 

 

 

 

 

 

 

 

expense (benefit)

 

33

 

2,514

 

1,097

 

(3,053)

 

591

Income (loss) from continuing operations before income

 

 

 

 

 

 

 

 

 

 

 

 

tax expense (benefit)

 

33

 

-

 

2,514

 

1,097

 

(3,053)

 

591

Income tax expense (benefit)

 

(544)

 

(12)

 

538

 

-

 

(18)

 

(544)

 

-

 

(12)

 

538

 

-

 

(18)

Income (loss) from continuing operations

 

577

 

2,526

 

559

 

(3,053)

 

609

 

577

 

-

 

2,526

 

559

 

(3,053)

 

609

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

 

(1)

 

-

 

8

 

-

 

7

Income (loss) from discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 

net of income taxes

 

(1)

 

-

 

-

 

8

 

-

 

7

Net income (loss)

 

576

 

2,526

 

567

 

(3,053)

 

616

 

576

 

-

 

2,526

 

567

 

(3,053)

 

616

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

40

 

-

 

40

Net income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

attributable to noncontrolling interests

 

-

 

-

 

-

 

40

 

-

 

40

Net income (loss) attributable to AIG

$

576

$

2,526

$

527

$

(3,053)

$

576

$

576

$

-

$

2,526

$

527

$

(3,053)

$

576

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Equity in earnings of consolidated subsidiaries*

$

2,226

$

(267)

$

-

$

(1,959)

$

-

Other income

 

209

 

5

 

39,833

 

(690)

 

39,357

Total revenues

 

2,435

 

(262)

 

39,833

 

(2,649)

 

39,357

Expenses:

 

 

 

 

 

 

 

 

 

 

Interest expense

 

743

 

39

 

177

 

(4)

 

955

(Gain) loss on extinguishment of debt

 

77

 

-

 

(1)

 

-

 

76

Other expenses

 

686

 

15

 

34,946

 

(702)

 

34,945

Total expenses

 

1,506

 

54

 

35,122

 

(706)

 

35,976

Income (loss) from continuing operations before income tax

 

 

 

 

 

 

 

 

 

 

expense (benefit)

 

929

 

(316)

 

4,711

 

(1,943)

 

3,381

Income tax expense (benefit)

 

(1,265)

 

(17)

 

2,452

 

-

 

1,170

Income (loss) from continuing operations

 

2,194

 

(299)

 

2,259

 

(1,943)

 

2,211

Loss from discontinued operations, net of income taxes

 

(2)

 

-

 

(52)

 

-

 

(54)

Net income (loss)

 

2,192

 

(299)

 

2,207

 

(1,943)

 

2,157

Less:

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations attributable to

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

(35)

 

-

 

(35)

Net income (loss) attributable to AIG

$

2,192

$

(299)

$

2,242

$

(1,943)

$

2,192

*    Eliminated in consolidation.

72AIG | Third Quarter 20172018 Form 10-Q66 


TABLE OF CONTENTS 

 

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

 

Condensed Consolidating Statements of Comprehensive Income

 

American

 

 

 

 

 

 

 

 

 

American

 

 

 

 

 

 

 

 

 

 

 

International

 

 

 

 

 

Reclassifications

 

 

 

International

 

Validus

 

 

 

 

 

Reclassifications

 

 

 

Group, Inc.

 

 

 

Other

 

and

 

Consolidated

 

Group, Inc.

 

Holdings,

 

 

 

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

 

(As Guarantor)

 

Ltd.

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(1,259)

$

(82)

$

1,306

$

(822)

$

(402)

$

(1,259)

Other comprehensive income (loss)

 

(766)

 

-

 

(301)

 

(1,436)

 

1,737

 

(766)

Comprehensive income (loss)

 

(2,025)

 

(82)

 

1,005

 

(2,258)

 

1,335

 

(2,025)

Total comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

-

 

-

 

-

Comprehensive income (loss) attributable to AIG

$

(2,025)

$

(82)

$

1,005

$

(2,258)

$

1,335

$

(2,025)

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(1,739)

$

1,129

$

(2,205)

$

1,102

$

(1,713)

$

(1,739)

$

-

$

1,129

$

(2,205)

$

1,102

$

(1,713)

Other comprehensive income (loss)

 

977

 

1,274

 

(30,625)

 

29,351

 

977

 

977

 

-

 

1,274

 

(30,625)

 

29,351

 

977

Comprehensive income (loss)

 

(762)

 

2,403

 

(32,830)

 

30,453

 

(736)

 

(762)

 

-

 

2,403

 

(32,830)

 

30,453

 

(736)

Total comprehensive income attributable to noncontrolling interests

 

-

 

-

 

26

 

-

 

26

Total comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

26

 

-

 

26

Comprehensive income (loss) attributable to AIG

$

(762)

$

2,403

$

(32,856)

$

30,453

$

(762)

$

(762)

$

-

$

2,403

$

(32,856)

$

30,453

$

(762)

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

462

$

519

$

969

$

(1,514)

$

436

$

616

$

(82)

$

2,459

$

921

$

(3,293)

$

621

Other comprehensive income (loss)

 

798

 

(56)

 

7

 

49

 

798

 

(5,425)

 

-

 

3,139

 

12,568

 

(15,707)

 

(5,425)

Comprehensive income (loss)

 

1,260

 

463

 

976

 

(1,465)

 

1,234

 

(4,809)

 

(82)

 

5,598

 

13,489

 

(19,000)

 

(4,804)

Total comprehensive loss attributable to noncontrolling interests

 

-

 

-

 

(26)

 

-

 

(26)

Total comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

5

 

-

 

5

Comprehensive income (loss) attributable to AIG

$

1,260

$

463

$

1,002

$

(1,465)

$

1,260

$

(4,809)

$

(82)

$

5,598

$

13,484

$

(19,000)

$

(4,809)

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

576

$

2,526

$

567

$

(3,053)

$

616

$

576

$

-

$

2,526

$

567

$

(3,053)

$

616

Other comprehensive income (loss)

 

2,709

 

7,056

 

18,864

 

(25,920)

 

2,709

 

2,709

 

-

 

7,056

 

18,864

 

(25,920)

 

2,709

Comprehensive income (loss)

 

3,285

 

9,582

 

19,431

 

(28,973)

 

3,325

 

3,285

 

-

 

9,582

 

19,431

 

(28,973)

 

3,325

Total comprehensive income attributable to noncontrolling interests

 

-

 

-

 

40

 

-

 

40

Total comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

-

 

-

 

40

 

-

 

40

Comprehensive income (loss) attributable to AIG

$

3,285

$

9,582

$

19,391

$

(28,973)

$

3,285

$

3,285

$

-

$

9,582

$

19,391

$

(28,973)

$

3,285

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

2,192

$

(299)

$

2,207

$

(1,943)

$

2,157

Other comprehensive income (loss)

 

6,520

 

7,204

 

48,555

 

(55,759)

 

6,520

Comprehensive income (loss)

 

8,712

 

6,905

 

50,762

 

(57,702)

 

8,677

Total comprehensive loss attributable to noncontrolling interests

 

-

 

-

 

(35)

 

-

 

(35)

Comprehensive income (loss) attributable to AIG

$

8,712

$

6,905

$

50,797

$

(57,702)

$

8,712

AIG | Third Quarter 20172018 Form 10-Q          6773


TABLE OF CONTENTS 

 

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

 

Condensed Consolidating Statements of Cash Flows

 

American

 

 

  

 

 

 

 

 

 

American

 

 

 

 

  

 

 

 

 

 

 

International

 

 

  

 

 

Reclassifications

 

 

 

International

 

Validus

 

 

  

 

Reclassifications

 

 

 

Group, Inc.

 

 

  

Other

 

and

 

Consolidated

 

Group, Inc.

 

Holdings,

 

 

  

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

AIGLH

 

Subsidiaries*

 

Eliminations*

 

AIG

(As Guarantor)

 

Ltd.

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

$

793

$

1,105

$

(8,773)

$

(2,320)

$

(9,195)

$

1,389

$

(40)

$

2,003

$

(433)

$

(2,957)

$

(38)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of investments

 

5,428

 

-

 

58,914

 

(3,508)

 

60,834

 

4,641

 

-

 

-

 

45,218

 

(3,326)

 

46,533

Sales of divested businesses, net

 

40

 

-

 

565

 

-

 

605

 

-

 

-

 

-

 

10

 

-

 

10

Purchase of investments

 

(1,781)

 

-

 

(49,675)

 

3,508

 

(47,948)

 

(1,680)

 

-

 

-

 

(45,574)

 

3,326

 

(43,928)

Loans to subsidiaries - net

 

38

 

-

 

5

 

(43)

 

-

 

878

 

-

 

-

 

(50)

 

(828)

 

-

Contributions from (to) subsidiaries - net

 

990

 

-

 

-

 

(990)

 

-

 

22

 

-

 

-

 

-

 

(22)

 

-

Net change in restricted cash

 

-

 

-

 

(23)

 

-

 

(23)

Acquisition of businesses, net of cash and

 

 

 

 

 

 

 

 

 

 

 

 

restricted cash acquired

 

(5,475)

 

112

 

-

 

311

 

-

 

(5,052)

Net change in short-term investments

 

1,925

 

-

 

890

 

-

 

2,815

 

1,267

 

-

 

-

 

1,144

 

-

 

2,411

Other, net

 

(17)

 

(4)

 

(1,488)

 

-

 

(1,509)

 

(55)

 

-

 

-

 

(836)

 

-

 

(891)

Net cash (used in) provided by investing activities

 

6,623

 

(4)

 

9,188

 

(1,033)

 

14,774

 

(402)

 

112

 

-

 

223

 

(850)

 

(917)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of long-term debt

 

1,108

 

-

 

1,297

 

-

 

2,405

 

2,470

 

-

 

-

 

1,589

 

-

 

4,059

Repayments of long-term debt

 

(1,354)

 

-

 

(1,397)

 

-

 

(2,751)

 

(1,493)

 

-

 

-

 

(1,295)

 

-

 

(2,788)

Purchase of common stock

 

(6,275)

 

-

 

-

 

-

 

(6,275)

 

(994)

 

-

 

-

 

-

 

-

 

(994)

Intercompany loans - net

 

(5)

 

-

 

(38)

 

43

 

-

 

50

 

-

 

-

 

(878)

 

828

 

-

Cash dividends paid

 

(884)

 

(1,133)

 

(1,187)

 

2,320

 

(884)

 

(858)

 

(6)

 

(2,020)

 

(931)

 

2,957

 

(858)

Other, net

 

(5)

 

-

 

1,394

 

990

 

2,379

 

(165)

 

-

 

-

 

2,057

 

22

 

1,914

Net cash (used in) provided by financing activities

 

(7,415)

 

(1,133)

 

69

 

3,353

 

(5,126)

 

(990)

 

(6)

 

(2,020)

 

542

 

3,807

 

1,333

Effect of exchange rate changes on cash

 

-

 

-

 

(21)

 

-

 

(21)

Change in cash

 

1

 

(32)

 

463

 

-

 

432

Cash at beginning of year

 

2

 

34

 

1,832

 

-

 

1,868

Change in cash of businesses held for sale

 

-

 

-

 

133

 

-

 

133

Cash at end of period

$

3

$

2

$

2,428

$

-

$

2,433

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and

 

 

 

 

 

 

 

 

 

 

 

 

restricted cash

 

-

 

-

 

-

 

8

 

-

 

8

Change in cash and restricted cash

 

(3)

 

66

 

(17)

 

340

 

-

 

386

Cash and restricted cash at beginning of year

 

8

 

-

 

20

 

2,709

 

-

 

2,737

Cash and restricted cash at end of period

$

5

$

66

$

3

$

3,049

$

-

$

3,123

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

$

1,671

$

1,664

$

2,277

$

(3,859)

$

1,753

$

793

$

-

$

1,105

$

(8,440)

$

(2,320)

$

(8,862)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of investments

 

3,242

 

-

 

59,669

 

(9,567)

 

53,344

 

5,428

 

-

 

-

 

58,592

 

(3,508)

 

60,512

Sales of divested businesses, net

 

40

 

-

 

-

 

565

 

-

 

605

Purchase of investments

 

(659)

 

-

 

(62,293)

 

9,567

 

(53,385)

 

(1,781)

 

-

 

-

 

(49,675)

 

3,508

 

(47,948)

Loans to subsidiaries - net

 

1,025

 

-

 

73

 

(1,098)

 

-

 

38

 

-

 

-

 

5

 

(43)

 

-

Contributions from (to) subsidiaries - net

 

1,593

 

-

 

-

 

(1,593)

 

-

 

990

 

-

 

-

 

-

 

(990)

 

-

Net change in restricted cash

 

-

 

-

 

(49)

 

-

 

(49)

Net change in short-term investments

 

1,006

 

-

 

(1,861)

 

-

 

(855)

 

1,926

 

-

 

-

 

889

 

-

 

2,815

Other, net

 

(179)

 

-

 

1,449

 

-

 

1,270

 

(17)

 

-

 

(4)

 

(1,488)

 

-

 

(1,509)

Net cash (used in) provided by investing activities

 

6,028

 

-

 

(3,012)

 

(2,691)

 

325

 

6,624

 

-

 

(4)

 

8,888

 

(1,033)

 

14,475

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of long-term debt

 

3,831

 

-

 

7,599

 

-

 

11,430

 

1,108

 

-

 

-

 

1,297

 

-

 

2,405

Repayments of long-term debt

 

(1,454)

 

(62)

 

(6,167)

 

-

 

(7,683)

 

(1,354)

 

-

 

-

 

(1,397)

 

-

 

(2,751)

Purchase of common stock

 

(8,506)

 

-

 

-

 

-

 

(8,506)

 

(6,275)

 

-

 

-

 

-

 

-

 

(6,275)

Intercompany loans - net

 

(73)

 

(3)

 

(1,022)

 

1,098

 

-

 

(5)

 

-

 

-

 

(38)

 

43

 

-

Cash dividends paid

 

(1,051)

 

(1,709)

 

(2,150)

 

3,859

 

(1,051)

 

(884)

 

-

 

(1,133)

 

(1,187)

 

2,320

 

(884)

Other, net

 

(263)

 

-

 

3,183

 

1,593

 

4,513

 

(5)

 

-

 

-

 

1,394

 

990

 

2,379

Net cash (used in) provided by financing activities

 

(7,516)

 

(1,774)

 

1,443

 

6,550

 

(1,297)

 

(7,415)

 

-

 

(1,133)

 

69

 

3,353

 

(5,126)

Effect of exchange rate changes on cash

 

-

 

-

 

88

 

-

 

88

Change in cash

 

183

 

(110)

 

796

 

-

 

869

Cash at beginning of year

 

34

 

116

 

1,479

 

-

 

1,629

Cash at end of period

$

217

$

6

$

2,275

$

-

$

2,498

Effect of exchange rate changes on cash and

 

 

 

 

 

 

 

 

 

 

 

 

restricted cash

 

-

 

-

 

-

 

(22)

 

-

 

(22)

Change in cash and restricted cash

 

2

 

-

 

(32)

 

495

 

-

 

465

Cash and restricted cash at beginning of year

 

3

 

-

 

34

 

2,070

 

-

 

2,107

Change in cash of businesses held for sale

 

-

 

-

 

-

 

133

 

-

 

133

Cash and restricted cash at end of period

$

5

$

-

$

2

$

2,698

$

-

$

2,705

74AIG | Third Quarter 20172018 Form 10-Q68 


TABLE OF CONTENTS 

 

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

 

Supplementary Disclosure of Condensed Consolidating Cash Flow Information

 

American

 

 

 

 

 

 

 

 

 

American

 

 

 

 

 

 

 

 

 

 

 

International

 

 

 

 

 

Reclassifications

 

 

 

International

 

Validus

 

 

 

 

Reclassifications

 

 

 

Group, Inc.

 

 

 

Other

 

and

 

Consolidated

 

Group, Inc.

 

Holdings,

 

 

 

Other

 

and

 

Consolidated

(in millions)

 

(As Guarantor)

 

AIGLH

 

Subsidiaries*

 

Eliminations*

 

AIG

(As Guarantor)

 

Ltd.

 

AIGLH

 

Subsidiaries

 

Eliminations

 

AIG

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

3

$

66

$

3

$

2,669

$

-

$

2,741

Restricted cash included in Short-term investments

 

1

 

-

 

-

 

27

 

-

 

28

Restricted cash included in Other assets

 

1

 

-

 

-

 

353

 

-

 

354

Total cash and restricted cash shown in the Condensed

 

 

 

 

 

 

 

 

 

 

 

 

Consolidating Statements of Cash Flows

$

5

$

66

$

3

$

3,049

$

-

$

3,123

 

 

 

 

 

 

 

 

 

 

 

 

Cash (paid) received during the 2018 period for:

 

 

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

Third party

$

(706)

$

14

$

(47)

$

(279)

$

-

$

(1,018)

Intercompany

 

(1)

 

-

 

(1)

 

2

 

-

 

-

Taxes:

 

 

 

 

 

 

 

 

 

 

 

 

Income tax authorities

$

(23)

$

-

$

-

$

(44)

$

-

$

(67)

Intercompany

 

1,084

 

-

 

-

 

(1,084)

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Cash

$

3

$

-

$

2

$

2,428

$

-

$

2,433

Restricted cash included in Short-term investments

 

1

 

-

 

-

 

52

 

-

 

53

Restricted cash included in Other assets

 

1

 

-

 

-

 

218

 

-

 

219

Total cash and restricted cash shown in the Condensed

 

 

 

 

 

 

 

 

 

 

 

 

Consolidating Statements of Cash Flows

$

5

$

-

$

2

$

2,698

$

-

$

2,705

 

 

 

 

 

 

 

 

 

 

 

 

Cash (paid) received during the 2017 period for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third party

$

(791)

$

(47)

$

(208)

$

-

$

(1,046)

$

(791)

$

-

$

(47)

$

(208)

$

-

$

(1,046)

Intercompany

 

(1)

 

(1)

 

2

 

-

 

-

 

(1)

 

-

 

(1)

 

2

 

-

 

-

Taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax authorities

$

(324)

$

-

$

(166)

$

-

$

(490)

$

(324)

$

-

$

-

$

(166)

$

-

$

(490)

Intercompany

 

1,852

 

-

 

(1,852)

 

-

 

-

 

1,852

 

-

 

-

 

(1,852)

 

-

 

-

Cash (paid) received during the 2016 period for:

 

 

 

 

 

 

 

 

 

 

Interest:

 

 

 

 

 

 

 

 

 

 

Third party

$

(797)

$

(51)

$

(161)

$

-

$

(1,009)

Intercompany

 

-

 

-

 

-

 

-

 

-

Taxes:

 

 

 

 

 

 

 

 

 

 

Income tax authorities

$

(11)

$

-

$

(197)

$

-

$

(208)

Intercompany

 

782

 

-

 

(782)

 

-

 

-

American International Group, Inc. (As Guarantor) supplementary disclosureSupplementary Disclosure of non-cash activities:Non-Cash Activities:

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

(in millions)

 

2017

 

2016

 

2018

 

2017

Intercompany non-cash financing and investing activities:

 

 

 

 

 

 

 

 

Capital contributions

$

198

$

3,086

$

2,339

$

198

Dividends received in the form of securities

 

735

 

4,055

 

745

 

735

Return of capital

 

26

 

-

 

2,706

 

26

Fixed maturity securities received in exchange for equity securities

 

-

 

440

17.AIG | Third Quarter 2018 Form 10-Q          75


TABLE OF CONTENTS

ITEM 1 |Notes to Condensed Consolidated Financial Statements (unaudited) |17. Subsequent Events

17. Subsequent Events  

BREXIT

On October 25, 2018 we announced that our European subsidiary, AIG Europe Limited has received approval from the High Court of England & Wales to transfer its business into two new entities: American International Group UK Limited and AIG Europe SA in preparation for the UK’s exit from the European Union. This is the final UK approval needed to complete the restructuring of our European operations and ensure our readiness for Brexit.

Dividends Declared

On November 2, 2017,October 31, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on December 22, 201726, 2018 to shareholders of record on December 8, 2017.12, 2018.

 

76AIG | Third Quarter 20172018 Form 10-Q69


TABLE OF CONTENTS 

 

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, in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 20172018 and June 30, 20172018 and in our Annual Report on Form 10-K for the year ended December 31, 20162017 (the 20162017 Annual Report) to assist readers seeking additional information related to a particular subject.

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

Cautionary Statement Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q and other publicly available documents may include, and officers and representatives of AIG may from time to time make and discuss, projections, goals, assumptions and statements that may constitute “forward‑looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These projections, goals, assumptions and statements are not historical facts but instead represent only oura belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These projections, goals, assumptions and statements include statements preceded by, followed by or including words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” "goal" or “estimate.” These projections, goals, assumptions and statements may address, among other things, our:relate to

future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, anticipated organizational, business or regulatory changes, anticipated sales, monetization and/or acquisitions of businesses or assets or successful integration of acquired businesses, management succession and retention plans, exposure to risk, trends in operations and financial results.exposures to subprime mortgages, monoline insurers, the residential and commercial real estate markets, state and municipal bond issuers, sovereign bond issuers, the energy sector and currency exchange rates;

exposure to European governments and European financial institutions;

strategy for risk management;

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

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

generation of deployable capital;

strategies to increase return on equity and earnings per share;

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

anticipated organizational, business and regulatory changes;

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

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

segments’ revenues and combined ratios; and

management succession and retention plans.

AIG | Third Quarter 20172018 Form 10-Q          7077


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

      changes in market and industry conditions;

      negative impacts on customers, business partners and other stakeholders;

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

      significant legal, regulatoryour ability to successfully reorganize our businesses, as well as improve profitability, without negatively impacting client relationships or governmental proceedings;our competitive position;

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

changes in judgments concerning insurance underwriting and insurance liabilities;

changes in judgments concerning potential cost saving opportunities;

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

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

our ability to successfully manage Legacy portfolios;

concentrations in our investment portfolios;

actions by credit rating agencies;

the requirements, which may change from time to time, of anythe global regulatory framework to which we are subject, including as a global systemically important insurer (G‑SII)(G-SII);

      concentrations in our investment portfolios;significant legal, regulatory or governmental proceedings;

actions by credit rating agencies;

      judgments concerning casualty insurance underwriting and insurance liabilities;

our ability to successfully manage Legacy portfolios;

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

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

in judgments concerning the recognition of deferred tax assets;

judgments concerning estimated restructuring charges and estimated cost savings; and

      such other factors discussed in:

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

-   Part I, Item 2. MD&A and Part II, Item 1A. Risk Factors  of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018

-Part I, Item 2. MD&A of the Quarterly ReportsReport on Form 10-Q for the quarterly periodsperiod ended March 31, 2017 and June 30, 2017;2018; and

-   Part I, Item 1A. Risk Factors and Part II, Item 7. MD&A of the 20162017 Annual Report.

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

78AIG | Third Quarter 20172018 Form 10-Q71



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ITEM 2 | Use of Non-GAAP Measures

Use of Non-GAAP Measures

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

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

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

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

deferred income tax valuation allowance releases and charges; and

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

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

AIG | Third Quarter 2017 Form 10-Q73


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ITEM 2 | Use of Non-GAAP Measures

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

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

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

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

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

loss (gain) on extinguishment of debt;

net realized capital gains and losses;

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

income or loss from discontinued operations;

net loss reserve discount benefit (charge);

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

income and loss from divested businesses;

non-operating litigation reserves and settlements;

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

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

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

·Commercial Insurance: Liability and Financial Lines, Property and Special Risks; Consumer Insurance: Personal Insurance

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

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

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

   Premiums and deposits: includes direct and assumed amounts received and earned on traditional life insurance policies, group benefit policies and life‑contingent payout annuities, as well as deposits received on universal life, investment‑type annuity contracts and mutual funds.

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

AIG | Third Quarter 2017 Form 10-Q74



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ITEM 2 | Use of Non-GAAP Measures

Use of Non-GAAP Measures 

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

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

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

Adjusted after-tax income attributable to AIG is derived by excluding the tax effected adjusted pre-tax income (APTI) adjustments described below 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).

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.

80AIG | Third Quarter 2018 Form 10-Q


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ITEM 2 | Use of Non-GAAP Measures

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

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

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

loss (gain) on extinguishment of debt;

all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for non-qualifying (economic) hedging or for asset replication. Earned income on such economic hedges is reclassified from net realized capital gains and losses to specific APTI line items based on the economic risk being hedged (e.g. net investment income and interest credited to policyholder account balances);

income or loss from discontinued operations;

net loss reserve discount benefit (charge);

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

income and loss from divested businesses;

non-operating litigation reserves and settlements;

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

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

integration and transaction costs associated with acquired businesses.

·General Insurance

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

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

·Life and Retirement

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

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

AIG | Third Quarter 2018 Form 10-Q81


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ITEM 2 |Critical Accounting Estimates

Critical Accounting Estimates

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

The accounting policies that we believe are most dependent on the application of accounting policies that often involve a significant degree of judgment.

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

·loss reserves;

·reinsurance assets;

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

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

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

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

·liability for legal contingencies;

·fair value measurements of certain financial assets and liabilities; and

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

These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected. For a complete discussion of our critical accounting estimates, you should read Part II, Item 7. MD&A — Critical Accounting Estimatesare related to the determination of:

loss reserves;

reinsurance assets;

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

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

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

impairment charges, including other-than-temporary impairments on available for sale securities, impairments on other invested assets, including investments in the 2016 Annual Report.life settlements, and goodwill impairment;

AIG | Third Quarter 2017 Form 10-Q      75allowances for loan losses;

      liability for legal contingencies;

fair value measurements of certain financial assets and liabilities; and

income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset and provisional estimates associated with the Tax Act.

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

For a complete discussion of our critical accounting estimates, see Part II, Item 7. MD&A — Critical Accounting Estimates in the 2017 Annual Report.

82AIG | Third Quarter 2018 Form 10-Q


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ITEM 2 |Executive Summary

Executive Summary

Overview

This overview of the MD&A highlights selected information and may not contain all of the information that is important to current or potential investors in our securities. You should read this Quarterly Report on Form 10-Q, together with the 2016 Annual Report,  in their entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us.

AIG’S OPERATING MODEL

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

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

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

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

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ITEM 2 |Executive Summary

Business Modules

Commercial Insurance

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

 

Consumer Insurance

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

 

Other Operations

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

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

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

Legacy Portfolio

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

Geography Modules

United States

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

Europe

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

Japan

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

AIG | Third Quarter 2017 Form 10-Q77


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ITEM 2 |  Executive Summary

 

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 2017 Annual Report,  in their entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us.

On July 18, 2018, we completed our acquisition of Validus Holdings, Ltd. (Validus), a leading provider of reinsurance, primary insurance, and asset management services, for approximately $5.5 billion in cash. This transaction strengthens our global General Insurance business by expanding our current product portfolio through additional distribution channels and advancing the tools available to enhance underwriting.  The results of Validus following the date of the acquisition are included in our General Insurance segment starting in the third quarter of 2018.  Our North America results include the results of Validus Reinsurance, Ltd. and Western World Insurance Group, Inc., while our International results include the results of Talbot Holdings Ltd.

In February 2018, we closed a series of affiliated reinsurance transactions impacting the Legacy Portfolio. These transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines into a single legal entity, Fortitude Re, formerly known as DSA Reinsurance Company, Ltd., a Bermuda domiciled composite reinsurer, 100 percent owned by AIG. As of September 30, 2018, the transactions include the cession of approximately $31 billion of reserves from our Legacy Life and Retirement Run-Off Lines and approximately $5 billion of reserves from our Legacy General Insurance Run-Off Lines relating to business written by multiple AIG legal entities, which represented over 82 percent of the insurance reserves in the Legacy Portfolio. Fortitude Re has approximately $42 billion of total assets, managed by AIG Investments, and is AIG’s main run-off reinsurer with its own dedicated management team.

On July 31, 2018, we entered into a membership interest purchase agreement with Fortitude Group Holdings, LLC (Fortitude Holdings), a wholly-owned subsidiary of AIG, and TC Group Cayman Investment Holdings, L.P. (TCG), an affiliate of The Carlyle Group L.P. We formed Fortitude Holdings to act as a holding company for Fortitude Re. Subject to the satisfaction or waiver of certain conditions in the purchase agreement, TCG will purchase a 19.9 percent ownership interest in Fortitude Holdings. As of the closing of the transaction, Fortitude Holdings will own 100 percent of the outstanding common shares of Fortitude Re and AIG will have an 80.1 percent ownership interest in Fortitude Holdings.

On September 21, 2018 AIG entered into an agreement to acquire Glatfelter Insurance Group, a full-service broker and insurance company providing services for specialty programs and retail operations.

See Business Segment Operations – Legacy Portfolio.

AIG | Third Quarter 2018 Form 10-Q83


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ITEM 2 |Executive Summary

AIG’S OPERATING STRUCTURE

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

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

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 Limited; Validus Reinsurance, Ltd. , Talbot Holdings Ltd and Western World Insurance Group, Inc.

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

Other Operations

Other Operations consists of businesses and items not attributed to our General Insurance and Life and Retirement segments or our Legacy Portfolio. It includes AIG Parent; Blackboard; AIG Fuji Life Insurance Company, Ltd. (Fuji Life), which was sold on April 30, 2017; deferred tax assets related to tax attributes; corporate expenses and intercompany eliminations.

Legacy Portfolio

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

84AIG | Third Quarter 2018 Form 10-Q


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ITEM 2 |Executive Summary

Financial Performance Summary

 

Net Income (Loss) Attributable To AIG

Three Months Ended September 30,

($ in millions)

2017Quarterly 2018 and 2016 Quarterly2017 Comparison

DecreasedDecrease in Net loss attributable to AIG due to to:

lower income from insurance operations, reflecting aggregate pre-taxpolicyholder benefits and losses incurred driven by significantly lower catastrophe losses and lower unfavorable prior year loss reserve development, as well as lower severe losses; and

lower net realized capital losses.

The decrease in Net loss attributable to AIG was partially offset by:

a net unfavorable adjustment from the review and update of $3.0 billion, which included losses from Hurricanes Harvey, Irma and Maria and the earthquake in Mexico,actuarial assumptions compared to catastrophe losses of $282 milliona net favorable adjustment in the same period in the prior year; an increase in unfavorable prior year loss reserve development driven by and

higher than expected loss emergence mainly in Liability and Financial Lines primarily related to accident year 2016; lower net investment income; and higher net realized capital losses. These decreases were partially offset by lower general operating and other expenses, and a net positive adjustment from the update of actuarial assumptions compared to a net negative adjustment in the same period in the prior year.

Net Income Attributable To AIG

Nine Months Ended September 30,

($ in millions)

2017 and 2016 Year-to-Date Comparison

Decreased due to lower income from insurance operations, reflecting higher catastrophe losses, an increase in unfavorable prior year loss reserve development driven by higher than expected loss emergence mainly in Liability and Financial Lines primarily related to accident year 2016, a loss on sale of divested businessespartially due to the saleacquisition of Fuji Life in 2017 compared to a gain on sale of divested businesses due to the sale of AIG Advisor Group Inc. (AIG Advisor Group) and NSM Insurance Group LLC (NSM) in 2016 and higher net realized capital losses. These decreases were partially offset by lower general operating and other expenses, a net positive adjustment from the update of actuarial assumptions compared to a net negative adjustment in the same period in the prior year and fair value gains on derivative positions in the Legacy Portfolio, as well as higher net investment income due to increased income from alternative investments and higher appreciation on assets for which the fair value option was elected.Validus.

For further discussion seeMD&A – Consolidated Results of OperationsOperations.

 

AIG | Third Quarter 20172018 Form 10-Q          7885


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ITEM 2 |  Executive Summary

 

Pre-Tax OperatingNet Income (Loss)*Attributable To AIG

ThreeNine Months Ended September 30,

($ in millions)

2017Year-to-Date 2018 and 2016 Quarterly2017 Comparison

DecreasedIncrease in net income attributable to AIG due to to:

lower income from insurance operations, reflecting higher aggregate pre-taxpolicyholder benefits and losses incurred driven by significantly lower catastrophe losses and lower unfavorable prior year loss reserve development, partially offset by higher severe losses;

lower net realized capital losses; and

gains on sale of $3.0 billion, which included losses from Hurricanes Harvey, Irma and Maria anddivested businesses in the earthquake in Mexico,nine-month period ended September 30, 2018 compared to catastrophe losses on sale of $282 milliondivested businesses in the same period in the prior year, anyear.

This increase in unfavorable prior year loss reserve developmentwas partially offset by: 

lower investment returns primarily driven by higher than expected loss emergence mainlylower hedge fund performance, a decline in Liabilityincome from securities for which the fair value option was elected as a result of credit spread widening and Financial Lines primarily related to accident year 2016rising interest rates, losses on our fair value option equities portfolio, and lower net investment income. These decreases were partially offset by lower general operating and other expenses and invested assets resulting from the funding of the adverse development reinsurance agreement with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc. (Berkshire) late in the first quarter of 2017;

a net positiveunfavorable adjustment from the review and update of actuarial assumptions compared to a net negativefavorable adjustment in the same period in the prior year; and

higher general operating and other expenses.

For further discussion see Consolidated Results of Operations.

Adjusted Pre-Tax Income (Loss)*

Three Months Ended September 30,

(in millions)

Quarterly 2018 and 2017 Comparison

Decrease in Adjusted pre-tax loss due to lower policyholder benefits and losses incurred driven by significantly lower catastrophe losses and lower unfavorable prior year loss reserve development, as well as lower severe losses.

The decrease was partially offset by a net unfavorable adjustment from the review and update of actuarial assumptions compared to a net favorable adjustment in the same period in the prior year.

Pre-Tax Operating Income*

Nine Months Ended September 30,

($ in millions)

2017 and 2016 Year-to-Date Comparison

Decreased due to lower income from insurance operations, reflecting higher pre-tax catastrophe losses and an increase in unfavorable prior year loss reserve development driven by higher than expected loss emergence mainly in Liability and in Financial Lines primarily related to accident year 2016. These decreases were partially offset by lower general operating and other expenses, a net positive adjustment from the update of actuarial assumptions compared to a net negative adjustment in the same period in the prior year and fair value gains on derivative positions in the Legacy Portfolio as well as higher net investment income due to increased income from alternative investments and higher appreciation on assets for which the fair value option was elected.

For further discussion see MD&A – Business Segment Operations

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

 

86AIG | Third Quarter 20172018 Form 10-Q79


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ITEM 2 |  Executive Summary

 

Adjusted Pre-Tax Income*

Nine Months Ended September 30,

(in millions)

Year-to-Date 2018 and 2017 Comparison

Decrease in Adjusted pre-tax income due to:

lower investment returns primarily driven by lower hedge fund performance, a decline in income from securities for which the fair value option was elected as a result of credit spread widening and rising interest rates, losses on our fair value option equities portfolio, and lower invested assets resulting from the funding of the adverse development reinsurance agreement with NICO late in the first quarter of 2017;

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

This decrease was partially offset by lower policyholder benefits and losses incurred driven by significantly lower catastrophe losses and lower unfavorable prior year loss reserve development, partially offset by higher severe losses.

For further discussion see Consolidated Results of Operations.

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

General Operating and Other Expenses

Three Months Ended September 30,

($ in millions)

General Operating and Other Expenses

2017Quarterly 2018 and 2016 Quarterly2017 Comparison

DeclinedIncreased due to lower employee-related expensesthe acquisition of Validus, business growth and professional fee reductions related to our ongoing efficiency program, divestitures of businesses, including United Guaranty and NSM, and a favorable foreign exchange impact of $19 million.continued investments in business platforms.

In keeping with our broad and ongoing efforts to transform for long-term competitiveness, general operating and other expenses for the third quarters of 20172018 and 20162017 included approximately $31$35 million and $210$31 million of pre-tax restructuring and other costs, respectively, which were primarily comprised ofrelated to asset impairment and employee severance charges.charges in connection with efficiency initiatives.

General Operating Expenses, Operating Basis*

Nine Months Ended September 30,

($ in millions)

General Operating and Other Expenses

2017 and 2016 Year-to-Date Comparison

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

General operating and other expenses for the nine-month periods ended September 30, 2017 and 2016 included approximately $259 million and $488 million of pre-tax restructuring and other costs, respectively, which were primarily comprised of employee severance charges.

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

General Operating Expenses, Operating Basis*

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

 

AIG | Third Quarter 20172018 Form 10-Q          8087


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ITEM 2 |  Executive Summary

 

Capital Returned to ShareholdersGeneral Operating and Other Expenses

Nine Months Ended September 30,

($ in millions)

We have returned $20.3 billionYear-to-Date 2018 and 2017 Comparison

Increased due to the acquisition of Validus, business growth and continued investments in capitalbusiness platforms.

In keeping with our broad and ongoing efforts to our shareholders through dividendstransform for long-term competitiveness, general operating and share and warrant repurchases from January 1, 2016 toother expenses for the nine-month periods ended September 30, 2017.2018 and 2017 included approximately $259 million and $259 million of pre-tax restructuring and other costs, respectively, which were primarily comprised of employee severance charges related to efficiency initiatives.

We continue to execute initiatives focused on organizational simplification, operational efficiency, and business rationalization.

 

Return on Equity

Three Months Ended September 30,

 

 

 

Adjusted Return on Equity*Equity*

Three Months Ended September 30,

 

 

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

88AIG | Third Quarter 2018 Form 10-Q


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ITEM 2 |Executive Summary

Book Value Per Share

Book Value Per Share, excluding AOCI*

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

AIG | Third Quarter 2017 Form 10-Q81


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ITEM 2 |Executive Summary

Book Value Per Common Share

Adjusted Book Value Per Common Share*

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

AIG’s Outlook – Industry and economic factors

Our business is affected by industry and economic factors such as interest rates, currency exchange rates, credit and equity market conditions, catastrophic claims events, regulation, tax policy, competition, and general economic, market and political conditions. We continued to operate under difficult market conditions in the first nine months of 2017,2018, characterized by factors such as the impact of historically low interest rates, uncertainties in the Departmentannuity marketplace resulting from legislative and regulatory initiatives aimed at re-evaluating the standard of Labor’s (the DOL) final fiduciary duty rule (the DOL Fiduciary Rule), volatile energy markets,care for sales of investment products and services, historically high levels of catastrophic events, slowing growth in China and Euro-Zone economies, and the formal commencement of the United Kingdom’s (the UK)UK’s pending withdrawal from its membership in the European Union (the EU) (commonly referred to as Brexit). Brexit has also affected the U.S. dollar/British pound exchange rate and increased the volatility of exchange rates among the euro, British pound and the Japanese yen (the Major Currencies), which may continue for some time.

Impact of Changes in the Interest Rate Environment

InterestWhile interest rates decreased marginally inremain low by historical standards, during the first nine months of 2017 and2018 interest rates, particularly in the United States, have remained at historically low levels. Certain marketsrisen, in which we operate have experienced negative interest rates. A sustainedsome cases close to highs of the last five to ten years. The low interest rate environment negatively affects sales of interest rate sensitive products in our industry and may negatively impact the profitability of our existing business as we reinvest cash flows from investments, including increased calls and prepayments of fixed maturity securities and mortgage loans, at rates below the average yield of our existing portfolios. As 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 on discounting of projected benefit cash flows for our pension plans may result in higher pension expense.

Annuity Sales and Surrenders

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

AIG | Third Quarter 20172018 Form 10-Q          8289


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ITEM 2 |  Executive Summary

 

Reinvestment and Spread Management

We actively monitor fixed income markets, including the level of interest rates, credit spreads and the shape of the yield curve. We also frequently review our interest rate assumptions and actively manage the crediting rates used for new and in-force business. Business strategies continue to evolve to maintain profitability of the overall business in a historically lowlight of the interest rate environment. TheA low interest rate environment makes it more difficult to profitably price many of our products and 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 while maintaining satisfactory investment quality and liquidity.environment. In addition, there is investment risk associated with future premium receipts from certain in‑force business. Specifically, the investment of these future premium receipts may be at a yield below that required to meet future policy liabilities.

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

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

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

Of the aggregate fixed account values of our Individual Retirement and Group Retirement annuity products, 7368 percent were crediting at the contractual minimum guaranteed interest rate at September 30, 2017.2018. The percentage of fixed account values of our annuity products that are currently crediting at rates above one percent was 7067 percent and 69 percent at both September 30, 20172018 and December 31, 2016.2017, respectively. These businesses continue to focus on pricing discipline and strategies to reducemanage the minimum guaranteed interest crediting rates offered on new sales.sales in the context of regulatory requirements and competitive positioning. In the core universal life business in our Life Insurance business, 71 percent of the account values were crediting at the contractual minimum guaranteed interest rate at September 30, 2017.

2018.

90AIG | Third Quarter 20172018 Form 10-Q83


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ITEM 2 |  Executive Summary

 

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

Current Crediting Rates

Current Crediting Rates

September 30, 2017

 

 

1-50 Basis

More than 50

 

 

 

September 30, 2018

 

 

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%

$

5,353

$

4,034

$

12,638

$

22,025

 

$

2,619

$

4,768

$

16,748

$

24,135

 

> 1% - 2%

 

7,125

 

142

 

1,927

 

9,194

 

 

6,849

 

137

 

1,114

 

8,100

 

> 2% - 3%

 

14,009

 

31

 

441

 

14,481

 

 

12,892

 

284

 

83

 

13,259

 

> 3% - 4%

 

10,358

 

44

 

7

 

10,409

 

 

9,775

 

43

 

7

 

9,825

 

> 4% - 5%

 

562

 

-

 

4

 

566

 

 

616

 

-

 

4

 

620

 

> 5% - 5.5%

 

34

 

-

 

5

 

39

 

 

34

 

-

 

5

 

39

 

Total Individual Retirement

$

37,441

$

4,251

$

15,022

$

56,714

 

$

32,785

$

5,232

$

17,961

$

55,978

 

Group Retirement*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1%

$

1,378

$

2,570

$

2,579

$

6,527

 

$

1,582

$

3,158

$

2,181

$

6,921

 

> 1% - 2%

 

6,261

 

662

 

156

 

7,079

 

 

6,152

 

793

 

215

 

7,160

 

> 2% - 3%

 

15,448

 

-

 

167

 

15,615

 

 

15,328

 

-

 

-

 

15,328

 

> 3% - 4%

 

905

 

-

 

-

 

905

 

 

859

 

-

 

-

 

859

 

> 4% - 5%

 

7,163

 

-

 

-

 

7,163

 

 

7,131

 

-

 

-

 

7,131

 

> 5% - 5.5%

 

162

 

-

 

-

 

162

 

 

179

 

-

 

-

 

179

 

Total Group Retirement

$

31,317

$

3,232

$

2,902

$

37,451

 

$

31,231

$

3,951

$

2,396

$

37,578

 

Universal life insurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1%

$

-

$

-

$

8

$

8

 

$

-

$

-

$

10

$

10

 

> 1% - 2%

 

27

 

177

 

205

 

409

 

 

120

 

95

 

224

 

439

 

> 2% - 3%

 

566

 

529

 

943

 

2,038

 

 

605

 

472

 

995

 

2,072

 

> 3% - 4%

 

1,785

 

353

 

6

 

2,144

 

 

1,667

 

355

 

7

 

2,029

 

> 4% - 5%

 

3,383

 

214

 

-

 

3,597

 

 

3,172

 

222

 

-

 

3,394

 

> 5% - 5.5%

 

303

 

-

 

-

 

303

 

 

303

 

-

 

-

 

303

 

Total universal life insurance

$

6,064

$

1,273

$

1,162

$

8,499

 

$

5,867

$

1,144

$

1,236

$

8,247

 

Total

$

74,822

$

8,756

$

19,086

$

102,664

 

$

69,883

$

10,327

$

21,593

$

101,803

 

Percentage of total

 

73

%

8

%

19

%

100

%

 

69

%

10

%

21

%

100

%

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

Assumption Updates and Loss Recognition

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

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

CommercialGeneral Insurance

The impact of low interest rates on our CommercialGeneral Insurance segment is primarily on our long-tail Casualty line of business. We expect limited impacts on our existing long-tail Casualty business as the duration of our assets is slightly longer than that of our liabilities. We do expect sustainedSustained low interest rates willwould 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.

AIG | Third Quarter 2017 Form 10-Q84


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ITEM 2 |Executive Summary

In addition, for our CommercialGeneral Insurance segment and run-off insurance linesGeneral 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.

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

Standard of Care Developments

The SEC, federal and state lawmakers and state insurance regulators continue their efforts at evaluating what is an appropriate regulatory framework around a standard of care for the sale of investment products and services.  On April 18, 2018, the SEC proposed a package of rulemakings and interpretations designed to address the standard of care issues and the transparency of retail investors’ relationships with investment advisors and broker-dealers.  The comment period for these proposed rules expired on August 7, 2018.

AIG | Third Quarter 2018 Form 10-Q91


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ITEM 2 |Executive Summary

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 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.  The regulation 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.  This regulation also imposes additional duties on life insurance companies in relation to these transactions. We are evaluating the scope and impact of Regulation 187 on our businesses, and will implement and enhance processes and procedures, where needed, to comply with this regulation.

Regarding the Department of Labor (the DOL) fiduciary duty rule issued by the DOL in April 2016 (the DOL Fiduciary Rule), on March 15, 2018, the U.S. Court of Appeals for the Fifth Circuit (the Fifth Circuit) ruled that the DOL exceeded its authority in promulgating the DOL Fiduciary Rule

Our Individual Retirement, specifically in its broadening of the scope of “investment advice” fiduciary and Group Retirement operating segments provide products and services to certain employee benefit plansin the terms of the best interest contract exemption.  Following the Fifth Circuit’s decision, the DOL announced on March 16, 2018, that are subject to restrictions imposed by the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the Internal Revenue Code, including the requirementsit was suspending enforcement of the DOL Fiduciary Rule related exemption amendments,pending further review. On May 22, 2018, the Fifth Circuit subsequently denied a motion to reconsider the panel’s decision and subsequent interpretative guidance and bulletins.  Overall,a further motion for rehearing by the full Fifth Circuit. As the Fifth Circuit’s final judgment has not been further appealed, the ruling has the effect of invalidating the DOL Fiduciary Rule as currently promulgated, would result in increased compliance costs and may create increased exposureits entirety.

We continue to legal claims under certain circumstances, including class actions. Following the extension of the applicability dates of the DOL Fiduciary Rule and related exemptions announced by the DOL in April 2017, the new definition of fiduciary and the impartial conduct standards under the DOL Fiduciary Rule became applicable on June 9, 2017, with the remaining provisions of the rule scheduled to become applicable on January 1, 2018.

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

Liability and Financial Lines, Property and Special Risks, International Life Insurance and PersonalGeneral Insurance businesses are transacted in most major foreign currencies. The following table presents the average of the quarterly weighted average exchange rates of the Major Currencies, which have the most significant impact on our businesses:

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

Rate for 1 USD

2017

2016

 

Change

 

2017

2016

 

Change

 

2018

2017

 

Change

 

 

2018

2017

 

Change

 

Currency:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GBP

0.77

0.77

 

-

%

 

0.74

0.79

 

(6)

%

EUR

0.86

0.87

 

(1)

%

 

0.84

0.91

 

(8)

%

JPY

110.99

103.53

 

7

%

 

112.51

110.72

 

2

%

111.48

110.99

 

-

%

 

109.95

112.51

 

(2)

%

EUR

0.87

0.90

 

(3)

%

 

0.91

0.90

 

1

%

GBP

0.77

0.74

 

4

%

 

0.79

0.71

 

11

%

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

AIG | Third Quarter 2017 Form 10-Q85


TABLE OF CONTENTS

ITEM 2 |Executive Summary

Other Industry Developments

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

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

 

92AIG | Third Quarter 20172018 Form 10-Q86 


TABLE OF CONTENTS 

 

ITEM 2 | Consolidated Results of Operations

 

Consolidated Results of Operations

The following section provides a comparative discussion of our Consolidated Results of Operations on a reported basis for the three-andthree- and nine-month periods ended September 30, 20172018 and 2016.2017. 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&Aand Part II, Item 7. MD&A — Critical Accounting Estimates in the 20162017 Annual Report

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

Three Months Ended

 

 

 

 

 

Nine Months Ended

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Percentage

 

 

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

 

2018

 

2017

 

Change

 

 

 

2018

 

2017

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

8,063

$

  8,581

 

(6)

%

 

$

23,459

$

  26,138

 

(10)

%

$

7,668

$

  8,063

 

(5)

%

 

$

22,150

$

  23,459

 

(6)

%

Policy fees

 

728

 

  646

 

13

 

 

 

2,177

 

  2,029

 

7

 

 

530

 

  728

 

(27)

 

 

 

2,057

 

  2,177

 

(6)

 

Net investment income

 

3,416

 

  3,783

 

(10)

 

 

 

10,715

 

  10,479

 

2

 

 

3,396

 

  3,416

 

(1)

 

 

 

9,722

 

  10,715

 

(9)

 

Net realized capital losses

 

(922)

 

  (765)

 

(21)

 

 

 

(1,106)

 

  (829)

 

(33)

 

 

(511)

 

  (922)

 

45

 

 

 

(365)

 

  (1,106)

 

67

 

Other income

 

466

 

  609

 

(23)

 

 

 

1,640

 

  1,540

 

6

 

 

403

 

  466

 

(14)

 

 

 

1,265

 

  1,640

 

(23)

 

Total revenues

 

11,751

 

  12,854

 

(9)

 

 

 

36,885

 

  39,357

 

(6)

 

 

11,486

 

  11,751

 

(2)

 

 

 

34,829

 

  36,885

 

(6)

 

Benefits, losses and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

10,322

 

  7,489

 

38

 

 

 

22,653

 

  20,748

 

9

 

 

8,312

 

  10,322

 

(19)

 

 

 

19,484

 

  22,653

 

(14)

 

Interest credited to policyholder account balances

 

867

 

  887

 

(2)

 

 

 

2,683

 

  2,798

 

(4)

 

 

933

 

  867

 

8

 

 

 

2,784

 

  2,683

 

4

 

Amortization of deferred policy acquisition costs

 

912

 

  1,018

 

(10)

 

 

 

3,135

 

  3,625

 

(14)

 

 

1,118

 

  912

 

23

 

 

 

3,813

 

  3,135

 

22

 

General operating and other expenses

 

2,149

 

  2,536

 

(15)

 

 

 

6,774

 

  8,125

 

(17)

 

 

2,325

 

  2,149

 

8

 

 

 

6,919

 

  6,774

 

2

 

Interest expense

 

290

 

  329

 

(12)

 

 

 

880

 

  955

 

(8)

 

 

326

 

  290

 

12

 

 

 

902

 

  880

 

3

 

(Gain) loss on extinguishment of debt

 

1

 

  (14)

 

NM

 

 

 

(4)

 

  76

 

NM

 

 

1

 

  1

 

-

 

 

 

10

 

  (4)

 

NM

 

Net (gain) loss on sale of divested businesses

 

13

 

  (128)

 

NM

 

 

 

173

 

  (351)

 

NM

 

 

(2)

 

  13

 

NM

 

 

 

(35)

 

  173

 

NM

 

Total benefits, losses and expenses

 

14,554

 

  12,117

 

20

 

 

 

36,294

 

  35,976

 

1

 

 

13,013

 

  14,554

 

(11)

 

 

 

33,877

 

  36,294

 

(7)

 

Income (loss) from continuing operations before

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income tax expense (benefit)

 

(2,803)

 

  737

 

NM

 

 

 

591

 

  3,381

 

(83)

 

 

(1,527)

 

  (2,803)

 

46

 

 

 

952

 

  591

 

61

 

Income tax expense (benefit)

 

(1,091)

 

  304

 

NM

 

 

 

(18)

 

  1,170

 

NM

 

 

(307)

 

  (1,091)

 

72

 

 

 

291

 

  (18)

 

NM

 

Income (loss) from continuing operations

 

(1,712)

 

  433

 

NM

 

 

 

609

 

  2,211

 

(72)

 

 

(1,220)

 

  (1,712)

 

29

 

 

 

661

 

  609

 

9

 

Income (loss) from discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of income tax expense (benefit)

 

(1)

 

  3

 

NM

 

 

 

7

 

  (54)

 

NM

 

 

(39)

 

  (1)

 

NM

 

 

 

(40)

 

  7

 

NM

 

Net income (loss)

 

(1,713)

 

  436

 

NM

 

 

 

616

 

  2,157

 

(71)

 

 

(1,259)

 

  (1,713)

 

27

 

 

 

621

 

  616

 

1

 

Less: Net income (loss) attributable to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests

 

26

 

  (26)

 

NM

 

 

 

40

 

  (35)

 

NM

 

Less: Net income (loss) attributable to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

 

-

 

  26

 

NM

 

 

5

 

  40

 

(88)

 

Net income (loss) attributable to AIG

$

(1,739)

$

  462

 

NM

%

 

$

576

$

  2,192

 

(74)

%

$

(1,259)

$

  (1,739)

 

28

%

 

$

616

$

  576

 

7

%

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

(in millions, except per share data)

 

 

 

 

 

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

 

 

 

 

 

$

503,073

 

$

498,264

 

 

 

 

 

 

 

 

$

504,860

 

$

498,301

 

Long-term debt

 

 

 

 

 

 

 

 

31,039

 

 

30,912

 

 

 

 

 

 

 

 

 

34,594

 

 

31,640

 

Total AIG shareholders’ equity

 

 

 

 

 

 

 

 

72,468

 

 

76,300

 

 

 

 

 

 

 

 

 

58,586

 

 

65,171

 

Book value per common share

 

 

 

 

 

 

 

 

80.62

 

 

76.66

 

 

 

 

 

 

 

 

 

66.23

 

 

72.49

 

Book value per common share, excluding AOCI

 

 

 

 

 

 

 

 

74.01

 

 

73.41

 

 

 

 

 

 

 

 

 

66.83

 

 

66.41

 

Adjusted book value per common share

Adjusted book value per common share

 

 

 

 

 

 

 

57.44

 

 

58.57

 

 

 

 

 

 

 

 

 

55.58

 

 

54.74

 

AIG | Third Quarter 20172018 Form 10-Q          8793


TABLE OF CONTENTS 

 

ITEM 2 | Consolidated Results of Operations

 

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

 

 

 

 

 

 

September 30,

 

December 31,

 

 

September 30,

 

December 31,

(in millions, except per share data)

 

 

 

 

 

 

2017

 

2016

 

 

2018

 

2017

Total AIG shareholders' equity

 

 

 

 

 

$

72,468

$

76,300

 

$

58,586

$

65,171

Accumulated other comprehensive income

 

 

 

 

 

 

5,939

 

3,230

Accumulated other comprehensive income (loss)

 

 

(536)

 

5,465

Total AIG shareholders' equity, excluding AOCI

 

 

 

 

 

 

66,529

 

73,070

 

 

59,122

 

59,706

 

 

 

 

 

 

 

 

 

Deferred tax assets

 

 

 

 

 

 

14,897

 

14,770

 

 

9,953

 

10,492

Adjusted shareholders' equity

 

 

 

 

 

$

51,632

$

58,300

 

$

49,169

$

49,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total common shares outstanding

 

 

 

 

 

 

898,880,087

 

995,335,841

 

 

884,647,527

 

899,044,657

Book value per common share

 

 

 

 

 

$

80.62

$

76.66

 

$

66.23

$

72.49

Book value per common share, excluding AOCI

 

 

 

 

 

 

74.01

 

73.41

 

 

66.83

 

66.41

Adjusted book value per common share

 

 

 

 

 

 

57.44

 

58.57

 

 

55.58

 

54.74

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

 

Three Months Ended

 

Nine Months Ended

 

 

Year Ended

 

 

September 30,

 

September 30,

 

 

December 31,

 

(dollars in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

2016

 

Actual or annualized net income (loss) attributable to AIG

$

(6,956)

 

$

1,848

 

$

768

 

$

2,923

 

 

$

(849)

 

Actual or annualized after-tax operating income attributable to AIG

 

(4,444)

 

 

4,460

 

 

2,273

 

 

4,257

 

 

 

406

 

Average AIG Shareholders' equity

 

73,100

 

 

89,305

 

 

74,142

 

 

89,196

 

 

 

86,617

 

Average AOCI

 

5,451

 

 

8,658

 

 

4,477

 

 

6,344

 

 

 

5,722

 

Average AIG Shareholders' equity, excluding average AOCI

 

67,649

 

 

80,647

 

 

69,665

 

 

82,852

 

 

 

80,895

 

Average DTA

 

14,592

 

 

15,591

 

 

14,635

 

 

16,189

 

 

 

15,905

 

Average adjusted AIG Shareholders' equity

$

53,057

 

$

65,056

 

$

55,030

 

$

66,663

 

 

$

64,990

 

ROE

 

(9.5)

%

 

2.1

%

 

1.0

%

 

3.3

%

 

 

(1.0)

%

Adjusted Return on Equity

 

(8.4)

%

 

6.9

%

 

4.1

%

 

6.4

%

 

 

0.6

%

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

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

General operating and other expenses

$

2,149

$

2,536

 

(15)

%

 

$

6,774

$

8,125

 

(17)

%

Restructuring and other costs

 

(31)

 

(210)

 

85

 

 

 

(259)

 

(488)

 

47

 

Other (income) expense related to retroactive reinsurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

agreement

 

-

 

(4)

 

NM

 

 

 

-

 

8

 

NM

 

Pension expense related to a one-time lump sum payment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

to former employees

 

(49)

 

-

 

NM

 

 

 

(50)

 

-

 

NM

 

Non-operating litigation reserves

 

-

 

2

 

NM

 

 

 

70

 

(1)

 

NM

 

Total general operating and other expenses included

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in pre-tax operating income

 

2,069

 

2,324

 

(11)

 

 

 

6,535

 

7,644

 

(15)

 

Loss adjustment expenses, reported as policyholder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

benefits and losses incurred

 

289

 

340

 

(15)

 

 

 

889

 

1,031

 

(14)

 

Advisory fee expenses

 

(84)

 

(76)

 

(11)

 

 

 

(238)

 

(566)

 

58

 

Non-deferrable insurance commissions and other

 

(148)

 

(107)

 

(38)

 

 

 

(410)

 

(350)

 

(17)

 

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

 

(56)

 

(52)

 

(8)

 

 

 

(226)

 

(329)

 

31

 

Investment expenses reported as net investment income and other

 

32

 

15

 

113

 

 

 

49

 

45

 

9

 

Total general operating expenses, operating basis

$

2,102

$

2,444

 

(14)

%

 

$

6,599

$

7,475

 

(12)

%

 

Three Months Ended

 

Nine Months Ended

 

 

Year Ended

 

 

September 30,

 

September 30,

 

 

December 31,

 

(dollars in millions)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

2017

 

Actual or annualized net income (loss) attributable to AIG

$

(5,036)

 

$

(6,956)

 

$

821

 

$

768

 

 

$

(6,084)

 

Actual or annualized adjusted after-tax income attributable to AIG

 

(1,204)

 

 

(4,444)

 

 

2,164

 

 

2,273

 

 

 

2,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average AIG Shareholders' equity

$

59,886

 

$

73,100

 

$

61,934

 

$

74,142

 

 

$

72,348

 

Average AOCI

 

(153)

 

 

5,451

 

 

1,845

 

 

4,477

 

 

 

4,675

 

Average AIG Shareholders' equity, excluding average AOCI

 

60,039

 

 

67,649

 

 

60,089

 

 

69,665

 

 

 

67,673

 

Average DTA

 

9,903

 

 

14,592

 

 

10,128

 

 

14,635

 

 

 

13,806

 

Average adjusted AIG Shareholders' equity

$

50,136

 

$

53,057

 

$

49,961

 

$

55,030

 

 

$

53,867

 

Return on equity

 

(8.4)

%

 

(9.5)

%

 

1.3

%

 

1.0

%

 

 

(8.4)

%

Adjusted Return on Equity

 

(2.4)

%

 

(8.4)

%

 

4.3

%

 

4.1

%

 

 

4.1

%

94AIG | Third Quarter 20172018 Form 10-Q88 


TABLE OF CONTENTS 

 

ITEM 2 | Consolidated Results of Operations

 

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

Three Months Ended September 30,

2017

 

2016

 

 

 

 

Total Tax

 

 

 

 

 

 

Total Tax

 

 

 

 

 

 

(Benefit)

 

After

 

 

 

 

(Benefit)

 

After

(in millions, except per share data)

Pre-tax

 

Charge

 

Tax

 

Pre-tax

 

Charge

 

Tax

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

$

(2,803)

$

(1,091)

$

(1,714)

 

$

737

$

304

$

465

Noncontrolling interest

 

 

 

 

 

(25)

 

 

 

 

 

 

(3)

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

$

(2,803)

$

(1,091)

$

(1,739)

 

$

737

$

304

$

462

Uncertain tax positions and other tax adjustments

 

 

 

(11)

 

11

 

 

 

 

(42)

 

42

Deferred income tax valuation allowance releases

 

 

 

2

 

(2)

 

 

 

 

2

 

(2)

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

 

(26)

 

(9)

 

(17)

 

 

(17)

 

(6)

 

(11)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

gains (losses)

 

(84)

 

(29)

 

(55)

 

 

67

 

24

 

43

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

 

 

 

 

 

 

 

 

 

 

 

 

 

under retroactive reinsurance agreements

 

(7)

 

(2)

 

(5)

 

 

(3)

 

(1)

 

(2)

(Gain) loss on extinguishment of debt

 

1

 

1

 

-

 

 

(14)

 

(5)

 

(9)

Net realized capital losses

 

922

 

316

 

606

 

 

765

 

210

 

555

Noncontrolling interest on net realized capital losses

 

 

 

 

 

1

 

 

 

 

 

 

(29)

(Income) loss from discontinued operations

 

 

 

 

 

1

 

 

 

 

 

 

(3)

(Income) loss from divested businesses

 

13

 

7

 

6

 

 

(128)

 

(45)

 

(83)

Non-operating litigation reserves and settlements

 

-

 

-

 

-

 

 

(5)

 

(2)

 

(3)

Net loss reserve discount (benefit) charge

 

48

 

20

 

28

 

 

32

 

14

 

18

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

 

49

 

16

 

33

 

 

-

 

-

 

-

Restructuring and other costs

 

31

 

10

 

21

 

 

210

 

73

 

137

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

$

(1,856)

$

(770)

$

(1,111)

 

$

1,644

$

526

$

1,115

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

908.7

 

 

 

 

 

 

1,102.4

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

 

 

 

 

$

(1.91)

 

 

 

 

 

$

0.42

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

 

 

 

 

$

(1.22)

 

 

 

 

 

$

1.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

2017

 

2016

 

 

 

 

Total Tax

 

 

 

 

 

 

Total Tax

 

 

 

 

 

 

(Benefit)

 

After

 

 

 

 

(Benefit)

 

After

(in millions, except per share data)

Pre-tax

 

Charge

 

Tax

 

Pre-tax

 

Charge

 

Tax

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

$

591

$

(18)

$

610

 

$

3,381

$

1,170

$

2,197

Noncontrolling interest

 

 

 

 

 

(34)

 

 

 

 

 

 

(5)

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

$

591

$

(18)

$

576

 

$

3,381

$

1,170

$

2,192

Uncertain tax positions and other tax adjustments

 

 

 

(27)

 

27

 

 

 

 

(184)

 

184

Deferred income tax valuation allowance releases

 

 

 

23

 

(23)

 

 

 

 

4

 

(4)

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

 

(117)

 

(41)

 

(76)

 

 

(270)

 

(95)

 

(175)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

gains (losses)

 

(195)

 

(68)

 

(127)

 

 

91

 

32

 

59

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

 

 

 

 

 

 

 

 

 

 

 

 

 

under retroactive reinsurance agreements

 

258

 

91

 

167

 

 

(15)

 

(5)

 

(10)

(Gain) loss on extinguishment of debt

 

(4)

 

(1)

 

(3)

 

 

76

 

26

 

50

Net realized capital losses

 

1,106

 

401

 

705

 

 

829

 

217

 

612

Noncontrolling interest on net realized capital losses

 

 

 

 

 

6

 

 

 

 

 

 

(40)

(Income) loss from discontinued operations

 

 

 

 

 

(7)

 

 

 

 

 

 

54

(Income) loss from divested businesses

 

173

 

41

 

132

 

 

(351)

 

(123)

 

(228)

Non-operating litigation reserves and settlements

 

(86)

 

(30)

 

(56)

 

 

(43)

 

(15)

 

(28)

Net loss reserve discount (benefit) charge

 

283

 

101

 

182

 

 

323

 

113

 

210

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

 

50

 

17

 

33

 

 

-

 

-

 

-

Restructuring and other costs

 

259

 

90

 

169

 

 

488

 

171

 

317

Pre-tax operating income/After-tax operating income

$

2,318

$

579

$

1,705

 

$

4,509

$

1,311

$

3,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

961.3

 

 

 

 

 

 

1,142.7

Income per common share attributable to AIG (diluted)

 

 

 

 

$

0.60

 

 

 

 

 

$

1.92

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

 

 

 

 

$

1.77

 

 

 

 

 

$

2.79

Three Months Ended September 30,

2018

 

2017

 

 

 

 

Total Tax

 

 

 

 

 

 

Total Tax

 

 

 

 

 

 

(Benefit)

 

After

 

 

 

 

(Benefit)

 

After

(in millions, except per share data)

 

Pre-tax

 

Charge

 

Tax

 

 

Pre-tax

 

Charge

 

Tax

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

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

$

(1,527)

$

(307)

$

(1,258)

 

$

(2,803)

$

(1,091)

$

(1,714)

Noncontrolling interest

 

 

 

 

 

(1)

 

 

 

 

 

 

(25)

Pre-tax income/net income (loss) attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

to AIG

$

(1,527)

$

(307)

$

(1,259)

 

$

(2,803)

$

(1,091)

$

(1,739)

Changes in uncertain tax positions and other tax adjustments

 

 

 

(54)

 

54

 

 

 

 

(11)

 

11

Deferred income tax valuation allowance charges

 

 

 

(5)

 

5

 

 

 

 

2

 

(2)

Changes in fair value of securities used to hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

guaranteed living benefits

 

14

 

3

 

11

 

 

(26)

 

(9)

 

(17)

Changes in benefit reserves and DAC, VOBA and

 

 

 

 

 

 

 

 

 

 

 

 

 

SIA related to net realized capital gains (losses)

 

(76)

 

(16)

 

(60)

 

 

(84)

 

(29)

 

(55)

Unfavorable (favorable) prior year development and

 

 

 

 

 

 

 

 

 

 

 

 

 

related amortization changes ceded

 

 

 

 

 

 

 

 

 

 

 

 

 

under retroactive reinsurance agreements

 

605

 

128

 

477

 

 

(7)

 

(2)

 

(5)

(Gain) loss on extinguishment of debt

 

1

 

-

 

1

 

 

1

 

1

 

-

Net realized capital losses(a)

 

524

 

127

 

397

 

 

922

 

316

 

606

Noncontrolling interest on

 

 

 

 

 

 

 

 

 

 

 

 

 

net realized capital losses

 

 

 

 

 

(1)

 

 

 

 

 

 

1

Loss from discontinued operations

 

 

 

 

 

39

 

 

 

 

 

 

1

(Income) loss from divested businesses

 

(2)

 

(1)

 

(1)

 

 

13

 

7

 

6

Non-operating litigation reserves and settlements

 

5

 

2

 

3

 

 

-

 

-

 

-

Net loss reserve discount (benefit) charge

 

(86)

 

(18)

 

(68)

 

 

48

 

20

 

28

Pension expense related to a one-time lump sum

 

 

 

 

 

 

 

 

 

 

 

 

 

payment to former employees

 

-

 

-

 

-

 

 

49

 

16

 

33

Integration and transaction costs associated with acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

businesses

 

91

 

19

 

72

 

 

-

 

-

 

-

Restructuring and other costs

 

35

 

6

 

29

 

 

31

 

10

 

21

Adjusted pre-tax income/Adjusted after-tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 loss 

$

(416)

$

(116)

$

(301)

 

$

(1,856)

$

(770)

$

(1,111)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

895.2

 

 

 

 

 

 

908.7

Income (loss) per common share attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

to AIG (diluted)

 

 

 

 

$

(1.41)

 

 

 

 

 

$

(1.91)

Adjusted after-tax income (loss) per

 

 

 

 

 

 

 

 

 

 

 

 

 

common share attributable to AIG (diluted)(b)

 

 

 

 

$

(0.34)

 

 

 

 

 

$

(1.22)

AIG | Third Quarter 2018 Form 10-Q95

*


TABLE OF CONTENTS

ITEM 2 | Consolidated Results of Operations

Nine Months Ended September 30,

2018

 

2017

 

 

 

 

Total Tax

 

 

 

 

 

 

Total Tax

 

 

 

 

 

 

(Benefit)

 

After

 

 

 

 

(Benefit)

 

After

(in millions, except per share data)

 

Pre-tax

 

Charge

 

Tax

 

 

Pre-tax

 

Charge

 

Tax

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

 

 

 

 

 

 

 

 

 

 

 

 

 

noncontrolling interests

$

952

$

291

$

623

 

$

591

$

(18)

$

610

Noncontrolling interest

 

 

 

 

 

(7)

 

 

 

 

 

 

(34)

Pre-tax income/net income (loss) attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

to AIG

$

952

$

291

$

616

 

$

591

$

(18)

$

576

Changes in uncertain tax positions and other tax adjustments

 

 

 

(53)

 

53

 

 

 

 

(27)

 

27

Deferred income tax valuation allowance charges

 

 

 

(42)

 

42

 

 

 

 

23

 

(23)

Changes in fair value of securities used to hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

guaranteed living benefits

 

127

 

27

 

100

 

 

(117)

 

(41)

 

(76)

Changes in benefit reserves and DAC, VOBA and

 

 

 

 

 

 

 

 

 

 

 

 

 

SIA related to net realized capital gains (losses)

 

(46)

 

(10)

 

(36)

 

 

(195)

 

(68)

 

(127)

Unfavorable (favorable) prior year development and

 

 

 

 

 

 

 

 

 

 

 

 

 

related amortization changes ceded

 

 

 

 

 

 

 

 

 

 

 

 

 

under retroactive reinsurance agreements

 

607

 

128

 

479

 

 

258

 

91

 

167

(Gain) loss on extinguishment of debt

 

10

 

2

 

8

 

 

(4)

 

(1)

 

(3)

Net realized capital losses(a)

 

388

 

97

 

291

 

 

1,106

 

401

 

705

Noncontrolling interest on

 

 

 

 

 

 

 

 

 

 

 

 

 

net realized capital losses

 

 

 

 

 

(2)

 

 

 

 

 

 

6

(Income) loss from discontinued operations

 

 

 

 

 

40

 

 

 

 

 

 

(7)

(Income) loss from divested businesses

 

(35)

 

(8)

 

(27)

 

 

173

 

41

 

132

Non-operating litigation reserves and settlements

 

30

 

7

 

23

 

 

(86)

 

(30)

 

(56)

Net loss reserve discount (benefit) charge

 

(305)

 

(64)

 

(241)

 

 

283

 

101

 

182

Pension expense related to a one-time lump sum

 

 

 

 

 

 

 

 

 

 

 

 

 

payment to former employees

 

-

 

-

 

-

 

 

50

 

17

 

33

Integration and transaction costs associated with acquired

 

 

 

 

 

 

 

 

 

 

 

 

 

businesses

 

91

 

19

 

72

 

 

-

 

-

 

-

Restructuring and other costs

 

259

 

54

 

205

 

 

259

 

90

 

169

Adjusted pre-tax income/Adjusted after-tax

 

 

 

��

 

 

 

 

 

 

 

 

 

 income 

$

2,078

$

448

$

1,623

 

$

2,318

$

579

$

1,705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding

 

 

 

 

 

916.8

 

 

 

 

 

 

961.3

Income (loss) per common share attributable

 

 

 

 

 

 

 

 

 

 

 

 

 

to AIG (diluted)

 

 

 

 

$

0.67

 

 

 

 

 

$

0.60

Adjusted after-tax income (loss) per

 

 

 

 

 

 

 

 

 

 

 

 

 

common share attributable to AIG (diluted)

 

 

 

 

$

1.77

 

 

 

 

 

$

1.77

(a)  Includes all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for non-qualifying (economic) hedging or for asset replication.

(b)  For the three-month periodperiods ended September 30, 2018 and 2017, because we reported a net losslosses and an after-tax operating loss,losses, all common stock equivalents are anti-dilutive and are therefore excluded from the calculation of diluted shares and diluted per share amounts. The shares excluded from these calculations were 13,538,168 and 22,459,868 shares.shares, respectively.

96AIG | Third Quarter 20172018 Form 10-Q89


TABLE OF CONTENTS

ITEM 2 | Consolidated Results of Operations

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

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

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

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

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

an increase in net realized capital losses reflecting:

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

higher impairments on investments in life settlements.

Partially offset by:

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

These decreases were partially offset by:

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

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

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

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

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

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

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

an increase in net realized capital losses reflecting:

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

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

Partially offset by:

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

lower other-than-temporary impairments.

These decreases were partially offset by:

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

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

higher Legacy Portfolio fair value gains on certain investments; and 

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

AIG | Third Quarter 2017 Form 10-Q90 


TABLE OF CONTENTS 

 

ITEM 2 | Consolidated Results of Operations

 

QUARTERLY pre-tax income Comparison for 2018 and 2017

Pre-tax loss decreased in the three-month period ended September 30, 2018 compared to the same period in 2017 primarily due to:

lower policyholder benefits and losses incurred driven by significantly lower catastrophe losses and lower unfavorable prior year loss reserve development, as well as lower severe losses; and

lower net realized capital losses due to

Life and Retirement guaranteed living benefits, net of hedges, which reflected lower net realized capital losses in the three-month period ended September 30, 2018 compared to the three-month period ended September 30, 2017, primarily due to changes in movement in the non-performance or “own credit” risk adjustment (NPA), which are 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 by:

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

higher general operating and other expenses due to the acquisition of Validus, business growth and continued investments in business platforms.

yEAR-TO-DATE pre-tax income Comparison for 2018 and 2017

Pre-tax income increased in the nine-month period ended September 30, 2018 compared to the same period in 2017 primarily due to:

lower policyholder benefits and losses incurred driven by significantly lower catastrophe losses and lower unfavorable prior year loss reserve development, partially offset by higher severe losses;

lower net realized capital losses due to:

Life and Retirement guaranteed living benefits, net of hedges, which reflected lower net realized capital losses in the nine-month period ended September 30, 2018 compared to the nine-month period ended September 30, 2017, primarily due to changes in movement in the NPA, which are 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); 

a gain on the sale of our investment in Castle Holdings’ aircraft assets in the nine-month period ended September 30, 2018; and

gains on sale of divested businesses in the nine-month period ended September 30, 2018 compared to losses on sale of divested businesses in the nine-month period ended September 30, 2017. The nine-month period ended September 30, 2017 included losses on the agreements to sell Fuji Life to FWD Group and certain insurance operations and assets to Fairfax.

Partially offset by:

lower investment returns primarily driven by lower hedge fund performance, a decline in income from securities for which the fair value option was elected as a result of credit spread widening and rising interest rates, losses on our fair value option equities portfolio, and lower invested assets resulting from the funding of the adverse development reinsurance agreement with NICO late in the first quarter of 2017;

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

higher general operating and other expenses due to the acquisition of Validus, business growth and continued investments in business platforms.

AIG | Third Quarter 2018 Form 10-Q97


TABLE OF CONTENTS

ITEM 2 | Consolidated Results of Operations

U.S. Tax Reform Overview

On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act).  The Tax Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG and the insurance industry.  At December 31, 2017, we originally recorded a provisional estimate of income tax effects of the Tax Act of $6.7 billion, including a tax charge of $6.7 billion attributable to the reduction in the U.S. corporate income tax rate and tax benefit of $38 million related to the deemed repatriation tax. Our provisional estimate of $6.7 billion was based in part on a reasonable estimate of the effects of the statutory income tax rate reduction on existing deferred tax balances and of certain provisions of the Tax Act. We recently filed our 2017 consolidated U.S. income tax return and have substantially completed our review of the primary impact of the Tax Act provisions on our deferred taxes. As a result, we consider the accounting for the effects of the rate change on deferred tax balances to be complete and no material measurement period changes were recorded for this item. As further guidance is issued by the U.S. tax authority, any resulting changes in our estimates will be treated in accordance with the relevant accounting guidance.

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.   

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 formal guidance from the U.S. tax authority is still pending. 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. 

In our assessment of the realizability of our deferred tax assets, we made certain assumptions related to the impact of the Tax Act on our future taxable income.  Because we have made provisional estimates related to the impact of certain aspects of the Tax Act on our future taxable income, corresponding determination of the need for a valuation allowance is also provisional. While we have substantively completed our review of the primary impact of the Tax Act provisions on our deferred tax balances, we are still analyzing the complex interplay of the new tax rules with the rules governing the utilization of our tax attributes. We expect to finalize this analysis and to complete our accounting within the prescribed measurement period. Accordingly, as of September 30, 2018, these estimates remain provisional.

As of September 30, 2018, we have not fully completed our accounting for the tax effects of the Tax Act. 

Repatriation Assumptions

As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed are subject to a one-time deemed repatriation tax. Going forward, foreign earnings not taxed as part of the one-time deemed repatriation (or otherwise taxed currently under the GILTI or subpart F regimes) will generally be exempt from U.S. tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings.  For the nine-month period ended September 30, 2018, 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.

Deemed Repatriation Tax & Impact on Liquidity

The Tax Act requires companies to pay a one-time transition tax, net of tax credits, related to applicable foreign taxes paid, on previously untaxed current and accumulated earnings and profits (E&P) of certain of our foreign subsidiaries.  We were able to reasonably estimate the deemed repatriation tax and originally recorded a provisional estimated tax benefit of $38 million at December 31, 2017. We have completed our review of post-1986 E&P computations of our foreign affiliates. Incorporating additional IRS guidance issued with respect to the deemed repatriation tax, as well as the relevant basis adjustments, we recognized a measurement period tax charge of $62 million. The effect of deemed repatriation tax, which has now been determined to be complete, resulted in a liability of $24 million.

98AIG | Third Quarter 2018 Form 10-Q


TABLE OF CONTENTS

ITEM 2 | Consolidated Results of 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 September 30, 2018, the annual effective tax rate includes the tax effects of significant catastrophe losses recognized in the third quarter of 2018.

Income Tax expense analysis

For the three-month period ended September 30, 20172018, the effective tax rate on loss from continuing operations was 38.920.1 percent. The effective tax rate on loss from continuing operations differs from the statutory tax rate of 21 percent primarily due to tax charges related to income in our foreign operations taxed at statutory tax rates higher than 21 percent, additional U.S. taxes imposed on income of our foreign subsidiaries under international provisions of the Tax Act, valuation allowance activity related to certain foreign subsidiaries and 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. As noted above, we also recorded a measurement period tax charge of $62 million related to the effects of the deemed repatriation tax.

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

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

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

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

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

AIG | Third Quarter 20172018 Form 10-Q          9199


TABLE OF CONTENTS 

 

ITEM 2 | Consolidated Results ofBusiness Segment Operations

 

Business Segment Operations

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

CommercialGeneral Insurance consists of two modules: Liabilityoperating segments: North America and Financial LinesInternational. Life and Property and Special Risks. Consumer InsuranceRetirement consists of four modules:operating segments: Group Retirement, Individual Retirement, Life Insurance and Personal Insurance.Institutional Markets. Other Operations consists of businesses and items not allocated to our other businesses, which are primarily AIG Parent, Institutional Markets, United GuarantyBlackboard and Fuji Life.Life, which was sold on April 30, 2017.  Our Legacy Portfolio consists of our Legacy PropertyLife and CasualtyRetirement Run-Off Insurance Lines, Legacy LifeGeneral Insurance Run-Off Lines, and Legacy Investments. Effective February 2018, Fortitude Re is included in our Legacy Portfolio.

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

Three Months Ended

 

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

 

September 30,

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

 

2018

 

2017

 

 

2018

 

2017

Core business:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Insurance

 

 

 

 

 

 

 

 

 

Liability and Financial Lines

$

(257)

$

948

 

$

903

$

2,332

Property and Special Risks

 

(2,605)

 

(263)

 

 

(2,200)

 

(44)

Commercial Insurance

 

(2,862)

 

685

 

 

(1,297)

 

2,288

Consumer Insurance

 

 

 

 

 

 

 

 

 

General Insurance

 

 

 

 

 

 

 

 

 

North America

$

(160)

$

(2,193)

 

$

567

$

(644)

International

 

(665)

 

(740)

 

 

(314)

 

(182)

General Insurance

 

(825)

 

(2,933)

 

 

253

 

(826)

Life and Retirement

 

 

 

 

 

 

 

 

 

Individual Retirement

 

718

 

920

 

 

1,815

 

1,727

 

393

 

718

 

 

1,354

 

1,815

Group Retirement

 

249

 

214

 

 

758

 

670

 

242

 

249

 

 

774

 

758

Life Insurance

 

112

 

(54)

 

 

272

 

(27)

 

16

 

112

 

 

243

 

272

Personal Insurance

 

(71)

 

148

 

 

471

 

510

Consumer Insurance

 

1,008

 

1,228

 

 

3,316

 

2,880

Institutional Markets

 

62

 

79

 

 

196

 

204

Life and Retirement

 

713

 

1,158

 

 

2,567

 

3,049

Other Operations

 

(287)

 

(164)

 

 

(835)

 

(565)

 

(417)

 

(366)

 

 

(1,133)

 

(1,039)

Consolidations, eliminations and other adjustments

 

(1)

 

(6)

 

 

75

 

-

 

29

 

(1)

 

 

28

 

75

Total Core

 

(2,142)

 

1,743

 

 

1,259

 

4,603

 

(500)

 

(2,142)

 

 

1,715

 

1,259

Legacy Portfolio

 

286

 

(99)

 

 

1,059

 

(94)

 

84

 

286

 

 

363

 

1,059

Pre-tax operating income (loss)

$

(1,856)

$

1,644

 

$

2,318

$

4,509

Adjusted pre-tax income (loss)

$

(416)

$

(1,856)

 

$

2,078

$

2,318

100AIG | Third Quarter 20172018 Form 10-Q92 


TABLE OF CONTENTS 

 

ITEM 2 | Business Segment Operations  | CommercialGeneral Insurance 

 

Commercial Insurance

General Insurance

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

PRODUCTS AND DISTRIBUTION


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

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

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

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

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

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

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

Distribution

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

BUSINESS STRATEGY 

Customer: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 provide commercial insurance solutionsoptimize our reinsurance program to manage volatility and protect the full spectrumbalance sheet from tail events and unpredictable net losses in support of enterprises — from large, multinational,our profitable growth objectives.

Underwriting Excellence: Empower and mid-sized companies to small businesses, entrepreneurs,increase accountability of the underwriter and non-profit organizations across the globe. We expect that investments in underwriting, claimsservices, client risk services, science and data will continue to differentiate us fromour peersintegrate underwriting, claims and drive a superior clientexperience. 

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

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

AIG | Third Quarter 20172018 Form 10-Q          93101


TABLE OF CONTENTS 

 

ITEM 2 | Business Segment Operations  | CommercialGeneral Insurance 

 

COMPETITION and challenges

Operating in a highly competitive industry, CommercialGeneral Insurance competes against several hundred companies, specialty specialty insurance organizations, mutual companies and other underwriting organizations in the U.S. In international markets, we compete for business with the foreign insurance operations of large global insurance groups and local companies in specific market areas and product types. Insurance companies compete through a combination of risk acceptance criteria, product pricing, service and terms and conditions. CommercialGeneral 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 corporations to local  businesses and individuals. Our clients benefit from our substantial underwriting expertise.expertise.

Our challenges include:

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

      long-tail Commercial Lines exposures that create added challenges tocomplexity in pricing and risk management;

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

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

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

OUTLOOK—INDUSTRY AND ECONOMIC FACTORS

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

Liability and Financial LinesGeneral Insurance – North America

The Liability and Financial

Commercial Lines markets remainover recent years has experienced challenging market conditions, with widespread excess capacity continuing to negatively impactincreasing competition and suppressing rates across multiple classes of business. Following the rate environment. Despite this,significant catastrophic events of 2017 (including Hurricanes Harvey, Irma and Maria), rates have increased across certain loss affected classes, in particular for Property lines. Further, we continue to achieve positive rate increases in challenged areasacross a number of the portfolio, particularly for directors and officers liability (D&O) within U.S. Financial lines and classes of business as a result of our disciplined underwriting strategy and focus on risk selection. We note a trend of higher loss cost inflation evident within Casualty segments, in particular Excess Casualty and Commercial Auto. We continue to achieve growth in several of our Commercial Lines high margin businesses, although the more broadlyprofitable segments remain highly competitive.

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

General Insurance – International

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

The Commercial Lines market continues to be highly competitive, with increased pressure on rates, particularly in Europe and the Asia Pacific region, due to increased market capacity and ample availability of capital. Despite this, we are continuing to grow our most profitable segments across U.S. Casualty Lines. Within U.S. Casualty, we expect continued execution ofall regions and are maintaining market leadership in key developed and developing markets. We are maintaining our underwriting discipline and continuing our risk selection strategy alongside disciplined underwriting to allow us to achieve rate increases through the remainder of 2017. We have continued to observe higher loss cost trends, which are impacting not only the primary books, but also having a leveraged impactimprove profitability.

Personal Insurance focuses on excess layers. Liabilityindividual customers, as well as group and Financial Linescorporate clients. Although market competition within Personal Insurance has large international exposures within the Commercial Insurance portfolio and will therefore remain sensitive to volatility in foreign currencies.

Property and Special Risks

In the first nine months of 2017, Property and Special Risks experienced growth in certain of our targeted lines of business, including Middle Markets; however,increased, we faced certain challenges in other lines driven by the competitive market environment. Rates in more commoditized lines of business such as U.S. excess and surplus continue to be unsatisfactorybenefit from the underwriting quality, portfolio diversity, and we intend to continue to reduce our net premiums writtenlow volatility of the short-tailed risk in these areas. Property premiums declinedbusiness lines.  We expect our newly formed entity in Japan – AIG Sonpo – to provide the necessary scale and platform to compete more efficiently in the first nine monthsJapanese market.  Outside of 2017, primarily due to reductions in the portfolio driven by actions to address accounts with inadequate prices and unfavorable terms and conditions.

Overall, Property and Special Risks experienced rate pressure in the first nine months of 2017; however, recent hurricane and earthquake activity is expected to positively impact market pricing. Property and Special RisksJapan, Personal Insurance continues to differentiate its underwriting capacity from its peers by leveraging its global footprint, diverse product offering, risk engineering expertiseinvest selectively in international markets, which we believe have higher potential for sustainable profitability and significant underwriting experience.lower volatility across the entire portfolio.

102AIG | Third Quarter 20172018 Form 10-Q94 


TABLE OF CONTENTS 

 

ITEM 2 | Business Segment Operations  | CommercialGeneral Insurance 

 

COMMERCIALGeneral INSURANCE RESULTS

Three Months Ended September 30,

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

3,815

$

4,475

 

(15)

%

 

$

11,286

$

13,908

 

(19)

%

Net investment income

 

777

 

941

 

(17)

 

 

 

2,522

 

2,350

 

7

 

Total operating revenues

 

4,592

 

5,416

 

(15)

 

 

 

13,808

 

16,258

 

(15)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

6,426

 

3,455

 

86

 

 

 

11,868

 

9,958

 

19

 

Amortization of deferred policy acquisition costs

 

423

 

514

 

(18)

 

 

 

1,273

 

1,576

 

(19)

 

General operating and other expenses(a)

 

605

 

762

 

(21)

 

 

 

1,964

 

2,436

 

(19)

 

Total operating expenses

 

7,454

 

4,731

 

58

 

 

 

15,105

 

13,970

 

8

 

Pre-tax operating income (loss)

$

(2,862)

$

685

 

NM

%

 

$

(1,297)

$

2,288

 

NM

%

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2018

 

2017

 

Change

 

 

 

2018

 

2017

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

6,835

$

6,577

 

4

%

 

$

19,983

$

19,546

 

2

%

Decrease in unearned premiums(a)

 

246

 

61

 

303

 

 

 

351

 

105

 

234

 

Net premiums earned

 

7,081

 

6,638

 

7

 

 

 

20,334

 

19,651

 

3

 

Losses and loss adjustment expenses incurred(b)

 

6,276

 

8,240

 

(24)

 

 

 

15,081

 

16,652

 

(9)

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

1,223

 

933

 

31

 

 

 

3,381

 

2,802

 

21

 

Other acquisition expenses

 

313

 

344

 

(9)

 

 

 

995

 

1,082

 

(8)

 

Total acquisition expenses

 

1,536

 

1,277

 

20

 

 

 

4,376

 

3,884

 

13

 

General operating expenses

 

995

 

917

 

9

 

 

 

2,943

 

2,750

 

7

 

Underwriting income (loss)(a)

 

(1,726)

 

(3,796)

 

55

 

 

 

(2,066)

 

(3,635)

 

43

 

Net investment income

 

901

 

863

 

4

 

 

 

2,319

 

2,809

 

(17)

 

Adjusted pre-tax income (loss)

$

(825)

$

(2,933)

 

72

%

 

$

253

$

(826)

 

NM

%

Loss ratio(b)

 

168.4

 

77.3

 

91.1

 

105.2

 

71.5

 

33.7

 

 

88.6

 

124.1

 

(35.5)

 

 

74.2

 

84.7

 

(10.5)

 

Acquisition ratio

 

14.5

 

15.3

 

(0.8)

 

15.2

 

15.8

 

(0.6)

 

 

21.7

 

19.2

 

2.5

 

 

21.5

 

19.8

 

1.7

 

General operating expense ratio

 

12.5

 

13.2

 

(0.7)

 

13.5

 

13.0

 

0.5

 

 

14.1

 

13.8

 

0.3

 

 

14.5

 

14.0

 

0.5

 

Expense ratio

 

27.0

 

28.5

 

(1.5)

 

28.7

 

28.8

 

(0.1)

 

 

35.8

 

33.0

 

2.8

 

 

36.0

 

33.8

 

2.2

 

Combined ratio(b)

 

195.4

 

105.8

 

89.6

 

133.9

 

100.3

 

33.6

 

 

124.4

 

157.1

 

(32.7)

 

 

110.2

 

118.5

 

(8.3)

 

Adjustments for accident year loss ratio, as adjusted

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(71.2)

 

(5.6)

 

(65.6)

 

(27.5)

 

(5.9)

 

(21.6)

 

 

(22.0)

 

(45.4)

 

23.4

 

 

(10.3)

 

(17.4)

 

7.1

 

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

 

(22.1)

 

(7.0)

 

(15.1)

 

(8.5)

 

(2.4)

 

(6.1)

 

 

(2.7)

 

(12.7)

 

10.0

 

 

(0.2)

 

(4.8)

 

4.6

 

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

 

-

 

-

 

NM

 

(0.3)

 

-

 

(0.3)

 

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

 

(0.3)

 

-

 

(0.3)

 

 

0.3

 

(0.2)

 

0.5

 

Accident year loss ratio, as adjusted

 

75.1

 

64.7

 

10.4

 

68.9

 

63.2

 

5.7

 

 

63.6

 

66.0

 

(2.4)

 

 

64.0

 

62.3

 

1.7

 

Accident year combined ratio, as adjusted

 

102.1

 

93.2

 

8.9

 

97.6

 

92.0

 

5.6

 

 

99.4

 

99.0

 

0.4

 

 

100.0

 

96.1

 

3.9

 

(a) Includes general operating expenses, commissions and other acquisition expenses.In the nine-month period ended September 30, 2018, the Underwriting loss includes an additional $115 million of net premiums earned for multi-year policies related to earlier accident years.

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

Three Months Ended September 30,

Three Months

Ended September 30,

 

Percentage

Change in

 

Nine Months

Ended September 30,

 

Percentage

Change in

(in millions)

 

2017

 

2016

 

U.S. dollars

 

 

Original currency

 

 

 

2017

 

2016

 

U.S. dollars

 

 

Original currency

 

Liability and Financial Lines

$

2,175

$

2,389

 

(9)

%

 

(9)

%

 

$

6,476

$

7,219

 

(10)

%

 

(9)

%

Property and Special Risks

 

1,595

 

1,965

 

(19)

 

 

(19)

 

 

 

4,749

 

6,007

 

(21)

 

 

(20)

 

Total net premiums written

$

3,770

$

4,354

 

(13)

%

 

(13)

%

 

$

11,225

$

13,226

 

(15)

%

 

(14)

%

 

Three Months

Ended September 30,

 

Percentage Change in

 

Nine Months

Ended September 30,

 

Percentage Change in

(in millions)

 

2018

 

2017

 

U.S. dollars

 

Original Currency

 

 

 

2018

 

2017

 

U.S. dollars

 

Original Currency

 

North America(a)

$

3,164

$

2,942

 

8

%

8

%

 

$

8,439

$

8,390

 

1

%

1

%

International(a)(b)

 

3,671

 

3,635

 

1

 

2

 

 

 

11,544

 

11,156

 

3

 

-

 

Total net premiums written

$

6,835

$

6,577

 

4

%

5

%

 

$

19,983

$

19,546

 

2

%

-

%

(a)As a result of the Validus acquisition, the three-month and nine-month periods ended September 30, 2018, include additional Net premiums written for North America and International of $275 million and $165 million respectively.

(b)As a result of the merger of AIUI Japan and Fuji Fire and Marine Insurance Company (Fuji), Fuji’s fiscal reporting period was conformed to that of AIUI Japan (Japan Merger Impact).  Therefore, the nine-month period ended September 30, 2018 includes approximately $300 million for two additional months of Net premiums written. This also resulted in Fuji’s annual policy renewal period being reported in the second quarter of 2018 compared to the third quarter of the prior year.

AIG | Third Quarter 20172018 Form 10-Q          95103


TABLE OF CONTENTS 

 

ITEM 2 | Business Segment Operations  | CommercialGeneral Insurance 

 

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

Catastrophes(b)

# of

 

 

 

 

 

 

 

 

 

 

 

# of

 

 

North

 

 

 

 

(in millions)

Events

 

 

U.S.

 

Japan

 

Europe

 

Other

 

Total

Events

 

 

America

 

International

 

Total

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Flooding

1

 

$

4

$

106

$

110

Windstorms and hailstorms

11

 

 

754

 

672

 

1,426

Wildfire

2

 

 

26

 

-

 

26

Earthquakes

-

 

 

-

 

(3)

 

(3)

Volcanic eruptions

-

 

 

7

 

1

 

8

Total catastrophe-related charges

14

 

$

791

$

776

$

1,567

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

-

(c)

$

996

$

-

$

87

$

48

$

1,131

-

(c)

$

1,039

$

172

$

1,211

Windstorms and hailstorms

7

 

 

1,380

 

9

 

111

 

58

 

1,558

7

 

 

1,235

 

529

 

1,764

Earthquakes

1

 

 

26

 

-

 

10

 

(6)

 

30

1

 

 

1

 

40

 

41

Total catastrophe-related charges

8

 

$

2,402

$

9

$

208

$

100

$

2,719

8

 

$

2,275

$

741

$

3,016

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

Flooding

1

 

$

97

$

-

$

(10)

$

-

$

87

1

 

$

4

$

106

$

110

Windstorms and hailstorms

7

 

 

103

 

19

 

10

$

2

 

134

19

 

 

1,126

 

708

 

1,834

Wildfire

-

 

 

11

 

-

 

1

 

9

 

21

3

 

 

37

 

-

 

37

Earthquakes

-

 

 

21

 

(11)

 

(1)

 

(2)

 

7

2

 

 

13

 

81

 

94

Other

-

 

 

-

 

-

 

-

 

3

 

3

Volcanic eruptions

1

 

 

17

 

1

 

18

Total catastrophe-related charges

8

 

$

232

$

8

$

-

$

12

$

252

26

 

$

1,197

$

896

$

2,093

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

-

(c)

$

996

$

-

$

87

$

48

$

1,131

-

(c)

$

1,039

$

172

$

1,211

Windstorms and hailstorms

17

 

 

1,694

 

9

 

115

 

58

 

1,876

17

 

 

1,573

 

533

 

2,106

Tropical cyclone

1

 

 

20

 

-

 

-

 

41

 

61

1

 

 

-

 

66

 

66

Earthquakes

1

 

 

26

 

-

 

10

 

(6)

 

30

1

 

 

1

 

40

 

41

Total catastrophe-related charges

19

 

$

2,736

$

9

$

212

$

141

$

3,098

19

 

$

2,613

$

811

$

3,424

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

3

 

$

134

$

-

$

34

$

-

$

168

Windstorms and hailstorms

18

 

 

413

 

21

 

10

 

8

 

452

Wildfire

1

 

 

48

 

-

 

1

 

33

 

82

Earthquakes

2

 

 

68

 

5

 

1

 

16

 

90

Other

1

 

 

-

 

-

 

32

 

3

 

35

Total catastrophe-related charges

25

 

$

663

$

26

$

78

$

60

$

827

(a)  Geography shownGeography: North America primarily includes insurance businesses in the table represents whereUnited States, Canada and Bermuda. International includes insurance businesses in Japan, the ultimate liability resides, after intercompanyUnited Kingdom, Europe, the Asia Pacific region, Latin America, Puerto Rico, Australia, the Middle East and Africa. Geography results are presented before consideration of internal reinsurance agreements, and is not necessarily indicative of where the catastrophe or severe loss events have occurred.  This presentation follows our geography modules.  agreements.For further discussion on our geography modules seeMD&A – Executive Summary

(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. Catastropheseach and also include certain man-made events, such as terrorism and civil disorders that meetexceed the $10 million threshold.

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

Severe Losses(d)

# of

 

 

 

 

 

 

 

 

 

 

# of

 

North

 

 

 

 

(in millions)

Events

 

U.S.

 

Japan

 

Europe

 

Other

 

Total

Events

 

America

 

International

 

Total

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018(e)

9

$

88

$

65

$

153

2017

12

$

164

$

-

$

48

$

20

$

232

13

$

111

$

132

$

243

2016

7

$

54

$

-

$

36

$

5

$

95

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018(e)

34

$

284

$

297

$

581

2017

20

$

242

$

-

$

125

$

30

$

397

22

$

216

$

209

$

425

2016

17

$

173

$

-

$

129

$

31

$

333

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

(e)  The amounts presented for the three- and nine-month periods ended September 30, 2018, are net of $53 million of recoveries, $13 million in North America and $40 million in International, under aggregate reinsurance contracts. Eligible incurred losses under these agreements exceeded the applicable aggregate attachment point in the third quarter of 2018. There were no aggregate recoveries included in the amounts presented for 2017.

104AIG | Third Quarter 20172018 Form 10-Q96 


TABLE OF CONTENTS 

 

ITEM 2 | Business Segment Operations  | CommercialGeneral Insurance 

 

Liability and Financial LinesNorth america Results

Nine Months Ended September 30,

Three Months Ended September 30,

 

Nine Months Ended September 30,

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

 

2018

 

2017

 

Change

 

 

 

2018

 

2017

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

2,175

$

2,389

 

(9)

%

 

$

6,476

$

7,219

 

(10)

%

$

3,164

$

2,942

 

8

%

 

$

8,439

$

8,390

 

1

%

Decrease in unearned premiums

 

70

 

221

 

(68)

 

 

36

 

951

 

(96)

 

(Increase) decrease in unearned premiums(a)

 

138

 

(55)

 

NM

 

 

447

 

338

 

32

 

Net premiums earned

 

2,245

 

2,610

 

(14)

 

 

6,512

 

8,170

 

(20)

 

 

3,302

 

2,887

 

14

 

 

8,886

 

8,728

 

2

 

Losses and loss adjustment expenses incurred(b)

 

2,538

 

1,768

 

44

 

 

5,783

 

5,643

 

2

 

 

3,264

 

5,053

 

(35)

 

 

7,532

 

9,382

 

(20)

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

215

 

242

 

(11)

 

 

624

 

862

 

(28)

 

 

534

 

307

 

74

 

 

1,322

 

970

 

36

 

Other acquisition expenses

 

77

 

76

 

1

 

 

251

 

234

 

7

 

 

92

 

127

 

(28)

 

 

348

 

402

 

(13)

 

Total acquisition expenses

 

292

 

318

 

(8)

 

 

875

 

1,096

 

(20)

 

 

626

 

434

 

44

 

 

1,670

 

1,372

 

22

 

General operating expenses

 

275

 

345

 

(20)

 

 

882

 

1,047

 

(16)

 

 

399

 

340

 

17

 

 

1,126

 

1,035

 

9

 

Underwriting income (loss)

 

(860)

 

179

 

NM

 

 

(1,028)

 

384

 

NM

 

Underwriting loss(a)

 

(987)

 

(2,940)

 

66

 

 

(1,442)

 

(3,061)

 

53

 

Net investment income

 

603

 

769

 

(22)

 

 

1,931

 

1,948

 

(1)

 

 

827

 

747

 

11

 

 

2,009

 

2,417

 

(17)

 

Pre-tax operating income (loss)

$

(257)

$

948

 

NM

%

 

$

903

$

2,332

 

(61)

%

Adjusted pre-tax income (loss)

$

(160)

$

(2,193)

 

93

%

 

$

567

$

(644)

 

NM

%

Loss ratio(a)(b)

 

113.1

 

67.7

 

45.4

 

 

 

88.8

 

69.1

 

19.7

 

 

98.8

 

175.0

 

(76.2)

 

84.8

 

107.5

 

(22.7)

 

Acquisition ratio

 

13.0

 

12.2

 

0.8

 

 

 

13.4

 

13.4

 

-

 

 

19.0

 

15.0

 

4.0

 

18.8

 

15.7

 

3.1

 

General operating expense ratio

 

12.2

 

13.2

 

(1.0)

 

 

 

13.5

 

12.8

 

0.7

 

 

12.1

 

11.8

 

0.3

 

12.7

 

11.9

 

0.8

 

Expense ratio

 

25.2

 

25.4

 

(0.2)

 

 

 

26.9

 

26.2

 

0.7

 

 

31.1

 

26.8

 

4.3

 

31.5

 

27.6

 

3.9

 

Combined ratio(a)(b)

 

138.3

 

93.1

 

45.2

 

 

 

115.7

 

95.3

 

20.4

 

 

129.9

 

201.8

 

(71.9)

 

116.3

 

135.1

 

(18.8)

 

Adjustments for accident year loss ratio, as adjusted

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses(b) and reinstatement premiums

 

(0.9)

 

(0.2)

 

(0.7)

 

 

 

(0.3)

 

(0.1)

 

(0.2)

 

Catastrophe losses and reinstatement premiums

 

(23.7)

 

(78.8)

 

55.1

 

(13.4)

 

(29.9)

 

16.5

 

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

 

(34.1)

 

0.5

 

(34.6)

 

 

 

(13.5)

 

(1.0)

 

(12.5)

 

 

(4.8)

 

(19.0)

 

14.2

 

(0.5)

 

(5.9)

 

5.4

 

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

 

-

 

-

 

NM

 

 

 

(0.5)

 

-

 

(0.5)

 

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

 

(0.5)

 

-

 

(0.5)

 

0.8

 

(0.3)

 

1.1

 

Accident year loss ratio, as adjusted

 

78.1

 

68.0

 

10.1

 

 

 

74.5

 

68.0

 

6.5

 

 

69.8

 

77.2

 

(7.4)

 

71.7

 

71.4

 

0.3

 

Accident year combined ratio, as adjusted

 

103.3

 

93.4

 

9.9

 

 

 

101.4

 

94.2

 

7.2

 

 

100.9

 

104.0

 

(3.1)

 

103.2

 

99.0

 

4.2

 

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

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

Business and Financial Highlights

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

Net investment income reflected lower interest and dividends in the three- and nine-month periods ended September 30, 2017, due to lower invested assets resulting from the first quarter 2017 funding of the adverse development reinsurance agreement with NICO.  In the nine-month period ended September 30, 2017,2018, the lowerUnderwriting loss includes an additional $115 million of net investment income was partially offset by higher income on alternative investments and gains on securities where we elected the fair value option.

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

AIG | Third Quarter 2017 Form 10-Q97


TABLE OF CONTENTS

ITEM 2 | Business Segment Operations| Commercial Insurance

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

Three Months Ended September 30,

(in millions)

Quarterly 2017 and 2016 Comparison

Pre-tax operating income decreased due to:

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

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

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

This decrease was partially offset by:

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

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

Liability and Financial Lines Pre-Tax Operating Income

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Pre-tax operating income decreased due to:

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

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

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

This decrease was partially offset by:

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

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

AIG | Third Quarter 2017 Form 10-Q98


TABLE OF CONTENTS

ITEM 2 | Business Segment Operations| Commercial Insurance

Liability and Financial Lines Net Premiums Written

Three Months Ended September 30,

(in millions)

Quarterly 2017 and 2016 Comparison

Net premiums written decreased primarily due to:

continued execution of our risk selection strategy in U.S. Casualty as we optimize our product portfolio; and

lower production primarily in D&O and M&A products within U.S. Financial Lines due to efforts to maintain underwriting discipline in the current competitive market environment.

Liability and Financial Lines Net Premiums Written

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Net premiums written decreased primarily due to:

continued execution of our risk selection strategy in U.S. Casualty as we optimize our product portfolio; and

lower production primarily in the U.S. due to efforts to maintain underwriting discipline in the current competitive market environment.

AIG | Third Quarter 2017 Form 10-Q99


TABLE OF CONTENTS

ITEM 2 | Business Segment Operations| Commercial Insurance

Liability and Financial Lines Combined Ratios

Three Months Ended September 30,

Quarterly 2017 and 2016 Comparison

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

The increase in the loss ratio was due to: 

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

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

This increase was slightly offset by a decrease in the expense ratio due to a lower general operating expense ratio that was almost entirely offset by a higher acquisition ratio.

* Excludes adjustmentpremiums earned for ceded premiums under reinsurance contractsmulti-year policies related to priorearlier accident years.

Liability and Financial Lines Combined Ratios

Nine Months Ended September 30,

Year-to-Date 2017 and 2016 Comparison

The increase in combined ratio reflected an increase in both the loss ratio and the expense ratio.

The increase in the loss ratio was due to: 

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

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

The increase in the expense ratio reflected a higher general operating expense ratio due to a decrease in net premiums earned reflecting portfolio optimization, which more than offset expense reductions.

* Excludes adjustment for ceded premiums under reinsurance contracts related to prior accident years.

AIG | Third Quarter 2017 Form 10-Q100


TABLE OF CONTENTS

ITEM 2 | Business Segment Operations| Commercial Insurance

Property and Special Risks Results

Three Months Ended September 30,

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

1,595

$

1,965

 

(19)

%

 

$

4,749

$

6,007

 

(21)

%

(Increase) decrease in unearned premiums

 

(25)

 

(100)

 

75

 

 

 

25

 

(269)

 

NM

 

Net premiums earned

 

1,570

 

1,865

 

(16)

 

 

 

4,774

 

5,738

 

(17)

 

Losses and loss adjustment expenses incurred

 

3,888

 

1,687

 

130

 

 

 

6,085

 

4,315

 

41

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

208

 

272

 

(24)

 

 

 

649

 

714

 

(9)

 

Other acquisition expenses

 

52

 

94

 

(45)

 

 

 

192

 

390

 

(51)

 

Total acquisition expenses

 

260

 

366

 

(29)

 

 

 

841

 

1,104

 

(24)

 

General operating expenses

 

201

 

247

 

(19)

 

 

 

639

 

765

 

(16)

 

Underwriting loss

 

(2,779)

 

(435)

 

NM

 

 

 

(2,791)

 

(446)

 

NM

 

Net investment income

 

174

 

172

 

1

 

 

 

591

 

402

 

47

 

Pre-tax operating loss

$

(2,605)

$

(263)

 

NM

%

 

$

(2,200)

$

(44)

 

NM

%

Loss ratio(a)

 

247.6

 

90.5

 

157.1

 

 

 

127.5

 

75.2

 

52.3

 

Acquisition ratio

 

16.6

 

19.6

 

(3.0)

 

 

 

17.6

 

19.2

 

(1.6)

 

General operating expense ratio

 

12.8

 

13.2

 

(0.4)

 

 

 

13.4

 

13.3

 

0.1

 

Expense ratio

 

29.4

 

32.8

 

(3.4)

 

 

 

31.0

 

32.5

 

(1.5)

 

Combined ratio(a)

 

277.0

 

123.3

 

153.7

 

 

 

158.5

 

107.7

 

50.8

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(172.0)

 

(13.3)

 

(158.7)

 

 

 

(64.6)

 

(14.3)

 

(50.3)

 

Prior year development

 

(4.9)

 

(17.3)

 

12.4

 

 

 

(1.7)

 

(4.5)

 

2.8

 

Accident year loss ratio, as adjusted

 

70.7

 

59.9

 

10.8

 

 

 

61.2

 

56.4

 

4.8

 

Accident year combined ratio, as adjusted

 

100.1

 

92.7

 

7.4

 

 

 

92.2

 

88.9

 

3.3

 

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

Business and Financial Highlights

PropertyThe North America General Insurance business is focused on making progress towards improved underwriting results and Special Risksefficiencies. This includes strengthening our talent base; ongoing investment in pricing and monitoring tools; continuous review of our risk appetite combined with enhanced focus on portfolio management and individual business strategy; and increased use of reinsurance.

Adjusted pre-tax operatingloss decreased in the three-month period ended September 30, 2018 compared to the same period in the prior year, primarily due to the lower loss ratio. The loss ratio decreased primarily due to lower catastrophe losses, lower unfavorable prior year loss reserve development and lower current accident year loss ratio, as adjusted.

We recorded adjusted pre-tax income decreasedin the nine-month period ended September 30, 2018 compared to an adjusted pre-tax loss in the same period in the prior year, primarily due to lower catastrophe losses and lower unfavorable prior year loss reserve development, partially offset by lower net investment income mainly due to lower investment returns on alternative investments.

For further discussion on prior year loss reserve developmentsee Insurance Reserves.

Net premiums written increased in the three- and nine-month periods ended September 30, 20172018 compared to the same periods in the prior year primarily due to higher catastrophe and severe losses, and an elevated current accident year loss ratio, as adjusted, primarilygrowth in U.S. and Europe commercial property. Property and Special Risks netPersonal Insurance, lower ceded premiums written decreased mainly in U.S. and Europe commercial property and in U.S. programs due to portfolio optimization and continued challenging market conditions. The sale of our interestdriven by changes in the Ascot business in the fourth quarter of 20162018 reinsurance programs and the changes made toinclusion of the Validus acquisition.

For a discussion of 2018 reinsurance programs see Part II, Item 7 Management's Discussion and Analysis of Financial Condition Results of Operation - Enterprise Risk Management in our 2017 catastrophe reinsurance program, specifically the large North American catastrophe reinsurance cover, also resulted in a decline in net premiums written. General operating expenses continued to decrease due to expense savings initiatives.

Net investment income reflected higher year-to-date income from alternative investments and gains on securities where we elected the fair value option compared to the prior year, which was partially offset in the nine-month period ended September 30, 2017 by lower interest and dividends due to portfolio rebalancing.Annual Report.

AIG | Third Quarter 20172018 Form 10-Q          101105


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ITEM 2 | Business Segment Operations  | CommercialGeneral Insurance 

 

Property and Special RisksNorth America Adjusted Pre-Tax Operating Income (Loss)Loss

Three Months Ended September 30,

(in millions)

Quarterly 20172018 and 20162017 Comparison

Pre-tax operating incomeAdjusted pre-tax loss decreased primarily due to:

      highersignificantly lower catastrophe losses driven by hurricanes Harvey, Irma and Maria, as well as other catastrophes including the recent Mexico earthquake; andlosses;

      a higherlower unfavorable prior year loss reserve development;

lower current accident year loss ratio, as adjusted as discussed in the U.S.Combined Ratios section below; and Europe primarily from higher severe losses in commercial property.

The decrease was partially offset by:

      lower unfavorable prior year development in the U.S. programs business within Special Risks; and

lower general operating expenseshigher net investment income primarily driven by lower employee-related expenses and other expense reduction initiatives.

Property and Special Risks Pre-Tax Operating Income (Loss)

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Pre-tax operating income decreased primarily due to:

higher catastrophe losses driven by hurricanes Harvey, Irma and Maria, as well as other catastrophes including the recent Mexico earthquake; and

inclusion a higher current accident year loss ratio, as adjusted, primarily in U.S. and Europe commercial property.of the Validus acquisition.

This decrease was partially offset by:

      higher acquisition ratio primarily driven by changes in Personal Insurance’s portfolio mix, higher insurance taxes, licenses and fees, and changes in the 2018 reinsurance programs, partially offset by the inclusion of the Validus acquisition; and

higher general operating expenses due to  the inclusion of the Validus acquisition.

North America Adjusted Pre-Tax Income (Loss)

Nine Months Ended September 30,

(in millions)

Year-to-Date 2018 and 2017 Comparison

Adjusted pre-tax income in 2018 compared to adjusted pre-tax loss in 2017 reflected:

significantly lower catastrophe losses; and

lower unfavorable prior year development in the U.S. programs business within Special Risks;loss reserve development.

These were partially offset by:

      higher netlower investment incomereturns on alternative investments, primarily driven by improvementless robust private equity and hedge fund performance compared to the same period in equity market performance,2017, and gains ona decline in income from securities where we electedfor which the fair value option;option was elected as well as lower interest and dividends due to lower invested assets resulting from the first quarter 2017 funding of the adverse development reinsurance agreement with NICO;

higher acquisition ratio primarily driven by changes in Personal Insurance’s portfolio mix, higher insurance taxes, licenses and fees, and changes in the 2018 reinsurance programs; and

      lowerhigher general operating expenses driven by lower employee-related expenses and other expense reduction initiatives.due to  the inclusion of the Validus acquisition.

 

106AIG | Third Quarter 20172018 Form 10-Q102 


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ITEM 2 | Business Segment Operations  | CommercialGeneral Insurance 

 

Property and Special RisksNorth America Net Premiums Written

Three Months Ended September 30,

(in millions)

Quarterly 20172018 and 20162017 Comparison

Net premiums written decreasedincreased primarily due to:

      lower production in U.S. and Europe commercial property primarily driven by remediation efforts and a competitive market environment;the inclusion of the Validus acquisition;

      reducedlower ceded premiums due to changes in the 2018 reinsurance programs; and

growth in the Travel and Private Client Group businesses within Personal Insurance.

This increase was partially offset by:

lower production primarily in U.S. programs driven bythe Property and Programs business mainly due to underwriting actions taken to addressstrengthen our portfolio profitability;

the sale of our interest in the Ascot business;and to maintain pricing discipline; and

      higher ceded premiums related to the additional layerexit of coverage added to the North American catastrophe reinsurance cover for 2017.certain businesses in Accident & Health in prior year.

This decrease was partially offset by recognition of ceded return premiums on our excess of loss reinsurance covers.  

 

Property and Special RisksNorth America Net Premiums Written

Nine Months Ended September 30,

(in millions)

Year-to-Date 20172018 and 20162017 Comparison

Net premiums written decreasedincreased primarily due to:

      lower productiongrowth in U.S.the Travel and Europe commercial property primarily driven by remediation efforts and a competitive market environment;Private Client Group businesses within Personal Insurance;

reduced production primarily in U.S. programs driven by actions to address portfolio profitability;

      the sale of our interest in the Ascot business; and

higherlower ceded premiums due to changes made toin the North American catastrophe2018 reinsurance cover for 2017.programs; and

the inclusion of the Validus acquisition.

This decreaseincrease was partially offset by recognitionby:

lower production primarily in Property, Programs business, and D&O products within the Financial Lines mainly due to underwriting actions taken to strengthen our portfolio and to maintain pricing discipline; and

exit of ceded return premiums on our excess of loss reinsurance covers.  

certain businesses in Accident & Health in prior year.

 

AIG | Third Quarter 20172018 Form 10-Q          103107


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ITEM 2 | Business Segment Operations  | CommercialGeneral Insurance 

 

Property and Special RisksNorth America Combined Ratios

Three Months Ended September 30,

Quarterly 20172018 and 20162017 Comparison

The increasedecrease in the combined ratio reflected an increasea decrease in the loss ratio partially offset by a decreasean increase in the expense ratio.

The decrease in the loss ratio reflected:

significantly lower catastrophe losses;

lower unfavorable prior year loss reserve development; and

lower current accident year loss ratio, as adjusted.

The decrease in the current accident year loss ratio, as adjusted reflected:

changes in portfolio mix;

a year-to-date increase in accident year loss estimates for Property recorded in the third quarter of 2017; and  

lower severe losses.

These decreases in the current accident year loss ratio, as adjusted were partially offset by changes in 2018 reinsurance programs.

The increase in the expense ratio primarily reflected a higher acquisition ratio driven mainly by changes in Personal Insurance’s portfolio mix, higher insurance taxes, licenses and fees, and changes in the 2018 reinsurance programs, partially offset by the inclusion of the Validus acquisition.

North America Combined Ratios

Nine Months Ended September 30,

Year-to-Date 2018 and 2017 Comparison

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

The decrease in the loss ratio reflected:

significantly lower catastrophe losses; and

lower unfavorable prior year loss reserve development.

The increase in the expense ratio reflected a higher acquisition ratio primarily due to changes in Personal Insurance’s portfolio mix, higher insurance taxes, licenses and fees, and changes in the 2018 reinsurance programs.

108AIG | Third Quarter 2018 Form 10-Q


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ITEM 2 | Business Segment Operations| General Insurance

International Results

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2018

 

2017

 

Change

 

 

 

2018

 

2017

 

Change

 

Underwriting results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net premiums written

$

3,671

$

3,635

 

1

%

 

$

11,544

$

11,156

 

3

%

(Increase) decrease in unearned premiums

 

108

 

116

 

(7)

 

 

 

(96)

 

(233)

 

59

 

Net premiums earned

 

3,779

 

3,751

 

1

 

 

 

11,448

 

10,923

 

5

 

Losses and loss adjustment expenses incurred

 

3,012

 

3,187

 

(5)

 

 

 

7,549

 

7,270

 

4

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

689

 

626

 

10

 

 

 

2,059

 

1,832

 

12

 

Other acquisition expenses

 

221

 

217

 

2

 

 

 

647

 

680

 

(5)

 

Total acquisition expenses

 

910

 

843

 

8

 

 

 

2,706

 

2,512

 

8

 

General operating expenses

 

596

 

577

 

3

 

 

 

1,817

 

1,715

 

6

 

Underwriting loss(a)

 

(739)

 

(856)

 

14

 

 

 

(624)

 

(574)

 

(9)

 

Net investment income

 

74

 

116

 

(36)

 

 

 

310

 

392

 

(21)

 

Adjusted pre-tax loss

$

(665)

$

(740)

 

10

%

 

$

(314)

$

(182)

 

(73)

%

Loss ratio

 

79.7

 

85.0

 

(5.3)

 

 

 

65.9

 

66.6

 

(0.7)

 

Acquisition ratio

 

24.1

 

22.5

 

1.6

 

 

 

23.6

 

23.0

 

0.6

 

General operating expense ratio

 

15.8

 

15.4

 

0.4

 

 

 

15.9

 

15.7

 

0.2

 

Expense ratio

 

39.9

 

37.9

 

2.0

 

 

 

39.5

 

38.7

 

0.8

 

Combined ratio

 

119.6

 

122.9

 

(3.3)

 

 

 

105.4

 

105.3

 

0.1

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(20.5)

 

(19.8)

 

(0.7)

 

 

 

(7.8)

 

(7.5)

 

(0.3)

 

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

 

(1.0)

 

(7.9)

 

6.9

 

 

 

-

 

(4.1)

 

NM

 

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

 

-

 

-

 

NM

 

 

 

-

 

-

 

NM

 

Accident year loss ratio, as adjusted

 

58.2

 

57.3

 

0.9

 

 

 

58.1

 

55.0

 

3.1

 

Accident year combined ratio, as adjusted

 

98.1

 

95.2

 

2.9

 

 

 

97.6

 

93.7

 

3.9

 

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

Business and Financial Highlights

The International General Insurance business is focused on underwriting profits and improved efficiency, further improving underwriting margins, and growing profitably in segments and geographies that support our growth strategy.  This includes the execution of efficiency gains, a focus on new business sales in Japan, preparation for Brexit, a strategic review of the use of reinsurance and leveraging Talbot, International’s newly acquired Lloyd’s of London insurance syndicate.

Adjusted pre-tax loss decreased in the three-month period ended September 30, 2018 compared to the same period in the prior year, primarily due to significantly lower unfavorable prior year loss reserve development, partially offset by higher catastrophe losses and lower net investment income. 

Adjusted pre-tax loss increased in the nine-month period ended September 30, 2018 compared to the same period in the prior year primarily due to higher catastrophe and attritional losses, and lower net investment income, partially offset by significantly lower unfavorable prior year loss reserve development.

For further discussion on prior year loss reserve development see Insurance Reserves.

Net premiums written, excluding the impact of foreign exchange, increased slightly in the three-month period ended September 30, 2018 primarily due to the inclusion of the Validus acquisition and business growth partially offset by the sale of certain insurance operations and assets to Fairfax and the seasonally large Fuji annual policy renewal period being reported in the second quarter results in 2018, which in previous years was reported in the third quarter. Net premiums written, excluding the impact of foreign exchange, in the nine-month period ended September 30, 2018 decreased primarily due to the impact of the previously mentioned sale of certain businesses to Fairfax.

AIG | Third Quarter 2018 Form 10-Q109


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ITEM 2 | Business Segment Operations| General Insurance

International Adjusted Pre-Tax Loss

Three Months Ended September 30,

(in millions)

Quarterly 2018 and 2017 Comparison

Adjusted pre-tax loss decreased due to significantly lower unfavorable prior year loss reserve development partially offset by:

slightly higher current accident year loss ratio, as adjusted, driven primarily by  an increase in year-to-date loss estimates in Financial Lines and Special Risks in Europe which occurred in the third quarter of 2018 partially offset by lower severe losses; and

lower net investment income driven by weaker market performance of equity securities for which the fair value option was elected and lower income from equity method investments.

International Adjusted Pre-Tax Loss

Nine Months Ended September 30,

(in millions)

Year-to-Date 2018 and 2017 Comparison

Adjusted pre-tax loss increased due to:

·higher current accident year loss ratio, as adjusted, driven primarily by an increase in loss estimates in Financial Lines and Special Risks in Europe which occurred in 2018, higher severe losses, and higher ceded earned premiums;

·lower net investment income driven by weaker market performanceof equity securities for which the fair value option was elected, a decrease in alternative investments portfolio holdings and lower income from equity method investments;  and

·higher catastrophe losses.

This increase was partially offset by significantly lower unfavorable prior year loss reserve development.

110AIG | Third Quarter 2018 Form 10-Q


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ITEM 2 | Business Segment Operations| General Insurance

International Net Premiums Written

Three Months Ended September 30,

(in millions)

Quarterly 2018 and 2017 Comparison

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

·higher premiums driven by the inclusion of the Validus acquisition;

·growth in the Financial Lines business in Europe; and

·higher premiums driven by Accident & Health and Personal Lines business in Asia Pacific.

These increases were partially offset by:

the sale of certain insurance operations and assets to Fairfax;

lower production primarily driven by portfolio remediation efforts;

lower business production in Japan because of delayed product introduction related to the merger and exit from unprofitable distribution channels; and

the Japan Merger Impact.

International Net Premiums Written

Nine Months Ended September 30,

(in millions)

Year-to-Date 2018 and 2017 Comparison

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

·the sale of certain insurance operations and assets to Fairfax;

·higher ceded premiums due to changes in 2018 reinsurance programs;

·lower business production in Japan because of delayed product introduction related to the merger and exit from unprofitable distribution channels; and

·lower production primarily driven by portfolio remediation efforts.

This decrease was partially offset by:

·higher premiums driven by Accident & Health and Personal Lines business in Asia Pacific;

·growth in the Financial Lines business in Europe;

·higher premiums driven by the inclusion of the Validus acquisition; and

·the Japan Merger Impact.

AIG | Third Quarter 2018 Form 10-Q111


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ITEM 2 | Business Segment Operations| General Insurance

International Combined Ratios

Three Months Ended September 30,

Quarterly 2018 and 2017 Comparison

The decrease in the combined ratio primarily reflected a lower loss ratio partially offset by a higher expense ratio.

The decrease in the loss ratio was primarily due to higher catastrophe losses and a higher current accident year loss ratio, as adjusted, mainly driven by higher severe losses partially offset bysignificantly lower unfavorable prior year loss reserve development and lower severe losses.

The decrease in the U.S. programs business within Special Risks.

This increaseloss ratio was partially offset by a decreaseby:

an increase in year-to-date loss estimates in Financial Lines and Special Risks in Europe which occurred in the third quarter of 2018; and

higher catastrophe losses.

The increase in the expense ratio was primarily driven by:

a decrease in the general operating expenseby higher acquisition ratio mainly due to lower employee-related expenses and other expense reduction initiatives; and

a decreasechanges in the acquisition ratio due to the sale of our interestbusiness mix combined with changes in the Ascot business, reduced production and increased operating efficiency.

2018 reinsurance programs.

Property and Special RisksInternational Combined Ratios

Nine Months Ended September 30,

Year-to-Date 20172018 and 20162017 Comparison

The increase in combined ratio reflected an increase in theremained flat due to a lower loss ratio partiallyentirely offset by a decrease in theslightly higher expense ratio.

The increaseThis decrease in the loss ratio was primarily due to higher catastrophe losses and a higher current accident year loss ratio, as adjusted, mainly driven by higher severe losses partially offset bysignificantly lower unfavorable prior year loss reserve development partially offset by:

an increase in loss estimates in Financial Lines and Special Risks in Europe which occurred in 2018;

higher ceded earned premiums related to the U.S. programs business within Special Risks.additional reinsurance protection added for international locations on a global basis and the 2018 catastrophe reinsurance program; and

The decrease in the expense ratio was due to a lower acquisition ratio driven by the sale of our interest in the Ascot business, reduced production and increased operating efficiency.higher severe losses. 

112AIG | Third Quarter 20172018 Form 10-Q104 


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ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

Consumer Insurance

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 index. Certain fixed index annuity products offer optional income protection features. Fixed index annuities are distributed primarily through banks, broker dealers, independent marketing organizations and independent insurance agents.

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

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

 

Group Retirement:  Productsand services include group mutual funds, group fixed annuities, group variable annuities, individual annuity and investment products, and financial planning and advisory services.

Products and services are marketed by VALICThe Variable Annuity Life Insurance Company (VALIC) under the VALIC brand and include investment offerings and plan administrative and compliance services. VALIC career financial advisors and independent financial advisors provide retirement plan participants with enrollment support and comprehensive financial planning services.

Life Insurance: In the U.S., products primarily includesinclude term life and universal life insurance.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 UKU.K. and Ireland.  Life

Institutional Markets: Products primarily include stable value wrap products, in the U.S.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 independentspecialized marketing organizations, independent insurance agents, financial advisors and direct marketing.

Individual:Products include personal autoconsulting firms and property in Japan and other selected international markets and insurance for high net worth individuals offered through AIG Private Client Group, including auto, homeowners, umbrella, yacht, fine art and collections insurance, with a focus on the U.S. and multi-national coverage offerings. Products are distributed through various channels, including agents andstructured settlement brokers.

Group: Products include voluntary and sponsor-paid personal accident and supplemental health products for individuals, employees, associations and other organizations, a broad range of travel insurance products and services for leisure and business travelers as well as extended warranty insurance covering electronics, appliances, and HVAC industries. Products are distributed through various channels, including agents, brokers, affinity partners, airlines and travel agents.

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

AIG | Third Quarter 20172018 Form 10-Q          105113


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ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

BUSINESS STRATEGY 

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

Sharpen Consumer Focus:Position market leading businesses to serve growing needs Invest by continually enhancing product solutions, service delivery and digital capabilities while using data and analytics in areas where Consumer Insurance can grow profitability and sustainably, andachieve and maintain industry leading positions. an innovative manner to improve customer experience.  

 

 

 

 

 

 

 

Individual Retirement  willcontinueto capitalize on the opportunity to meet consumer demand for guaranteed income by maintaining innovative variable and index annuity productswhile also managing risk from guarantee features through risk-mitigating product design andwell-developedeconomic hedging capabilities. 

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

Group Retirementcontinues to enhance its technology platform to improve thecustomer experience for plansponsors and individual participants. VALIC’s self-service tools paired with its career financial advisors provide compelling service platform. Group Retirement’s strategy also involves providing financial planning services for its clients and meeting their demand for income in retirement.

 

Life Insurance continues to invest to position itself for growth, while executingon strategies to enhance returns.

Life Insurance is focused on rationalizingits product portfolio, aligning distribution with itsmost productive channels, consolidatingsystems to state-of-the-art platforms, and employing innovative underwriting enhancements.

 

Personal Insuranceaims to provide clients with valuablesolutions, delivered throughthe channels they prefer. We continue to focus and investin the most profitable markets and segments

Weare alsoleveraging ourmultinational capabilitiesto meet the increasingdemand for cross-bordercoverage and services. Personal Insurancewill continue to useour strong risk management andmarket expertise tofoster growth by providing innovativeand competitive solutions to its customersand distributors.

Operational Effectiveness:Simplify processes and enhance operating environments to increase competitiveness, improve service and product capabilities and facilitate deliveryof our target customer experience.Wcontinueto invest in technology to improve operating efficiency and ease of doing business for our distribution partners and customers. In the U.S. Life business, we are focused on leveraging our most efficient systems and increasing automation of our underwriting process. We believe that simplifying our operating models will enhance productivity and support further profitable growth.

Balance Sheet Management: Lead a rigorous product and portfolio approach with enhanced product design and high quality investments that match our asset and liability exposures and are designed to ensure our ability to meet cash and liquidity needs under all operating scenarios.

Value Creation and Capital Management: Strive to deliversolid earnings throughdisciplined pricing, sustainableunderwriting improvements, expense reductions, and diversification of risk, while optimizing capital allocation and efficiency within insurance entitiesto enhance return on equity.

AIG | Third Quarter 2017 Form 10-Q106


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ITEM 2 |Business Segment Operations | Consumer Insurance

COMPETITION and challenges

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

Consumer Insurance remains competitive due to its long-standing market leading positions, innovative products, distribution relationships across multiple channels, customer-focused service, multi-national capabilities and strong financial ratings.

Our primary challenges include:

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

increased competition in our primary markets, including aggressive pricing of annuities by private equity-backed annuity writers, increased competition and consolidation of employer groups in the group retirement planning market, and increased competition for auto and homeowners’ insurance in Japan;

increasingly complex new and proposed regulatory requirements have created uncertainty that is affecting industry growth; and

investments to upgrade our technology and underwriting processes challenge our management of general operating expenses.

OUTLOOK—INDUSTRY AND ECONOMIC FACTORS

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

Individual Retirement

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

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

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

Individual Retirement provides products and services to certain employee benefit plans that are subject to the requirements of the DOL Fiduciary Rule. 

For additional information on the DOL Fiduciary Rule see Executive Summary – AIG’s Outlook – Industry and Economic Factors – Department of Labor Fiduciary Rule.

Group Retirement

Group Retirement competes in the defined contribution market under the VALIC brand.  VALIC is a leadingcontinues retirementto plan provider inenhance the U.S. for K-12 schools and school districts, highereducation, healthcare, government andother not-for-profit institutions.The defined contribution market is a highly efficient and competitive market that requires supportfor bothplan sponsors and individualparticipants. Tmeet this challenge, VALIC isinvesting in client-focusedits technology platform toimprove the supportcustomer improvedexperience compliancefor andplansponsors  self-serviceand  functionality.individual participants. VALIC’s servicemodel pairs self-service tools paired with its career financial advisors who provide individual plan participants with enrollment support and comprehensive financial planning services.

AIG | Third Quarter 2017 Form 10-Q107


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ITEM 2 |Business Segment Operations | Consumer Insurance

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

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

Group Retirement provides products and services to certain employee benefit plans that are subject to the requirements of the DOL Fiduciary Rule.

For additional information on the DOL Fiduciary Rule see Executive Summary – AIG’s Outlook – Industry and Economic Factors – Department of Labor Fiduciary Rule

Life Insurance

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

In response to consumer needs and a sustained low interest rate environment, our Life Insurance product portfolio has been evolving. We implemented a strategy to de-emphasize products with long-duration interest rate guarantees and placed a stronger focus on indexed universal life products.

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

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

Personal Insurance

Theneed forfull life cycle productsand coverage, increases inpersonal wealth accumulation, and awarenessof insurance protection and riskmanagement continue to support the growth of the Personal Insurance industry. PersonalInsurance focuses on group and corporateclients, together with individual customers within national markets.We expect thedemand for multinational cross-border coverage and servicesto increasedue to the internationalization of clients andcustomers. We believe our globalpresence provides PersonalInsuranceprovide distinctcompelling  competitiveservice  advantage.platform. Group Retirement’s strategy also involves providing financial planning services for its clients and meeting their need for income in retirement.

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

In Japan, the competition for auto insurance has intensified, in part driven by a decline in new car sales and the existence of fewer but largerinsurers. Inaddition, theoverall market sizein homeowners insurance contracted after the durationrestriction on long-term fire insurance became effective in October 2015. In the U.S.U.K., we compete in the high net worthmarket andwill continueto expand our innovative products and servicesto distribution partnersand clients.Outside ofJapan and the U.S., Personal AIG Life Insurance continues to invest selectivelyin markets that webelieve have higher potential for sustainable profitability.

Recent Developments

In August 2017, Hurricane Harvey made landfall in Texas and Louisiana causing widespread flooding and property damage in various southern counties within the region. Certain business modules in our Consumer Insurance segment have operations in Houston, Texas and have been directly impacted by the storm. As of September 30, 2017, we have incurred approximately $27 million of storm-related costs. Wewill continue to assessfocus on growing the full financial impact of Hurricane Harveybusiness organically and its impact to our business operations.through potential acquisition opportunities.

AIG | Third Quarter 2017 Form 10-Q108 


TABLE OF CONTENTS

ITEM 2 | 

Business Segment Operations | Institutional MarketsConsumer Insurance

CONSUMER INSURANCE RESULTS

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

3,237

$

3,313

 

(2)

%

 

$

9,601

$

9,754

 

(2)

%

Policy fees

 

646

 

573

 

13

 

 

 

1,940

 

1,792

 

8

 

Net investment income

 

1,843

 

1,903

 

(3)

 

 

 

5,665

 

5,427

 

4

 

Other income

 

228

 

220

 

4

 

 

 

670

 

1,059

 

(37)

 

Total operating revenue

 

5,954

 

6,009

 

(1)

 

 

 

17,876

 

18,032

 

(1)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

2,426

 

2,367

 

2

 

 

 

6,669

 

6,701

 

-

 

Interest credited to policyholder account balances

 

742

 

755

 

(2)

 

 

 

2,319

 

2,398

 

(3)

 

Amortization of deferred policy acquisition costs

 

539

 

455

 

18

 

 

 

1,984

 

1,929

 

3

 

General operating and other expenses*

 

1,207

 

1,181

 

2

 

 

 

3,515

 

4,059

 

(13)

 

Interest expense

 

32

 

23

 

39

 

 

 

73

 

65

 

12

 

Total operating expenses

 

4,946

 

4,781

 

3

 

 

 

14,560

 

15,152

 

(4)

 

Pre-tax operating income

$

1,008

$

1,228

 

(18)

%

 

$

3,316

$

2,880

 

15

%

*    Includes general operating expenses, non-deferrable commissions, other acquisition expenses, advisory fee expenses continues to grow its assets under management across multiple product lines, including stable value wrap, GICs and other expenses.

pension risk transfer annuities. Our insurance companies generate significant revenues from investment activities. As a result, the modules in Consumer Insurance are subjectgrowth strategy is opportunistic and allows us to variances in net investment income on the asset portfoliospursue select transactions that support insurance liabilities and surplus.

For additional information onmeet our investment strategy, asset-liability management process and invested asset composition seeInvestmentsrisk-adjusted return requirements.

The Individual Retirement, Group Retirement and Life Insurance modules review and update estimated gross profit assumptions used to amortize DAC and related items for investment-oriented products, as well as other actuarial assumptions, at least annually. As a result, the pre-tax operating earnings of these businesses include adjustments to policy fees, policyholder benefits, interest credited and DAC amortization to reflect such assumption updates, which may be significant.

For the amount of adjustments recorded to reflect such assumption updates by product line and financial statement line item and for related discussion of the assumption changes that resulted in these adjustments see Insurance Reserves – Life and Annuity Reserves and DAC – Update of Actuarial Assumptions.

AIG | Third Quarter 2017 Form 10-Q109


TABLE OF CONTENTS

ITEM 2 | 

Business Segment

Operations |

Consumer

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

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

Deliver Value Creation and Manage Capital by striving to deliversolid earnings throughdisciplined pricing, sustainableunderwriting improvements, expense reductions, and diversification of risk, while optimizing capital allocation and efficiency within insurance entitiesto enhance return on equity

114AIG | Third Quarter 2018 Form 10-Q


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Life and Retirement

COMPETITION and challenges

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

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

Our primary challenges include:

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

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

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

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

OUTLOOK—INDUSTRY AND ECONOMIC FACTORS

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

Individual Retirement

Increasing life expectancy and reduced expectations for traditional retirement income from defined benefit programs and fixed income securities are leadingAmericans to seek additional financial security as they approach retirement.The strong demand for individual variable and fixed index annuities with guaranteed income features has attracted increased 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 and fixed index annuities with margins that are less sensitive to the level of interest rates. 

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

Group Retirement

Group Retirement competes in the defined contribution market under the VALIC brand.  VALIC is a leadingretirement plan provider in the U.S. for K-12 schools and school districts, highereducation, healthcare, government andother not-for-profit institutions.The defined contribution market is a highly efficient and competitive market that requires supportfor bothplan sponsors and individualparticipants. Tmeet this challenge, VALIC isinvesting in client-focused technology platform tosupport improved compliance and self-service functionality.VALIC’s servicemodel pairs self-service tools with its career financial advisors who provide individual plan participants with enrollment support and comprehensive financial planning services.

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

AIG | Third Quarter 2018 Form 10-Q115


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Life and Retirement

Life Insurance

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

In response to consumer needs and a sustained low interest rate environment, our Life Insurance product portfolio will continue to de-emphasize products with long-duration interest rate guarantees.

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

Institutional Markets

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

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

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

life and retirement RESULTS

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2018

 

2017

 

Change

 

 

 

2018

 

2017

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

443

$

1,311

 

(66)

%

 

$

1,379

$

2,649

 

(48)

%

Policy fees

 

500

 

690

 

(28)

 

 

 

1,965

 

2,072

 

(5)

 

Net investment income

 

1,960

 

1,907

 

3

 

 

 

6,001

 

5,813

 

3

 

Other income

 

243

 

228

 

7

 

 

 

726

 

670

 

8

 

Total adjusted revenues

 

3,146

 

4,136

 

(24)

 

 

 

10,071

 

11,204

 

(10)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

962

 

1,537

 

(37)

 

 

 

2,562

 

3,414

 

(25)

 

Interest credited to policyholder account balances

 

877

 

808

 

9

 

 

 

2,600

 

2,505

 

4

 

Amortization of deferred policy acquisition costs

 

(60)

 

31

 

NM

 

 

 

411

 

458

 

(10)

 

General operating and other expenses*

 

607

 

568

 

7

 

 

 

1,806

 

1,701

 

6

 

Interest expense

 

47

 

34

 

38

 

 

 

125

 

77

 

62

 

Total operating expenses

 

2,433

 

2,978

 

(18)

 

 

 

7,504

 

8,155

 

(8)

 

Adjusted pre-tax income

$

713

$

1,158

 

(38)

%

 

$

2,567

$

3,049

 

(16)

%

*    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.

116AIG | Third Quarter 2018 Form 10-Q


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Life and Retirement 

 

Individual Retirement Results

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2018

 

2017

 

Change

 

 

 

2018

 

2017

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

9

$

22

 

(59)

%

 

$

37

$

81

 

(54)

%

Policy fees

 

204

 

190

 

7

 

 

 

610

 

567

 

8

 

Net investment income

 

956

 

973

 

(2)

 

 

 

2,915

 

2,983

 

(2)

 

Advisory fee and other income

 

166

 

158

 

5

 

 

 

500

 

468

 

7

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

52

 

15

 

247

 

 

 

184

 

88

 

109

 

Interest credited to policyholder account balances

 

420

 

366

 

15

 

 

 

1,247

 

1,193

 

5

 

Amortization of deferred policy acquisition costs

 

196

 

(20)

 

NM

 

 

 

460

 

235

 

96

 

Non deferrable insurance commissions

 

81

 

82

 

(1)

 

 

 

242

 

227

 

7

 

Advisory fee expenses

 

62

 

61

 

2

 

 

 

183

 

179

 

2

 

General operating expenses

 

107

 

103

 

4

 

 

 

329

 

321

 

2

 

Interest expense

 

24

 

18

 

33

 

 

 

63

 

41

 

54

 

Adjusted pre-tax income

$

393

$

718

 

(45)

%

 

$

1,354

$

1,815

 

(25)

%

Fixed Annuities base net investment spread:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base yield

 

4.57

%

4.68

%

(11)

bps

 

 

4.63

%

4.82

%

(19)

bps

Cost of funds

 

2.64

 

2.65

 

(1)

 

 

 

2.65

 

2.65

 

-

 

Fixed Annuities base net investment spread

 

1.93

%

2.03

%

(10)

bps

 

 

1.98

%

2.17

%

(19)

bps

The following table presents individual retirement results:

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

22

$

37

 

(41)

%

 

$

81

$

129

 

(37)

%

Policy fees

 

190

 

183

 

4

 

 

 

567

 

528

 

7

 

Net investment income

 

973

 

1,009

 

(4)

 

 

 

2,983

 

2,868

 

4

 

Advisory fee and other income

 

158

 

151

 

5

 

 

 

468

 

857

 

(45)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

15

 

(20)

 

NM

 

 

 

88

 

133

 

(34)

 

Interest credited to policyholder account balances

 

366

 

370

 

(1)

 

 

 

1,193

 

1,259

 

(5)

 

Amortization of deferred policy acquisition costs

 

(20)

 

(119)

 

83

 

 

 

235

 

165

 

42

 

Non deferrable insurance commissions

 

82

 

59

 

39

 

 

 

227

 

166

 

37

 

Advisory fee expenses

 

61

 

58

 

5

 

 

 

179

 

514

 

(65)

 

General operating expenses

 

103

 

99

 

4

 

 

 

321

 

381

 

(16)

 

Interest expense

 

18

 

13

 

38

 

 

 

41

 

37

 

11

 

Pre-tax operating income

$

718

$

920

 

(22)

%

 

$

1,815

$

1,727

 

5

%

Fixed Annuities base net investment spread:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base yield

 

4.69

%

4.95

%

(26)

bps

 

 

4.84

%

4.95

%

(11)

bps

Cost of funds

 

2.65

 

2.74

 

(9)

 

 

 

2.65

 

2.76

 

(11)

 

Fixed Annuities base net investment spread

 

2.04

%

2.21

%

(17)

bps

 

 

2.19

%

2.19

%

-

bps

Business and Financial Highlights

The market environment reflected continued uncertainty aboutcontinues to reflect uncertainties in the DOL Fiduciary Rule andannuity business resulting from a sustained low interest rate environment. While interest rates which remainedcontinue to increase, rates remain low relative to historical levels. As a result,Premiums and deposits improved in the three- and nine-month periods ended September 30, 2017 were lower than2018 compared to the same periods in the prior yearyear. Premiums and deposits in most product lines.the nine-month period ended September 30, 2018 included deposits from the FHLB funding agreement. Net investment incomeflows in the three-month period ended September 30, 2017 included lower alternative investment income primarily due to a reduction in the overall size of the hedge fund portfolio, partially offset by higher gains on securities for which the fair value option was elected. In the nine-month period ended September 30, 2017, net investment income included higher gains on securities for which the fair value option was elected and higher returns from alternative investments, partially offset by a reduction in the overall size of the hedge fund portfolio. Pre-tax operating income also included adjustments in each period to update actuarial assumptions, particularly from updates to assumptions for lapses, spreads, and separate account long-term asset growth rate.

Fixed Annuities base net investment spread decreased in the three-month period ended September 30, 20172018 improved compared to the same period in the prior year primarily due to lower reinvestment yields, accretion incomegrowth in the Fixed and commercial mortgage loan prepayments, partially mitigated by disciplined pricing and active crediting rate management. InIndex Annuity business. Net flows in the nine-month period ended September 30, 2017, base net investment spread was comparable2018 deteriorated compared to the same period in the prior year asand continued to be negative primarily due to higher surrenders and withdrawals, primarily in Retail Mutual Funds.

Excluding the impact of the review and update of actuarial assumptions, adjusted pre-tax income decreased in the three- and nine-month periods ended September 30, 2018 compared to the same periods in the prior year, reflecting decreased Fixed Annuity base spread income. Partially offsetting this decrease were higher policy fees and advisory fees, increased base spread income for Index Annuities and, in the nine-month period ended September 30, 2018, the receipt of non-recurring payments on structured securities.

Fixed Annuities base net investment spread in the three- and nine-month periods ended September 30, 2018 declined compared to the same periods in the prior year primarily due to lower reinvestment yields, accretion income and prepayments on commercial mortgage loans was mostly mitigated by disciplined pricing and active crediting rate management.

yields.

AIG | Third Quarter 20172018 Form 10-Q          110117


TABLE OF CONTENTS 

 

ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

Individual Retirement Adjusted Pre-Tax Operating Income

Three Months Ended September 30,

(in millions)

Quarterly 2018 and 2017 and 2016 Comparison

Pre-tax operatingAdjusted pre-tax income decreased primarily due to:

      lowera net positiveunfavorable adjustment from the review and update of actuarial assumptions, which was $242$52 million compared to $369a net favorable adjustment of $242 million in the same period in the prior year;

      lowera decline in net investment income, primarily from alternative investments due to continued impact of the reduction in the overall size of the hedge fund portfolio, partially offset by higherlower gains on securities for which the fair value option was elected;elected as a result of credit spread widening and rising interest rates, lower bond call and tender income, and lower alternative investment returns, partially offset by higher commercial mortgage loan prepayment income; and

      lower base net investment spreada decline in Fixed Annuities primarily due toAnnuity base spread income driven by lower reinvestment yields and volumes, partially offset by increases from accretion income and commercial mortgage loan prepayments, partially mitigated by disciplined pricing and active crediting rate management;

higher policyholder benefit expense primarily due to growth in Index Annuities and lower benefit expense in the prior year driven by reductions in variable annuity reserves; and

higher commission expense primarily due to growth in account values from improvements in the equity markets and an allocation of life reinsurance risk charges, as all U.S. life segments benefited from the reduction in required statutory capital resulting from a reinsurance agreement entered into in 2016 involving certain whole life, term life and universal life businesses (Life Insurance Reinsurance Transactions);other investment income.

Partially offsetting these decreases were:

      higher Index Annuity base portfolio income reflecting growth in assets; and

higher policy feefees and advisory fee income,fees, net of expenses, primarily due todriven by asset growth in account values from improvements in the equity markets;Index and

higher base net investment spread in Variable and Index Annuities primarily due to growth in invested assets, higher commercial mortgage loan prepayments, and disciplined pricing and active crediting rate management.Annuities.

 

Individual Retirement Adjusted Pre-Tax Income

Nine Months Ended September 30,

(in millions)

Year-to-Date 2018 and 2017 Comparison

Adjusted pre-tax income decreased primarily due to:

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

a decline in net investment income, primarily from lower gains on securities for which the fair value option was elected as a result of credit spread widening and rising interest rates and lower bond call and tender income, partially offset by the receipt of non-recurring payments on structured securities; and

a decline in Fixed Annuity base spread income primarily driven by lower reinvestment yields and volumes. In addition, income from base portfolio reflected declines due to lower invested assets in Fixed Annuities.

Partially offsetting these decreases were:

higher Index Annuity base portfolio income reflecting growth in assets from increased sales; and

higher policy fees and advisory fees, net of expenses, primarily driven by asset growth in Index and Variable Annuities.

118AIG | Third Quarter 20172018 Form 10-Q111


TABLE OF CONTENTS 

 

ITEM 2 |  Business Segment Operations | Consumer Insurance

IndividualLife and Retirement Pre-Tax Operating Income

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Pre-tax operating income increased primarily due to:

net investment income, which included higher gains on securities for which the fair value option was elected and higher returns on alternative investments, partially offset by a reduction in the overall size of the hedge fund portfolio;

higher base net investment spread in Variable and Index Annuities primarily due to growth in invested assets, and disciplined pricing and active crediting rate management, partially offset by lower commercial mortgage loan prepayments and accretion income;

lower policyholder benefit expense primarily due to a reduction in immediate annuity reserves, partially offset by growth in Index Annuities and lower benefit expense in the prior year driven by reductions in variable annuity reserves;

excluding the impact of the actuarial assumption updates, lower DAC amortization primarily due to improved equity market performance; and

higher policy fee and advisory fee income, net of expenses, due to growth in annuity account values from improvement in the equity markets.

Partially offsetting these increases were:

lower net positive adjustment from the review and update of actuarial assumptions as discussed above;

higher commission expense primarily due to growth in account values from improvements in the equity markets and the allocation of reinsurance risk charges from Life Insurance Reinsurance Transactions; and

the sale of AIG Advisor Group in May 2016, which drove the decreases in advisory fee income, advisory expenses and general operating expenses, and resulted in a net $14 million decrease in pre-tax operating income.

AIG | Third Quarter 2017 Form 10-Q112


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Consumer Insurance 

 

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

For Individual Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums decreased in the three- and nine-month periods ended September 30, 20172018 compared to the same periods in the prior year, primarily due to stronger sales of immediate annuities in the prior-year periods, in which higher equitycompetitive market volatility made immediate annuities more attractive to customers seeking less volatile returns.rates.

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

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

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

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

 

2018

 

2017

 

 

2018

 

2017

Premiums

$

22

$

37

 

$

81

$

129

$

9

$

22

 

$

37

$

81

Deposits

 

2,504

 

3,328

 

 

8,723

 

12,854

 

3,609

 

2,504

 

 

11,364

 

8,723

Other

 

-

 

(2)

 

 

(4)

 

1

 

(2)

 

-

 

 

(5)

 

(4)

Premiums and deposits

$

2,526

$

3,363

 

$

8,800

$

12,984

$

3,616

$

2,526

 

$

11,396

$

8,800

Surrender Rates

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

Three Months Ended

 

Nine Months Ended

 

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

 

September 30,

 

September 30,

2017

 

2016

 

2017

 

2016

 

2018

 

2017

 

 

2018

 

2017

 

Surrenders as a percentage of average reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Annuities

5.9

%

7.2

%

 

6.6

%

7.6

%

8.2

%

5.9

%

 

7.9

%

6.6

%

Variable and Index Annuities

5.6

 

5.2

 

5.9

 

5.0

 

6.3

 

5.6

 

6.3

 

5.9

 

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

 

 

 

September 30, 2017

 

 

 

December 31, 2016

September 30, 2018

 

December 31, 2017

 

 

 

 

 

 

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

 

 

 

$

33,029

$

17,818

 

 

 

 

$

34,674

$

15,338

 

$

30,707

$

20,924

 

$

32,299

$

18,896

 

Greater than 0% - 2%

 

 

 

 

1,649

 

5,692

 

 

 

 

857

 

4,558

 

 

1,265

 

6,809

 

 

1,704

 

6,045

 

Greater than 2% - 4%

 

 

 

 

1,596

 

8,267

 

 

 

 

2,221

 

5,741

 

 

2,039

 

11,465

 

 

1,560

 

9,470

 

Greater than 4%

 

 

 

 

12,920

 

34,823

 

 

 

 

12,599

 

34,966

 

 

14,324

 

32,838

 

 

13,329

 

34,677

 

Non-surrenderable

 

 

 

 

1,535

 

417

 

 

 

 

1,606

 

380

 

 

1,610

 

470

 

 

1,665

 

429

 

Total reserves

 

 

 

$

50,729

$

67,017

 

 

 

 

$

51,957

$

60,983

 

$

49,945

$

72,506

 

$

50,557

$

69,517

 

Individual Retirement annuities are typically subject to a four- to seven-year surrender charge period, depending on the product. For Variable and Index Annuities, the proportion of reserves subject to surrender charges at September 30, 20172018 has decreased compared to December 31, 20162017 due to normal aging of the business and slower sales, which were duecontinued decline in part to uncertainty around the implementation of the DOL Fiduciary Rule.sales. The increase in reserves with no surrender charge contributed to the increase in the surrender rate infor Variable and Index Annuities in the three- and nine-month periods ended September 30, 20172018 compared to the same periods in the prior year.

Increases in market interest rates in the nine-month period ended September 30, 2018 contributed to the increase in the surrender rate for Fixed Annuities in the nine-month period ended September 30, 2018 compared to the same period in the prior year.

AIG | Third Quarter 20172018 Form 10-Q          113119


TABLE OF CONTENTS 

 

ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

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

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

Three Months Ended September 30,

(in millions)

Quarterly 20172018 and 20162017 Comparison  

      Fixed Annuitiespremiums and deposits were slightly higher than the prior-year periodincreased primarily due to strategic crediting rate enhancements for certain products.higher broker dealer and bank distribution sales driven by favorable market conditions. Net flows continued to be negative but improved compared to the prior-year period, primarily due to lower surrenders, in addition to higher premiums and deposits.deposits, partially offset by increased surrenders.

      Variable and Index Annuities premiums and deposits and net flows declined,increased primarily due to lowerhigher index annuity sales ofdriven by expanded distribution and market growth, and increased variable annuities, due in part to continuedannuity deposits driven by improved bank and broker dealer distribution sales. Sales were also positively impacted by removing the industry uncertainty in the annuity market around the implementation ofcaused by the DOL Fiduciary Rule. Lower sales combined withRule, which was vacated in June 2018. Index annuity net flows increased primarily due to higher sales. Variable annuity net flows remained negative and deteriorated primarily due to higher surrenders, compared to the prior-year period resulted in lower net flows.partially offset by improved sales.

      Retail Mutual Funds had negative net flows in the three-month period ended September 30, 2017 compared to positive net flows in the same period in the prior year,remained negative and deteriorated reflecting lower deposits and higher withdrawals due to continued negative industry trends in U.S. equity actively managed funds and uncertainty surrounding the DOL Fiduciary Rule.impact of underperformance within our largest fund.

 

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

Nine Months Ended September 30,

(in millions)

Year-to-Date 20172018 and 20162017 Comparison  

      Fixed Annuities premiums and deposits were lower than the prior-year period,increased primarily due to higher broker dealer and netbank distribution sales driven by favorable market conditions. Net flows continued to be negative but improved primarily due to disciplined pricing in the continued low interest rate environmenthigher premiums and higher equity market volatility in the prior-year period, which made fixed annuities more attractive to customers seeking less volatile returns.deposits, partially offset by increased surrenders.

      Variable and Index Annuitiespremiums and deposits increased primarily due to higher index annuity sales driven by expanded distribution and net flows declined, reflectingmarket growth, partially offset by lower sales of index annuities, along with a continued decrease in variable annuity sales driven by lower bank and broker dealer distribution sales. Sales were also positively impacted by removing the industry sales due in part to uncertainty around the implementation ofcaused by the DOL Fiduciary Rule. Lower sales combined with higher surrenders compared to the prior-year period resultedRule, which was vacated in a decrease inJune 2018. Index annuity net flows for the indexincreased primarily due to higher sales. Variable annuity product line and negative net flows comparedremained negative and deteriorated primarily due to positive net flows in the prior-year period for the variable annuity product line.lower sales and higher surrenders.

      Retail Mutual FundsFunding Agreements had negative net flowspremiums and deposits in the nine-month period ended September 30, 2017 compared to positive 2018 reflected deposits from the FHLB funding agreement, which were excluded from reported net flows.

Retail Mutual Funds net flows in the same period in the prior year,remained negative and deteriorated reflecting lower deposits and higher withdrawals due to continued negative industry trends in U.S. equity actively managed funds and uncertainty surrounding the DOL Fiduciary Rule.impact of underperformance within our largest fund.

120AIG | Third Quarter 20172018 Form 10-Q114 


TABLE OF CONTENTS 

 

ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

Group Retirement Results

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

 

2018

 

2017

 

Change

 

 

 

2018

 

2017

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

8

$

9

 

(11)

%

 

$

21

$

21

 

-

%

$

9

$

8

 

13

%

 

$

30

$

21

 

43

%

Policy fees

 

113

 

99

 

14

 

 

 

313

 

285

 

10

 

 

115

 

113

 

2

 

 

 

339

 

313

 

8

 

Net investment income

 

524

 

554

 

(5)

 

 

 

1,614

 

1,588

 

2

 

 

531

 

524

 

1

 

 

 

1,655

 

1,614

 

3

 

Advisory fee and other income

 

57

 

55

 

4

 

 

 

168

 

159

 

6

 

 

63

 

57

 

11

 

 

 

185

 

168

 

10

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

10

 

14

 

(29)

 

 

 

36

 

31

 

16

 

 

25

 

10

 

150

 

 

 

63

 

36

 

75

 

Interest credited to policyholder account balances

 

283

 

289

 

(2)

 

 

 

845

 

849

 

-

 

 

275

 

283

 

(3)

 

 

 

826

 

845

 

(2)

 

Amortization of deferred policy acquisition costs

 

12

 

63

 

(81)

 

 

 

59

 

106

 

(44)

 

 

7

 

12

 

(42)

 

 

 

58

 

59

 

(2)

 

Non deferrable insurance commissions

 

28

 

20

 

40

 

 

 

80

 

59

 

36

 

 

30

 

28

 

7

 

 

 

87

 

80

 

9

 

Advisory fee expenses

 

22

 

18

 

22

 

 

 

59

 

52

 

13

 

 

26

 

22

 

18

 

 

 

67

 

59

 

14

 

General operating expenses

 

88

 

92

 

(4)

 

 

 

256

 

267

 

(4)

 

 

101

 

88

 

15

 

 

 

301

 

256

 

18

 

Interest expense

 

10

 

7

 

43

 

 

 

23

 

19

 

21

 

 

12

 

10

 

20

 

 

 

33

 

23

 

43

 

Pre-tax operating income

$

249

$

214

 

16

%

 

$

758

$

670

 

13

%

Adjusted pre-tax income

$

242

$

249

 

(3)

%

 

$

774

$

758

 

2

%

Base net investment spread:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base yield

 

4.52

%

4.71

%

(19)

bps

 

 

4.56

%

4.82

%

(26)

bps

 

4.49

%

4.50

%

(1)

bps

 

 

4.53

%

4.55

%

(2)

bps

Cost of funds

 

2.78

 

2.86

 

(8)

 

 

 

2.80

 

2.90

 

(10)

 

 

2.68

 

2.78

 

(10)

 

 

 

2.70

 

2.80

 

(10)

 

Base net investment spread

 

1.74

%

1.85

%

(11)

bps

 

 

1.76

%

1.92

%

(16)

bps

 

1.81

%

1.72

%

9

bps

 

 

1.83

%

1.75

%

8

bps

Business and Financial Highlights

Group Retirement premiumsis focused on implementing initiatives to grow its business. However, external factors, including the consolidation of healthcare providers and other employers in target markets, continue to impact Group Retirement’s customer retention. Premiums and deposits increased in the three- and nine-month periods ended September 30, 2017 were comparable to the same periods in the prior year, while premiums and deposits in the three- and nine-month period ended September 30, 2017 increased2018 compared to the same periods in the prior year. The increase in premiumsPremiums and deposits was primarily driven by higher deposits from group acquisitions, which, along with lower surrenders, drove the improvement in net flows in the three-month period ended September 30, 2017. Net flows in the nine-month period ended September 30, 2017 declined2018 included deposits from the FHLB funding agreement. Net flows deteriorated in the three- and nine-month periods ended September 30, 2018 compared to the same periods in the prior year and continued to be negative primarily due to higher surrenders, reflecting continued pressure frompartially offset by increased deposits.

Adjusted pre-tax income decreased in the consolidation of healthcare providers and other employersthree-month period ended September 30, 2018 as improvements in our target markets.

Low base net investment yieldsspread, higher policy fees and lower commercial mortgage loan prepaymentsnet investment income were more than offset by increases in general operating expenses and policyholder benefits and losses incurred. Adjusted pre-tax income increased in the nine-month period ended September 30, 2018 reflecting improved base net investment spread, higher policy fees and net investment income, partially offset by increases in general operating expenses and policyholder benefits and losses incurred.

Group Retirement base spread income improved in the three- and nine-month periods ended September 30, 2017 continued2018 compared to pressure investment spreads, partially mitigated by crediting rate management. Net investment incomethe same periods in the three-month period ended September 30, 2017 included lower alternative investment incomeprior year primarily due to a reduction in the overall size of the hedge fund portfolio. Ineffective crediting rate management, partially offset by lower reinvestment yields. Base spread income for the nine-month period ended September 30, 2017, net investment income2018, included higher gains on securities for which the fair value option was electedaccretion and higher returns from alternative investments, partially offset by a reduction in the overall size of the hedge fund portfolio. Pre-tax operating income also included adjustments in each period to update actuarial assumptions, particularly from updates to separate account long-term asset growth rate assumption.

other investment income.

AIG | Third Quarter 20172018 Form 10-Q          115121


TABLE OF CONTENTS 

 

ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

Group Retirement Adjusted Pre-Tax Operating Income

Three Months Ended September 30,

(in millions)

Quarterly 20172018 and 20162017 Comparison

Pre-tax operatingAdjusted pre-tax income increaseddecreased primarily due to:

·        a net positive adjustment from the review and update of actuarial assumptions, which was $13 million compared to a $47 million net negative adjustment in the prior year; and

higher policy fee incomegeneral operating expenses primarily due to growthcontinued investments in account values from improvement in the equity markets.people and technology.

Partially offsetting these increasesdecreases were:

·        lower basean increase in net investment spread primarily due to lower reinvestment yields and commercial mortgage loan prepayments, partially mitigated by effective crediting rate management;management, partially offset by lower reinvestment yields;

·        lowerhigher net investment income from alternative investments due to continued impact of the reduction in the overall size of the hedge fund portfolio; and

higher commission expense primarily due to the allocation of reinsurance risk chargesincreased income from Life Insurance Reinsurance Transactions.

Group Retirement Pre-Tax Operating Income

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017bond call and 2016 Comparison

Pre-tax operating income increased primarily due to:

a net positive adjustment from the reviewtender and update of actuarial assumptions compared to a net negative adjustment in the prior year as discussed above;

netother investment income, which included higherpartially offset by lower gains on securities for which the fair value option was elected as a result of credit spread widening and higherrising interest rates and lower returns on alternative investments,investments; and

·higher policy fees primarily driven by growth in assets.

Group Retirement Adjusted Pre-Tax Income

Nine Months Ended September 30,

(in millions)

Year-to-Date 2018 and 2017 Comparison

Adjusted pre-tax income increased primarily due to:

higher net investment income, primarily from the receipt of non-recurring payments on structured securities and higher commercial mortgage loan prepayments, partially offset by lower gains on securities for which the fair value option was elected as a reduction in the overall sizeresult of the hedge fund portfolio;credit spread widening and rising interest rates;

higher policy fee income due to growth in account values from improvement in the equity markets; and

      lower general operating expenses primarily due to lower legal expenses, partially offset by higher spending for implementation of the DOL Fiduciary Rule.

Partially offsetting these increases were:

lower basean increase in net investment spread primarily due to lower reinvestment yields and commercial mortgage loan prepayments, partially mitigated by effective crediting rate management;management, higher accretion and other investment income, partially offset by lower reinvestment yields; and

      higher commission expensepolicy fees and advisory fees, net of expenses, primarily duedriven by growth in assets.

Partially offsetting these increases were

higher general operating expenses, which reflected lower legal expenses in the prior-year period, while  the current year-period reflected expenses related to the allocation of reinsurance risk charges from Life Insurance Reinsurance Transactions.continued investments in people and technology.

122AIG | Third Quarter 20172018 Form 10-Q116 


TABLE OF CONTENTS 

 

ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

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

For Group Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums in the three- and nine-month periods ended September 30, 2017,2018, which primarily represent immediate annuities, were comparableincreased compared to the same periods in the prior year.year reflecting the typical volumes expected for this product.

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

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.withdrawals. Deposits from FHLB funding agreements were excluded from net flows of Group Retirement, as net flows from these funding agreements are 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 to GAAP premiums:deposits:

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

 

2018

 

2017

 

 

2018

 

2017

Premiums

$

8

$

9

 

$

21

$

21

$

9

$

8

 

$

30

$

21

Deposits

 

1,852

 

1,812

 

 

5,681

 

5,493

 

2,107

 

1,852

 

 

6,503

 

5,681

Premiums and deposits

$

1,860

$

1,821

 

$

5,702

$

5,514

$

2,116

$

1,860

 

$

6,533

$

5,702

Surrender Rates

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

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2017

 

2016

 

 

2017

 

2016

 

Surrenders as a percentage of average reserves and mutual funds

7.4

%

8.3

%

 

8.5

%

8.0

%

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2018

 

2017

 

 

2018

 

2017

 

Surrenders as a percentage of average reserves and mutual funds

12.0

%

7.4

%

 

11.0

%

8.5

%

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

September 30,

 

December 31,

 

 

September 30,

 

 

December 31,

 

(in millions)

 

2017

(a)

 

2016

(a)

 

2018

(a)

 

2017

(a)

No surrender charge(b)

$

67,856

 

$

64,160

 

$

70,133

 

$

69,006

 

Greater than 0% - 2%

 

1,230

 

 

906

 

 

747

 

 

1,087

 

Greater than 2% - 4%

 

1,133

 

 

1,395

 

 

1,308

 

 

1,344

 

Greater than 4%

 

5,188

 

 

5,434

 

 

5,943

 

 

5,270

 

Non-surrenderable

 

450

 

 

417

 

 

625

 

 

439

 

Total reserves

$

75,857

 

$

72,312

 

$

78,756

 

$

77,146

 

(a)  Excludes mutual fund assets under administration of $19.1 billion and $16.3$20.2 billion, at both September 30, 20172018 and December 31, 2016, respectively.2017.

(b)  Group Retirement amounts in this category include reserves of approximately $6.3 billion, at both September 30, 20172018 and December 31, 2016,2017, which are subject to 20 percent annual withdrawal limitations.

Group Retirement annuities are typically subject to a five- to seven-year surrender charge period, depending on the product.  The increase in the amount and proportion ofAt September 30, 2018, Group Retirement annuity reserves that have no surrender charge at September 30, 2017increased compared to December 31, 2016 was2017 primarily due to normal aging of this book of business, withdrawal limitations on certain plan assetsincreased deposits. The surrender rate in the three- and lower than expected surrenders of older contracts with higher minimum interest rates on fixed account balances that have continued to be attractivenine-month periods ended September 30, 2018 increased compared to the contract holderssame periods in the low interest rate environment.prior year primarily due to higher surrenders, including approximately $1.5 billion of large group plan surrenders.

AIG | Third Quarter 20172018 Form 10-Q          117123


TABLE OF CONTENTS 

 

ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

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

Group Retirement Premiums and Deposits and Net Flows

Three Months Ended September 30,

(in millions)

Quarterly 20172018 and 20162017 Comparison

Premiums and deposits increased primarily drivendue to higher in-plan and individual sales, partially offset by higher deposits fromlower group acquisitions.acquisition deposits. Net flows deteriorated and continued to be negative but improved compared to the prior-year period, primarily due to lowerhigher surrenders driven mainly by the consolidation of healthcare providers, partially offset by improvements in addition to higher premiums and deposits.

Group Retirement Premiums and Deposits and Net Flows

Nine Months Ended September 30,

(in millions)

Year-to-Date 20172018 and 20162017 Comparison

Premiums and deposits increased primarily driven by higher deposits from group acquisitions. Net flows declineddeteriorated and continued to be negative asprimarily due to higher surrenders driven mainly by the growth in sales was more than offset by surrenders,consolidation of healthcare providers, including approximately $1.5 billion of large group plan surrenders, of approximately $350 million,partially offset by higher group acquisition and individual annuity deposits. Premiums and deposits in the nine-month period ended September 30, 2018 reflected deposits from the FHLB funding agreement, which were within expectations but higher than in the prior-year period.excluded from reported net flows.

��

124AIG | Third Quarter 20172018 Form 10-Q118 


TABLE OF CONTENTS 

 

ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

Life Insurance Results

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

 

2018

 

2017

 

Change

 

 

2018

 

2017

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

384

$

349

 

10

%

 

$

1,168

$

1,068

 

9

%

$

379

$

384

 

(1)

%

 

$

1,176

$

1,168

 

1

%

Policy fees

 

343

 

291

 

18

 

 

 

1,060

 

979

 

8

 

 

141

 

343

 

(59)

 

 

895

 

1,060

 

(16)

 

Net investment income

 

260

 

267

 

(3)

 

 

 

781

 

772

 

1

 

 

275

 

260

 

6

 

 

850

 

781

 

9

 

Other income

 

13

 

14

 

(7)

 

 

 

34

 

43

 

(21)

 

 

14

 

13

 

8

 

 

41

 

34

 

21

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

587

 

730

 

(20)

 

 

 

1,795

 

1,851

 

(3)

 

 

780

 

587

 

33

 

 

1,997

 

1,795

 

11

 

Interest credited to policyholder account balances

 

93

 

96

 

(3)

 

 

 

281

 

290

 

(3)

 

 

92

 

93

 

(1)

 

 

281

 

281

 

-

 

Amortization of deferred policy acquisition costs

 

37

 

(43)

 

NM

 

 

 

161

 

113

 

42

 

 

(265)

 

37

 

NM

 

 

(111)

 

161

 

NM

 

Non deferrable insurance commissions

 

32

 

37

 

(14)

 

 

 

88

 

122

 

(28)

 

 

27

 

32

 

(16)

 

 

69

 

88

 

(22)

 

General operating expenses

 

135

 

152

 

(11)

 

 

 

437

 

504

 

(13)

 

 

152

 

135

 

13

 

 

464

 

437

 

6

 

Interest expense

 

4

 

3

 

33

 

 

 

9

 

9

 

-

 

 

7

 

4

 

75

 

 

19

 

9

 

111

 

Pre-tax operating income (loss)

$

112

$

(54)

 

NM

%

 

$

272

$

(27)

 

NM

%

Adjusted pre-tax income

$

16

$

112

 

(86)

%

 

$

243

$

272

 

(11)

%

Business and Financial Highlights

New individual life premiums and deposits in the three- and nine-month periods ended September 30, 2017 reflected higher universal life deposits and term life premiums compared to the prior-year periods. Life Insurance is focused on selling profitable new products through strategic channels to enhance future returns. General operating expenses decreasedPremiums in the three- and nine-month periods ended September 30, 20172018 reflected growth in universal life premiums, term life premiums and international life and health premiums, offset by lower group benefits premiums as a result of the strategic decision to refocus the group benefit business. Adjusted pre-tax income in the three- and nine-month periods ended September 30, 2018 decreased compared to the same periods in the prior year primarily due to the strategic decisionnet unfavorable actuarial assumption updates compared to refocus the group benefits business. Pre-tax operating income also included adjustments in each period to update actuarial assumptions, which was a net positivefavorable adjustment in the three- and nine-month periods ended September 30, 2017 compared2017. General operating expenses increased due to a net negative adjustmentbusiness growth in international life and increased distribution cost in the same periodsU.S. In addition, prior-year general operating expenses include the impact of a new business reinsurance agreement ended March 31, 2018. Higher net investment income in the prior year.current year was primarily due to higher base portfolio income driven by growth in invested assets.

Life Insurance Adjusted Pre-Tax Income

Three Months Ended September 30,

(in millions)

Quarterly 2018 and 2017 Comparison

Adjusted pre-tax income decreased primarily due to:

a net unfavorable adjustment from the review and update of actuarial assumptions, which was $63 million compared to a net favorable adjustment of $29 million in the same period in the prior year; and

higher general operating expenses primarily due to growth in international life and increased distribution costs.  In addition, prior-year general operating expenses were reduced by the impact of new business reinsurance.

Partially offsetting these decreases were:

higher net investment income primarily due to higher base portfolio income driven by growth in invested assets; and

favorable mortality in the U.S.

AIG | Third Quarter 20172018 Form 10-Q          119125


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ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

Life Insurance Adjusted Pre-Tax Operating Income (Loss)

ThreeNine Months Ended September 30,

(in millions)

QuarterlyYear-to-Date 2018 and 2017 and 2016 Comparison

Pre-tax operatingAdjusted pre-tax income increaseddecreased primarily due to:

      a net positive adjustment from the review and update of actuarial assumptions, which was $29 million compared to a $92 million net negative adjustment in the prior year;

higher policy fee income primarily from growth in universal life; and

lower general operating expenses primarily due to the strategic decision to refocus the group benefits business, reductions in domestic life acquisition expenses and lower employee-related expenses on international life.  

Partially offsetting these increases was lower net investment income from alternative investments due to continued impact of the reduction in the overall size of the hedge fund portfolio and lower income from yield enhancements, partially offset by higher commercial mortgage loan prepayments.

Life Insurance Pre-Tax Operating Income (Loss)

Nine Months Ended September 30,

(in millions)

Year-to-Date 2017 and 2016 Comparison

Pre-tax operating income increased primarily due to:

a net positiveunfavorable adjustment from the review and update of actuarial assumptions compared to a net negativefavorable adjustment in the same period in the prior year as discussed above;year; and

      lowerhigher general operating expenses primarily due to growth in international life and increased distribution costs.  In addition, prior-year general operating expenses were reduced by the strategic decision to refocus the group benefitsimpact of new business and reductions in domestic life acquisition expenses;reinsurance.

Partially offsetting these decreases were:

      excluding the impact of thefavorable actuarial assumption updates, lower DAC amortization primarily dueadjustments to lapse assumptions on internationaluniversal life and favorable reinsurance adjustments in term life;

      lower policyholder benefit expense due to favorable loss experience and a reserve reduction in group benefits business;

higher policy fee income primarily from growth in universal life; and

higher net investment income reflecting higher commercial loan prepaymentsprimarily due to increases in base portfolio income driven by growth in invested assets and higher returns onincome from alternative investments partially offset by a reduction; and

favorable mortality in the overall size of the hedge fund portfolio and lower income from yield enhancements.U.S.

AIG | Third Quarter 2017 Form 10-Q120


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ITEM 2 |Business Segment Operations | Consumer Insurance

Life Insurance GAAP Premiums and Premiums and Deposits

Premiums for Life Insurance represent amounts received on traditional life insurance policies, primarily term life, international life and health and group benefit policies.benefits. Premiums, increasedexcluding the effect of foreign exchange, decreased in the three- and nine-month periods ended September 30, 20172018 compared to the same periodperiods in the prior year excluding the effect of foreign exchange, primarily due to assumed premiums related to business distributed by Laya Healthcareas lower domestic group benefits and growth in term life andpremiums more than offset the growth in international life and health partially offset by lower premiums on group benefits policies.business. Premiums for the nine-month period ended September 30, 2018 included favorable ceded premium reinsurance adjustments in domestic life business.

Premiums and deposits for Life Insurance is a non-GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance.

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

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Premiums

$

384

$

349

 

$

1,168

$

1,068

Deposits

 

371

 

355

 

 

1,120

 

1,050

Other

 

180

 

176

 

 

504

 

490

Premiums and deposits

$

935

$

880

 

$

2,792

$

2,608

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

Life Insurance Premiums and Deposits

Three Months Ended September 30,

(in millions)

Premiums and deposits grew by six percent, excluding the effect of foreign exchange, principally driven by assumed premiums related to business distributed by Laya Healthcare and growth in universal life, term life and international life and health, partially offset by lower premiums on group benefits policies.

Life Insurance Premiums and Deposits

Nine Months Ended September 30,

(in millions)

Premiums and deposits grew by eight percent, excluding the effect of foreign exchange, principally driven by assumed premiums related to business distributed by Laya Healthcare and growth in universal life, term life and international life and health, partially offset by lower premiums on group benefits policies.

126AIG | Third Quarter 20172018 Form 10-Q121


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ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

Personal Insurance Results

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

Underwriting results:

 

 

 

 

 

  

 

 

 

 

 

 

 

  

 

Net premiums written

$

2,807

$

2,922

 

(4)

%

 

$

8,321

$

8,655

 

(4)

%

(Increase) decrease in unearned premiums

 

16

 

(4)

 

NM

 

 

 

10

 

(119)

 

NM

 

Net premiums earned

 

2,823

 

2,918

 

(3)

 

 

 

8,331

 

8,536

 

(2)

 

Losses and loss adjustment expenses incurred

 

1,814

 

1,643

 

10

 

 

 

4,750

 

4,686

 

1

 

Acquisition expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of deferred policy acquisition costs

 

510

 

554

 

(8)

 

 

 

1,529

 

1,545

 

(1)

 

Other acquisition expenses

 

215

 

215

 

-

 

 

 

639

 

677

 

(6)

 

Total acquisition expenses

 

725

 

769

 

(6)

 

 

 

2,168

 

2,222

 

(2)

 

General operating expenses

 

441

 

431

 

2

 

 

 

1,229

 

1,317

 

(7)

 

Underwriting income (loss)

 

(157)

 

75

 

NM

 

 

 

184

 

311

 

(41)

 

Net investment income

 

86

 

73

 

18

 

 

 

287

 

199

 

44

 

Pre-tax operating income (loss)

$

(71)

$

148

 

NM

%

 

$

471

$

510

 

(8)

%

Loss ratio

 

64.3

 

56.3

 

8.0

 

 

 

57.0

 

54.9

 

2.1

 

Acquisition ratio

 

25.7

 

26.4

 

(0.7)

 

 

 

26.0

 

26.0

 

-

 

General operating expense ratio

 

15.6

 

14.8

 

0.8

 

 

 

14.8

 

15.4

 

(0.6)

 

Expense ratio

 

41.3

 

41.2

 

0.1

 

 

 

40.8

 

41.4

 

(0.6)

 

Combined ratio

 

105.6

 

97.5

 

8.1

 

 

 

97.8

 

96.3

 

1.5

 

Adjustments for accident year loss ratio, as adjusted

 

 

 

 

 

 

 

 

 

 

 

 

 

and accident year combined ratio, as adjusted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(10.6)

 

(0.9)

 

(9.7)

 

 

 

(3.9)

 

(1.4)

 

(2.5)

 

Prior year development

 

-

 

1.1

 

NM

 

 

 

-

 

1.5

 

NM

 

Accident year loss ratio, as adjusted

 

53.7

 

56.5

 

(2.8)

 

 

 

53.1

 

55.0

 

(1.9)

 

Accident year combined ratio, as adjusted

 

95.0

 

97.7

 

(2.7)

 

 

 

93.9

 

96.4

 

(2.5)

 

The following table presents Personala reconciliation of Life Insurance netGAAP premiums written, showing change on both reportedto premiums and constant dollar basis:deposits:

Three Months Ended

 

Nine Months Ended

Three Months

Ended September 30,

 

Percentage

Change in

 

Nine Months

Ended September 30,

 

Percentage

Change in

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

U.S. dollars

 

Original currency

 

 

 

2017

 

2016

 

U.S. dollars

 

Original currency

 

 

2018

 

2017

 

 

2018

 

2017

Net premiums written

$

2,807

$

2,922

 

(4)

%

 

(2)

%

 

$

8,321

$

8,655

 

(4)

%

 

(3)

%

Premiums

$

379

$

384

 

$

1,176

$

1,168

Deposits

 

410

 

371

 

 

1,232

 

1,120

Other

 

189

 

180

 

 

519

 

504

Premiums and deposits

$

978

$

935

 

$

2,927

$

2,792

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

Life Insurance Premiums and Deposits

Three Months Ended September 30,

(in millions)

Quarterly 2018 and 2017 Comparison

Premiums and deposits, excluding the effect of foreign exchange, increased primarily due to growth in universal life, term life and international life and health, including assumed premiums on business distributed by Laya Healthcare. This increase was partially offset by lower group benefits premiums.

Life Insurance Premiums and Deposits

Nine Months Ended September 30,

(in millions)

Year-to-Date 2018 and 2017 Comparison

Premiums and deposits, excluding the effect of foreign exchange, increased primarily due to growth in universal life, term life and international life and health, including assumed premiums on business distributed by Laya Healthcare. This increase was partially offset by lower group benefits premiums.

AIG | Third Quarter 20172018 Form 10-Q          122127


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ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

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

Catastrophes(b)Institutional markets Results

 

# of

 

 

 

 

 

 

 

 

 

 

 

(in millions)

Events

 

 

U.S.

 

Japan

 

Europe

 

Other

 

Total

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

-

(c)

$

80

$

-

$

-

$

-

$

80

Windstorms and hailstorms

5

 

 

195

 

11

 

-

 

-

 

206

Earthquakes

1

 

 

11

 

-

 

-

 

-

 

11

Total catastrophe-related charges

6

 

$

286

$

11

$

-

$

-

$

297

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

1

 

$

5

$

-

$

-

$

-

$

5

Windstorms and hailstorms

6

 

 

5

 

19

 

-

 

2

 

26

Earthquakes

-

 

 

(2)

 

-

 

-

 

(2)

 

(4)

Total catastrophe-related charges

7

 

$

8

$

19

$

-

$

-

$

27

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

-

(c)

$

80

$

-

$

-

$

-

$

80

Windstorms and hailstorms

14

 

 

219

 

11

 

-

 

-

 

230

Tropical cyclone

1

 

 

2

 

-

 

-

 

3

 

5

Earthquakes

1

 

 

11

 

-

 

-

 

-

 

11

Total catastrophe-related charges

16

 

$

312

$

11

$

-

$

3

$

326

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Flooding

3

 

$

8

$

-

$

1

$

-

$

9

Windstorms and hailstorms

16

 

 

40

 

21

 

-

 

2

 

63

Earthquakes

2

 

 

12

 

23

 

-

 

7

 

42

Other

1

 

 

-

 

-

 

1

 

-

 

1

Total catastrophe-related charges

22

 

$

60

$

44

$

2

$

9

$

115

 

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

(in millions)

 

2018

 

2017

 

Change

 

 

 

2018

 

2017

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

46

$

897

 

(95)

%

 

$

136

$

1,379

 

(90)

%

Policy fees

 

40

 

44

 

(9)

 

 

 

121

 

132

 

(8)

 

Net investment income

 

198

 

150

 

32

 

 

 

581

 

435

 

34

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses incurred

 

105

 

925

 

(89)

 

 

 

318

 

1,495

 

(79)

 

Interest credited to policyholder account balances

 

90

 

66

 

36

 

 

 

246

 

186

 

32

 

Amortization of deferred policy acquisition costs

 

2

 

2

 

-

 

 

 

4

 

3

 

33

 

Non deferrable insurance commissions

 

7

 

7

 

-

 

 

 

21

 

22

 

(5)

 

General operating expenses

 

14

 

10

 

40

 

 

 

43

 

32

 

34

 

Interest expense

 

4

 

2

 

100

 

 

 

10

 

4

 

150

 

Adjusted pre-tax income

$

62

$

79

 

(22)

%

 

$

196

$

204

 

(4)

%

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

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

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

Severe Losses(d)

 

# of

 

 

 

 

 

 

 

 

 

 

(in millions)

Events

 

U.S.

 

Japan

 

Europe

 

Other

 

Total

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2017

1

$

11

$

-

$

-

$

-

$

11

2016

-

$

-

$

-

$

-

$

-

$

-

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2017

2

$

20

$

-

$

-

$

8

$

28

2016

1

$

16

$

-

$

-

$

-

$

16

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

Business and Financial Highlights

Personal Insurance operating results decreasedInstitutional Markets continued to opportunistically grow its assets under management, which drove the increase in net investment spread over recent years. Product distribution continues to be strong and the three- and nine-month periods ended September 30, 2017 compared to the same periods in 2016, driven by multiple catastrophe events in the current quarter. Personal Insurance continued its execution of strategic and portfolio actions while implementing underwriting actions andbusiness is focused on maintaining pricing discipline. Although market competition in the Personal Insurance industry has intensified, the accident year loss ratio, asdiscipline to achieve attractive risk adjusted continued to reflect the underwriting quality, portfolio diversity, and low volatility of short-tailed risk in our Personal Insurance book.return.

Institutional Markets Adjusted Pre-Tax Income

Three Months Ended September 30,

(in millions)

Quarterly 2018 and 2017 Comparison

Adjusted pre-tax income decreased primarily due to:

favorable mortality experience in the prior year period;

a decrease in policy fees primarily due to lower stable value wrap notional amount; and

higher general operating expenses  due to growth in business.

Adjusted pre-tax income reflected continued growth in reserves and assets under management, which drove the increase in net investment income with similar impact to interest credited to policyholder account balances.

128AIG | Third Quarter 20172018 Form 10-Q123


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ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

Personal InsuranceInstitutional Markets Adjusted Pre-Tax Operating Income (Loss)

Three Months Ended September 30,

(in millions)

Quarterly 2017 and 2016 Comparison

Pre-tax operating income decreased due to:

higher catastrophe losses driven by hurricanes Harvey, Irma and Maria, as well as other catastrophes including the recent Mexico earthquake; and

lower net favorable prior year loss reserve development.

Partially offsetting these decreases were:

lower accident year losses; and

higher net investment income from alternative investments partially offset by lower interest and dividends due to portfolio rebalancing.

Personal Insurance Pre-Tax Operating Income

Nine Months Ended September 30,

(in millions)

Year-to-Date 20172018 and 20162017 Comparison

Pre-tax operatingAdjusted pre-tax income decreased primarily due to:

higher catastrophe losses;

      a decrease in policy fees primarily due to lower earned premium base;stable value wrap notional amount; and

lower net favorable prior year loss reserve development.

Partially offsetting these decreases were:

      lower accident year losses;higher general operating expenses  due to growth in business.

strategic actions to reduce expenses; and

higher net investment income on alternative investments.

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 decreased in the three- and nine-month periods ended September 30, 2018 compared to the same periods in the prior year primarily driven by the pension risk transfer business written in the three- and nine-month periods ended September 30, 2017.

Premiums and deposits for Institutional Markets is a non-GAAP financial measure that includes direct premiums as well as deposits received on universal life insurance and investment-type annuity contracts, including GICs and FHLB funding agreements. Deposits decreased in the three-month period ending September 30, 2018 compared to the same period in the prior year due to GIC issuances in prior period. Deposits increased in nine-month period ending September 30, 2018 compared to prior year due to FHLB funding agreements.

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

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2018

 

2017

 

 

2018

 

2017

Premiums

$

46

$

897

 

$

136

$

1,379

Deposits

 

17

 

573

 

 

1,990

 

799

Other

 

6

 

6

 

 

58

 

21

Premiums and deposits

$

69

$

1,476

 

$

2,184

$

2,199

AIG | Third Quarter 20172018 Form 10-Q          124129


TABLE OF CONTENTS 

 

ITEM 2 |  Business Segment Operations | Consumer InsuranceLife and Retirement 

 

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

Personal Insurance NetInstitutional Markets Premiums Writtenand Deposits

Three Months Ended September 30,

(in millions)

Quarterly 20172018 and 20162017 Comparison

Net premiums writtenPremiums and deposits decreased excluding the impact of foreign exchange,primarily due to:to lower GIC deposits and pension risk transfer sales.

lower production in automobileInstitutional Markets Premiums and personal property; andDeposits

higher ceded premiums related to the additional layer of coverage added to the North American catastrophe reinsurance cover for 2017.

These decreases were partially offset by higher production growth in the AIG private client group business, Accident and Health, and warranty service programs.

Personal Insurance Net Premiums Written

Nine Months Ended September 30,

(in millions)

Year-to-Date 20172018 and 20162017 Comparison

Net premiums written decreased, excluding the impact of foreign exchange, reflecting the following:

decreased production in Accident and Health including increased reinsurance purchases on certain blocks of business to manage aggregate exposure;

lower automobilePremiums and personal property production in our Japan business; and

higher ceded premiumsdeposits decreased slightly due to the lower attachment pointsales in pension risk transfer and the additional layer of coverage on our catastrophe reinsurance programs.

These decreases were partiallystructured settlements, significantly offset by production growth$1.4 billion in the AIG private client group business.

AIG | Third Quarter 2017 Form 10-Q125


TABLE OF CONTENTS

ITEM 2 |Business Segment Operations | Consumer Insurance

Personal Insurance Combined Ratios

Three Months Ended September 30,

Quarterly 2017 and 2016 Comparison

The increase in combined ratio primarily reflected a higher loss ratio.

The higher loss ratio was driven by:

higher losses arising from multiple catastrophe events; and

lower net favorable prior year loss reserve development. 

The loss ratio increase was partially offset by improved accident year losses.

The expense ratio remained flat due to a higher general operating expense ratio almost entirely offset by a lower acquisition ratio.

Personal Insurance Combined Ratios

Nine Months Ended September 30,

Year-to-Date 2017 and 2016 Comparison

The increase in combined ratio reflected a higher loss ratio, partially offset by improvement in expense ratio.

The increase in loss ratio was driven by:

higher catastrophe losses; and

lower net favorable prior year loss reserve development.

The loss ratio increase was partially offset by improved accident year losses.

The improvement in expense ratio reflected continued strategic actions to reduce expenses.

FHLB funding agreements.

130AIG | Third Quarter 20172018 Form 10-Q126 


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ITEM 2 |  Business Segment Operations  | Other Operations

 

Other Operations

 

The following table presents Other Operations results:

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

 

2018

 

2017

 

Change

 

 

2018

 

2017

 

Change

 

Pre-tax operating income (loss) by activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United Guaranty

$

-

$

130

 

NM

%

 

$

-

$

401

 

NM

%

Institutional Markets

 

79

 

69

 

14

 

 

 

204

 

190

 

7

 

Adjusted pre-tax income (loss) by activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fuji Life

 

-

 

7

 

NM

 

 

 

43

 

3

 

NM

 

$

-

$

-

 

NM

%

 

$

-

$

43

 

NM

%

Parent and Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate General operating expenses

 

(172)

 

(167)

 

(3)

 

 

 

(563)

 

(514)

 

(10)

 

Corporate general operating expenses

 

(182)

 

(172)

 

(6)

 

 

 

(519)

 

(563)

 

8

 

Interest expense

 

(243)

 

(248)

 

2

 

 

 

(729)

 

(740)

 

1

 

 

(289)

 

(243)

 

(19)

 

 

 

(785)

 

(729)

 

(8)

 

Other income, net

 

49

 

45

 

9

 

 

 

210

 

95

 

121

 

 

54

 

49

 

10

 

 

 

171

 

210

 

(19)

 

Total Parent and Other

 

(366)

 

(370)

 

1

 

 

 

(1,082)

 

(1,159)

 

7

 

 

(417)

 

(366)

 

(14)

 

 

 

(1,133)

 

(1,082)

 

(5)

 

Pre-tax operating loss before eliminations

 

(287)

 

(164)

 

(75)

 

 

 

(835)

 

(565)

 

(48)

 

Adjusted pre-tax loss before eliminations

 

(417)

 

(366)

 

(14)

 

 

 

(1,133)

 

(1,039)

 

(9)

 

Consolidation, eliminations and other adjustments

 

(1)

 

(6)

 

83

 

 

 

75

 

-

 

NM

 

 

29

 

(1)

 

NM

 

 

 

28

 

75

 

(63)

 

Pre-tax operating loss

$

(288)

$

(170)

 

(69)

%

 

$

(760)

$

(565)

 

(35)

%

Adjusted pre-tax loss

$

(388)

$

(367)

 

(6)

%

 

$

(1,105)

$

(964)

 

(15)

%

Quarterly 20172018 and 20162017 Comparison

Pre-tax operating loss increased primarily due to the sale of United Guaranty during the fourth quarter of 2016.

Institutional Markets pre-tax operating income increased due to favorable mortality experience.

Parent and Other adjusted pre-tax operating loss was flatincreased compared to the same period in the prior year primarily due to higher gainsinterest expense driven by debt issuances totaling $2.5 billion at the end of the first quarter of 2018. Other income increased as a result of higher income on securities where we electedpurchased under reverse repurchase agreements, partially offset by lower income from investments accounted for under the fair value option offset by higher corporate general operating expenses.and lower income on available for sale investments.

year-to-dateYear-to-date 2018 and 2017 and 2016 Comparison

Pre-taxParent and Other adjusted pre-tax loss increased compared to the same period in the prior year. General operating loss increasedexpenses decreased primarily due to one-time payments in the sale of United Guaranty during the fourthsecond quarter of 2016.

Institutional Markets pre-tax operating2017 related to executive leadership changes. Interest expense increased as a result of debt issuances totaling $2.5 billion at the end of the first quarter of 2018. Other income increased due to higher net spreads driven by growth in business.

Parent and Other pre-tax operating loss decreased as a result of gains on securities where we electedlower income from investments accounted for under the fair value option, partially and lower income on available for sale investments, offset by higher general operating expenses related to one time paymentsinvestment income for recent executive leadership changes.equity securities and income on securities purchased under reverse repurchase agreements.

Fuji Life pre-tax operating results increased primarily as a result of increases in underwriting income as a result of new products launched during 2016 as well as growth within existing product lines. Fuji Life was sold on April 30, 2017.

 

AIG | Third Quarter 20172018 Form 10-Q          127131


TABLE OF CONTENTS 

 

ITEM 2 |  Business Segment Operations  | Legacy Portfolio

 

Legacy Portfolio

 

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

Legacy Property and Casualty Run-Off Insurance Lines — consists of asbestos and environmental exposures and other exposures within certain Property and Casualty profit centers no longer written, including excess workers’ compensation, environmental impairment liability, public entity liability, accident & health, physicians and surgeons professional liability, and various other workers’ compensation and general liability exposures.

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

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

Legacy Investments includeIncludes investment classes that we have placed into run-off (life settlements, Legacy Global Real Estateincluding holdings in direct investments as well as investments in global capital markets and the Direct Investment book) and equity-like securities with high yield, high-risk characteristics.global real estate.

BUSINESS STRATEGY 

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

      Third party and affiliated reinsurance and retrocessions to improve capital efficiency

      Commutations of assumed reinsurance and direct policy buy-backs

      Enhance insured policyholder options and claims resolution strategies

      Enhanced asset liability management and expense management

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

SALE OF NON-CONTROLLING INTEREST IN FORTITUDE

Fortitude Re was formed during the asset is under our sole control, we expectfirst quarter of 2018 in connection with a series of affiliated reinsurance transactions related to achieve this through a combination of unaffiliated and affiliated sales and securitizations. Where the asset is not under our sole control, there are fewer options as we may, for example, have fiduciary duty obligations to joint venture partners (such as in our Legacy Global Real Estate book)Portfolio. Those reinsurance transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines into a single legal entity. As of September 30, 2018, the affiliated transactions included the cession of approximately $31 billion of reserves from our Legacy Life and Retirement Run-Off Lines and approximately $5 billion of reserves from our Legacy General Insurance Run-Off Lines related to business written by multiple wholly-owned AIG subsidiaries. In the second quarter of 2018, we formed Fortitude Holdings, a wholly-owned subsidiary of AIG, to act as a holding company for Fortitude Re.

On July 31, 2018, we entered into a membership interest purchase agreement (the Purchase Agreement) with Fortitude Holdings and TCG, an affiliate of The Carlyle Group L.P. (Carlyle).  Subject to the satisfaction or waiver of certain conditions set forth therein, the Purchase Agreement provides that TCG will purchase a 19.9 percent ownership interest in Fortitude Holdings (the Fortitude Re Transaction).  Following the closing of the Fortitude Re Transaction (the Fortitude Re Closing), Fortitude Holdings will own 100 percent of the outstanding common shares of Fortitude Re and AIG will have an 80.1 percent ownership interest in Fortitude Holdings.

Subject to certain adjustments specified in the Purchase Agreement, TCG will pay us approximately $476 million, which is based on Fortitude Re’s total shareholder’s equity of $2.9 billion as of March 31, 2018 excluding planned distributions that the parties will seek to cause to be paid to us on a non-pro rata basis prior to the end of the 18th month following the Fortitude Re Closing, subject to regulatory approvals (the Target Distribution). $381 million of the purchase price will be paid at the Fortitude Re Closing and up to $95 million will be paid following December 31, 2023 (the Deferred Payment), subject to the purchase price adjustment described below. To the extent we do not receive all or a portion of the Target Distribution within 18 months of the Fortitude Re Closing, TCG will pay us up to an additional $100 million. 

132AIG | Third Quarter 20172018 Form 10-Q128 


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ITEM 2 |Business Segment Operations| Legacy Portfolio

As part of the establishment of Fortitude Re, we implemented a capital maintenance agreement (CMA) with Fortitude Re that remains in effect so long as we own at least 50 percent of Fortitude Re.  If there are any CMA funding obligations that occur within 18 months of the Fortitude Re Closing, we will fund those obligations on a non-dilutive basis to TCG, but only if, and to the extent, we actually receive the Target Distribution prior to the expiration of such period. 

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 assets have been eliminated in AIG’s consolidated financial statements since the counterparties were wholly-owned. In the event of a sale of a controlling interest in Fortitude Holdings, our Legacy Portfolio may 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 interest in Fortitude Holdings becomes non-controlling. This loss would be incremental to any gain or loss recognized on the sale of our controlling interest in Fortitude Holdings.

We have also agreed to a post-closing purchase price adjustment wherein we 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 Holdings. Any amount due to TCG in respect of this will be offset by the amount of the Deferred Payment otherwise due from TCG to us.

We have agreed to commit to invest $6 billion of investment assets into various Carlyle strategies within the 30 months following the Fortitude Re Closing, and will be required to pay a proportionate amount of an agreed make-whole fee to the extent we fail to satisfy such commitment.

Our Board of Directors and the governing bodies of TCG and Fortitude Holdings have each approved the Fortitude Re Transaction.  Each of the parties has made customary representations and warranties in the Purchase Agreement and agreed to certain covenants and agreements.  We have agreed, subject to certain exceptions, to cause Fortitude Re to conduct its business in all material respects in the ordinary course of business consistent with past practice between the date of the Purchase Agreement and the Fortitude Re Closing and that Fortitude Re will not engage in certain kinds of transactions during such period. 

As contemplated by the Purchase Agreement, at the Fortitude Re Closing, we, Fortitude Holdings and TCG will enter into an Amended and Restated Limited Liability Company Operating Agreement of Fortitude Holdings, governing the rights of the parties thereto.  In addition, at the Fortitude Re Closing, Fortitude Re will enter into (1) a Transition Services Agreement with us, pursuant to which we and certain of our affiliates will provide certain transition services to Fortitude Re, (2) an Investment Management Agreement with an affiliate of TCG (the Investment Manager), pursuant to which the Investment Manager will provide certain alternative asset management and advisory services to Fortitude Re with respect to certain asset classes and (3) an Exclusivity Agreement with the Investment Manager pursuant to which the Investment Manager will be the exclusive provider of alternative asset management and advisory services with respect to certain new business acquired by Fortitude Re following the Fortitude Re Closing with respect to certain asset classes. 

Consummation of the Fortitude Re Transaction is subject to customary closing conditions, including, among others, (1) the receipt of regulatory approval of the Bermuda Monetary Authority, (2) the absence of any injunction, judgment or ruling of a governmental authority enjoining, restraining or otherwise prohibiting the Fortitude Re Transaction and (3) subject to specified materiality standards, the accuracy of the representations and warranties of, and performance of all covenants by, the parties as set forth in the Purchase Agreement. In addition, our obligations and the obligations of Fortitude Holdings to consummate the Fortitude Re Transaction are conditioned on Fortitude Re’s receipt of approvals from its board of directors regarding entry into the Investment Management Agreement and the Exclusivity Agreement. The Purchase Agreement also provides for certain termination rights for both us and TCG.

AIG | Third Quarter 2018 Form 10-Q133


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ITEM 2 |  Business Segment Operations  | Legacy Portfolio

 

LEGACY PORTFOLIO RESULTS

The following table presents Legacy Portfolio results:

Three Months Ended

 

 

 

 

Nine Months Ended

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

September 30,

 

Percentage

 

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

September 30,

 

Percentage

 

(in millions)

 

2017

 

2016

 

Change

 

 

 

2017

 

2016

 

Change

 

 

2018

 

2017

 

Change

 

2018

 

2017

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums

$

136

$

180

 

(24)

%

 

$

449

$

526

 

(15)

%

$

131

$

136

 

(4)

%

 

$

406

$

449

 

(10)

%

Policy fees

 

38

 

29

 

31

 

 

 

105

 

103

 

2

 

 

30

 

38

 

(21)

 

 

92

 

105

 

(12)

 

Net investment income

 

690

 

810

 

(15)

 

 

 

2,142

 

2,153

 

(1)

 

 

610

 

690

 

(12)

 

 

1,798

 

2,142

 

(16)

 

Other income (loss)

 

149

 

293

 

(49)

 

 

 

539

 

221

 

144

 

 

43

 

149

 

(71)

 

 

135

 

539

 

(75)

 

Total operating revenues

 

1,013

 

1,312

 

(23)

 

 

 

3,235

 

3,003

 

8

 

Total adjusted revenues

 

814

 

1,013

 

(20)

 

 

2,431

 

3,235

 

(25)

 

Benefits and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder benefits and losses and loss adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses incurred

 

500

 

1,137

 

(56)

 

 

 

1,470

 

2,194

 

(33)

 

 

545

 

500

 

9

 

 

1,504

 

1,470

 

2

 

Interest credited to policyholder account balances

 

61

 

73

 

(16)

 

 

 

181

 

211

 

(14)

 

 

57

 

61

 

(7)

 

 

179

 

181

 

(1)

 

Amortization of deferred policy acquisition costs

 

28

 

21

 

33

 

 

 

70

 

82

 

(15)

 

 

25

 

28

 

(11)

 

 

62

 

70

 

(11)

 

General operating and other expenses

 

105

 

110

 

(5)

 

 

 

352

 

373

 

(6)

 

 

96

 

105

 

(9)

 

 

300

 

352

 

(15)

 

Interest expense

 

33

 

70

 

(53)

 

 

 

103

 

237

 

(57)

 

 

7

 

33

 

(79)

 

 

23

 

103

 

(78)

 

Total benefits and expenses

 

727

 

1,411

 

(48)

 

 

 

2,176

 

3,097

 

(30)

 

 

730

 

727

 

-

 

 

2,068

 

2,176

 

(5)

 

Pre-tax operating income (loss)

$

286

$

(99)

 

NM

%

 

$

1,059

$

(94)

 

NM

%

Pre-tax operating income (loss) by type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and Casualty Run-Off Insurance Lines

$

63

$

68

 

(7)

%

 

$

207

$

94

 

120

%

Life Insurance Run-Off Lines

 

79

 

(510)

 

NM

 

 

 

308

 

(356)

 

NM

 

Adjusted pre-tax income

$

84

$

286

 

(71)

%

 

$

363

$

1,059

 

(66)

%

Adjusted pre-tax income by type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General Insurance Run-Off Lines

$

(37)

$

63

 

NM

%

 

$

69

$

207

 

(67)

%

Life and Retirement Run-Off Lines

 

68

 

79

 

(14)

 

 

154

 

308

 

(50)

 

Legacy Investments

 

144

 

343

 

(58)

 

 

 

544

 

168

 

224

 

 

53

 

144

 

(63)

 

 

140

 

544

 

(74)

 

Pre-tax operating income (loss)

$

286

$

(99)

 

NM

%

 

$

1,059

$

(94)

 

NM

%

Adjusted pre-tax income

$

84

$

286

 

(71)

%

 

$

363

$

1,059

 

(66)

%

Business and Financial Highlights

In February 2018, we used $2.6 billion of existing Legacy Portfolio cash and investment assets to capitalize Fortitude Re in order to enable it to assume insurance risk and other economic risk from U.S. and Bermudian insurance companies. These assets included approximately $1.6 billion of capital released by Eaglestone, an affiliated entity, to AIG Parent as a result of the commutation of certain property and casualty risks from other AIG subsidiaries, which were subsequently ceded to Fortitude Re. Fortitude Re also has additional eligible regulatory capital under the Bermuda Monetary Authority capital framework in the form of $550 million in letter of credit agreements with guarantees from AIG Parent. In the nine-month period ended September 30, 2017, the Legacy Investment portfolio executed several transactions with external parties for total consideration2018, Fortitude Re disbursed $444 million of approximately $676 million, which included sales of a portion of our life settlements portfolio with a face value (death benefits) of approximately $1.9 billion, resulting in a loss on the sale of $123 million. The majority of the consideration received was used to pay down intercompany loans and notes with affiliated insurance companies. In addition, the Legacy Investment portfolio returned approximately $1.0 billion of cash proceedstax sharing payments to AIG Parent in the nine-month period ended September 30, 2017, including $191 million from the sale of an AIG-sponsored fund that occurred in the fourth quarter of 2016.

On September 26, 2017, we signed a Purchase and Sale Agreement to sell the remaining life settlements contracts. The sale was completed on November 1, 2017. As a result, an impairment charge of $273 million was recorded in net realized capital losses in the third quarter of 2017 to write down the contracts to their fair market value.Parent.

134AIG | Third Quarter 20172018 Form 10-Q129


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ITEM 2 |  Business Segment Operations  | Legacy Portfolio

 

Legacy Portfolio Adjusted Pre-Tax Operating Income (Loss)

Three Months Ended September 30,

(in millions)

Quarterly 2018 and 2017 Comparison

Adjusted pre-tax income decreased due to:

·lower Legacy Life and Retirement earnings compared to the three-month period ended September 30, 2017 due to lower net investment income;

·lower Legacy General Insurance earnings compared to the three-month period ended September 30, 2017 due to Japanese catastrophe losses and lower net investment income; and

·lower Legacy Investment earnings compared to the three-month period ended September 30, 2017 due to continued dispositions of non- insurance investment assets, primarily driven by the sale of the life settlements portfolio in 2017 and 2016 Comparison

Pre-tax operating income increased due to higher Legacy Life pre-tax operating income due to significantly lower loss recognitiongain on certain payout annuities from the update of actuarial assumptionsfair value option portfolios in the three-month period ended September 30, 2017 compared to the same period in the prior year.

Partially offsetting the increase was lower Legacy Investment pre-tax operating income driven primarily by lower gains on portfolios for which the fair value option was elected, and lower income on the life settlements portfolio as a result of partial sales.2018.

Legacy Portfolio Adjusted Pre-Tax Operating Income (Loss)

Nine Months Ended September 30,

(in millions)

Year-to-Date 20172018 and 20162017 Comparison

Pre-tax operatingAdjusted pre-tax income increaseddecreased due to:

·        significantly lower loss recognition on certain payout annuities from the update of actuarial assumptions inLegacy Life and Retirement earnings compared to the nine-month period ended September 30, 2017 compareddue to lower net investment income and lower mortality gains than in the same period in the prior year;

·        increasedlower Legacy General Insurance earnings compared to the nine-month period ended September 30, 2017 due to Japanese catastrophe losses and lower net investment income; and

·lower Legacy Investment pre-tax operating incomeearnings compared to the nine-month period ended September 30, 2017 due to continued dispositions of non- insurance investment assets, primarily driven by the sale of the life settlements portfolio in 2017 compared to 2016 driven by higher fair value gainsand lower gain on portfolios for which the fair value option was elected; and

increased Legacy Property and Casualty pre-tax operating income due to unfavorable prior year developmentportfolios in the prior year.nine-month period ended September 30, 2018.

AIG | Third Quarter 20172018 Form 10-Q          130135


TABLE OF CONTENTS 

 

ITEM 2 | Investments

 

Investments

Overview

Our investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are driven by the respective business modulesoperating segments and AIG Parent. The primary objectives are generation of investment income, preservation of capital, liquidity management and growth of surplus to support the insurance products. The majority of assets backing our insurance liabilities consist of fixed maturity securities.

Investment Highlights duringin the Nine Months Ended September 30, 20172018

        A decreaserise in interest rates and narrowingwidening credit spreads, as well as the adoption of the Recognition and Measurement of Financial Assets and Financial Liabilities Standard (Financial Instruments Recognition and Measurement Standard) on January 1, 2018, which resulted in the reclassification of unrealized gains in our equity securities to retained earnings, resulted in a net unrealized gainloss in our investment portfolio.  Net unrealized gains in our available for sale portfolio increaseddecreased to approximately $14.1$4.7 billion as of September 30, 20172018 from approximately $9.7$13.9 billion as of December 31, 2016.2017.

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

        DuringLower investment returns in our hedge fund portfolio and a decline in income from fixed maturity securities for which the first quarterfair value option was elected as a result of 2017, we funded the adverse development reinsurance agreement entered into with NICO. The approximate $10.2 billion fundingcredit spread widening and rising interest rates, as well as negative performance of this agreement was the primary reason for the decrease in the invested asset portfolio in the nine-month period ended September 30, 2017.our fair value option securities portfolio.

        During the nine-month period ended September 30, 2017,2018, we reduced our hedge fund portfolio by approximately $1.8$1.7 billion as a result of redemptions consistent with our planned reduction of exposure. Our hedge fund portfolio experienced above average returns in the nine-month period ended September 30, 2017 due to higher equity market performance.

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

Other-than-temporary impairments decreased due to lower impairments in our structured securities and corporate bond portfolios.

        DuringIn the secondfirst quarter of 2017, partial sale of2018, we sold our investmentremaining interest in Arch Capital, Group Ltd. (Arch), which we received as part of the consideration for selling United Guaranty to Arch in 2016.

Our acquisition of Validus closed in the third quarter of 2018, increasing our investment portfolio by approximately $6.6 billion.

We agreed to sell certain private equity funds in our portfolio during the third quarter of 2018.

Investment Strategies

Investment strategies are based on considerations that include the local and general market conditions, liability duration and cash flow characteristics, rating agency and regulatory capital considerations, legal investment limitations, tax optimization and diversification.

Some of our key investment strategies are as follows:

      Fixed maturity securities held by the U.S. insurance companies included in Property CasualtyGeneral Insurance Companies consist of a mix of instruments that meet our current risk-return, tax, liquidity, credit quality and diversification objectives.

      Outside of the U.S., fixed maturity securities held by Property CasualtyGeneral Insurance Companiescompanies consist primarily of high-grade securities generally denominated in the currencies of the countries in which we operate.

      While more of a focus is placed on asset-liability management in Life Insurance Companies,and Retirement companies, our fundamental strategy across all of our investment portfolios is to optimize the duration characteristics of the assets within a target range based on comparable liability characteristics, to the extent practicable.

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

136AIG | Third Quarter 20172018 Form 10-Q131


TABLE OF CONTENTS 

 

ITEM 2 | Investments

 

The following table presents the components of Net Investment Income:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Interest and dividends

$

2,960

$

3,213

 

$

9,037

$

9,698

Alternative investments(a)

 

355

 

365

 

 

1,174

 

309

Other investment income(b)

 

237

 

320

 

 

894

 

810

Total investment income

 

3,552

 

3,898

 

 

11,105

 

10,817

Investment expenses

 

136

 

115

 

 

390

 

338

Total net investment income

$

3,416

$

3,783

 

$

10,715

$

10,479

(a)  Includes income from hedge funds, private equity funds and affordable housing partnerships. Hedge funds for which we elected the fair value option are recorded as of the balance sheet date. Other hedge funds are generally reported on a one-month lag, while private equity funds are generally reported on a one-quarter lag.

(b)  Primarily includes changes in fair value of certain fixed maturity securities where the fair value option has been elected and income on life settlements. For the three-month periods ended September 30, 2017 and 2016, the investment income (loss) recorded on these securities was $138 million and $98 million, respectively, and on life settlements was $55 million and $161 million, respectively. For the nine-month periods ended September 30, 2017 and 2016, the investment income (loss) recorded on these securities was $479 million and $370 million, respectively, and on life settlements was $256 million and $360 million, respectively.

Net investment income for the three-month period ended September 30, 2017 was lower than the same period in the prior year due to lower invested assets, lower income on our hedge fund portfolio, and blended investment yields on new investments that were lower than blended rates on investments that were sold, matured or called partially offset by higher gains on assets for which we elected the fair value option. Net investment income for the nine-month period ended September 30, 2017 was higher than the same period in the prior year as higher income on our alternative investments, primarily in our hedge fund portfolio, and higher gains on assets for which we elected the fair value option, more than offset lower invested assets and blended investment yields on new investments that were lower than blended rates on investments that were sold, matured or called.

Attribution of Net Investment Income to Operating ModulesSegments

Net investment income is attributed to our businesses based on internal models consistent with the nature of the underlying businesses.

For CommercialGeneral Insurance — LiabilityNorth America and Financial Lines, Property and Special Risks and Consumer Insurance — Personal InsuranceInternational and Legacy Property CasualtyGeneral Insurance Run-Off Lines, we estimate investable funds based primarily on loss reserves and unearned premiums. The allocation of net investment income of the Property CasualtyGeneral Insurance Companiescompanies to modulessegments is calculated based on these estimated investable funds, consistent with the approximate duration of the liabilities and the required economic capital allocation for each module.segment

For Consumer InsuranceLife and Retirement — Individual Retirement, Group Retirement, and Life Insurance, Other Operations —and Institutional Markets and Legacy Life Insuranceand Retirement Run-Off Lines, net investment income is attributed based on invested assets from segregated product line portfolios held in our Life Insurance Companies.and Retirement companies. All invested assets of the Life Insurance Companiesand Retirement companies in excess of liabilities are allocated based on estimates of required economic capital allocation for each module.segment.

Asset Liability Measurement

For the Property CasualtyGeneral Insurance Companies,companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As a result, the investment strategy within the Property CasualtyGeneral Insurance Companiescompanies focuses on growth of surplus and preservation of capital, subject to liability and other business considerations.

The Property CasualtyGeneral Insurance Companiescompanies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies and also invest in structured securities collateralized by, among other assets, residential and commercial real estate and commercial mortgage loans. While invested assets backing reserves of the Property CasualtyGeneral Insurance Companiescompanies are primarily invested in conventional fixed maturity securities, we have continued to allocate a portion of our investment activity into asset classes that offer higher yields, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments for their risk-return attributes, as well as to manage our exposure to potential changes in interest rates. This asset diversification has maintained stable average yields while the overall credit ratings of our fixed maturity securities were largely unchanged. We expect to continue to pursue this investment strategy to meet the Property CasualtyGeneral Insurance Companies’companies’ liquidity, duration and credit quality objectives as well as current risk‑return and tax objectives.

In addition, the Property CasualtyGeneral Insurance Companiescompanies seek to enhance returns through selective investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader portfolio. 

AIG | Third Quarter 2017 Form 10-Q132


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ITEM 2 | Investments

Fixed maturity securities of the Property CasualtyGeneral Insurance Companiescompanies’ domestic operations, with an average duration of 4.13.9 years, are currently comprised of corporate bonds, structured securities, taxable municipal bonds and government and agency bonds as well as tax-exempt securities, which provide attractive risk-adjusted after-tax returns. The majority of these high quality investments are rated A or higher based on composite ratings.

Fixed maturity securities held in the Property CasualtyGeneral Insurance Companiescompanies’ foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 3.4 years.

The investment strategy of the Life Insurance Companiesand Retirement companies is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset‑liability management and available investment opportunities.

The Life Insurance Companiesand Retirement companies use asset‑liability management as a primary tool to monitor and manage risk in their businesses. The Life Insurance Companies'and Retirement companies' fundamental investment strategy is to maintain a diversified, high to medium quality portfolio of fixed maturity securities that, to the extent practicable, complements the characteristics of liabilities, including duration, which is a measure of sensitivity to changes in interest rates. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in duration and others are longer in duration.  An extended low interest rate environment may result in a lengthening of liability durations from initial estimates, primarily due to lower lapses, which may require us to further extend the duration of the investment portfolio.

The Life Insurance Companiesand 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 Insurance Companies and Retirement companies seek to enhance returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields.  While a diversified portfolio of alternative investments remains a fundamental component of the investment strategy of the Life Insurance Companies,and Retirement companies, we intend to reducehave reduced the overall size of the hedge fund

AIG | Third Quarter 2018 Form 10-Q137


TABLE OF CONTENTS

ITEM 2 | Investments

portfolio, in light of changing market conditions and perceived market opportunities, and to continue reducing the size of the private equity portfolio.

Fixed maturity securities of the Life Insurance Companiesand 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.

Fixed maturity securities held in the Life Insurance Companiesand Retirement companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 20.621.1 years.

NAIC Designations of Fixed Maturity Securities

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

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

AIG | Third Quarter 2017 Form 10-Q133


TABLE OF CONTENTS

ITEM 2 | Investments

The following table presents the fixed maturity security portfolio of U.S. Insurance Companies categorized by NAIC Designation, at fair value:

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

 

Investment

 

 

NAIC Designation

 

1

 

2

 

Grade

 

 

3

 

4

 

5

 

6

 

Grade

 

Total

 

1

 

2

 

Grade

 

 

3

 

4

 

5

 

6

 

Grade

 

Total

Other fixed maturity securities

$

73,490

$

69,224

$

142,714

 

$

6,105

$

4,686

$

1,264

$

154

$

12,209

$

154,923

$

85,079

$

69,520

$

154,599

 

$

5,982

$

6,089

$

1,698

$

135

$

13,904

$

168,503

Mortgage-backed, asset-backed and collateralized

 

63,960

 

3,059

 

67,019

 

 

407

 

81

 

137

 

2,364

 

2,989

 

70,008

 

64,493

 

2,993

 

67,486

 

 

538

 

332

 

162

 

4,247

 

5,279

 

72,765

Total*

$

137,450

$

72,283

$

209,733

 

$

6,512

$

4,767

$

1,401

$

2,518

$

15,198

$

224,931

$

149,572

$

72,513

$

222,085

 

$

6,520

$

6,421

$

1,860

$

4,382

$

19,183

$

241,268

*     Excludes $25.5$2.9 billion of fixed maturity securities for which no NAIC Designation is available because they are held in legal entities within U.S. Insurance Companies that do not require a statutory filing.

The following table presents the fixed maturity security portfolio of U.S. Insurance Companies categorized by composite AIG credit rating, at fair value:

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

Below

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

CCC and

 

Investment

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

CCC and

 

Investment

 

 

Composite AIG Credit Rating

 

AAA/AA/A

 

BBB

 

Grade

 

 

BB

 

B

 

Lower

 

Grade

 

Total

 

AAA/AA/A

 

BBB

 

Grade

 

 

BB

 

B

 

Lower

 

Grade

 

Total

Other fixed maturity securities

$

74,088

$

69,232

$

143,320

 

$

5,580

$

4,653

$

1,370

$

11,603

$

154,923

$

85,352

$

69,571

$

154,923

 

$

5,804

$

6,546

$

1,230

$

13,580

$

168,503

Mortgage-backed, asset-backed and collateralized

 

44,390

 

4,737

 

49,127

 

 

992

 

709

 

19,180

 

20,881

 

70,008

 

48,278

 

4,229

 

52,507

 

 

1,184

 

588

 

18,486

 

20,258

 

72,765

Total*

$

118,478

$

73,969

$

192,447

 

$

6,572

$

5,362

$

20,550

$

32,484

$

224,931

$

133,630

$

73,800

$

207,430

 

$

6,988

$

7,134

$

19,716

$

33,838

$

241,268

*    Excludes $25.5$2.9 billion of fixed maturity securities for which no NAIC Designation is available because they are held in legal entities within U.S. Insurance Companies that do not require a statutory filing.

Credit Ratings

At September 30, 2017,2018, approximately 9187 percent of our fixed maturity securities were held by our domestic entities. Approximately 17 percent of these securities were rated AAA by one or more of the principal rating agencies, and approximately 1516 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.

138AIG | Third Quarter 2018 Form 10-Q


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ITEM 2 | Investments

Moody’s Investors’Investors Service Inc. (Moody’s), Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc. (S&P), or similar foreign rating services rate a significant portion of our foreign entities’ fixed maturity securities portfolio. Rating services are not available for some foreign-issued securities. Our Credit Risk Management department closely reviews the credit quality of the foreign portfolio’s non-rated fixed maturity securities. At September 30, 2017,2018, approximately 2321 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 87 percent were below investment grade or not rated. Approximately 3933 percent of the foreign entities’ fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.

AIG | Third Quarter 2017 Form 10-Q134


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ITEM 2 | Investments

Composite AIG Credit Ratings

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

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

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

Available for Sale

 

Other

 

Total

 

Available for Sale

 

Other

 

Total

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

September 30,

 

December 31,

 

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Rating:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other fixed maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

11,332

 

$

11,791

 

$

2,731

 

$

2,807

 

$

14,063

 

$

14,598

 

$

11,367

 

$

11,644

 

$

2,563

 

$

2,656

 

$

13,930

 

$

14,300

 

AA

 

30,059

 

 

33,647

 

 

221

 

 

250

 

 

30,280

 

 

33,897

 

 

28,147

 

 

29,560

 

 

132

 

 

212

 

 

28,279

 

 

29,772

 

A

 

43,879

 

 

45,619

 

 

1,635

 

 

1,612

 

 

45,514

 

 

47,231

 

 

42,056

 

 

45,049

 

 

1,538

 

 

1,745

 

 

43,594

 

 

46,794

 

BBB

 

71,591

 

 

68,700

 

 

142

 

 

76

 

 

71,733

 

 

68,776

 

 

69,729

 

 

70,636

 

 

157

 

 

138

 

 

69,886

 

 

70,774

 

Below investment grade

 

12,584

 

 

12,832

 

 

17

 

 

17

 

 

12,601

 

 

12,849

 

 

14,088

 

 

13,173

 

 

-

 

 

17

 

 

14,088

 

 

13,190

 

Non-rated

 

1,048

 

 

890

 

 

-

 

 

-

 

 

1,048

 

 

890

 

 

1,321

 

 

1,073

 

 

-

 

 

-

 

 

1,321

 

 

1,073

 

Total

$

170,493

 

$

173,479

 

$

4,746

 

$

4,762

 

$

175,239

 

$

178,241

 

$

166,708

 

$

171,135

 

$

4,390

 

$

4,768

 

$

171,098

 

$

175,903

 

Mortgage-backed, asset-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

backed and collateralized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

29,648

 

$

28,593

 

$

894

 

$

1,055

 

$

30,542

 

$

29,648

 

$

29,188

 

$

30,306

 

$

438

 

$

818

 

$

29,626

 

$

31,124

 

AA

 

7,593

 

 

6,114

 

 

615

 

 

714

 

 

8,208

 

 

6,828

 

 

10,394

 

 

8,158

 

 

890

 

 

610

 

 

11,284

 

 

8,768

 

A

 

7,843

 

 

8,504

 

 

364

 

 

307

 

 

8,207

 

 

8,811

 

 

7,155

 

 

7,760

 

 

222

 

 

382

 

 

7,377

 

 

8,142

 

BBB

 

4,591

 

 

4,996

 

 

178

 

 

303

 

 

4,769

 

 

5,299

 

 

4,070

 

 

4,414

 

 

159

 

 

163

 

 

4,229

 

 

4,577

 

Below investment grade

 

17,578

 

 

19,838

 

 

5,838

 

 

6,790

 

 

23,416

 

 

26,628

 

 

15,007

 

 

17,194

 

 

5,202

 

 

6,004

 

 

20,209

 

 

23,198

 

Non-rated

 

25

 

 

13

 

 

18

 

 

67

 

 

43

 

 

80

 

 

198

 

 

25

 

 

119

 

 

27

 

 

317

 

 

52

 

Total

$

67,278

 

$

68,058

 

$

7,907

 

$

9,236

 

$

75,185

 

$

77,294

 

$

66,012

 

$

67,857

 

$

7,030

 

$

8,004

 

$

73,042

 

$

75,861

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AAA

$

40,980

 

$

40,384

 

$

3,625

 

$

3,862

 

$

44,605

 

$

44,246

 

$

40,555

 

$

41,950

 

$

3,001

 

$

3,474

 

$

43,556

 

$

45,424

 

AA

 

37,652

 

 

39,761

 

 

836

 

 

964

 

 

38,488

 

 

40,725

 

 

38,541

 

 

37,718

 

 

1,022

 

 

822

 

 

39,563

 

 

38,540

 

A

 

51,722

 

 

54,123

 

 

1,999

 

 

1,919

 

 

53,721

 

 

56,042

 

 

49,211

 

 

52,809

 

 

1,760

 

 

2,127

 

 

50,971

 

 

54,936

 

BBB

 

76,182

 

 

73,696

 

 

320

 

 

379

 

 

76,502

 

 

74,075

 

 

73,799

 

 

75,050

 

 

316

 

 

301

 

 

74,115

 

 

75,351

 

Below investment grade

 

30,162

 

 

32,670

 

 

5,855

 

 

6,807

 

 

36,017

 

 

39,477

 

 

29,095

 

 

30,367

 

 

5,202

 

 

6,021

 

 

34,297

 

 

36,388

 

Non-rated

 

1,073

 

 

903

 

 

18

 

 

67

 

 

1,091

 

 

970

 

 

1,519

 

 

1,098

 

 

119

 

 

27

 

 

1,638

 

 

1,125

 

Total

$

237,771

 

$

241,537

 

$

12,653

 

$

13,998

 

$

250,424

 

$

255,535

 

$

232,720

 

$

238,992

 

$

11,420

 

$

12,772

 

$

244,140

 

$

251,764

 

 

AIG | Third Quarter 20172018 Form 10-Q          135139


TABLE OF CONTENTS 

 

ITEM 2 | Investments

 

Available‑for‑Sale Investments

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

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

2018

 

2017

Bonds available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government and government sponsored entities

 

 

 

 

 

$

2,384

$

1,992

 

 

 

 

 

$

3,093

$

2,656

Obligations of states, municipalities and political subdivisions

 

 

 

 

 

 

18,831

 

24,772

 

 

 

 

 

 

16,512

 

18,644

Non-U.S. governments

 

 

 

 

 

 

15,593

 

14,535

 

 

 

 

 

 

15,219

 

15,659

Corporate debt

 

 

 

 

 

 

133,685

 

132,180

 

 

 

 

 

 

131,884

 

134,176

Mortgage-backed, asset-backed and collateralized:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

 

 

 

 

 

37,509

 

37,374

 

 

 

 

 

 

35,226

 

37,234

CMBS

 

 

 

 

 

 

13,518

 

14,271

 

 

 

 

 

 

12,691

 

13,841

CDO/ABS

 

 

 

 

 

 

16,251

 

16,413

 

 

 

 

 

 

18,095

 

16,782

Total mortgage-backed, asset-backed and collateralized

 

 

 

 

 

 

67,278

 

68,058

 

 

 

 

 

 

66,012

 

67,857

Total bonds available for sale*

 

 

 

 

 

 

237,771

 

241,537

Total bonds available for sale(a)

 

 

 

 

 

 

232,720

 

238,992

Equity securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

 

 

 

1,056

 

1,065

 

 

 

 

 

 

-

 

1,061

Preferred stock

 

 

 

 

 

 

577

 

752

 

 

 

 

 

 

-

 

533

Mutual funds

 

 

 

 

 

 

74

 

261

 

 

 

 

 

 

-

 

114

Total equity securities available for sale(b)

 

 

 

 

 

 

1,707

 

2,078

 

 

 

 

 

 

-

 

1,708

Total

 

 

 

 

 

$

239,478

$

243,615

 

 

 

 

 

$

232,720

$

240,700

*(a)  At September 30, 20172018 and December 31, 2016,2017, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $31.2$30.6 billion and $33.6$31.5 billion, respectively.

(b)  As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and accounted for as available for sale securities.

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

September 30,

 

December 31,

September 30,

 

December 31,

(in millions)

 

2017

 

 

2016

 

2018

 

 

2017

Japan

$

1,820

 

$

2,140

$

1,706

 

$

1,791

Germany

 

1,635

 

 

1,168

 

1,139

 

 

1,623

United Kingdom

 

1,263

 

 

815

Canada

 

1,065

 

 

1,115

 

1,026

 

 

1,051

France

 

882

 

 

667

 

968

 

 

923

United Kingdom

 

882

 

 

1,214

Netherlands

 

610

 

 

608

United Arab Emirates

 

466

 

 

432

Mexico

 

609

 

 

637

 

459

 

 

513

Netherlands

 

561

 

 

445

Indonesia

 

452

 

 

366

 

446

 

 

493

Norway

 

438

 

 

456

 

383

 

 

409

Chile

 

352

 

 

360

Other

 

6,571

 

 

6,417

 

7,183

 

 

6,659

Total

$

15,648

 

$

14,586

$

15,268

 

$

15,716

140AIG | Third Quarter 20172018 Form 10-Q136 


TABLE OF CONTENTS 

 

ITEM 2 | Investments

 

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

September 30, 2017

 

 

September 30, 2018

 

 

 

 

 

 

 

Non-

 

 

 

 

December 31,

 

 

 

 

 

Non-

 

 

 

 

December 31,

 

 

 

Financial

 

Financial

 

Structured

 

 

 

2016

 

 

 

Financial

 

Financial

 

Structured

 

 

 

2017

(in millions)

 

Sovereign

 

Institution

 

Corporates

 

Products

 

Total

 

Total

 

Sovereign

 

Institution

 

Corporates

 

Products

 

Total

 

Total

Euro-Zone countries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

France

$

882

$

1,172

$

2,020

$

-

$

4,074

$

3,788

$

968

$

1,642

$

1,894

$

-

$

4,504

$

4,169

Germany

 

1,635

 

146

 

1,971

 

1

 

3,753

 

3,227

 

1,139

 

162

 

2,339

 

-

 

3,640

 

3,803

Netherlands

 

561

 

871

 

1,274

 

56

 

2,762

 

2,658

 

610

 

866

 

1,080

 

89

 

2,645

 

2,868

Ireland

 

67

 

-

 

489

 

836

 

1,392

 

1,071

Belgium

 

190

 

107

 

893

 

-

 

1,190

 

1,075

 

286

 

134

 

868

 

-

 

1,288

 

1,216

Ireland

 

11

 

-

 

582

 

551

 

1,144

 

1,263

Spain

 

-

 

89

 

924

 

-

 

1,013

 

918

 

32

 

208

 

818

 

-

 

1,058

 

1,009

Italy

 

-

 

176

 

584

 

-

 

760

 

842

 

-

 

208

 

415

 

-

 

623

 

694

Luxembourg

 

-

 

17

 

425

 

-

 

442

 

430

 

-

 

38

 

357

 

2

 

397

 

436

Finland

 

57

 

33

 

78

 

-

 

168

 

198

 

120

 

52

 

74

 

-

 

246

 

163

Austria

 

23

 

3

 

4

 

-

 

30

 

95

 

135

 

9

 

-

 

1

 

145

 

37

Other - EuroZone

 

742

 

41

 

234

 

-

 

1,017

 

1,104

 

623

 

90

 

237

 

-

 

950

 

1,013

Total Euro-Zone

$

4,101

$

2,655

$

8,989

$

608

$

16,353

$

15,598

$

3,980

$

3,409

$

8,571

$

928

$

16,888

$

16,479

Remainder of Europe

 

 

 

 

 

 

 

 

 

 

 

 

Remainder of Europe:

 

 

 

 

 

 

 

 

 

 

 

 

United Kingdom

$

1,263

$

3,402

$

8,398

$

3,671

$

16,734

$

15,293

$

882

$

3,610

$

8,113

$

3,544

$

16,149

$

16,975

Switzerland

 

40

 

1,265

 

990

 

-

 

2,295

 

2,360

 

32

 

1,091

 

922

 

-

 

2,045

 

2,299

Sweden

 

130

 

413

 

159

 

-

 

702

 

691

 

125

 

377

 

138

 

-

 

640

 

658

Norway

 

438

 

44

 

168

 

-

 

650

 

582

 

383

 

54

 

153

 

-

 

590

 

618

Russian Federation

 

105

 

20

 

158

 

-

 

283

 

169

 

102

 

18

 

123

 

-

 

243

 

284

Other - Remainder of Europe

 

160

 

116

 

77

 

-

 

353

 

285

 

129

 

41

 

105

 

-

 

275

 

287

Total - Remainder of Europe

$

2,136

$

5,260

$

9,950

$

3,671

$

21,017

$

19,380

$

1,653

$

5,191

$

9,554

$

3,544

$

19,942

$

21,121

Total

$

6,237

$

7,915

$

18,939

$

4,279

$

37,370

$

34,978

$

5,633

$

8,600

$

18,125

$

4,472

$

36,830

$

37,600

Investments in Municipal Bonds

At September 30, 2017,2018, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-backedtax-exempt bonds with over 9293 percent of the portfolio rated A or higher.

AIG | Third Quarter 20172018 Form 10-Q          137141


TABLE OF CONTENTS 

 

ITEM 2 | Investments

 

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

September 30, 2017

 

 

September 30, 2018

 

 

 

State

 

Local

 

 

 

Total

December 31,

 

State

 

Local

 

 

 

Total

December 31,

 

General

 

General

 

 

 

Fair

 

2016

 

General

 

General

 

 

 

Fair

 

2017

(in millions)

 

Obligation

 

Obligation

 

Revenue

 

Value

 

Total Fair Value

 

Obligation

 

Obligation

 

Revenue

 

Value

 

Total Fair Value

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

$

20

$

559

$

3,009

$

3,588

$

4,170

$

20

$

438

$

2,659

$

3,117

$

3,562

California

 

683

 

423

 

2,184

 

3,290

 

3,471

 

640

 

392

 

1,855

 

2,887

 

3,275

Texas

 

195

 

674

 

1,109

 

1,978

 

3,287

 

186

 

612

 

995

 

1,793

 

1,992

Illinois

 

96

 

121

 

710

 

927

 

908

Massachusetts

 

477

 

-

 

490

 

967

 

1,396

 

415

 

-

 

429

 

844

 

966

Illinois

 

72

 

129

 

657

 

858

 

1,171

Florida

 

62

 

-

 

657

 

719

 

1,016

 

50

 

-

 

576

 

626

 

666

Virginia

 

8

 

1

 

544

 

553

 

639

Washington

 

256

 

13

 

377

 

646

 

1,059

 

234

 

-

 

286

 

520

 

650

Virginia

 

8

 

-

 

632

 

640

 

789

Ohio

 

94

 

-

 

492

 

586

 

536

 

64

 

-

 

409

 

473

 

575

Washington D.C.

 

36

 

-

 

434

 

470

 

497

Georgia

 

131

 

167

 

266

 

564

 

747

 

102

 

86

 

269

 

457

 

566

Washington D.C.

 

37

 

-

 

460

 

497

 

671

Pennsylvania

 

161

 

23

 

223

 

407

 

719

 

126

 

22

 

238

 

386

 

418

Maryland

 

168

 

92

 

126

 

386

 

423

 

156

 

89

 

82

 

327

 

380

All other states(a)

 

419

 

356

 

2,930

 

3,705

 

5,317

 

383

 

281

 

2,468

 

3,132

 

3,550

Total(b)(c)

$

2,783

$

2,436

$

13,612

$

18,831

$

24,772

$

2,516

$

2,042

$

11,954

$

16,512

$

18,644

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

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

(c)  Includes $0.9 billion$524 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

 

September 30,

 

December 31,

 

 

September 30,

 

December 31,

 

(in millions)

 

2017

 

2016

 

 

2018

 

2017

 

Financial institutions:

 

 

 

 

 

 

 

 

 

 

Money Center/Global Bank Groups

$

9,285

$

8,892

 

$

9,703

$

9,295

 

Regional banks — other

 

562

 

606

 

 

652

 

562

 

Life insurance

 

3,652

 

3,100

 

 

3,300

 

3,603

 

Securities firms and other finance companies

 

375

 

392

 

 

374

 

386

 

Insurance non-life

 

5,013

 

5,213

 

 

4,620

 

4,893

 

Regional banks — North America

 

6,372

 

6,844

 

 

6,472

 

6,320

 

Other financial institutions

 

9,589

 

8,435

 

 

10,113

 

9,906

 

Utilities

 

18,498

 

17,938

 

 

17,676

 

18,655

 

Communications

 

9,872

 

10,025

 

 

9,287

 

9,756

 

Consumer noncyclical

 

15,935

 

15,338

 

 

16,566

 

15,873

 

Capital goods

 

7,853

 

8,339

 

 

7,387

 

7,797

 

Energy

 

13,274

 

13,618

 

 

12,629

 

13,171

 

Consumer cyclical

 

9,011

 

8,606

 

 

9,479

 

9,166

 

Basic

 

6,128

 

6,582

 

 

5,481

 

6,123

 

Other

 

18,266

 

18,252

 

 

18,145

 

18,670

 

Total *

$

133,685

$

132,180

 

$

131,884

$

134,176

 

*    At both September 30, 20172018 and December 31, 2016,2017, respectively, approximately 89 and 91 percent of these investments were rated investment grade.

Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, was 5.65.4 and 5.5 percent at both September 30, 20172018 and December 31, 2016.2017, 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.

142AIG | Third Quarter 20172018 Form 10-Q138 


TABLE OF CONTENTS 

 

ITEM 2 | Investments

 

Investments in RMBS

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

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

2018

 

2017

Agency RMBS

 

 

 

 

 

 

 

 

 

$

14,942

$

13,854

 

 

 

 

 

 

 

 

 

$

14,827

$

15,002

Alt-A RMBS

 

 

 

 

 

 

 

 

 

 

11,841

 

12,387

 

 

 

 

 

 

 

 

 

 

10,426

 

11,624

Subprime RMBS

 

 

 

 

 

 

 

 

 

 

3,058

 

2,905

 

 

 

 

 

 

 

 

 

 

2,859

 

2,947

Prime non-agency

 

 

 

 

 

 

 

 

 

 

6,890

 

7,422

 

 

 

 

 

 

 

 

 

 

6,379

 

6,891

Other housing related

 

 

 

 

 

 

 

 

 

 

778

 

806

 

 

 

 

 

 

 

 

 

 

735

 

770

Total RMBS(a)(b)

 

 

 

 

 

 

 

 

 

$

37,509

$

37,374

 

 

 

 

 

 

 

 

 

$

35,226

$

37,234

(a)  Includes approximately $12.5$10.9 billion and $12.9$12.3 billion at September 30, 2017,2018, and December 31, 2016,2017, 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 Statements6.

(b)  The weighted average expected life was seven years at September 30, 2018 and six years at both September 30, 2017 and December 31, 2016.2017.

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

Investments in CMBS

The following table presents our CMBS available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

Fair Value at

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

2017

CMBS (traditional)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10,883

$

11,782

 

 

 

 

 

 

 

 

 

 

 

 

 

$

10,134

$

11,092

Agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,986

 

1,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,987

 

2,093

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

649

 

752

 

 

 

 

 

 

 

 

 

 

 

 

 

 

570

 

656

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,518

$

14,271

 

 

 

 

 

 

 

 

 

 

 

 

 

$

12,691

$

13,841

The fair value of CMBS holdings remained stable during the third quarter of 2017.2018. The majority of our investments in CMBS are in tranches that contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit transactions, broadly diversified across property types and geographical areas.

Investments in CDOs

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

 

 

 

 

 

 

 

 

 

Fair value at

 

Fair value at

 

 

 

 

 

 

 

Fair value at

 

Fair value at

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

 

 

 

2017

 

2016

 

 

 

 

 

 

2018

 

2017

Collateral Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank loans (CLO)

 

 

 

 

 

 

 

 

$

7,777

$

8,548

 

 

 

 

 

 

$

8,327

$

8,112

Other

 

 

 

 

 

 

 

 

 

102

 

129

 

 

 

 

 

 

 

59

 

94

Total

 

 

 

 

 

 

 

 

$

7,879

$

8,677

 

 

 

 

 

 

$

8,386

$

8,206

Commercial Mortgage Loans

At September 30, 2017,2018, we had direct commercial mortgage loan exposure of $27.9 billion, of which 99.7 percent of the$32.1 billion. All commercial mortgage loans were current. current or performing according to their restructured terms.

AIG | Third Quarter 20172018 Form 10-Q          139143


TABLE OF CONTENTS 

 

ITEM 2 | Investments

 

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

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

Number

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

of

 

Class

 

 

of

 

of

 

Class

 

 

of

 

(dollars in millions)

Loans

 

Apartments

 

Offices

 

Retail

Industrial

Hotel

 

Others

 

Total

 

Loans

 

Apartments

 

Offices

 

Retail

Industrial

Hotel

 

Others

 

Total

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

97

 

$

1,881

$

4,088

$

515

$

393

$

102

$

-

$

6,979

22

%

California

82

 

 

491

 

1,122

 

294

 

561

 

835

 

150

 

3,453

11

 

Texas

52

 

 

316

 

1,089

 

198

 

113

 

125

 

6

 

1,847

6

 

New Jersey

44

 

 

1,010

 

46

 

424

 

41

 

28

 

33

 

1,582

5

 

Florida

87

 

 

323

 

159

 

596

 

224

 

218

 

35

 

1,555

5

 

Massachusetts

16

 

 

591

 

278

 

556

 

26

 

-

 

-

 

1,451

4

 

Illinois

17

 

 

456

 

303

 

11

 

25

 

-

 

22

 

817

2

 

Pennsylvania

25

 

 

80

 

21

 

570

 

47

 

25

 

-

 

743

2

 

Washington D.C.

12

 

 

326

 

355

 

-

 

-

 

19

 

-

 

700

2

 

Ohio

27

 

 

180

 

10

 

200

 

236

 

-

 

5

 

631

2

 

Other states

237

 

 

1,856

 

857

 

1,331

 

796

 

475

 

73

 

5,388

17

 

Foreign

71

 

 

2,883

 

1,042

 

638

 

555

 

720

 

1,098

 

6,936

22

 

Total*

767

 

$

10,393

$

9,370

$

5,333

$

3,017

$

2,547

$

1,422

$

32,082

100

%

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

97

 

$

1,538

$

3,653

$

527

$

226

$

119

$

178

$

6,241

22

%

97

 

$

1,673

$

3,716

$

556

$

265

$

105

$

177

$

6,492

23

%

California

86

 

 

324

 

1,071

 

303

 

315

 

847

 

396

 

3,256

12

 

86

 

 

438

 

1,055

 

301

 

313

 

845

 

360

 

3,312

12

 

Texas

56

 

 

327

 

936

 

162

 

84

 

154

 

38

 

1,701

6

 

55

 

 

327

 

934

 

160

 

83

 

154

 

38

 

1,696

6

 

Massachusetts

22

 

 

673

 

337

 

405

 

-

 

-

 

27

 

1,442

5

 

21

 

 

701

 

384

 

410

 

-

 

-

 

27

 

1,522

5

 

New Jersey

38

 

 

574

 

47

 

448

 

-

 

28

 

33

 

1,130

4

 

42

 

 

667

 

46

 

486

 

41

 

28

 

32

 

1,300

4

 

Florida

73

 

 

320

 

85

 

380

 

227

 

19

 

76

 

1,107

4

 

81

 

 

319

 

84

 

435

 

227

 

19

 

69

 

1,153

4

 

Pennsylvania

25

 

 

67

 

22

 

573

 

47

 

26

 

-

 

735

3

 

25

 

 

74

 

22

 

577

 

47

 

26

 

-

 

746

3

 

Illinois

14

 

 

258

 

305

 

11

 

26

 

-

 

23

 

623

2

 

15

 

 

315

 

304

 

11

 

25

 

-

 

23

 

678

2

 

Ohio

24

 

 

131

 

11

 

206

 

164

 

-

 

5

 

517

2

 

26

 

 

163

 

11

 

205

 

240

 

-

 

5

 

624

2

 

Connecticut

19

 

 

341

 

66

 

22

 

80

 

-

 

-

 

509

2

 

Washington D.C.

11

 

 

232

 

359

 

-

 

-

 

19

 

-

 

610

2

 

Other states

251

 

 

1,516

 

1,240

 

1,607

 

620

 

586

 

180

 

5,749

20

 

253

 

 

1,790

 

964

 

1,466

 

696

 

564

 

160

 

5,640

20

 

Foreign

71

 

 

1,205

 

938

 

745

 

358

 

628

 

1,046

 

4,920

18

 

71

 

 

1,464

 

821

 

754

 

86

 

629

 

1,069

 

4,823

17

 

Total*

776

 

$

7,274

$

8,711

$

5,389

$

2,147

$

2,407

$

2,002

$

27,930

100

%

783

 

$

8,163

$

8,700

$

5,361

$

2,023

$

2,389

$

1,960

$

28,596

100

%

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

96

 

$

1,391

$

3,527

$

534

$

215

$

163

$

185

$

6,015

24

%

California

89

 

 

325

 

761

 

282

 

286

 

870

 

401

 

2,925

12

 

Texas

58

 

 

255

 

857

 

97

 

108

 

154

 

44

 

1,515

6

 

Florida

67

 

 

322

 

94

 

340

 

165

 

19

 

76

 

1,016

4

 

Massachusetts

20

 

 

415

 

114

 

408

 

50

 

-

 

27

 

1,014

4

 

New Jersey

39

 

 

529

 

47

 

355

 

-

 

29

 

33

 

993

4

 

Illinois

19

 

 

258

 

307

 

20

 

52

 

36

 

23

 

696

3

 

Pennsylvania

24

 

 

-

 

28

 

473

 

51

 

26

 

-

 

578

2

 

Ohio

29

 

 

151

 

17

 

211

 

165

 

-

 

5

 

549

2

 

Connecticut

19

 

 

343

 

67

 

23

 

80

 

-

 

-

 

513

2

 

Other states

269

 

 

1,309

 

1,239

 

1,670

 

481

 

560

 

199

 

5,458

22

 

Foreign

59

 

 

707

 

906

 

784

 

245

 

532

 

596

 

3,770

15

 

Total*

788

 

$

6,005

$

7,964

$

5,197

$

1,898

$

2,389

$

1,589

$

25,042

100

%

*    Does not reflect allowance for credit losses.

For additional discussion on commercial mortgage loans see Note 67 to the Consolidated Financial Statements in the 20162017 Annual Report.

Impairments

The following table presents impairments by investment type:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

Other-than-temporary Impairments:

 

 

 

 

 

 

 

 

 

   Fixed maturity securities, available for sale

$

72

$

69

 

$

185

$

361

   Equity securities, available for sale

 

2

 

3

 

 

10

 

7

   Private equity funds and hedge funds

 

14

 

30

 

 

28

 

46

Subtotal

 

88

 

102

 

 

223

 

414

Other impairments:

 

 

 

 

 

 

 

 

 

   Investments in life settlements

 

273

 

80

 

 

360

 

329

   Other investments

 

16

 

25

 

 

20

 

52

   Real estate*

 

9

 

2

 

 

61

 

6

Total

$

386

$

209

 

$

664

$

801

144AIG | Third Quarter 20172018 Form 10-Q140 


TABLE OF CONTENTS 

 

ITEM 2 | Investments

 

*Impairments

The following table presents impairments by investment type:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

(in millions)

 

2018

 

2017

 

 

2018

 

2017

Other-than-temporary Impairments:

 

 

 

 

 

 

 

 

 

   Fixed maturity securities, available for sale

$

35

$

72

 

$

158

$

185

   Equity securities, available for sale(a)

 

-

 

2

 

 

-

 

10

   Private equity funds and hedge funds

 

-

 

14

 

 

-

 

28

Subtotal

 

35

 

88

 

 

158

 

223

Other impairments:

 

 

 

 

 

 

 

 

 

   Investments in life settlements

 

-

 

273

 

 

-

 

360

   Other investments

 

-

 

16

 

 

-

 

20

   Real estate(b)

 

-

 

9

 

 

71

 

61

Total

$

35

$

386

 

$

229

$

664

(a)  Upon the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer required to be evaluated for other-than-temporary impairments.

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

Other-Than-Temporary Impairments

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

AIG | Third Quarter 2018 Form 10-Q145


TABLE OF CONTENTS

ITEM 2 | Investments

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

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

 

 

 

 

 

Other Fixed

Equities/Other

 

 

 

 

 

 

 

Other Fixed

Equities/Other

 

 

(in millions)

RMBS

CDO/ABS

CMBS

Maturity

 Invested Assets*

 

Total

RMBS

CDO/ABS

CMBS

Maturity

 Invested Assets*

 

Total

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

-

$

-

Change in intent

 

-

 

-

 

-

 

3

 

-

 

3

Foreign currency declines

 

-

 

-

 

-

 

1

 

-

 

1

Issuer-specific credit events

 

25

 

-

 

1

 

4

 

-

 

30

Adverse projected cash flows

 

1

 

-

 

-

 

-

 

-

 

1

Total

$

26

$

-

$

1

$

8

$

-

$

35

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

$

-

Change in intent

 

-

 

-

 

-

 

1

 

-

 

1

 

-

 

-

 

-

 

1

 

-

 

1

Foreign currency declines

 

-

 

-

 

-

 

1

 

-

 

1

 

-

 

-

 

-

 

1

 

-

 

1

Issuer-specific credit events

 

5

 

-

 

7

 

57

 

16

 

85

 

5

 

-

 

7

 

57

 

16

 

85

Adverse projected cash flows

 

1

 

-

 

-

 

-

 

-

 

1

 

1

 

-

 

-

 

-

 

-

 

1

Total

$

6

$

-

$

7

$

59

$

16

$

88

$

6

$

-

$

7

$

59

$

16

$

88

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

10

$

10

$

-

$

-

$

-

$

-

$

-

$

-

Change in intent

 

-

 

-

 

-

 

2

 

-

 

2

 

-

 

-

 

-

 

52

 

-

 

52

Foreign currency declines

 

-

 

-

 

-

 

7

 

-

 

7

 

-

 

-

 

-

 

13

 

-

 

13

Issuer-specific credit events

 

20

 

-

 

13

 

21

 

23

 

77

 

49

 

2

 

14

 

27

 

-

 

92

Adverse projected cash flows

 

6

 

-

 

-

 

-

 

-

 

6

 

1

 

-

 

-

 

-

 

-

 

1

Total

$

26

$

-

$

13

$

30

$

33

$

102

$

50

$

2

$

14

$

92

$

-

$

158

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

2

$

2

$

-

$

-

$

-

$

-

$

2

$

2

Change in intent

 

-

 

-

 

-

 

9

 

-

 

9

 

-

 

-

 

-

 

9

 

-

 

9

Foreign currency declines

 

-

 

-

 

-

 

11

 

-

 

11

 

-

 

-

 

-

 

11

 

-

 

11

Issuer-specific credit events

 

21

 

33

 

28

 

79

 

36

 

197

 

21

 

33

 

28

 

79

 

36

 

197

Adverse projected cash flows

 

4

 

-

 

-

 

-

 

-

 

4

 

4

 

-

 

-

 

-

 

-

 

4

Total

$

25

$

33

$

28

$

99

$

38

$

223

$

25

$

33

$

28

$

99

$

38

$

223

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Impairment Type:

 

 

 

 

 

 

 

 

 

 

 

 

Severity

$

-

$

-

$

-

$

-

$

15

$

15

Change in intent

 

-

 

-

 

-

 

35

 

-

 

35

Foreign currency declines

 

-

 

-

 

-

 

14

 

-

 

14

Issuer-specific credit events

 

80

 

1

 

25

 

159

 

38

 

303

Adverse projected cash flows

 

47

 

-

 

-

 

-

 

-

 

47

Total

$

127

$

1

$

25

$

208

$

53

$

414

*    Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments. Upon the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer required to be evaluated for other-than-temporary impairments.

146AIG | Third Quarter 2018 Form 10-Q


TABLE OF CONTENTS

ITEM 2 | Investments

We recorded other-than-temporary impairment charges in the three- and nine-month periodsnine-months ended September 30, 20172018 and 20162017 related to:

      issuer-specific credit events;

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

      declines due to foreign exchange rates;

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

      securities that experienced severe market valuation declines.

AIG | Third Quarter 2017 Form 10-Q141


TABLE OF CONTENTS

ITEM 2 | Investments

In addition, impairments are recorded on real estate and investments in life settlements.

In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining life of the security. The accretion that was recognized for these securities in earnings was $147$164 million and $187$147 million in the three-month periods ended September 30, 20172018 and 2016,2017, respectively, and $523$433 million and $645$523 million in the nine-month periods ended September 30, 20172018 and 2016,2017, respectively.

For a discussion of our other-than-temporary impairment accounting policy see Note 6 to the Consolidated Financial Statements in the 20162017 Annual Report

The following table shows the aging of the pre-tax unrealized losses of fixed maturity and equity securities, the extent to which the fair value is less than amortized cost or cost, and the number of respective items in each category:

September 30, 2017

Less Than or Equal

 

 

Greater Than 20%

 

 

Greater Than 50%

 

 

  

September 30, 2018

September 30, 2018

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

$

18,397

$

179

2,138

 

$

90

$

32

3

 

$

-

$

-

 

$

18,487

$

211

2,141

$

44,703

$

805

6,982

 

$

26

$

10

2

 

$

5

$

3

2

 

$

44,734

$

818

6,986

7-11 months

 

6,910

 

167

753

 

 

36

 

12

6

 

 

8

 

6

3

 

 

6,954

 

185

762

 

33,977

 

1,550

4,182

 

 

84

 

19

4

 

 

-

 

-

 

 

34,061

 

1,569

4,186

12 months or more

 

11,768

 

543

1,264

 

 

339

 

115

20

 

 

14

 

8

4

 

 

12,121

 

666

1,288

 

20,615

 

1,217

2,473

 

 

39

 

11

10

 

 

18

 

12

5

 

 

20,672

 

1,240

2,488

Total

$

37,075

$

889

4,155

 

$

465

$

159

29

 

$

22

$

14

7

 

$

37,562

$

1,062

4,191

$

99,295

$

3,572

13,637

 

$

149

$

40

16

 

$

23

$

15

7

 

$

99,467

$

3,627

13,660

Below investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

grade bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

2,080

$

48

1,289

 

$

22

$

5

30

 

$

-

$

-

1

 

$

2,102

$

53

1,320

$

4,492

$

97

1,844

 

$

76

$

22

31

 

$

15

$

13

 

$

4,583

$

132

1,888

7-11 months

 

448

 

16

166

 

 

11

 

3

5

 

 

-

 

-

 

 

459

 

19

171

 

1,968

 

86

863

 

 

427

 

143

19

 

 

-

 

-

 

 

2,395

 

229

882

12 months or more

 

2,383

 

134

397

 

 

223

 

60

34

 

 

9

 

9

2

 

 

2,615

 

203

433

 

1,828

 

129

481

 

 

151

 

39

28

 

 

23

 

16

11

 

 

2,002

 

184

520

Total

$

4,911

$

198

1,852

 

$

256

$

68

69

 

$

9

$

9

3

 

$

5,176

$

275

1,924

$

8,288

$

312

3,188

 

$

654

$

204

78

 

$

38

$

29

24

 

$

8,980

$

545

3,290

Total bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-6 months

$

20,477

$

227

3,427

 

$

112

$

37

33

 

$

-

$

-

1

 

$

20,589

$

264

3,461

$

49,195

$

902

8,826

 

$

102

$

32

33

 

$

20

$

16

15

 

$

49,317

$

950

8,874

7-11 months

 

7,358

 

183

919

 

 

47

 

15

11

 

 

8

 

6

3

 

 

7,413

 

204

933

 

35,945

 

1,636

5,045

 

 

511

 

162

23

 

 

-

 

-

 

 

36,456

 

1,798

5,068

12 months or more

 

14,151

 

677

1,661

 

 

562

 

175

54

 

 

23

 

17

6

 

 

14,736

 

869

1,721

 

22,443

 

1,346

2,954

 

 

190

 

50

38

 

 

41

 

28

16

 

 

22,674

 

1,424

3,008

Total(e)

$

41,986

$

1,087

6,007

 

$

721

$

227

98

 

$

31

$

23

10

 

$

42,738

$

1,337

6,115

$

107,583

$

3,884

16,825

 

$

803

$

244

94

 

$

61

$

44

31

 

$

108,447

$

4,172

16,950

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0-11 months

$

158

$

8

65

 

$

6

$

1

7

 

$

-

$

-

 

$

164

$

9

72

12 months or more

 

1

 

-

2

 

 

-

 

-

1

 

 

-

 

-

 

 

1

 

-

3

Total

$

159

$

8

67

 

$

6

$

1

8

 

$

-

$

-

 

$

165

$

9

75

(a)  Represents the number of consecutive months that fair value has been less than cost by any amount.

(b)  Represents the percentage by which fair value is less than cost at September 30, 2017.2018.

(c)  For bonds, represents amortized cost.

(d)  The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.

(e)  Item count is by CUSIP by subsidiary.

Change in Unrealized Gains and Losses on Investments

The change in net unrealized gains and losses on investments in the three- and nine-month periodsperiod ended September 30, 20172018 was primarily attributable to decreases in the fair value of fixed maturity securities. For the nine-month period ended September 30, 2018, net unrealized losses related to fixed maturity securities decreased by $8.9 billion due primarily to an increase in rates and 2016a widening of credit spreads.

AIG | Third Quarter 2018 Form 10-Q147


TABLE OF CONTENTS

ITEM 2 | Investments

The change in net unrealized gains and losses on investments in the three- and nine-month period ended September 30, 2017 was primarily attributable to increases in the fair value of fixed maturity securities. For the nine-month period ended September 30, 2017, and 2016, net unrealized gains related to fixed maturity and equity securities increased by $4.4 billion and $10.8 billion, respectively, due primarily to a decrease in rates and a narrowing of credit spreads.

For further discussion of our investment portfolio see also Note 6 to the Condensed Consolidated Financial Statements.

AIG | Third Quarter 2017 Form 10-Q142


TABLE OF CONTENTS

ITEM 2 | Investments

Net Realized Capital Gains and Losses

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

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

 

2016

 

2018

 

2017

 

 

2018

 

 

2017

Sales of fixed maturity securities

$

54

$

135

 

$

374

 

$

(103)

$

11

$

54

 

$

8

 

$

374

Sales of equity securities

 

4

 

53

 

 

86

 

 

1,051

 

-

 

4

 

 

16

 

 

86

Other-than-temporary impairments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severity

 

-

 

(10)

 

 

(2)

 

 

(15)

 

-

 

-

 

 

-

 

 

(2)

Change in intent

 

(1)

 

(2)

 

 

(9)

 

 

(35)

 

(3)

 

(1)

 

 

(52)

 

 

(9)

Foreign currency declines

 

(1)

 

(7)

 

 

(11)

 

 

(14)

 

(1)

 

(1)

 

 

(13)

 

 

(11)

Issuer-specific credit events

 

(85)

 

(77)

 

 

(197)

 

 

(303)

 

(30)

 

(85)

 

 

(92)

 

 

(197)

Adverse projected cash flows

 

(1)

 

(6)

 

 

(4)

 

 

(47)

 

(1)

 

(1)

 

 

(1)

 

 

(4)

Provision for loan losses

 

(38)

 

8

 

 

(56)

 

 

8

 

(23)

 

(38)

 

 

(73)

 

 

(56)

Foreign exchange transactions

 

66

 

(639)

 

 

299

 

 

(1,197)

 

(21)

 

66

 

 

(155)

 

 

299

Variable annuity embedded derivatives, net of related hedges

 

(430)

 

(309)

 

 

(1,023)

 

 

(482)

 

(185)

 

(430)

 

 

(2)

 

 

(1,023)

All other derivatives and hedge accounting

 

(136)

 

83

 

 

(217)

 

 

353

 

(1)

 

(136)

 

 

149

 

 

(217)

Impairments on investments in life settlements

 

(273)

 

(80)

 

 

(360)

 

 

(329)

 

-

 

(273)

 

 

-

 

 

(360)

Other*

 

(81)

 

86

 

 

14

 

 

284

Loss on sale of private equity funds

 

(311)

 

-

 

 

(311)

 

 

-

Other

 

54

 

(81)

 

 

161

 

 

14

Net realized capital losses

$

(922)

$

(765)

 

$

(1,106)

 

$

(829)

$

(511)

$

(922)

 

$

(365)

 

$

(1,106)

*    Includes $107 million ofNet realized gains due to a purchase price adjustment oncapital losses in the sale of Class B shares of Prudential Financial, Inc. for the nine monthsthree- and nine-month periods ended September 30, 2016.

Net realized capital2018 decreased compared to the same periods in the prior year due primarily to lower derivative losses in the three-month period ended September 30, 2017 were higher than the net realized capital losses in2018 compared to the same period in the prior year, due primarilyand derivative gains in the nine-month period ended September 30, 2018 compared to higher hedge accountingderivative losses higher impairments on investments in life settlements, and lower gains on the sales of securities, which more than offset foreign exchange gains versus lossessame period in the prior year. Net realized capital losses in the three-month period ended September 30, 20172018 were primarily related to hedge accountingderivative losses and impairments. Net realized capital losses increased in the nine-month period ended September 30, 2017 compared to the same period in the prior year due primarily to higher hedge accounting losses and lower gainsa loss on the salessale of securities, which more than offset foreign exchange gains versus losses in the prior year and lower other-than-temporary impairments.a portion of our private equity portfolio. Net realized capital losses in the nine-month period ended September 30, 2018 were primarily related to a loss on the sale of a portion of our private equity portfolio, foreign exchange losses, and other-than-temporary impairment charges, which more than offset derivative gains.

Net realized capital losses in the three- and nine-month periods ended September 30, 2017 consistedwere primarily ofrelated to derivative and hedge accounting losses, and impairments, which were partially offset byhigher than the foreign exchange gains and the gains recognized on the sales of securitiessecurities.

Variable annuity embedded derivatives, net of related hedges, reflected gains in the three- and foreign exchange gains.

Derivative and hedge accountingnine-month periods ended September 30, 2018 compared to losses werein the same periods in the prior year primarily a result of the fair valuedue to changes in derivative instrumentsthe non-performance or “own credit” risk adjustment used to economically hedge market risk fromin the valuation of the variable annuities with guaranteed minimum withdrawal benefits (GMWB), embedded derivative, which were impacted by interest rates and equity market performance in the first nine monthsare not hedged as part of 2017, and changes in actuarial assumptions in our variable annuityeconomic hedging program.

For additional discussion of market risk management related to these product features see Part II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – Life Insurance Companiesand Retirement Companies’ Key Insurance Risks – Variable Annuity Risk Management and Hedging Programs in the 20162017 Annual Report. For more information on the economic hedging target and the impact to pre-tax income of this program see Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results in this MD&A.

Net realized capital losses in the three-month period ended September 30, 2016 were primarily due to foreign exchange losses related to British pound weakening following the Brexit vote, hedge accounting losses, and other-than-temporary-impairment charges, which more than offset gains on the sale of securities. Net realized capital losses in the nine-month period ended September 30, 2016 were primarily related to foreign exchange losses and impairments, which were higher than the gain recognized on the sale of a portion of our PICC Investment. Foreign exchange gains (losses) were primarily due to $528 million and $906 million of remeasurement losses in the three- and nine-month periods ended September 30, 2016, respectively, for a short term intercompany balance that was matched with available for sale investments in fixed maturity securities denominated in the same foreign currencies. Unrealized gains and losses on the available for sale investments were recorded in other comprehensive income resulting in an immaterial impact on our overall equity or book value per share from this arrangement.

For further discussion of our investment portfolio see also Note 6 to the Condensed Consolidated Financial Statements.

 

148AIG | Third Quarter 20172018 Form 10-Q143


TABLE OF CONTENTS 

 

ITEM 2 |  Insurance Reserves 

 

Insurance Reserves

Liability for unpaid losses and loss adjustment expenses (Loss Reserves)

The following table presents the components of our gross and net loss reserves by segment and major lines of business:

 

September 30, 2017

 

December 31, 2016

 

Net liability for

Reinsurance

Gross liability

 

Net liability

Reinsurance

Gross liability

 

unpaid losses

recoverable on

 for unpaid

 

for unpaid

recoverable on

 for unpaid

 

and loss

unpaid losses and

losses and

 

losses and

unpaid losses and

losses and

 

adjustment

loss adjustment

loss adjustment

 

loss adjustment

loss adjustment

loss adjustment

(in millions)

expenses

expenses

expenses

 

expenses

expenses

expenses

Commercial Insurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability and Financial Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Workers' Compensation*

 

 

 

 

 

 

 

 

 

 

 

 

 

(net of discount)

$

9,738

$

3,077

$

12,815

 

$

10,486

$

2,879

$

13,365

U.S. Excess Casualty

 

8,405

 

1,188

 

9,593

 

 

8,749

 

1,115

 

9,864

U.S. Other Casualty

 

8,661

 

3,430

 

12,091

 

 

8,746

 

3,209

 

11,955

U.S. Financial Lines

 

6,097

 

1,275

 

7,372

 

 

6,102

 

1,195

 

7,297

Europe Casualty and Financial Lines

 

6,345

 

1,002

 

7,347

 

 

5,587

 

1,313

 

6,900

Other product lines

 

2,410

 

1,028

 

3,438

 

 

2,279

 

986

 

3,265

Retroactive reinsurance

 

(10,801)

 

10,800

 

(1)

 

 

-

 

-

 

-

Unallocated loss adjustment expenses

 

2,322

 

294

 

2,616

 

 

2,260

 

252

 

2,512

Total Liability and Financial Lines

 

33,177

 

22,094

 

55,271

 

 

44,209

 

10,949

 

55,158

Property and Special Risks:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. and Europe

 

7,855

 

1,546

 

9,401

 

 

5,913

 

1,596

 

7,509

Other product lines

 

2,011

 

510

 

2,521

 

 

1,139

 

536

 

1,675

Retroactive reinsurance

 

(717)

 

718

 

1

 

 

-

 

-

 

-

Unallocated loss adjustment expenses

 

270

 

52

 

322

 

 

279

 

47

 

326

Total Property and Special Risks

 

9,419

 

2,826

 

12,245

 

 

7,331

 

2,179

 

9,510

Total Commercial Insurance

 

42,596

 

24,920

 

67,516

 

 

51,540

 

13,128

 

64,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Personal Insurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Europe and Japan

 

3,875

 

574

 

4,449

 

 

3,454

 

377

 

3,831

Other product lines

 

876

 

188

 

1,064

 

 

744

 

184

 

928

Retroactive reinsurance

 

(115)

 

115

 

-

 

 

-

 

-

 

-

Unallocated loss adjustment expenses

 

106

 

4

 

110

 

 

202

 

4

 

206

Total Consumer Personal Insurance

 

4,742

 

881

 

5,623

 

 

4,400

 

565

 

4,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legacy Portfolio - Run-off Property

 

 

 

 

 

 

 

 

 

 

 

 

 

and Casualty Insurance Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Long Tail Insurance lines

 

 

 

 

 

 

 

 

 

 

 

 

 

(net of discount)

 

4,736

 

28

 

4,764

 

 

6,659

 

-

 

6,659

Other run-off product lines

 

1,651

 

50

 

1,701

 

 

160

 

46

 

206

Retroactive reinsurance

 

(1,608)

 

1,608

 

-

 

 

(1,679)

 

1,679

 

-

Unallocated loss adjusted expenses

 

325

 

122

 

447

 

 

347

 

114

 

461

Total Legacy Portfolio - Run-off Property

 

 

 

 

 

 

 

 

 

 

 

 

 

and Casualty Insurance Lines

 

5,104

 

1,808

 

6,912

 

 

5,487

 

1,839

 

7,326

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Operations

 

36

 

-

 

36

 

 

118

 

-

 

118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

52,478

$

27,609

$

80,087

 

$

61,545

$

15,532

$

77,077

 

September 30, 2018

 

December 31, 2017

 

Net liability for

Reinsurance

Gross liability

 

Net liability

Reinsurance

Gross liability

 

unpaid losses

recoverable on

 for unpaid

 

for unpaid

recoverable on

 for unpaid

 

and loss

unpaid losses and

losses and

 

losses and

unpaid losses and

losses and

 

adjustment

loss adjustment

loss adjustment

 

loss adjustment

loss adjustment

loss adjustment

(in millions)

expenses

expenses

expenses

 

expenses

expenses

expenses

General Insurance:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Workers' Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

(net of discount)

$

5,217

$

5,060

$

10,277

 

$

5,690

$

4,974

$

10,664

U.S. Excess Casualty

 

4,883

 

4,550

 

9,433

 

 

4,802

 

4,053

 

8,855

U.S. Other Casualty

 

5,181

 

4,885

 

10,066

 

 

5,149

 

4,793

 

9,942

U.S. Financial Lines

 

4,826

 

2,024

 

6,850

 

 

5,104

 

1,962

 

7,066

U.S. Property and Special risks

 

6,651

 

1,853

 

8,504

 

 

5,410

 

968

 

6,378

U.S. Personal Insurance

 

882

 

200

 

1,082

 

 

1,380

 

194

 

1,574

Europe Casualty and Financial Lines

 

6,935

 

1,398

 

8,333

 

 

6,986

 

1,156

 

8,142

Europe Property and Special risks

 

3,233

 

1,120

 

4,353

 

 

2,022

 

632

 

2,654

Europe and Japan Personal Insurance

 

2,527

 

422

 

2,949

 

 

2,348

 

349

 

2,697

Other product lines

 

5,808

 

2,388

 

8,196

 

 

5,804

 

2,307

 

8,111

Unallocated loss adjustment expenses

 

2,034

 

1,309

 

3,343

 

 

1,974

 

1,258

 

3,232

Total General Insurance

 

48,177

 

25,209

 

73,386

 

 

46,669

 

22,646

 

69,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legacy Portfolio - Run-off Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Long Tail Insurance lines

 

 

 

 

 

 

 

 

 

 

 

 

 

(net of discount)

 

3,811

 

3,665

 

7,476

 

 

4,465

 

3,675

 

8,140

Other run-off product lines

 

346

 

68

 

414

 

 

153

 

65

 

218

Unallocated loss adjusted expenses

 

394

 

116

 

510

 

 

370

 

111

 

481

Total Legacy Portfolio - Run-off Lines

 

4,551

 

3,849

 

8,400

 

 

4,988

 

3,851

 

8,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Operations (Blackboard)

 

29

 

144

 

173

 

 

28

 

211

 

239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

52,757

$

29,202

$

81,959

 

$

51,685

$

26,708

$

78,393

*    Includes loss reserve discount of $2.0 billion and $1.8 billion and $3.6 billion for the nine-month period endedas of September 30, 20172018 and year ended December 31, 2016,2017, respectively. For discussion of loss reserve discount see Note 10 to the Condensed Consolidated Financial Statements.  

Statements.

AIG | Third Quarter 20172018 Form 10-Q          144149


TABLE OF CONTENTS 

 

ITEM 2 |  Insurance Reserves 

 

PRIOR YEAR DEVELOPMENT

The following table summarizes incurred (favorable) unfavorable prior year development net of reinsurance by segment and major lines of business:segment:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(in millions)

 

2017

 

 

2016

 

 

2017

 

 

2016

Commercial Insurance

 

 

 

 

 

 

 

 

 

 

 

Liability and Financial Lines

$

760

 

$

(5)

 

$

839

 

$

69

Property and Special Risks

 

77

 

 

322

 

 

83

 

 

268

Total Commercial Insurance

 

837

 

 

317

 

 

922

 

 

337

Consumer Personal Insurance

 

-

 

 

(33)

 

 

(3)

 

 

(120)

Legacy Portfolio - Property and Casualty Run off Insurance Lines

 

(1)

 

 

6

 

 

(17)

 

 

31

Other Operations

 

-

 

 

(16)

 

 

-

 

 

(34)

Total prior year unfavorable development*

$

836

 

$

274

 

$

902

 

$

214

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(in millions)

 

2018

 

2017

 

2018

 

2017

General Insurance:

 

 

 

 

 

 

 

 

North America*

$

134

$

542

$

2

$

468

International

 

38

 

295

 

1

 

451

Total General Insurance

$

172

$

837

$

3

$

919

Legacy Portfolio - Run-off Lines

 

(2)

 

(1)

 

(6)

 

(17)

Other Operations

 

-

 

-

 

-

 

-

Total prior year (favorable) unfavorable development

$

170

$

836

$

(3)

$

902

*    Includes the amortization attributed to the deferred gain at inception from the NICO adverse development reinsurance agreement of $57 million and $62 million for the three-month periods ended September 30, 2018 and 2017, respectively, and $176 million and $165 million infor the three and nine-month periods ended September 30, 2018 and 2017, respectively. Consistent with our definition of PTOI, the three- and nine-month periods ended September 30, 2017 excludeAPTI, prior year development excludes the portion of unfavorable prior year reserve development for which we have ceded the risk under the NICO reinsurance agreement of $722 million and $3 million for the three-month periods ended September 30, 2018 and 2017, respectively, and $712 million and $287 million respectively,for the nine-month periods ended September 30, 2018 and 2017, respectively. The related changes in amortization of the deferred gain ofwere $118 million and $13 million for the three-month periods ended September 30, 2018 and 2017, respectively, and $108 million and $30 million for the nine-month periods ended September 30, 2018 and 2017, respectively.

Net Loss Development

In the three-month period ended September 30, 2018, we recognized unfavorable prior year loss reserve development of $170 million. The key components of this development were as follows:  

·Unfavorable development in U.S. Excess Casualty lines, driven by adverse activity on construction defects claims and multi-year construction projects that cover all contractors on the site (“wrap business”), where we continue to observe significant loss activity, primarily from accident years 2015 and prior, including a meaningful proportion from accident years 2009 and prior. In aggregate, we strengthened U.S. Excess Casualty reserves by $1.3 billion, before applying the 80% cession to accident years 2015 and prior which are covered by the adverse development reinsurance agreement with NICO. For accident years 2015 and prior, unfavorable development, before applying the 80% cession of the adverse development reinsurance agreement with NICO was $1.1 billion. We have also seen higher than expected loss severity in accident years 2016 and 2017, which led to an increase in estimates for these accident years of $163 million;

·Favorable development on 2017 catastrophe events in U.S Property and Special Risks from lower than expected development from Hurricanes Harvey, Irma, and Maria, partially offset by adverse development in U.S. Personal Insurance, notably from the California wildfires and Hurricane Irma;

·Unfavorable development in Europe Casualty and Financial Lines driven by increased large loss activity in recent accident years, particularly related to directors and officers class action suits against insureds with global exposure; and

·Favorable development in Europe and Japan Personal Insurance, which was primarily a result of improved experience in European Accident & Health business.

In the nine-month period ended September 30, 2018, we recognized favorable prior year loss reserve development of $3 million. In addition to the items noted above, there were various items that occurred during the first half of 2018 that largely offset each other, including:

·Favorable development on prior year catastrophes in U.S. Property and Special Risks;

·Favorable development in Europe and Japan Personal Insurance;

·Unfavorable development on catastrophe events in U.S. Personal Insurance; and

·Within the Legacy portfolio, $150 million of unfavorable development in pre-1986 environmental liability entirely offset by favorable development in casualty trucking business, with smaller favorable contributions from runoff medical malpractice and post-1986 environmental liability.

150AIG | Third Quarter 2018 Form 10-Q


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

In the three-month period ended September 30, 2017, we recognized unfavorable prior year loss reserve development of $836 million. This unfavorable development was primarily a result of the following:

·        Higher than expected losses for EuropeanEurope Casualty and Financial Lines – We observed a significant increase in large claims activity in our European long-tail business,both Casualty and Financial Lines, primarily emanating from accident years 2015 and 2016;

·        Unfavorable development in U.S. Other Casualty – Commercial auto loss experience for accident year 2016 has been emergingemerged higher than expected, driven by an increase in the frequency of large claims. While we observed this trend in loss severity for several quarters, the rate of growth continues to exceed our revised expectations. We have similarly strengthened our estimateestimates for primary general liability in consideration of similar underlying severity trends;

·        Unfavorable development in U.S. Excess Casualty – This was driven by emerging loss experience in accident year 2016. The loss frequency and severity to date has exceeded initial expectations and is coincidingcoincided with increased loss severity in the underlying primary auto and general liability segments; and

·        Higher than expected losses in Property and Special Risks – We have observed unfavorable results in U.S. programs commercial auto business in accident years 2015 and 2016 primarily from terminateddiscontinued programs, along with some individual severe loss experience in aviation and surety. This was partially offset by favorable development in commercial property.

In the nine-month period ended September 30, 2017, we recognized unfavorable prior year loss reserve development of $902 million, primarily due to the impact of the factors noted above in the third quarter. In addition, during the second quarter weaddition:

·We observed unfavorable claim experience in the U.S. primary general liability and U.S. excess casualty segments, notably due to construction defects and multi-year construction projects that cover all contractors on the site (“wrap business”).business. The majority of this activity came from accident years 2015 and prior, including a significant proportion from accident years 2006 and prior. prior;

·We also observed higher than expected losses in propertyboth U.S. and special risksEurope Property and Special Risks driven by unexpected development on several large international claims including aviation, marine and trade credit primarily from accident year 2016.2016; and

In addition, in the first quarter of 2017, we·We increased our loss reserves by $102 million as a result of the decision made by the UK Ministry of Justice to reduce the discount rate applied to lump-sum bodily injury payouts, known as the Ogden rate, to negative 0.75 percent. Our carried reserves at December 31, 2016 were estimated using our assumption that the Ogden rate would decline to 1.0 percent.rate. This discount rate change primarily impacted the Europe casualtyCasualty and financial lines.

These prior year loss reserve increases were partially offset by the recognition of the amortization of the deferred gain from the adverse development reinsurance agreement with NICO of $62 million and $165 million in the three and nine-month periods ended September 30, 2017, respectively.

Our analyses and conclusions about prior year reserves also help inform our judgments about the current accident year loss and loss adjustment expense ratios we select. We increased our selections in the second and third quarter resulting in approximately $188 million and $212 million increase in net losses incurred in the three- and nine month periods ended September, 30 2017.Financial Lines. 

AIG | Third Quarter 20172018 Form 10-Q          145151


TABLE OF CONTENTS 

 

ITEM 2 |  Insurance Reserves 

 

In the three- and nine-month periods ended September 30, 2016, we recognized unfavorable prior year loss reserve development of $274 million and $214 million, respectively, primarily in U.S. programs business and U.S. worker’s compensation.  The U.S. programs unfavorable prior year development was driven by higher than expected loss emergence in the most recent calendar year emanating from terminated programs. The increase in our U.S. workers’ compensation loss reserves of approximately $100 million resulted from two separate rulings issued by the Florida Supreme Court that increased the potential liability for workers’ compensation claims in that state by reversing certain aspects of regulations in place since 2003. Also in the second quarter of 2016, the Florida Court of Appeals issued the Miles decision, declaring unconstitutional certain restrictions on claimant-paid attorney fees. We are continuing to monitor the impact of these decisions and may adjust our estimate as new facts and data emerge. This development was partially offset by favorable development from U.S. property, excluding catastrophes, and consumer personal insurance.

The following tables summarize incurred (favorable) or unfavorable prior year development net of reinsurance, by segment and major lines of business, and by accident year groupings:

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Total

 

2016

 

2015-2011

 

2010-2006

 

2005 & Prior

Liability and Financial Lines

$

760

$

666

$

21

$

28

$

45

Property and Special Risks

 

77

 

31

 

19

 

5

 

22

Consumer Personal Insurance

 

-

 

8

 

(6)

 

-

 

(2)

Legacy Portfolio - Property and Casualty Run-off

 

 

 

 

 

 

 

 

 

 

Insurance Lines

 

(1)

 

-

 

-

 

(15)

 

14

Total

$

836

$

705

$

34

$

18

$

79

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Total

 

2015

 

2014-2011

 

2010-2006

 

2005 & Prior

Liability and Financial Lines

$

(5)

$

1

$

(38)

$

36

$

(4)

Property and Special Risks

 

322

 

100

 

223

 

(12)

 

11

Consumer Personal Insurance

 

(33)

 

(18)

 

(14)

 

1

 

(2)

Legacy Portfolio - Property and Casualty Run-off

 

 

 

 

 

 

 

 

 

 

Insurance Lines

 

6

 

-

 

-

 

-

 

6

Other Operations

 

(16)

 

(5)

 

(3)

 

(7)

 

(1)

Total

$

274

$

78

$

168

$

18

$

10

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Total

 

2016

 

2015-2011

 

2010-2006

 

2005 & Prior

Liability and Financial Lines

$

839

$

681

$

(8)

$

60

$

106

Property and Special Risks

 

83

 

49

 

(2)

 

3

 

33

Consumer Personal Insurance

 

(3)

 

(15)

 

(2)

 

12

 

2

Legacy Portfolio - Property and Casualty Run-off

 

 

 

 

 

 

 

 

 

 

Insurance Lines

 

(17)

 

29

 

(26)

 

(27)

 

7

Total

$

902

$

744

$

(38)

$

48

$

148

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Total

 

2015

 

2014-2011

 

2010-2006

 

2005 & Prior

Liability and Financial Lines

$

69

$

20

$

(61)

$

99

$

11

Property and Special Risks

 

268

 

(25)

 

309

 

(9)

 

(7)

Consumer Personal Insurance

 

(120)

 

(42)

 

(71)

 

(1)

 

(6)

Legacy Portfolio - Property and Casualty Run-off

 

 

 

 

 

 

 

 

 

 

Insurance Lines

 

31

 

-

 

-

 

11

 

20

Other Operations

 

(34)

 

(9)

 

(17)

 

(7)

 

(1)

Total

$

214

$

(56)

$

160

$

93

$

17

Three Months Ended September 30, 2018

 

 

 

 

 

 

(in millions)

 

Total

 

2017

 

2016 & Prior

General Insurance North America:

 

 

 

 

 

 

U.S. Workers' Compensation

$

10

$

24

$

(14)

U.S. Excess casualty

 

370

 

144

 

226

U.S. Other casualty

 

(34)

 

5

 

(39)

U.S. Financial lines

 

(12)

 

(1)

 

(11)

U.S. Property and special risks

 

(351)

 

(305)

 

(46)

U.S. Personal insurance

 

149

 

155

 

(6)

Other product lines

 

2

 

(4)

 

6

Total General Insurance North America

$

134

$

18

$

116

General Insurance International:

 

 

 

 

 

 

Europe casualty and financial lines

$

75

$

(13)

$

88

Europe property and special risks

 

5

 

-

 

5

Europe and Japan Personal insurance

 

(30)

 

(13)

 

(17)

Other product lines

 

(12)

 

(1)

 

(11)

Total General Insurance International

$

38

$

(27)

$

65

 

 

 

 

 

 

 

Legacy Portfolio - Run-off Lines

 

(2)

 

-

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total prior year (favorable) unfavorable development

$

170

$

(9)

$

179

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 

 

 

 

 

 

(in millions)

 

Total

 

2016

 

2015 & Prior

General Insurance North America:

 

 

 

 

 

 

U.S. Workers' Compensation

$

(19)

$

-

$

(19)

U.S. Excess casualty

 

164

 

186

 

(22)

U.S. Other casualty

 

159

 

193

 

(34)

U.S. Financial lines

 

137

 

144

 

(7)

U.S. Property and special risks

 

91

 

57

 

34

U.S. Personal insurance

 

12

 

17

 

(5)

Other product lines

 

(2)

 

(8)

 

6

Total General Insurance North America

$

542

$

589

$

(47)

General Insurance International:

 

 

 

 

 

 

Europe casualty and financial lines

$

324

$

157

$

167

Europe property and special risks

 

8

 

1

 

7

Europe and Japan Personal insurance

 

(8)

 

(4)

 

(4)

Other product lines

 

(29)

 

(38)

 

9

Total General Insurance International

$

295

$

116

$

179

 

 

 

 

 

 

 

Legacy Portfolio - Run-off Lines

 

(1)

 

-

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total prior year (favorable) unfavorable development

$

836

$

705

$

131

152AIG | Third Quarter 2018 Form 10-Q


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Nine Months Ended September 30, 2018

 

 

 

 

 

 

(in millions)

 

Total

 

2017

 

2016 & Prior

General Insurance North America:

 

 

 

 

 

 

U.S. Workers' Compensation

$

(35)

$

24

$

(59)

U.S. Excess casualty

 

340

 

144

 

196

U.S. Other casualty

 

(51)

 

26

 

(77)

U.S. Financial lines

 

(34)

 

(4)

 

(30)

U.S. Property and special risks

 

(471)

 

(421)

 

(50)

U.S. Personal insurance

 

248

 

257

 

(9)

Other product lines

 

5

 

1

 

4

Total General Insurance North America

$

2

$

27

$

(25)

General Insurance International:

 

 

 

 

 

 

Europe casualty and financial lines

$

76

$

(13)

$

89

Europe property and special risks

 

3

 

(13)

 

16

Europe and Japan Personal insurance

 

(93)

 

(57)

 

(36)

Other product lines

 

15

 

26

 

(11)

Total General Insurance International

$

1

$

(57)

$

58

 

 

 

 

 

 

 

Legacy Portfolio - Run-off Lines

 

(6)

 

43

 

(49)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total prior year (favorable) unfavorable development

$

(3)

$

13

$

(16)

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

(in millions)

 

Total

 

2016

 

2015 & Prior

General Insurance North America:

 

 

 

 

 

 

U.S. Workers' Compensation

$

(52)

$

-

$

(52)

U.S. Excess casualty

 

153

 

198

 

(45)

U.S. Other casualty

 

180

 

185

 

(5)

U.S. Financial lines

 

132

 

145

 

(13)

U.S. Property and special risks

 

50

 

25

 

25

U.S. Personal insurance

 

(6)

 

-

 

(6)

Other product lines

 

11

 

(13)

 

24

Total General Insurance North America

$

468

$

540

$

(72)

General Insurance International:

 

 

 

 

 

 

Europe casualty and financial lines

$

420

$

161

$

259

Europe property and special risks

 

88

 

77

 

11

Europe and Japan Personal insurance

 

(1)

 

(10)

 

9

Other product lines

 

(56)

 

(53)

 

(3)

Total General Insurance International

$

451

$

175

$

276

 

 

 

 

 

 

 

Legacy Portfolio - Run-off Lines

 

(17)

 

29

 

(46)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total prior year (favorable) unfavorable development

$

902

$

744

$

158

ForWe 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. These reclassifications are shown as development in the respective years in the tables above. This may affect the comparability of the data presented in our tables.

AIG | Third Quarter 2017 Form 10-Q146


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Significant Reinsurance Agreements

Effective January 1, 2016, we entered into a two-year reinsurance arrangement with the Swiss Reinsurance Company Ltd, under which we ceded a proportional share of our new and renewal U.S. Casualty portfolio in order to reduce the concentration of casualty business in our portfolio.

Our 2017 catastrophe reinsurance program includes coverage for natural catastrophes and some coverage for terrorism events. It consists of a large North American occurrence cover (without reinstatement) to protect against large North America losses and Japan cover to protect against losses in Japan.  The attachment point for this reinsurance program is $1.5 billion for North America losses (down from $3.0 billion in 2016) and varies for the Japan cover, and through September 8, 2017 provided up to $3.2 billion of coverage on a per event basis, with approximately $525 million of coverage provided via reinsurance purchased from catastrophe bond issuers.  Effective September 8, 2017, we added approximately an additional $1.3 billion of coverage to the North American cover, making our total coverage $4.5 billion for the remainder of 2017.

In the first quarter of 2017, we entered into an adverse development reinsurance agreement with NICO, a subsidiary of Berkshire, under which we transferred to NICO 80 percent of the reserve risk on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of the losses on subject business paid on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion. At NICO’s 80 percent share, NICO’s limit of liability under the contract is $20 billion.  The covered losses ceded to NICO were $13.1 billion and the unexpired limit was $6.9 billion at September 30, 2017. We account for this transaction as retroactive reinsurance. We paid total consideration, including interest, of $10.2 billion. The consideration was placed into a collateral trust account as security for NICO’s claim payment obligations, and Berkshire has provided a parental guarantee to secure the obligations of NICO under the agreement. This transaction resulted in a gain, which under U.S. GAAP retroactive reinsurance accounting is deferred.

The table below shows the calculation of the inception to date deferred gain and the effect of discounting of loss reserves and amortization of the deferred gain. The deferred gain is amortized into income over the settlement period ofperiod. NICO created a collateral trust account as security for their claim payment obligations to us, into which they deposited the reinsured losses.consideration paid under the agreement, and Berkshire Hathaway Inc. has provided a parental guarantee to secure NICO’s obligations under the agreement.

 

 

 

 

 

Inception-To-Date

 

Third

 

 

 

 

 

First

 

Second

 

Third

 

Quarter

 

 

At

 

 

Quarter

 

Quarter

 

Quarter

 

2017

(in millions)

 

Inception

 

 

2017

 

2017

 

2017

 

Change

Gross Covered Losses

 

 

 

 

 

 

 

 

 

 

 

Covered reserves before discount

$

33,510

 

$

31,614

$

30,399

$

28,778

$

(1,621)

Losses paid

 

7,543

 

 

9,454

 

11,010

 

12,631

 

1,621

Attachment point

 

(25,000)

 

 

(25,000)

 

(25,000)

 

(25,000)

 

-

Covered losses above attachment point

$

16,053

 

$

16,068

$

16,409

$

16,409

$

-

 

 

 

 

 

 

 

 

 

 

 

 

Deferred Gain Development

 

 

 

 

 

 

 

 

 

 

 

Covered losses above attachment ceded to NICO (80%)

$

12,843

 

$

12,854

$

13,127

$

13,127

$

-

Consideration paid including interest

 

(10,188)

 

 

(10,188)

 

(10,188)

 

(10,188)

 

-

Pre-tax deferred gain before discount and amortization

 

2,655

 

 

2,666

 

2,939

 

2,939

 

-

Discount on ceded losses

 

(1,539)

 

 

(1,655)

 

(1,547)

 

(1,494)

 

53

Pre-tax deferred gain before amortization

 

1,116

 

 

1,011

 

1,392

 

1,445

 

53

Amortization attributed to deferred gain at inception

 

-

 

 

(41)

 

(103)

 

(165)

 

(62)

Amortization attributed to changes in deferred gain*

 

-

 

 

(2)

 

(12)

 

(19)

 

(7)

Deferred gain liability reflected in AIG's balance sheet

$

1,116

 

$

968

$

1,277

$

1,261

$

(16)

* Excluded from our definition of PTOI.

AIG | Third Quarter 20172018 Form 10-Q          147153


TABLE OF CONTENTS 

 

ITEM 2 |  Insurance Reserves 

 

For a description of AIG’s catastrophe reinsurance protection for 2018, see Part II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – General Insurance Companies’  Key Risks – Natural Catastrophe Risk in our 2017 Annual Report.

The table below shows the calculation of the deferred gain on the adverse development reinsurance agreement as of September 30, 2018 and as of December 31, 2017, showing the effect of discounting of loss reserves and amortization of the deferred gain.

 

 

September 30,

 

December 31,

(in millions)

 

2018

 

2017

Gross Covered Losses

 

 

 

 

Covered reserves before discount

$

24,102

$

26,654

Inception to date losses paid

 

18,234

 

14,788

Attachment point

 

(25,000)

 

(25,000)

Covered losses above attachment point

$

17,336

$

16,442

 

 

 

 

 

Deferred Gain Development

 

 

 

 

Covered losses above attachment ceded to NICO (80%)

$

13,869

$

13,153

Consideration paid including interest

 

(10,188)

 

(10,188)

Pre-tax deferred gain before discount and amortization

 

3,681

 

2,965

Discount on ceded losses(a)

 

(1,693)

 

(1,539)

Pre-tax deferred gain before amortization

 

1,988

 

1,426

Inception to date amortization of deferred gain at inception

 

(404)

 

(228)

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

 

(116)

 

(31)

Deferred gain liability reflected in AIG's balance sheet

$

1,468

$

1,167

(a)            For the period from inception to September 30, 2018, 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:gain from the adverse development reinsurance agreement:

Three Months Ended

 

Nine Months Ended

 

Three Months Ended

 

Nine Months Ended

September 30, 2017

 

September 30, 2017

 

September 30,

 

September 30,

(in millions)

Before Discount

 

Discount

 

Net

 

Before Discount

 

Discount

 

Net

 

2018

 

2017

 

2018

 

2017

Balance at beginning of period

$

2,824

$

(1,547)

$

1,277

 

$

-

$

-

$

-

Balance at beginning of year, net of discount

$

957

$

1,277

$

1,167

$

-

Gain at inception

 

-

 

-

 

-

 

2,655

 

(1,539)

 

1,116

 

-

 

-

 

-

 

1,116

Unfavorable prior year reserve development ceded to NICO(a)

 

-

 

-

 

-

 

284

 

-

 

284

 

723

 

-

 

716

 

284

Amortization attributed to deferred gain at inception(b)

 

(62)

 

-

 

(62)

 

(165)

 

-

 

(165)

 

(57)

 

(62)

 

(176)

 

(165)

Amortization attributed to changes in deferred gain(c)

 

(7)

 

-

 

(7)

 

(19)

 

-

 

(19)

 

(109)

 

(7)

 

(85)

 

(19)

Changes in discount on ceded loss reserves

 

-

 

53

 

53

 

-

 

45

 

45

 

(46)

 

53

 

(154)

 

45

Balance at end of period

$

2,755

$

(1,494)

$

1,261

 

$

2,755

$

(1,494)

$

1,261

Balance at end of period, net of discount

$

1,468

$

1,261

$

1,468

$

1,261

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

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

(c)  Excluded from APTI and included in U.S. GAAP.

The lines of business subject to this agreement have been the source of substantially allthe majority of the prior year adverse development charges over the past several years. The agreement resultedis expected to result in lower capital charges for reserve risks at our U.S. insurance subsidiaries. Under U.S. GAAP, any potential future prior year development would be recognized immediately as losses are incurred; however, the related recoveries under the reinsurance agreement would be deferred and recognized over the expected recovery period.  However, consistent with our definition of PTOI, we exclude the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.  In addition, amortizationwe would expect future net investment income to decline as a result of the deferred gain is recognized in PTOI based on the original amortization schedule at the time we entered into the agreement.lower invested assets.

For a summary of significant reinsurers seePart II, Item 7. MD&A – Enterprise Risk Management – Insurance Operations Risks – Reinsurance ActivitiesGeneral Insurance Companies Key Insurance Risks – Reinsurance Recoverable in our 20162017 Annual ReportReport.

154AIG | Third Quarter 2018 Form 10-Q


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

LIFE AND ANNUITY reserves and dac

The following section provides discussion of life and annuity reserves and deferred policy acquisition costs.

Update of Actuarial Assumptions

The Life Insurance Companies review and update estimated gross profit projections used to amortize DAC and related items (which may include VOBA, SIA, guaranteed benefit reserves and unearned revenue reserves) for investment-oriented products at least annually. Estimated gross profit projections include assumptions for investment-related returns and spreads, product-related fees and expenses, mortality gains and losses, policyholder behavior and other factors. In estimating future gross profits, lapse assumptions require judgment and can have a material impact on DAC amortization. If the assumptions used for estimated gross profits change significantly, DAC and related reserves (which may include VOBA, SIA, guaranteed benefit reserves and unearned revenue reserves) are recalculated using the new projections, and any resulting adjustment is included in income. Updating such projections may result in acceleration of amortization in some products and deceleration of amortization in other products.

The Life Insurance Companies also review assumptions related to their respective GMWB living benefits whichthat are accounted for as embedded derivatives and measured at fair value.  The fair value of these embedded derivatives is based on actuarial assumptions, including policyholder behavior, as well as capital market assumptions.

Various assumptions were updated, including the following effective September 30, 2017:2018:

      we reduceddecreased our reversion to the mean rates (gross of fees) to 2.92 percent from 3.74 percent for the Variable Annuity product line in Individual Retirement and to 1.90 percent from 3.78 percent for the Variable Annuity product line in Group Retirement. Our separate account long-term asset growth rate assumption related to equity market performance by 50 basis points toremained unchanged at 7.0 percent and increased our reversion to the mean rates (gross of fees) to 3.74 percent for the Variable Annuity product line in Individual Retirement and 3.78 percent for the Variable Annuity product line in Group Retirement;percent; and

      we lowered our ultimate projected yields on invested assets by approximately fivethree to 10six basis points.points on most annuity deposits and by approximately 12 to 19 basis points on most life insurance deposits. Projected yields are graded from a weighted average net GAAP book yield of existing assets supporting the business based on the value of the assetassets to a weighted average yield based on the duration of the assets excluding assets that mature during the grading period. The grading period is three years for annuity products and five years for life insurance products.

AIG | Third Quarter 2017 Form 10-Q148


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

For long-duration traditional products, which include whole life insurance, term life insurance, accident and health insurance, long-term care insurance, and life-contingent single premium immediate annuities and structured settlements, a “lock-in” principle applies. The assumptions used to calculate the benefit liabilities and DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs. Loss recognition occurs if observed changes in actual experience or estimates result in projected future losses under loss recognition testing. Underlying assumptions are reviewed periodically and updated as appropriate.

The net increases (decreases) to Adjusted pre-tax operating income and pre-tax income as a result of the update of actuarial assumptions for the three- and nine-month periods ended September 30, 20172018 and 20162017 are shown in the following tables.

AIG | Third Quarter 2018 Form 10-Q155


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

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

Three Months and Nine Months Ended September 30,

 

 

 

 

 

 

 

 

(in millions)

 

2017

 

2016

 

2018

 

2017

Consumer Insurance:

 

 

 

 

Life and Retirement:

 

 

 

 

Individual Retirement

 

 

 

 

 

 

 

 

Fixed Annuities

$

130

$

330

$

40

$

130

Variable and Indexed Annuities

 

112

 

39

 

(92)

 

112

Total Individual Retirement

 

242

 

369

 

(52)

 

242

Group Retirement

 

13

 

(47)

 

17

 

13

Life Insurance

 

29

 

(92)

 

(63)

 

29

Total Consumer Insurance

 

284

 

230

Other:

 

 

 

 

Institutional Markets

 

-

 

-

 

-

 

-

Legacy Life Run-off

 

(14)

 

(614)

Total increase (decrease) in pre-tax operating income from update of assumptions

$

270

$

(384)

Total Life and Retirement

 

(98)

 

284

Legacy Life and Retirement Run-off

 

(5)

 

(14)

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

$

(103)

$

270

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

Three Months and Nine Months Ended September 30,

 

 

 

 

 

 

 

 

(in millions)

 

2017

 

2016

 

2018

 

2017

Policy fees

$

(2)

$

(54)

$

(237)

$

(2)

Interest credited to policyholder account balances

 

49

 

65

 

-

 

49

Amortization of deferred policy acquisition costs

 

184

 

325

 

301

 

184

Policyholder benefits and losses incurred

 

39

 

(720)

 

(167)

 

39

Increase (decrease) in pre-tax operating income

 

270

 

(384)

Increase (decrease) in adjusted pre-tax income

 

(103)

 

270

Change in DAC related to net realized capital gains (losses)

 

44

 

13

 

35

 

44

Net realized capital gains (losses)

 

(246)

 

(56)

 

(55)

 

(246)

Increase (decrease) in pre-tax income

$

68

$

(427)

$

(123)

$

68

In the three- and nine-month periods ended September 30, 2018, Adjusted pre-tax income included a net unfavorable adjustment of $103 million, primarily in Variable Annuities driven by reductions to the GMWB full surrender assumption, and in Life Insurance primarily due to additional reserves for certain riders and interest crediting model refinements. The unfavorable adjustments were partially offset by favorable adjustments in Life Insurance primarily due to lower lapse and mortality assumptions and a reduction in IBNR reserves and in Individual Retirement due to lower lapse assumptions in Fixed Annuities and refinements to partial withdrawal assumptions in Variable Annuities.

In the three- and nine-month periods ended September 30, 2017, Adjusted pre-tax operating income included a net positivefavorable adjustment of $270 million, primarily driven by lower lapse assumptions in Fixed Annuities, improved mortality assumptions in Life Insurance, and an increase in the reversion to the mean rates in Variable Annuities. The positivefavorable adjustments were partially offset by lower spread assumptions in Fixed Annuities and a loss recognition expense on long-term care business in the Legacy Life Insurance Run-Off Lines.

In the three- and nine-month periods ended September 30, 2016, pre-tax operating income included a net negative adjustment of $384 million, primarily driven by $622 million of loss recognition reserves for pre-2010 payout annuities in the Legacy Portfolio, and an increase in Life Insurance reserves for universal life with secondary guarantees. These negative adjustments were partially offset by positive adjustments, primarily due to lower lapse assumptions in Fixed Annuities.

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

Update of Actuarial Assumptions by Business Segment

Individual Retirement

The update of actuarial assumptions resulted in a net unfavorable adjustment to Adjusted pre-tax income of Individual Retirement of $52 million in the three- and nine-month periods ended September 30, 2018 compared to a net favorable adjustment of $242 million in the three- and nine-month periods ended September 30, 2017.

In Fixed Annuities, the update of estimated gross profit assumptions resulted in a net favorable adjustment of $40 million and $130 million in the three- and nine-month periods ended September 30, 2018 and 2017, respectively, both of which reflected lower lapse assumptions, partially offset by lower spread assumptions.

156AIG | Third Quarter 20172018 Form 10-Q149


TABLE OF CONTENTS 

 

ITEM 2 |  Insurance Reserves 

 

Update of Actuarial Assumptions by Business Module

Individual Retirement

The update of actuarial assumptions resulted in net positive adjustments to pre-tax operating income of Individual Retirement of $242 million and $369 million in the three- and nine-month periods ended September 30, 2017 and 2016, respectively.

In Fixed Annuities, the update of estimated gross profit assumptions resulted in a net positive adjustment of $130 million in the three- and nine-month periods ended September 30, 2017, which reflected lower lapse assumptions, partially offset by lower spread assumptions. In the three- and nine-month periods ended September 30, 2016, a net positive adjustment of $330 million reflected lower lapse assumptions, primarily due to lower long-term interest rates, as well as updates to spread assumptions.

In Variable and Index Annuities, the update of estimated gross profit assumptions resulted in a net positiveunfavorable adjustment of $112$92 million in the three- and nine-month periods ended September 30, 2018, primarily due to refinements to the GMWB partial withdrawal assumptions in Variable Annuities and the multi-year index strategy crediting parameters in Index Annuities. The unfavorable adjustments were partially offset by lower GMWB lapse assumptions in Variable Annuities.

In the three- and nine-month periods ended September 30, 2017, the update of estimated gross profit assumptions resulted in a net favorable adjustment of $112 million in Variable and Index Annuities primarily due to an increase in the reversion to the mean rate used for projecting future estimated gross profit for variable annuity products and changes in volatility assumptions. The net positivefavorable adjustment was partially offset by a decrease in the separate account long-term asset growth rate assumption from 7.5 percent to 7.0 percent (before expenses that reduce the asset base from which future fees are projected) and a negativean unfavorable adjustment in connection with the conversion to a new modeling platform for Index Annuities.

In the three- and nine-month periods ended September 30, 2016, the update of estimated gross profit assumptions resulted in a net positive adjustment of $39 million primarily due to favorable updates to assumptions for volatility, lapses, mortality and policy expenses, partially offset by a decrease in the separate account long-term asset growth rate assumption from 8.5 percent to 7.5 percent (before expenses that reduce the asset base from which future fees are projected). The net positive adjustment included a net negative adjustment of approximately $24 million in connection with the conversion to a new modeling platform for variable annuities, primarily due to refinements to assumptions for guaranteed minimum interest rates and investment fees, partially offset by the impact of other refinements identified during the conversion.

Group Retirement

In Group Retirement, the update of estimated gross profit assumptions resulted in a net positivefavorable adjustment of $13$17 million in the three- and nine-month periods ended September 30, 2018, primarily due to improved premium persistency assumptions.

In the three- and nine-month periods ended September 30, 2017, a net favorable adjustment of $13 million was primarily due to an increase in the reversion to the mean rate used for projecting future estimated gross profit for variable annuity products and changes in maintenance expense assumptions. The net positive adjustment wasfavorable adjustments were partially offset by a decrease in the separate account long-term asset growth rate assumption from 7.5 percent to 7.0 percent (before expenses that reduce the asset base from which future fees are projected) and decreases in fixed annuity spread and separate account fee assumptions. In the three- and nine-month periods ended September 30, 2016, a net negative adjustment of $47 million was primarily due to refinements in lapse and partial withdrawal assumptions and a decrease in the separate account long-term asset growth rate assumption from 8.5 percent to 7.5 percent (before expenses that reduce the asset base from which future fees are projected).

Life Insurance

In Life Insurance, the update of actuarial assumptions resulted in a net positiveunfavorable adjustment of $29$63 million in the three- and nine-month periods ended September 30, 2018, primarily due to additional reserves for certain riders, decreased lapses and interest crediting model refinements. The unfavorable adjustments were partially offset by favorable adjustments driven by updates to mortality assumptions and a reduction to IBNR reserves.

In the three- and nine-month periods ended September 30, 2017, a net favorable adjustment of $29 million was primarily due to improved mortality assumptions, partially offset by lower spread assumptions.

Legacy Portfolio

In Legacy Portfolio, the three- and nine-month periods ended September 30, 2016,update of actuarial assumptions resulted in a net negativeunfavorable adjustment of $92$5 million was primarily due to refinement to reserves for universal life insurance with secondary guarantees due to lower assumed surrender rates. The update to Life Insurance assumptions in the three- and nine-month periods ended September 30, 2016 also included lower spread assumptions.

Legacy Portfolio2018, reflecting updates to mortality and lapse assumptions.

The update of actuarial assumptions resulted in a net negativeunfavorable adjustment of $14 million in the three- and nine-month periods ended September 30, 2017, primarily due to $13 million of loss recognition expense on long-term care business in the Legacy Life Insurance Run-Off Lines resulting from model enhancements.

The update of actuarial assumptions resulted in $622 million of loss recognition expense in the three- and nine-month periods ended September 30, 2016 on payout annuities in the Legacy Life Insurance Run-Off Lines. The loss recognition reflected the establishment of additional reserves primarily as a result of mortality experience studies, which indicated increased longevity, particularly on disabled lives on a block of structured settlements underwritten prior to 2010.

AIG | Third Quarter 2017 Form 10-Q150


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Variable Annuity Guaranteed Benefits and Hedging Results

Our Individual Retirement and Group Retirement businesses offer variable annuity products with GMWB riders that provide guaranteed living benefit features. The liabilities for GMWB are accounted for as embedded derivatives measured at fair value. The fair value of the embedded derivatives may fluctuate significantly based on market interest rates, equity prices, credit spreads, market volatility, policyholder behavior and other factors.

In addition to risk-mitigating features in our variable annuity product design, we have an economic hedging program designed to manage market risk from GMWB, including exposures to changes in interest rates, equity prices, credit spreads and volatility. The hedging program utilizes derivative instruments, including but not limited to equity options, futures contracts and interest rate swap and swaption contracts, as well as fixed maturity securities with a fair value election.

For additional discussion of market risk management related to these product features see Part II, Item 7. MD&A – Enterprise Risk Management – Insurance Risks – Life Insuranceand Retirement Companies Key Insurance Risks – Variable Annuity Risk Management and Hedging Programs in our 20162017 Annual Report

AIG | Third Quarter 2018 Form 10-Q157


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Differences in Valuation of Embedded Derivatives and Economic Hedge Target

The variable annuity hedging program utilizes an economic hedge target, which represents an estimate of the underlying economic risks in our GMWB riders. The economic hedge target differs from the U.S. GAAP valuation of the GMWB embedded derivatives primarily due to the following:

      The economic hedge target includes 100 percent of rider fees in present value calculations; the U.S. GAAP valuation reflects only those fees attributed to the embedded derivative such that the initial value at contract issue equals zero;

      The economic hedge target uses best estimate actuarial assumptions and excludes explicit risk margins used for U.S. GAAP valuation, such as margins for policyholder behavior, mortality, and volatility; and

      The economic hedge target excludes the non-performance or “own credit” risk adjustment used in the U.S. GAAP valuation, which reflects a market participant’s view of our claims-paying ability by incorporating an additional spread (the NPA spread) to the swap curve used to discount projected benefit cash flows. For more information on our valuation methodology for embedded derivatives within policyholder contract deposits seeNote 5 to the Condensed Consolidated Financial Statements. Because the discount rate includes the NPA spread and other explicit risk margins, the U.S. GAAP valuation is generally less sensitive to movements in interest rates and other market factors, and to changes from actuarial assumption updates, than the economic hedge target.For more information on our valuation methodology for embedded derivatives within policyholder contract deposits seeNote 5 to the Condensed Consolidated Financial Statements

The market value of the hedge portfolio compared to the economic hedge target at any point in time may be different and is not expected to be fully offsetting. In addition to the derivatives held in conjunction with the variable annuity hedging program, the Life Insurance Companiesand Retirement companies have cash and invested assets available to cover future claims payable under these guarantees.  The primary sources of difference between the change in the fair value of the hedging portfolio and the economic hedge target include:

      Basis risk due to the variance between expected and actual fund returns, which may be either positive or negative;

      Realized volatility versus implied volatility;

      Actual versus expected changes in the hedge target driven by assumptions not subject to hedging, particularly policyholder behavior; and

      Risk exposures that we have elected not to explicitly or fully hedge.

The following table presents a reconciliation between the fair value of the U.S. GAAP embedded derivatives and the value of our economic hedge target:

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

2017

 

2016

Reconciliation of embedded derivatives and economic hedge target:

 

 

 

 

 

 

 

 

 

Embedded derivative liability

 

 

 

 

 

$

2,104

$

1,777

Exclude non-performance risk adjustment

 

 

 

 

 

 

(2,425)

 

(3,148)

Embedded derivative liability, excluding NPA

 

 

 

 

 

 

4,529

 

4,925

Adjustments for risk margins and differences in valuation

 

 

 

 

 

 

(1,904)

 

(2,251)

Economic hedge target liability

 

 

 

 

 

$

2,625

$

2,674

AIG | Third Quarter 2017 Form 10-Q151


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

 

 

 

 

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

 

 

 

2018

 

2017

Reconciliation of embedded derivatives and economic hedge target:

 

 

 

 

 

 

 

 

 

Embedded derivative liability

 

 

 

 

 

$

1,046

$

1,994

Exclude non-performance risk adjustment

 

 

 

 

 

 

(1,689)

 

(1,947)

Embedded derivative liability, excluding NPA

 

 

 

 

 

 

2,735

 

3,941

Adjustments for risk margins and differences in valuation

 

 

 

 

 

 

(1,342)

 

(1,557)

Economic hedge target liability

 

 

 

 

 

$

1,393

$

2,384

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 operating income of Individual Retirement and Group Retirement.

The change in the fair value of the embedded derivatives and the change in the value of the hedging portfolio are not expected to be fully offsetting, primarily due to the differences in valuation between the economic hedge target, the U.S. GAAP embedded derivatives and changes in the fair value of the hedging portfolio, as discussed above. When corporate credit spreads widen, the change in the NPA spread generally reduces the fair value of the embedded derivative liabilities, resulting in a gain, and when corporate credit spreads narrow or tighten, the change in the NPA spread generally increases the fair value of the embedded derivative liabilities, resulting in a loss. In addition to changes driven by credit market-related movements in the NPA spread, the NPA balance also reflects changes in business activity and in the net amount at risk from the underlying guaranteed living benefits.

158AIG | Third Quarter 2018 Form 10-Q


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

The following table presents the net increase (decrease) to consolidated pre-tax income (loss) from changes in the fair value of the GMWB embedded derivatives and related hedges, excluding related DAC amortization:

Three Months Ended

 

Nine Months Ended

 

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

 

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016*

 

2018

 

2017

 

 

2018

 

2017

Change in fair value of embedded derivatives, excluding update of actuarial

 

 

 

 

 

 

 

 

 

assumptions and NPA

$

284

$

25

 

$

856

$

(2,502)

Change in fair value of embedded derivatives, excluding update of

 

 

 

 

 

 

 

 

 

actuarial assumptions and NPA

$

553

$

284

 

$

1,477

$

856

Change in fair value of variable annuity hedging portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities

 

26

 

17

 

 

117

 

270

 

(13)

 

26

 

 

(127)

 

117

Interest rate derivative contracts

 

(20)

 

27

 

 

10

 

1,411

 

(257)

 

(20)

 

 

(847)

 

10

Equity derivative contracts

 

(310)

 

(350)

 

 

(978)

 

(650)

 

(332)

 

(310)

 

 

(412)

 

(978)

Change in fair value of variable annuity hedging portfolio

 

(304)

 

(306)

 

 

(851)

 

1,031

 

(602)

 

(304)

 

 

(1,386)

 

(851)

Change in fair value of embedded derivatives excluding update of actuarial assumptions

 

 

 

 

 

 

 

 

 

and NPA, net of hedging portfolio

 

(20)

 

(281)

 

 

5

 

(1,471)

Change in fair value of embedded derivatives excluding update of actuarial

 

 

 

 

 

 

 

 

 

assumptions and NPA, net of hedging portfolio

 

(49)

 

(20)

 

 

91

 

5

Change in fair value of embedded derivatives due to NPA spread

 

(82)

 

(68)

 

 

(485)

 

55

 

(168)

 

(82)

 

 

4

 

(485)

Change in fair value of embedded derivatives due to change in NPA volume

 

(114)

 

158

 

 

(238)

 

1,305

 

(19)

 

(114)

 

 

(262)

 

(238)

Change in fair value of embedded derivatives due to update of actuarial assumptions

 

(188)

 

(101)

 

 

(188)

 

(101)

 

38

 

(188)

 

 

38

 

(188)

Total change due to update of actuarial assumptions and NPA

 

(384)

 

(11)

 

 

(911)

 

1,259

 

(149)

 

(384)

 

 

(220)

 

(911)

Net impact on pre-tax income (loss)

$

(404)

$

(292)

 

$

(906)

$

(212)

$

(198)

$

(404)

 

$

(129)

$

(906)

 

 

 

 

 

 

 

 

 

By Consolidated Income Statement line

 

 

 

 

 

 

 

 

 

Net investment income

$

(13)

$

26

 

$

(127)

$

117

Net realized capital gains (losses)

 

(185)

 

(430)

 

 

(2)

 

(1,023)

Net impact on pre-tax income (loss)

$

(198)

$

(404)

 

$

(129)

$

(906)

*   The change in fair value of embedded derivatives, excluding update of actuarial assumptions and NPA includes revisions for the three-month periods ended March 31, 2016 from $(1,116) million to $(1,586) million and June 30, 2016 from $(885) million to $(941) million. The change in fair value of embedded derivatives, excluding update of actuarial assumptions and NPA, net of hedging portfolio includes revisions for the three-month periods ended March 31, 2016 from $(270) million to $(740) million and June 30, 2016 from $(394) million to $(450) million.  The change in fair value of embedded derivatives due to change in NPA volume includes revisions for the three-month periods ended March 31, 2016 from $203 million to $673 million and June 30, 2016 from $418 million to $474 million.  The total change due to update of actuarial assumptions and NPA includes revisions for the three-month periods ended March 31, 2016 from $358 million to $828 million and June 30, 2016 from $386 million to $442 million. These changes had no impact on pre-tax income (loss)from the GMWB embedded derivatives and are not considered material to previously issued financial statements.

related hedges in the three -month period ended September 30, 2018 (excluding related DAC amortization) was primarily driven by losses from the impact of tightening credit spreads on the NPA spread, partially offset by higher interest rates, and equity market volatility. In the three- and nine-month periods ended September 30, 2018, increases in interest rates resulted in NPA volume losses from lower expected GMWB payments. The net impact on pre-tax income from the GMWB and related hedges in the three- and nine-month periods ended September 30, 2017 (excluding related DAC amortization) was primarily driven by losses from actuarial assumption updates to lapse and volatility assumptions, tightening credit spreads on the NPA spread and the impact on the NPA (volume) of lower expected GMWB payments, driven by higher equity markets. In

The change in the fair value of the GMWB embedded derivatives, excluding NPA and update of actuarial assumptions, in the three- and nine-month periods ended September 30, 2016, the net impact on pre-tax income was primarily2018 reflected gains from equity market volatility and reductions in risk margins due to decreased GMWB claims driven by losses from actuarial assumption updates to lapse and mortality assumptions and changes inhigher interest rates, partially offset by losses from the impactrelated hedging portfolio in the three- and nine-month periods ended September 30, 2018. In the nine-month period ended September 30, 2018, fair value gains on embedded derivatives, excluding NPA and actuarial assumption update, was fully offset by fair value losses on the NPA (volume) of higher expected GMWB claims.

related hedging portfolio. The change in the fair value of GMWB embedded derivatives excluding NPA and update of actuarial assumptions and NPA, in the three- and nine-month periods ended September 30, 2017 was substantiallylargely offset by the related hedging portfolio. However, in the three- and nine-month periods ended September 30, 2016, the change in fair value of the hedging portfolio were more than offset by losses from the change in fair value of embedded derivatives, excluding update of actuarial assumptions and NPA, primarily due to changes in interest rates, which impacted the embedded derivative liability excluding NPA more than the related impact to the hedging portfolio.

Fair value gains or losses in the hedging portfolio are typically not fully offset by increases or decreases in liabilities on a U.S. GAAP basis, due to the NPA and other risk margins used for U.S. GAAP valuation that cause the embedded derivatives to be less sensitive to changes in market rates than the hedge portfolio. On an economic basis, the changes in the fair value of the hedge portfolio were partially offset by the decrease in the economic hedge target, as discussed below.

AIG | Third Quarter 2017 Form 10-Q152


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Change in Economic Hedge Target

The slight decrease in the economic hedge target liability at September 30, 2017 compared to December 31, 2016in the first nine months of 2018 was primarily due to positive equity markets and increases in markethigher interest rates partially offset by tighter credit spreads and lower equity market volatility.

AIG | Third Quarter 2018 Form 10-Q159


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Change in Fair Value of the Hedging Portfolio

The changes in the fair value of the economic hedge target and, to a lesser extent, the embedded derivatives, were offset in part by the following changes in the fair value of the variable annuity hedging portfolio:

      Changes in the fair value of fixed maturity securities, primarily corporate bonds for which the fair value option has been elected, are used as a capital-efficient way to economically hedge interest rate and credit spread-related risk. The change in the fair value of the corporate bond hedging program in the three- and nine-month periodperiods ended September 30, 2018 reflected losses due to increases in interest rates, partially offset by the tightening of credit spreads. Gains in the three- and nine-month periods ended September 30, 2017 reflected gainswere primarily due to tightening of credit spreads, while the nine-months period ended September 30, 2016 reflected higher gains primarily due to decreases in market interest rates. Changes in the fair value of the hedging bonds in the three-month period ended September 30, 2017 and 2016 were not significant.spreads. The change in the fair value of the hedging bonds, which is excluded from the adjusted pre-tax operating income of the Individual Retirement and Group Retirement segments, is reported in net investment income on the Consolidated Statements of Income (Loss).

      Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions and futures, resulted in net losses driven by higher interest rates in the three- and nine-month periods ended September 30, 2018 compared to a loss in the three-month period ended September 30, 2017 and smallera net gain in the nine-month period ended September 30, 2017 compared to significant gains from interest rate declines in the nine-month period ended September 30, 2016. The change in the fair value of interest rate derivative contracts in the three-month period ended September 30, 2016 was not significant..

      The change in the fair value of equity derivative contracts, which included futures and options, resulted inreflected lower losses in the three- and nine-month periods ended September 30, 2017 and 2016,2018 compared to the same periods in the prior year, which varied based on the relative change in equity market performancereturns in the respective periods.

DAC

The following table summarizes the major components of the changes in DAC, including VOBA, within the life insuranceLife and Retirement companies, excluding DAC of Institutional Markets andthe Legacy Portfolio:

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

(in millions)

 

2017

 

2016

 

2018

 

2017

Balance, beginning of year

$

7,543

$

7,149

$

7,637

$

7,571

Acquisition costs deferred

 

693

 

782

 

850

 

696

Amortization expense:

 

 

 

 

 

 

 

 

Update of assumptions included in pre-tax operating income

 

194

 

315

Update of assumptions included in adjusted pre-tax income

 

307

 

194

Related to realized capital gains and losses

 

190

 

5

 

47

 

190

All other operating amortization

 

(649)

 

(699)

 

(718)

 

(652)

Increase (decrease) in DAC due to foreign exchange

 

49

 

(28)

 

(14)

 

49

Change related to unrealized depreciation (appreciation) of investments

 

(494)

 

(948)

 

873

 

(495)

Other

 

-

 

-

Balance, end of period*

$

7,526

$

6,576

$

8,982

$

7,553

*   DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $8.8$9.4 billion and $8.1$8.8 billion at September 30, 2018 and 2017, and 2016, respectively.

AIG | Third Quarter 2017 Form 10-Q153


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

DAC and Reserves Related to Unrealized Appreciation of Investments

DAC and Reserves for universal life and investment-type products (collectively, investment-oriented products) isare 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 DAC)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 movesmove 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 decreasedincreased in the nine-month period ended September 30, 2017. As30,2018, which resulted in a result,$7.4 billion decrease in the unrealized appreciation of fixed maturity securities held to support businesses in the Life Insurance Companies that support the businessesand Retirement companies at September 30, 2017 increased by $3.6 billion2018 compared to December 31, 2016, which resulted2017. At September 30, 2018, the shadow Investment-Oriented Adjustments reflected increases in DAC and unearned revenues and a decrease in DACfuture policy benefit liabilities compared to reflectDecember 31, 2017, while the shadow DAC adjustment.Loss Adjustments reflected a decrease in future policy benefit liabilities.

160AIG | Third Quarter 2018 Form 10-Q


TABLE OF CONTENTS

ITEM 2 |Insurance Reserves

Reserves

The following table presents a rollforward of insurance reserves by operating segments for IndividualLife and Retirement, Group Retirement and Life Insurance modules, including future policy benefits, policyholder contract deposits, other policy funds, and separate account liabilities, as well as Retail Mutual Funds and Group Retirement mutual fund assets under administration:administration:

Three Months Ended

 

Nine Months Ended

Three Months Ended

 

Nine Months Ended

September 30,

 

September 30,

September 30,

 

September 30,

(in millions)

 

2017

 

2016

 

 

2017

 

2016

 

2018

 

2017

 

 

2018

 

2017

Individual Retirement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

133,211

$

128,033

 

$

129,321

$

121,474

$

137,134

$

133,211

 

$

138,571

$

129,321

Premiums and deposits

 

2,526

 

3,363

 

 

8,800

 

12,984

 

3,616

 

2,526

 

 

11,396

 

8,800

Surrenders and withdrawals

 

(2,499)

 

(2,401)

 

 

(8,135)

 

(7,333)

 

(3,369)

 

(2,499)

 

 

(10,106)

 

(8,135)

Death and other contract benefits

 

(745)

 

(733)

 

 

(2,369)

 

(2,286)

 

(792)

 

(745)

 

 

(2,556)

 

(2,369)

Subtotal

 

(718)

 

229

 

 

(1,704)

 

3,365

 

(545)

 

(718)

 

 

(1,266)

 

(1,704)

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

policy fees

 

2,735

 

1,781

 

 

6,999

 

4,284

 

2,215

 

2,735

 

 

941

 

6,999

Cost of funds*

 

384

 

407

 

 

1,147

 

1,220

 

386

 

384

 

 

1,141

 

1,147

Other reserve changes

 

(152)

 

(104)

 

 

(303)

 

3

 

(26)

 

(152)

 

 

(223)

 

(303)

Balance at end of period

 

135,460

 

130,346

 

 

135,460

 

130,346

 

139,164

 

135,460

 

 

139,164

 

135,460

Reinsurance ceded

 

(324)

 

(352)

 

 

(324)

 

(352)

 

(319)

 

(324)

 

 

(319)

 

(324)

Total Individual Retirement insurance reserves and mutual fund assets

$

135,136

$

129,994

 

$

135,136

$

129,994

$

138,845

$

135,136

 

$

138,845

$

135,136

Group Retirement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

92,649

$

85,943

 

$

88,622

$

84,145

$

97,548

$

92,649

 

$

97,306

$

88,622

Premiums and deposits

 

1,860

 

1,821

 

 

5,702

 

5,514

 

2,116

 

1,860

 

 

6,533

 

5,702

Surrenders and withdrawals

 

(1,740)

 

(1,796)

 

 

(5,863)

 

(5,141)

 

(2,957)

 

(1,740)

 

 

(8,062)

 

(5,863)

Death and other contract benefits

 

(135)

 

(122)

 

 

(417)

 

(395)

 

(145)

 

(135)

 

 

(462)

 

(417)

Subtotal

 

(15)

 

(97)

 

 

(578)

 

(22)

 

(986)

 

(15)

 

 

(1,991)

 

(578)

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

policy fees

 

2,078

 

2,074

 

 

6,115

 

3,247

 

2,129

 

2,078

 

 

2,841

 

6,115

Cost of funds*

 

280

 

280

 

 

833

 

830

 

275

 

280

 

 

816

 

833

Other reserve changes

 

4

 

-

 

 

(2)

 

-

Balance at end of period

 

94,992

 

88,200

 

 

94,992

 

88,200

 

98,970

 

94,992

 

 

98,970

 

94,992

Total Group Retirement insurance reserves and mutual fund assets

$

94,992

$

88,200

 

$

94,992

$

88,200

$

98,970

$

94,992

 

$

98,970

$

94,992

Life Insurance

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

19,647

$

18,694

 

$

19,424

$

18,397

Premiums and deposits

 

887

 

860

 

 

2,663

 

2,600

Surrenders and withdrawals

 

(286)

 

(143)

 

 

(600)

 

(437)

Death and other contract benefits

 

(140)

 

(151)

 

 

(346)

 

(441)

Subtotal

 

461

 

566

 

 

1,717

 

1,722

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

policy fees

 

(229)

 

(242)

 

 

(771)

 

(675)

Cost of funds*

 

92

 

93

 

 

281

 

281

Other reserve changes

 

87

 

(275)

 

 

(593)

 

(889)

Balance at end of period

 

20,058

 

18,836

 

 

20,058

 

18,836

Reinsurance ceded

 

(1,232)

 

(1,049)

 

 

(1,232)

 

(1,049)

Total Life Insurance reserves

$

18,826

$

17,787

 

$

18,826

$

17,787

AIG | Third Quarter 20172018 Form 10-Q          154161


TABLE OF CONTENTS 

 

ITEM 2 |  Insurance Reserves 

 

Life Insurance

 

 

 

 

 

 

 

 

 

Institutional Markets

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

18,694

$

18,050

 

$

18,397

$

18,006

$

19,694

$

15,445

 

$

18,580

$

15,385

Premiums and deposits

 

860

 

841

 

 

2,600

 

2,522

 

69

 

1,476

 

 

2,184

 

2,199

Surrenders and withdrawals

 

(143)

 

(149)

 

 

(437)

 

(481)

 

(183)

 

(37)

 

 

(1,189)

 

(800)

Death and other contract benefits

 

(151)

 

(144)

 

 

(441)

 

(394)

 

(112)

 

(72)

 

(387)

 

(275)

Subtotal

 

566

 

548

 

 

1,722

 

1,647

 

(226)

 

1,367

 

 

608

 

1,124

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

policy fees

 

(242)

 

(204)

 

 

(675)

 

(770)

 

81

 

86

 

 

158

 

189

Cost of funds*

 

93

 

96

 

 

281

 

290

 

90

 

66

 

 

246

 

186

Other reserve changes

 

(275)

 

(184)

 

 

(889)

 

(867)

 

63

 

27

 

 

110

 

107

Balance at end of period

 

18,836

 

18,306

 

 

18,836

 

18,306

 

19,702

 

16,991

 

 

19,702

 

16,991

Reinsurance ceded

 

(1,049)

 

(1,079)

 

 

(1,049)

 

(1,079)

 

(43)

 

(3)

 

 

(43)

 

(3)

Total Life Insurance reserves

$

17,787

$

17,227

 

$

17,787

$

17,227

Total Institutional Markets reserves

$

19,659

$

16,988

 

$

19,659

$

16,988

Total insurance reserves and mutual fund assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period, gross

$

244,554

$

232,026

 

$

236,340

$

223,625

$

274,023

$

259,999

 

$

273,881

$

251,725

Premiums and deposits

 

5,246

 

6,025

 

 

17,102

 

21,020

 

6,688

 

6,722

 

 

22,776

 

19,301

Surrenders and withdrawals

 

(4,382)

 

(4,346)

 

 

(14,435)

 

(12,955)

 

(6,795)

 

(4,419)

 

 

(19,957)

 

(15,235)

Death and other contract benefits

 

(1,031)

 

(999)

 

 

(3,227)

 

(3,075)

 

(1,189)

 

(1,103)

 

 

(3,751)

 

(3,502)

Subtotal

 

(167)

 

680

 

 

(560)

 

4,990

 

(1,296)

 

1,200

 

 

(932)

 

564

Change in fair value of underlying assets and reserve accretion, net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

policy fees

 

4,571

 

3,651

 

 

12,439

 

6,761

 

4,196

 

4,657

 

 

3,169

 

12,628

Cost of funds*

 

757

 

783

 

 

2,261

 

2,340

 

843

 

823

 

 

2,484

 

2,447

Other reserve changes

 

(427)

 

(288)

 

 

(1,192)

 

(864)

 

128

 

(400)

 

 

(708)

 

(1,085)

Balance at end of period

 

249,288

 

236,852

 

 

249,288

 

236,852

 

277,894

 

266,279

 

 

277,894

 

266,279

Reinsurance ceded

 

(1,373)

 

(1,431)

 

 

(1,373)

 

(1,431)

 

(1,594)

 

(1,376)

 

 

(1,594)

 

(1,376)

Total insurance reserves and mutual fund assets

$

247,915

$

235,421

 

$

247,915

$

235,421

$

276,300

$

264,903

 

$

276,300

$

264,903

*    Excludes amortization of deferred sales inducementsinducements.

InsuranceInsurance reserves of IndividualLife and Retirement, Group Retirement and Life Insurance modules, andas well as Retail Mutual Funds and Group Retirement mutual fund assets under administration, were comprised of the following balances:balances:

 

 

 

September 30,

 

December 31,

 

 

 

September 30,

 

December 31,

(in millions)

 

 

 

2017

 

2016

 

 

 

2018

 

2017

Future policy benefits

 

 

$

7,517

$

7,380

 

 

$

13,853

$

13,592

Policyholder contract deposits

 

 

 

121,420

 

119,644

 

 

 

135,916

 

130,735

Other policy funds

 

 

 

334

 

378

 

 

 

476

 

401

Separate account liabilities

 

 

 

83,492

 

76,619

 

 

 

91,041

 

90,819

Total insurance reserves

 

 

 

212,763

 

204,021

Total insurance reserves*

 

 

 

241,286

 

235,547

Mutual fund assets

 

 

 

36,525

 

32,319

 

 

 

36,608

 

38,334

Total insurance reserves and mutual fund assets

 

 

$

249,288

$

236,340

 

 

$

277,894

$

273,881

*    Excludes reserves related to the Legacy Portfolio.

162AIG | Third Quarter 20172018 Form 10-Q155


TABLE OF CONTENTS 

 

ITEM 2 |  Liquidity and Capital Resources 

 

Liquidity and Capital Resources

Overview

Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations.  It is defined as cash and unencumbered assets that can be monetized in a short period of time at a reasonable cost. We 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-monthssix months under a liquidity stress scenario.

For additional information seeSee Part II, Item 7. MD&A Enterprise Risk Management — Risk Appetite, Limits, Identification, and Measurement in the 20162017 Annual Report and Enterprise Risk Management — Liquidity Risk Management below.below for additional information.

Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth, and cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital generation is 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 for bothat AIG and the individual businesses and are based on internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual capital levels are monitored on a regular basis, and using ERM’s stress testing methodology, we evaluate the capital impact of potential macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of both AIG and our insurance subsidiaries.

We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or events.

Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable capital resources, as was the case in 2008.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, paying dividends to our shareholders and share and/or warrant repurchases. 

AIG | Third Quarter 20172018 Form 10-Q          156163


TABLE OF CONTENTS 

 

ITEM 2 |  Liquidity and Capital Resources 

 

LIQUIDITY AND CAPITAL RESOURCES ACTIVITY FOR the NINE-month period ended SEPTEMBERnine-MONTH PERIOD ENDED September 30, 20172018

Sources

AIG Parent Funding from Subsidiaries

During the nine-month period ended September 30, 2017,2018, AIG Parent received $1.6$3.8 billion in dividends from subsidiaries. Of this amount, $350 million was$1.6 billion consisted of dividends in the form of cash and fixed maturity securities from our Property CasualtyGeneral Insurance Companies, $1.3companies, $2.1 billion wasconsisted of dividends and loan repayments in the form of cash and fixed maturity securities from our Life Insurance Companies and $2Retirement companies and $48 million wasconsisted of dividends in the form of cash dividends from AIG Federal Savings Bank.our Other category.

AIG Parent also received $3.4a net amount of $1.1 billion in tax sharing payments in the form of cash and fixed maturity securities from our insurance businesses in the nine-month period ended September 30, 2017,2018, including $309$238 million of such payments in the third quarter of 2017.2018.  The tax sharing payments may be subject to adjustment in future periods.

The dividends, loan repayments and tax sharing payments from our Life Insurance Companies resulted from and were funded, in part, by excess statutory capital released by Life Insurance Reinsurance Transactions. For information regarding the Life Insurance Reinsurance Transactions, see Business Segment Operations — Consumer Insurance.

Debt Issuance

In June 2017,March 2018, we issued €1.0 billion aggregate principal amount ($1.1 billion at closing) of 1.875% Notes Due 2027.

Legacy Investments

During the nine-month period ended September 30, 2017, we generated approximately $1.0 billion in return of capital from Legacy Investments.

Arch

In June 2017, AIG Parent and National Union received gross proceeds of approximately $391 million and $261 million, respectively, from the sale of approximately four million and three million shares, respectively, of common stock of Arch Capital Group Ltd. by means of an underwritten public offering.

Uses

Debt Reduction

On July 17, 2017, we redeemed $290$750 million aggregate principal amount of our outstanding 4.90% Callable4.200% Notes Due July 17, 2045.

On September 25, 2017, we redeemed $4202028; $1.0 billion aggregate principal amount of 4.750% Notes Due 2048; and $750 million aggregate principal amount of 5.750% Fixed-To-Floating Rate Series A-9 Junior Subordinated Debentures Due 2048 (Junior Subordinated Debentures). We used the net proceeds from these offerings for general corporate purposes, including funding a portion of the consideration for the acquisition of Validus.

Uses

Debt Reduction*

In May 2018,  we redeemed all of our outstanding 4.90% Callable Notes Due September 25, 2045.8.000% Series A-7 Junior Subordinated Debentures and 8.625% Series A-8 Junior Subordinated Debentures in each case for a redemption price of 100 percent of the principal amount, plus accrued and unpaid interest, for approximately $15 million and $7 million, respectively.

We also made other repurchases of and repayments on debt instruments of approximately $2.1$2.9 billion during the nine-month period ended September 30, 2017.2018.   AIG Parent made interest payments on our debt instruments totaling $789$706 million during the nine-month period ended September 30, 2017.2018.

Validus Acquisition

On July 18, 2018, we completed our acquisition of Validus for approximately $5.5 billion in cash.  Following the consummation of the acquisition, AIG executed a guarantee, dated July 26, 2018, with respect to Validus’ outstanding Series A Preference Shares and Series B Preference Shares (together, the Preference Shares), pursuant to which AIG provided a full and unconditional guarantee of Validus’ obligations with respect to the Preference Shares. In addition, AIG executed a guarantee, dated July 26, 2018, with respect to Validus’ aggregate outstanding 8.875% Senior Notes due 2040 (the Notes), pursuant to which AIG provided a full and unconditional guarantee of Validus’ obligations with respect to the Notes. AIG also entered into certain letter of credit agreements in support of the Validus companies.

Dividend

We paid a cash dividend of $0.32 per share on AIG Common Stock during each of the first, second and third quarters of 20172018 totaling $885$858 million.

Repurchase of Common Stock

We repurchased approximately 10018.5 million shares of AIG Common Stock during the nine-month period ended September 30, 2017,2018, for an aggregate purchase price of approximately $6.3 billion.$994 million.

* On October 30, 2018, Validus redeemed all of its outstanding Preference Shares at a redemption price of $26,000 per Preference Share for approximately $416 million in the aggregate. In addition, on October 30, 2018, Validus Reinsurance, Ltd. redeemed its outstanding Floating Rate Deferrable Interest Junior Subordinated Notes due July 30, 2037 at a redemption price of 100 percent of the principal amount, plus accrued and unpaid interest, for a net amount of approximately $90 million.

164AIG | Third Quarter 20172018 Form 10-Q157


TABLE OF CONTENTS 

 

ITEM 2 |  Liquidity and Capital Resources 

 

Analysis of Sources and Uses of Cash

The following table presents selected data from AIG's Consolidated Statements of Cash Flows:

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

2017

 

2016

 

 

 

2018

 

2017

Sources:

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

$

-

$

1,753

Net cash provided by other investing activities

 

 

 

14,797

 

374

 

 

 

4,135

 

14,475

Changes in policyholder contract balances

 

 

 

1,801

 

3,598

 

 

 

5,146

 

1,801

Issuance of long-term debt

 

 

 

2,405

 

11,430

 

 

 

4,059

 

2,405

Net cash provided by other financing activities

 

 

 

581

 

1,178

 

 

 

-

 

578

Total sources

 

 

 

19,584

 

18,333

 

 

 

13,340

 

19,259

Uses:

 

 

 

  

 

  

 

 

 

 

  

 

Net cash used in operating activities

 

 

 

(9,195)

 

-

 

 

 

(38)

 

(8,862)

Change in restricted cash

 

 

 

(23)

 

(49)

Acquisition of businesses, net of cash and restricted cash acquired

 

 

 

(5,052)

 

-

Repayments of long-term debt

 

 

 

(2,751)

 

(7,683)

 

 

 

(2,788)

 

(2,751)

Purchases of AIG Common Stock

 

 

 

(6,275)

 

(8,506)

 

 

 

(994)

 

(6,275)

Dividends paid

 

 

 

(884)

 

(1,051)

 

 

 

(858)

 

(884)

Purchases of warrants

 

 

 

(3)

 

(263)

Net cash used in other financing activities

 

 

 

(3,232)

 

-

Total uses

 

 

 

(19,131)

 

(17,552)

 

 

 

(12,962)

 

(18,772)

Effect of exchange rate changes on cash

 

 

 

(21)

 

88

Increase in cash

 

 

$

432

$

869

Effect of exchange rate changes on cash and restricted cash

 

 

 

8

 

(22)

Increase (decrease) in cash and restricted cash

 

 

$

386

$

465

The following table presents a summary of AIG’s Consolidated Statement of Cash Flows:

Nine Months Ended September 30,

 

 

 

 

 

 

 

(in millions)

 

 

 

 

2017

 

2016

Summary:

 

 

 

 

 

 

 

   Net cash provided by (used in) operating activities

 

 

 

$

(9,195)

$

1,753

   Net cash provided by investing activities

 

 

 

 

14,774

 

325

   Net cash used in financing activities

 

 

 

 

(5,126)

 

(1,297)

   Effect of exchange rate changes on cash

 

 

 

 

(21)

 

88

Increase in cash

 

 

 

 

432

 

869

Cash at beginning of year

 

 

 

 

1,868

 

1,629

Change in cash of businesses held for sale

 

 

 

 

133

 

-

Cash at end of period

 

 

 

$

2,433

$

2,498

Nine Months Ended September 30,

 

 

 

 

 

 

 

(in millions)

 

 

 

 

2018

 

2017

Summary:

 

 

 

 

 

 

 

   Net cash provided by (used in) operating activities

 

 

 

$

(38)

$

(8,862)

   Net cash provided by (used in) investing activities

 

 

 

 

(917)

 

14,475

   Net cash provided by (used in) financing activities

 

 

 

 

1,333

 

(5,126)

   Effect of exchange rate changes on cash and restricted cash

 

 

 

 

8

 

(22)

Increase (decrease) in cash and restricted cash

 

 

 

 

386

 

465

Cash and restricted cash at beginning of year

 

 

 

 

2,737

 

2,107

Change in cash of businesses held for sale

 

 

 

 

-

 

133

Cash and restricted cash at end of period

 

 

 

$

3,123

$

2,705

Operating Cash Flow Activities

Insurance companies generally receive most premiums in advance of the payment of claims or policy benefits. The ability of insurance companies to generate positive cash flow is affected by the frequency and severity of losses under their insurance policies, policy retention rates and operating expenses.

Interest payments totaled $1.0 billion in both the nine-month periodsperiod ended September 30, 2017 and 2016.2018 compared to $1.0 billion in the same period in the prior year. Excluding interest payments, AIG had operating cash outflowsinflows of $8.2 billion$980 million in the nine-month period ended September 30, 20172018 compared to positive operating cash outflows of $2.8$7.8 billion in the nine-monthsame period ended September 30, 2016.in the prior year. The operating cash outflow in the nine-month period ended September 30, 2017 was primarily due to payment for the adverse development reinsurance agreement entered into with NICO.

 

AIG | Third Quarter 20172018 Form 10-Q          158165


TABLE OF CONTENTS 

 

ITEM 2 |  Liquidity and Capital Resources 

 

Investing Cash Flow Activities

Net cash provided byused in investing activities in the nine-month period ended September 30, 20172018 was $14.8 billion$917 million compared to investing cash inflows of $325 million$14.5 billion in the nine-month period ended September 30, 2016.2017. The nine-month period ended September 30, 2018 included our acquisition of Validus for approximately $5.5 billion in cash. The nine-month period ended September 30, 2017 included sales of certain investments to fund the adverse development reinsurance agreement entered into with NICO.

Financing Cash Flow Activities

Net cash used in financing activities in the nine-month period ended September 30, 2017 included:

approximately $884 million in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each of the first, second and third quarters of 2017;

approximately $6.3 billion to repurchase approximately 100 million shares of AIG Common Stock; and

approximately $346 million in net outflows from the issuance and repayment of long-term debt.

Net cash used in financing activities in the nine-month period ended September 30, 2016 included:

approximately $1.1 billion in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each of the first, second and third quarters of 2016;

approximately $8.5 billion to repurchase approximately 153 million shares of AIG Common Stock; and

$263 million to repurchase 15 million warrants to purchase shares of AIG Common Stock.

These items were partially offset by approximately $3.7 billion in net inflows from the issuance and repayment of long-term debt.

Net cash provided by financing activities in the nine-month period ended September 30, 2018 reflected:

approximately $858 million in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each

of the first, second, and third quarters of 2018;

approximately $994 million to repurchase approximately 18.5 million shares of AIG Common Stock; and

approximately $1.3 billion in net inflows from the issuance and repayment of long-term debt.

Net cash used in financing activities in the nine-month period ended September 30, 2017 reflected:

approximately $884 million in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each

     of the first, second, and third quarters of 2017;

approximately $6.3 billion to repurchase approximately 100 million shares of AIG Common Stock; and

approximately $346 million in net outflows from the issuance and repayment of long-term debt.

Liquidity and Capital Resources of AIG Parent and Subsidiaries

AIG Parent

As of September 30, 2017,2018, AIG Parent had approximately $11.2$9.0 billion in liquidity sources. AIG Parent’s liquidity sources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities. Fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities. AIG Parent actively manages its assets and liabilities in terms of products, counterparties and duration. Based upon an assessment of funding needs, the liquidity sources can be readily monetized through sales 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 markets from time to time to meet funding requirements as needed.

We utilize our capital resources to support our businesses, with the majority of capital allocated to our insurance operations. Should we have or generate more capital than is needed to support our business strategies (including organic growth or acquisition opportunities) or mitigate risks inherent to our business, we may develop plans to distribute such capital to shareholders via dividends or share repurchase authorizations or deploy such capital towards liability management.

In the normal course, it is expected that a portion of the capital released by our insurance operations, by our other operations or through the utilization of AIG’s deferred tax assets may be available 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.

166AIG | Third Quarter 20172018 Form 10-Q159


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ITEM 2 |  Liquidity and Capital Resources 

 

The following table presents AIG Parent's liquidity sources:

As of

As of

As of

As of

(In millions)

September 30, 2017

December 31, 2016

September 30, 2018

December 31, 2017

Cash and short-term investments(a)

$

2,184

$

3,950

$

851

$

2,114

Unencumbered fixed maturity securities(b)

 

4,560

 

4,470

 

3,663

 

5,172

Total AIG Parent liquidity

 

6,744

 

8,420

 

4,514

 

7,286

Available capacity under syndicated credit facility(c)

 

4,500

 

4,500

 

4,500

 

4,500

Total AIG Parent liquidity sources

$

11,244

$

12,920

$

9,014

$

11,786

(a)  Cash and short-term investments include reverse repurchase agreements totaling $1.6 billion$631 million and $1.0$1.7 billion as of September 30, 20172018 and December 31, 2016,2017, respectively.

(b)  Unencumbered securities consist of publicly traded, investment grade rated fixed maturity securities. Fixed maturity securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.

(c)  For additional information relating to this syndicated credit facility see Credit Facilities belowbelow.

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.income and maturities. The primary uses of liquidity are paid losses, reinsurance payments, benefit claims, surrenders, withdrawals, interest payments, dividends, expenses, investmentsinvestment purchases and collateral requirements.

Our Property CasualtyGeneral Insurance Companiescompanies may require additional funding to meet capital or liquidity needs under certain circumstances.  Large catastrophes may require us to provide additional support to our affected operations. Downgrades in our credit ratings could put pressure on the insurer financial strength ratings of our subsidiaries, which could result in non‑renewals or cancellations by policyholders and adversely affect the subsidiary’s ability to meet its own obligations. Increases in market interest rates may adversely affect the financial strength ratings of our subsidiaries, as rating agency capital models may reduce the amount of available capital relative to required capital. Other potential events that could cause a liquidity strain include an economic collapse of a nation or region significant to our operations, nationalization, catastrophic terrorist acts, pandemics or other events causing economic or political upheaval.

On January 20, 2017, certain of our Property Casualty Insurance Companies entered into an adverse development reinsurance agreement with NICO under which they transferred to NICO 80 percent of reserve risk on substantially all of their U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, these Property Casualty Insurance Companies 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. The total consideration paid, including interest, was $10.2 billion.

Management believes that because of the size and liquidity of our Life Insurance Companies’and Retirement companies’ investment portfolios, normal deviations from projected claim or surrender experience would not create significant liquidity risk. Furthermore, our Life Insurance Companies’and Retirement companies’ products contain certain features that mitigate surrender risk, including surrender charges. However, as we saw in 2008, in times of extreme capital markets disruption, liquidity needs could outpace resources. As part of their risk management framework, our Life Insurance Companiesand 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) in their respective districts. Borrowings from the FHLBs are used to supplement liquidity or for other uses deemed appropriate by management. Our U.S. Property CasualtyGeneral Insurance Companiescompanies had outstanding borrowings from the FHLBs in an aggregate amount of approximately $556$200 million and $733$190 million at September 30, 20172018 and December 31, 2016,2017, respectively. The outstandingincrease was primarily due to borrowings are being used primarily for interest rate risk management purposesof approximately $110 million by Validus companies, partially offset by a decrease in connection with certain reinsurance arrangements, and the related balances are expected to decline as underlying premiums are collected.borrowings from other U.S. General Insurance companies. Our U.S. Life Insurance Companiesand Retirement companies had no outstanding borrowings in the form of cash advances from the FHLBs in an aggregate amount of $30 million at September 30, 2017,2018 and aggregatehad no outstanding borrowings in the form of cash advances of approximately $2 million at December 31, 2016.2017. In addition, $606 million$3.4 billion and $429$606 million were due to the FHLBFHLBs in the respective districts of Dallasour U.S. Life and Retirement companies at September 30, 20172018  and December 31, 2016,2017, respectively, under funding agreements issued bythrough our Individual Retirement, Group Retirement and Institutional Markets business,operating segments, which were reported in Policyholder contract deposits.

AIG | Third Quarter 2017 Form 10-Q160


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ITEM 2 |Liquidity and Capital Resources

Certain of our U.S. Life Insurance Companiesand 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 Insurance Companiesand 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. Additionally, the aggregate amount of securities that a Life Insurance Companyand 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 Insurance Companiesand Retirement companies had $2.9$1.1 billion and $2.4$2.9 billion of securities subject to

AIG | Third Quarter 2018 Form 10-Q167


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ITEM 2 |Liquidity and Capital Resources

these agreements at September 30, 20172018 and December 31, 2016,2017, respectively, and $3.0$1.1 billion and $2.5$3.0 billion of liabilities to borrowers for collateral received at September 30, 20172018 and December 31, 2016,2017, 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 is party toentered into a CMA with AGC Life Insurance Company.Fortitude Re. Among other things, the CMA provides that AIG Parent will maintain the total adjustedavailable statutory capital and surplus of AGC Life Insurance CompanyFortitude Re’s long term business fund and its general business account at or above a specified minimumstress threshold percentage of its projected NAIC Company Action Level Risk-Based Capital (RBC).enhanced capital requirement in respect of the applicable fund, as defined under Bermuda law. As of September 30, 2017,2018, the specified minimumstress threshold percentage under this CMA was 250125 percent.

AIG Parent and/or certain subsidiaries are parties to several letter of credit agreements with various financial institutions, which issue letters of credit from time to time in support of our insurance companies. Letters of credit issued in support of the General Insurance companies totaled approximately $2.7 billion at September 30, 2018, an increase of $309 million from June 30, 2018. The increase was primarily due to outstanding and new letters of credit issued in support of the Validus companies totaling $278 million, including a $60 million letter of credit issued for Talbot 2002 Underwriting Capital Limited, a member of the Lloyd’s of London insurance syndicate. Letters of credit issued in support of the Life and Retirement companies totaled approximately $910 million at September 30, 2018. Letters of credit issued in support of Fortitude Re totaled $550 million at September 30, 2018.

During 2016, we created a new Switzerland-domiciled international holding company, AIG International Holdings, GmbH (AIGIH), which is intended to be the ultimate holding company for all of our international entities. This international holding company structure is part of our ongoing efforts to simplify our organizational structure, and is expected to facilitate the optimization of our international capital strategy from both a regulatory and a tax perspective. Through November 2, 2017, the followingOctober 31, 2018, substantially all of our international operations have been transferred to AIGIH: Europe, Canada, Asia PacificAIGIH. We will continue to monitor our international holding company structure in light of regulatory, tax and Latin America/Caribbean.other developments, to ensure that this strategy continues to be effective.

In the nine-month period ended September 30, 2017, 2018, our Property CasualtyGeneral Insurance Companiescompanies collectively paid a total of approximately $350 million$1.6 billion in dividends in the form of cash and fixed maturity securities to AIG Parent. The fixed maturity securities primarily included U.S. government and government-sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.

In the nine-month period ended September 30, 2017, the2018, our Life Insurance Companiesand Retirement companies collectively declaredpaid a total of approximately $2.1 billion ofin dividends return of capital and loan repayments. Of this amount, $867 million was paidrepayments in the form of cash $387 million was paid in the form of fixed maturity securities, and $890 million was retained at an intermediate life insurance holding company to fund tax sharing payments to AIG Parent. The Life Insurance Companies made

Tax Matters

If the settlement agreements in principle are concluded in our ongoing dispute related to the disallowance of foreign tax sharing paymentscredits 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 nine-month period ended September 30, 2017 totaling $3.2 billionrelevant authorities as well as the amount and timing of any potential payments, which are not likely to be made before sometime in 2019.

For additional information regarding this matter see Note 15 to the form of cash and fixed maturity securities, primarily as a result of the Life Insurance Reinsurance Transactions. Fixed maturity securities used to fund dividends and tax sharing payments included U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.Condensed Consolidated Financial Statements.

Credit Facilities

We maintain a committed, revolving syndicated credit facility (the Facility) as a potential source of liquidity for general corporate purposes. The Facility provides for aggregate commitments by the bank syndicate to provide unsecured revolving loans and/or standby letters of credit of up to $4.5 billion without any limits on the type of borrowings and is scheduled to expire in June 2022.

As of September 30, 2017,2018, a total of $4.5 billion remains available under the Facility. Our ability to borrow underutilize the Facility is not contingent on our credit ratings. However, our ability to borrow underutilize 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 borrow underutilize the Facility from time to time, and may use the proceeds for general corporate purposes.

168AIG | Third Quarter 20172018 Form 10-Q161


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ITEM 2 |  Liquidity and Capital Resources 

 

Contractual Obligations

The following table summarizes contractual obligations in total, and by remaining maturity:

September 30, 2017

 

  

 

Payments due by Period

September 30, 2018

 

  

Payments due by Period

 

Total

 

Remainder

 

2018 -

 

2020 -

 

 

 

 

 

Total

Remainder of

 

2019 -

 

2021 -

 

 

 

 

(in millions)

 

Payments

 

of 2017

 

2019

 

2021

 

2022

 

Thereafter

 

Payments

 

2018

 

2020

 

2022

 

2023

 

Thereafter

Insurance operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss reserves

$

81,880

$

5,436

$

29,400

$

16,160

$

5,294

$

25,590

$

83,954

$

19,047

$

24,100

$

13,468

$

4,402

$

22,937

Insurance and investment contract liabilities

 

244,657

 

4,085

 

29,909

 

27,806

 

12,846

 

170,011

 

222,828

 

6,486

 

30,165

 

28,086

 

12,167

 

145,924

Borrowings

 

984

 

-

 

-

 

342

 

-

 

642

Borrowings(a)

 

1,342

 

-

 

117

 

222

 

-

 

1,003

Interest payments on borrowings

 

903

 

1

 

99

 

99

 

50

 

654

 

853

 

1

 

99

 

99

 

50

 

604

Other long-term obligations

 

7

 

1

 

3

 

2

 

1

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Total

$

328,431

$

9,523

$

59,411

$

44,409

$

18,191

$

196,897

$

308,977

$

25,534

$

54,481

$

41,875

$

16,619

$

170,468

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings

$

24,478

$

396

$

3,359

$

3,113

$

1,553

$

16,057

$

24,771

$

136

$

2,643

$

3,208

$

1,736

$

17,048

Interest payments on borrowings

 

13,460

 

174

 

1,921

 

1,700

 

732

 

8,933

 

15,751

 

472

 

2,071

 

1,798

 

821

 

10,589

Other long-term obligations

 

220

 

12

 

125

 

41

 

-

 

42

 

409

 

21

 

180

 

171

 

1

 

36

Total

$

38,158

$

582

$

5,405

$

4,854

$

2,285

$

25,032

$

40,931

$

629

$

4,894

$

5,177

$

2,558

$

27,673

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss reserves

$

81,880

$

5,436

$

29,400

$

16,160

$

5,294

$

25,590

$

83,954

$

19,047

$

24,100

$

13,468

$

4,402

$

22,937

Insurance and investment contract liabilities

 

244,657

 

4,085

 

29,909

 

27,806

 

12,846

 

170,011

 

222,828

 

6,486

 

30,165

 

28,086

 

12,167

 

145,924

Borrowings

 

25,462

 

396

 

3,359

 

3,455

 

1,553

 

16,699

Borrowings(a)

 

26,113

 

136

 

2,760

 

3,430

 

1,736

 

18,051

Interest payments on borrowings

 

14,363

 

175

 

2,020

 

1,799

 

782

 

9,587

 

16,604

 

473

 

2,170

 

1,897

 

871

 

11,193

Other long-term obligations(a)(b)

 

227

 

13

 

128

 

43

 

1

 

42

 

409

 

21

 

180

 

171

 

1

 

36

Total(b)(c)

$

366,589

$

10,105

$

64,816

$

49,263

$

20,476

$

221,929

$

349,908

$

26,163

$

59,375

$

47,052

$

19,177

$

198,141

(a)  On October 30, 2018, Validus Reinsurance, Ltd. redeemed its outstanding Floating Rate Deferrable Interest Junior Subordinated Notes due July 30, 2037 at a redemption price of 100 percent of the principal amount, plus accrued and unpaid interest, for a net amount of approximately $90 million. Accordingly, in the table above, this instrument is reported as maturing in 2018 instead of its original maturity date.

(b)  Primarily includes contracts to purchase future services and other capital expenditures.

(b)(c)  Does not reflect unrecognized tax benefits of $4.6 billion,$4.7 billion. For additional information see Note 15 to the timing of which is uncertain.Condensed Consolidated Financial Statements.

Loss Reserves

Loss reserves relate to our Property CasualtyGeneral Insurance Companiescompanies and represent estimates of future loss and loss adjustment expense payments estimated based on historical loss development payment patterns. Due to the significance of the assumptions used, the payments by period presented above could be materially different from actual required payments. We believe that our Property CasualtyGeneral Insurance Companiescompanies maintain adequate financial resources to meet the actual required payments under these obligations.

Insurance and Investment Contract Liabilities

Insurance and investment contract liabilities, including GIC liabilities, relate to our Life Insurance Companies.and Retirement companies. These liabilities include various investment-type products with contractually scheduled maturities, including periodic payments. These liabilities also include benefit and claim liabilities, of which a significant portion represents policies and contracts that do not have stated contractual maturity dates and may not result in any future payment obligations. For these policies and contracts (i) we are not currently making payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or (iii) payment may occur due to a surrender or other non-scheduled event beyond our control.

We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits. These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts presented could be materially different from actual required payments. The amounts presented in this table are undiscounted and exceed the future policy benefits and policyholder contract deposits included in the Condensed Consolidated Balance Sheets.

We believe that our Life Insurance Companiesand 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 Insurance Companiesand Retirement companies maintain significant levels of investment  grade rated fixed maturity securities, including substantial holdings in government and corporate bonds, and could seek to monetize those holdings in the event operating cash flows are insufficient. We expect liquidity needs related to GIC liabilities to be funded through cash flows generated from maturities and sales of invested assets.

AIG | Third Quarter 20172018 Form 10-Q          162169


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ITEM 2 |  Liquidity and Capital Resources 

 

Borrowings

Our borrowings exclude those incurred by consolidated investments and include hybrid financial instrument liabilities recorded at fair value. We expect to repay the long-term debt maturities and interest accrued on borrowings by AIG through maturing investments and dispositions of invested assets, future cash flows from operations, cash flows generated from invested assets, future debt issuance and other financing arrangements. Borrowings supported by assets of AIG include various notes and bonds payable as well as GIAs that are supported by cash and investments held by AIG Parent and certain non-insurance subsidiaries for the repayment of those obligations.

Off-Balance Sheet Arrangements and Commercial Commitments

The following table summarizes Off-Balance Sheet Arrangements and Commercial Commitments in total, and by remaining maturity:

September 30, 2017

 

  

 

Amount of Commitment Expiring

September 30, 2018

 

  

 

Amount of Commitment Expiring

 

Total Amounts

 

Remainder

 

2018 -

 

2020 -

 

 

 

 

 

Total Amounts

 

Remainder

 

2019 -

 

2021 -

 

 

 

 

(in millions)

 

Committed

 

of 2017

 

2019

 

2021

 

2022

 

Thereafter

 

Committed

 

of 2018

 

2020

 

2022

 

2023

 

Thereafter

Insurance operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Standby letters of credit

$

67

$

35

$

21

$

-

$

-

$

11

$

173

$

161

$

2

$

-

$

-

$

10

Guarantees of indebtedness

 

71

 

71

 

-

 

-

 

-

 

-

 

59

 

59

 

-

 

-

 

-

 

-

All other guarantees(a)

 

2

 

-

 

-

 

2

 

-

 

-

 

79

 

7

 

14

 

16

 

14

 

28

Commitments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment commitments(b)

 

2,915

 

1,737

 

820

 

313

 

-

 

45

 

3,274

 

1,757

 

1,138

 

344

 

-

 

35

Commitments to extend credit

 

2,603

 

1,276

 

887

 

424

 

7

 

9

 

2,115

 

975

 

609

 

305

 

140

 

86

Letters of credit

 

5

 

5

 

-

 

-

 

-

 

-

 

5

 

-

 

5

 

-

 

-

 

-

Total(c)

$

5,663

$

3,124

$

1,728

$

739

$

7

$

65

$

5,705

$

2,959

$

1,768

$

665

$

154

$

159

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity facilities(d)

$

74

$

-

$

-

$

-

$

-

$

74

$

74

$

-

$

-

$

-

$

-

$

74

Standby letters of credit

 

139

 

139

 

-

 

-

 

-

 

-

 

85

 

85

 

-

 

-

 

-

 

-

All other guarantees

 

84

 

-

 

21

 

28

 

14

 

21

 

-

 

-

 

-

 

-

 

-

 

-

Commitments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment commitments(b)

 

198

 

6

 

32

 

40

 

69

 

51

 

300

 

1

 

27

 

75

 

80

 

117

Commitments to extend credit(e)

 

500

 

-

 

500

 

-

 

-

 

-

Commitments to extend credit

 

-

 

-

 

-

 

-

 

-

 

-

Letters of credit

 

24

 

6

 

18

 

-

 

-

 

-

 

16

 

16

 

-

 

-

 

-

 

-

Total(c)(f)

$

1,019

$

151

$

571

$

68

$

83

$

146

Total(c)(e)

$

475

$

102

$

27

$

75

$

80

$

191

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Guarantees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity facilities(d)

$

74

$

-

$

-

$

-

$

-

$

74

$

74

$

-

$

-

$

-

$

-

$

74

Standby letters of credit

 

206

 

174

 

21

 

-

 

-

 

11

 

258

 

246

 

2

 

-

 

-

 

10

Guarantees of indebtedness

 

71

 

71

 

-

 

-

 

-

 

-

 

59

 

59

 

-

 

-

 

-

 

-

All other guarantees(a)

 

86

 

-

 

21

 

30

 

14

 

21

 

79

 

7

 

14

 

16

 

14

 

28

Commitments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment commitments(b)

 

3,113

 

1,743

 

852

 

353

 

69

 

96

 

3,574

 

1,758

 

1,165

 

419

 

80

 

152

Commitments to extend credit(e)

 

3,103

 

1,276

 

1,387

 

424

 

7

 

9

Commitments to extend credit

 

2,115

 

975

 

609

 

305

 

140

 

86

Letters of credit

 

29

 

11

 

18

 

-

 

-

 

-

 

21

 

16

 

5

 

-

 

-

 

-

Total(c)(f)

$

6,682

$

3,275

$

2,299

$

807

$

90

$

211

Total(c)(e)

$

6,180

$

3,061

$

1,795

$

740

$

234

$

350

(a)  Includes construction guarantees connected to affordable housing investments by our Life Insurance Companies.and Retirement companies. 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 StatementsStatements.

(b)  Includes commitments to invest in private equity funds, hedge funds and other funds and commitments to purchase and develop real estate in the United States and abroad. The commitments to invest in private equity funds, hedge funds and other funds are called at the discretion of each fund, as needed for funding new investments or expenses of the fund. The expiration of these commitments is estimated in the table above based on the expected life cycle of the related fund, consistent with past trends of requirements for funding. Investors under these commitments are primarily insurance and real estate subsidiaries.

(c)  Does not include guarantees, CMAs or other support arrangements among AIG consolidated entities.

(d)  Primarily represents liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.

(e)  Includes a five-year senior unsecured revolving credit facility of upExcludes commitments with respect to $500pension plans. The remaining annual pension contribution for 2018 is expected to be approximately $13 million between AerCap Ireland Capital Limited, as borrower,for U.S. and AIG Parent, as lender (the AerCap Credit Facility) scheduled to mature in May 2019. The AerCap Credit Facility permits loans for general corporate purposes. At September 30, 2017, no amounts were outstanding under the AerCap Credit Facility.non-U.S. plans.

170AIG | Third Quarter 20172018 Form 10-Q163


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ITEM 2 |  Liquidity and Capital Resources 

 

(f)  Excludes commitments with respect to pension plans. There is no remaining annual pension contribution for 2017 for U.S. and non-U.S. plans.

Arrangements with Variable Interest Entities

We enter into various arrangements with variable interest entities (VIEs) in the normal course of business, and we consolidate a VIE when we are the primary beneficiary of the entity.

For a further discussion of our involvement with VIEs see Note 8 to the Condensed Consolidated Financial Statements.

Indemnification Agreements

We are subject to financial guarantees and indemnity arrangements in connection with our sales of businesses. These arrangements may be triggered by declines in asset values, specified business contingencies, the realization of contingent liabilities, litigation developments, or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to time limitations, defined by contract or by operation of law, such as by prevailing statutes of limitation. Depending on the specific terms of the arrangements, the maximum potential obligation may or may not be subject to contractual limitations.

For additional information regarding our indemnification agreements see Note 11 to the Condensed Consolidated Financial Statements.

We have recorded liabilities for certain of these arrangements where it is possible to estimate them. These liabilities are not material in the aggregate. We are unable to develop a reasonable estimate of the maximum potential payout under some of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments under these arrangements.

Debt

The following table provides the rollforward of AIG’s total debt outstanding:

 

Balance at

 

  

 

Maturities

 

Effect of

 

 

 

 

Balance at

 

Balance at

 

  

 

Maturities

 

Effect of

 

 

 

 

Balance at

Nine Months Ended September 30, 2017

 

December 31,

 

  

 

and

 

Foreign

 

Other

 

September 30,

Nine Months Ended September 30, 2018

 

December 31,

 

  

 

and

 

Foreign

 

Other

 

September 30,

(in millions)

 

2016

 

Issuances

Repayments

 

Exchange

 

Changes

 

 

2017

 

2017

 

Issuances

Repayments

 

Exchange

 

Changes

 

 

2018

Debt issued or guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIG general borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes and bonds payable

$

19,432

$

1,108

$

(710)

$

236

$

12

 

$

20,078

$

20,339

$

1,727

$

(1,107)

$

(95)

$

23

 

$

20,887

Junior subordinated debt

 

843

 

-

 

(38)

 

30

 

1

 

 

836

 

841

 

742

 

(22)

 

(10)

 

1

 

 

1,552

AIG Japan Holdings Kabushiki Kaisha

 

330

 

-

 

-

 

12

 

-

 

 

342

 

334

 

-

 

-

 

5

 

-

 

 

339

Validus notes and bonds payable

 

-

 

-

 

-

 

-

 

360

 

 

360

AIGLH notes and bonds payable

 

281

 

-

 

-

 

-

 

-

 

 

281

 

281

 

-

 

-

 

-

 

1

 

 

282

AIGLH junior subordinated debt

 

361

 

-

 

-

 

-

 

-

 

 

361

 

361

 

-

 

-

 

-

 

-

 

 

361

Total AIG general borrowings

 

21,247

 

1,108

 

(748)

 

278

 

13

 

 

21,898

 

22,156

 

2,469

 

(1,129)

 

(100)

 

385

 

 

23,781

AIG borrowings supported by assets:(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MIP notes payable

 

1,099

 

-

 

(606)

 

44

 

(2)

 

 

535

 

356

 

-

 

(364)

 

8

 

-

 

 

-

Series AIGFP matched notes and bonds payable

 

32

 

-

 

-

 

-

 

(1)

 

 

31

 

21

 

-

 

-

 

-

 

-

 

 

21

GIAs, at fair value

 

2,934

 

319

 

(493)

 

-

 

57

(b)

 

2,817

 

2,707

 

118

 

(518)

 

-

 

(44)

(b)

 

2,263

Notes and bonds payable, at fair value

 

494

 

1

 

(356)

 

-

 

42

(b)

 

181

 

181

 

-

 

(129)

 

-

 

(4)

(b)

 

48

Total AIG borrowings supported by assets

 

4,559

 

320

 

(1,455)

 

44

 

96

 

 

3,564

 

3,265

 

118

 

(1,011)

 

8

 

(48)

 

 

2,332

Total debt issued or guaranteed by AIG

 

25,806

 

1,428

 

(2,203)

 

322

 

109

 

 

25,462

 

25,421

 

2,587

 

(2,140)

 

(92)

 

337

 

 

26,113

Debt not guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Validus junior subordinated debt

 

-

 

-

 

-

 

-

 

539

 

 

539

Other subsidiaries' notes, bonds, loans and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

mortgages payable(c)

 

735

 

-

 

(178)

 

-

 

(1)

 

 

556

 

190

 

30

 

(196)

 

-

 

206

 

 

230

Debt of consolidated investments(d)

 

4,371

 

977

 

(467)

 

(2)

 

142

(e)

 

5,021

 

6,029

 

1,442

 

(549)

 

(27)

 

817

(e)

 

7,712

Total debt not guaranteed by AIG

 

5,106

 

977

 

(645)

 

(2)

 

141

 

 

5,577

 

6,219

 

1,472

 

(745)

 

(27)

 

1,562

 

 

8,481

Total debt

$

30,912

$

2,405

$

(2,848)

$

320

$

250

 

$

31,039

$

31,640

$

4,059

$

(2,885)

$

(119)

$

1,899

 

$

34,594

(a)  AIG Parent guarantees all such debt, except for MIP notes payable and Series AIGFP matched notes and bonds payable, which are direct obligations of AIG Parent. Collateral posted to third parties was $2.0$1.6 billion and $2.2$2.0 billion at September 30, 20172018 and December 31, 2016,2017, respectively. This collateral primarily consists of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.

(b)  Primarily represents adjustments to the fair value of debt.

(c)  Includes primarily borrowings with Federal Home Loan Banks by our U.S. insurance companies.  These borrowings are short term in nature and related activity is presented net of issuances and maturities and repayments.

(d)  At September 30, 2018, includes debt of consolidated investment vehicles related to real estate investments of $2.8 billion, affordable housing partnership investments of $1.9 billion and other securitization vehicles of $3.0 billion. At December 31, 2017, includes debt of consolidated investment vehicles related to real estate investments of $2.0$2.5 billion, affordable housing partnership investments of $1.8 billion and other securitization vehicles of $1.2$1.7 billion. At December 31, 2016, includes debt of consolidated investment vehicles related to real estate investments of $1.9 billion, affordable housing partnership investments of $1.7 billion and other securitization vehicles of $771 million.

(e)  Includes the effect of consolidating previously unconsolidated partnerships.

AIG | Third Quarter 20172018 Form 10-Q          164171


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ITEM 2 |  Liquidity and Capital Resources 

 

(e)  Includes the effect of consolidating previously unconsolidated partnerships.

TOTAL DEBT OUTSTANDING

(in millions)

 

 

Debt Maturities

The following table summarizes maturing debt at September 30, 20172018 of AIG (excluding $5.0$7.7 billion of borrowings of consolidated investments) for the next four quarters:

 

Fourth

 

First

 

Second

 

Third

 

 

 

Fourth

 

First

 

Second

 

Third

 

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

 

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

 

(in millions)

 

2017

 

2018

 

2018

 

2018

 

Total

 

2018

 

2019

 

2019

 

2019

 

Total

AIG general borrowings

$

183

$

1,107

$

-

$

-

$

1,290

$

-

$

-

$

-

$

999

$

999

AIG borrowings supported by assets

 

213

 

34

 

348

 

473

 

1,068

 

136

 

17

 

17

 

143

 

313

Validus junior subordinated debt(a)

 

89

 

-

 

-

 

-

 

89

Other subsidiaries' notes, bonds, loans and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

mortgages payable

 

366

 

190

 

-

 

-

 

556

 

120

 

110

 

-

 

-

 

230

Total

$

762

$

1,331

$

348

$

473

$

2,914

$

345

$

127

$

17

$

1,142

$

1,631

(a)  On October 30, 2018, Validus Reinsurance, Ltd. redeemed its outstanding Floating Rate Deferrable Interest Junior Subordinated Notes due July 30, 2037 at a redemption price of 100 percent of the principal amount, plus accrued and unpaid interest, for a net amount of approximately $90 million. Accordingly, in the table above, this instrument is reported as maturing in the fourth quarter of 2018 instead of its original maturity date.

172AIG | Third Quarter 20172018 Form 10-Q165


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ITEM 2 |  Liquidity and Capital Resources 

 

The following table presents maturities of long-term debt (including unamortized original issue discount, hedge accounting valuation adjustments and fair value adjustments, when applicable), excluding $5.0$7.7 billion in borrowings of debt of consolidated investments:

September 30, 2017

 

 

 

Remainder

Year Ending

September 30, 2018

 

 

 

Remainder

Year Ending

(in millions)

 

 

Total

 

of 2017

 

2018

 

2019

 

2020

 

2021

 

2022

Thereafter

 

 

Total

 

of 2018

 

2019

 

2020

 

2021

 

2022

 

2023

Thereafter

Debt issued or guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIG general borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes and bonds payable

 

$

20,078

$

183

$

1,107

$

998

$

1,343

$

1,495

$

1,506

$

13,446

 

$

20,887

$

-

$

999

$

1,344

$

1,497

$

1,508

$

1,625

$

13,914

Junior subordinated debt

 

 

836

 

-

 

-

 

-

 

-

 

-

 

-

 

836

 

 

1,552

 

-

 

-

 

-

 

-

 

-

 

-

 

1,552

AIG Japan Holdings Kabushiki Kaisha

 

 

342

 

-

 

-

 

-

 

118

 

224

 

-

 

-

 

 

339

 

-

 

-

 

117

 

222

 

-

 

-

 

-

Validus notes and bonds payable

 

 

360

 

-

 

-

 

-

 

-

 

-

 

-

 

360

AIGLH notes and bonds payable

 

 

281

 

-

 

-

 

-

 

-

 

-

 

-

 

281

 

 

282

 

-

 

-

 

-

 

-

 

-

 

-

 

282

AIGLH junior subordinated debt

 

 

361

 

-

 

-

 

-

 

-

 

-

 

-

 

361

 

 

361

 

-

 

-

 

-

 

-

 

-

 

-

 

361

Total AIG general borrowings

 

 

21,898

 

183

 

1,107

 

998

 

1,461

 

1,719

 

1,506

 

14,924

 

 

23,781

 

-

 

999

 

1,461

 

1,719

 

1,508

 

1,625

 

16,469

AIG borrowings supported by assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MIP notes payable

 

 

535

 

178

 

357

 

-

 

-

 

-

 

-

 

-

 

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Series AIGFP matched notes and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonds payable

 

 

31

 

10

 

-

 

-

 

-

 

-

 

-

 

21

 

 

21

 

-

 

-

 

-

 

-

 

-

 

-

 

21

GIAs, at fair value

 

 

2,817

 

22

 

507

 

265

 

31

 

244

 

47

 

1,701

 

 

2,263

 

136

 

269

 

31

 

156

 

47

 

111

 

1,513

Notes and bonds payable, at fair value

 

 

181

 

3

 

125

 

-

 

-

 

-

 

-

 

53

 

 

48

 

-

 

-

 

-

 

-

 

-

 

-

 

48

Total AIG borrowings supported by assets

Total AIG borrowings supported by assets

 

3,564

 

213

 

989

 

265

 

31

 

244

 

47

 

1,775

Total AIG borrowings supported by assets

 

2,332

 

136

 

269

 

31

 

156

 

47

 

111

 

1,582

Total debt issued or guaranteed by AIG

 

 

25,462

 

396

 

2,096

 

1,263

 

1,492

 

1,963

 

1,553

 

16,699

 

 

26,113

 

136

 

1,268

 

1,492

 

1,875

 

1,555

 

1,736

 

18,051

Debt not guaranteed by AIG:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Validus junior subordinated debt(a)

 

 

539

 

89

 

-

 

-

 

-

 

-

 

-

 

450

Other subsidiaries notes, bonds, loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and mortgages payable

 

 

556

 

366

 

190

 

-

 

-

 

-

 

-

 

-

 

 

230

 

120

 

110

 

-

 

-

 

-

 

-

 

-

Total debt not guaranteed by AIG

Total debt not guaranteed by AIG

 

769

 

209

 

110

 

-

 

-

 

-

 

-

 

450

Total

 

$

26,018

$

762

$

2,286

$

1,263

$

1,492

$

1,963

$

1,553

$

16,699

 

$

26,882

$

345

$

1,378

$

1,492

$

1,875

$

1,555

$

1,736

$

18,501

(a)  On October 30, 2018, Validus Reinsurance, Ltd. redeemed its outstanding Floating Rate Deferrable Interest Junior Subordinated Notes due July 30, 2037 at a redemption price of 100 percent of the principal amount, plus accrued and unpaid interest, for a net amount of approximately $90 million. Accordingly, in the table above, this instrument is reported as maturing in 2018 instead of its original maturity date.

Credit Ratings

Credit ratings estimate a company’s ability to meet its obligations and may directly affect the cost and availability of financing to that company. The following table presents the credit ratings of AIG and certain of its subsidiaries as of October 27, 2017.29, 2018. 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)

AIGAmerican 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

Negative Outlook

Negative Outlook

AIG Financial Products Corp.(d)

P-2

A-2

 

Baa 1

BBB+

-

 

Stable Outlook

 

 

Stable Outlook

Negative Outlook

 

(a)  Moody’s appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within the rating categories.

(b)  S&P ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

(c)  Fitch ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

(d)  AIG guarantees all obligations of AIG Financial Products Corp.

These credit ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at our request.

AIG | Third Quarter 2018 Form 10-Q173


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ITEM 2 |Liquidity and Capital Resources

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 adverse actions on our long-term debt ratings by the major rating agencies, AIGFP and certain other AIG entities would be required to post additional collateral under some derivative transactions or could experience termination of the transactions. Such requirements and terminations could adversely affect our business, our consolidated results of operations in a reporting period or our liquidity. In the event of a further downgrade of AIG’s long-term senior debt ratings, AIGFP and certain other AIG entities would be required to post additional collateral under some derivative and other transactions, or certain of the counterparties of AIGFP or of such other AIG entities would be permitted to terminate their contractssuch transactions early.

AIG | Third Quarter 2017 Form 10-Q166


TABLE OF CONTENTS

ITEM 2 |Liquidity and Capital Resources

The actual amount of collateral that we would be required to post to counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at the time of the downgrade.

For a discussion of the effects of downgrades in 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 20162017 Annual Report.  

FINANCIAL STRENGTH Ratings

Financial Strength ratings estimate an insurance company’s ability to pay its obligations under an insurance policy.  The following table presents the ratings of our significant insurance subsidiaries as of October 27, 2017.29, 2018.

 

A.M. Best

S&P

Fitch

Moody’s

National Union Fire Insurance Company of Pittsburgh, Pa.

A

A+ / A-1+

A

A2

Lexington Insurance Company

A

A+

A

A2

American Home Assurance Company  (US)

A

A+

A

A2

American General Life Insurance Company

A

A+

A+

A2

The Variable Annuity Life Insurance Company

A

A+

A+

A2

United States Life Insurance Company in the City of New York

A

A+

A+

A2

AIG Europe Limited

A

A+

A

A2

Fuji Fire and MarineAIG General Insurance CompanyCo. Ltd.

NR

A+

NR

NR

AIU Insurance Company,Validus Reinsurance, Ltd.

NRA

A+A

NRA

NRA2

These financial strength ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. 

For a discussion of the effects of downgrades in our financial strength ratings see Note 9 to the Condensed Consolidated Financial Statements herein and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit in our 20162017 Annual Report.  

Regulation and Supervision

For a discussion of our regulation and supervision by different regulatory authorities in the United States and abroad, including with respect to our liquidity and capital resources see Part I, Item 1. Business — Regulation and Part I, Item 1A. Risk Factors — Regulation in our 20162017 Annual Report, and Part I, Item 2. MD&A – Regulatory Environment below in this Quarterly Report on Form 10-Q  and the Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2017 and March 31, 2017.10-Q.

Dividends and Repurchases of AIG Common Stock

On February 14, 2017,8, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 29, 20172018 to shareholders of record on March 15, 2017.2018. On May 3, 2017,2, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on June 28, 20172018 to shareholders of record on June 14, 2017.2018.  On August 2, 2017,2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on September 29, 201728, 2018 to shareholders of record on September 15, 2017.17, 2018. On November 2, 2017,October 31, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on December 22, 201726, 2018 to shareholders of record on December 8, 2017.12, 2018. 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.

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 May 3, 2017, our Board of Directors approved an additional increase of $2.5 billion to the share repurchase authorization.  As of November 2, 2017,October 31, 2018, approximately $2.2$1.3 billion remained under the authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants).  Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The timing of any future share repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors.

During the nine-month period ended September 30, 2017, we repurchased approximately 100 million shares of AIG Common Stock for an aggregate purchase price of approximately $6.3 billion pursuant to this authorization.

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repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors.

During the nine-month period ended September 30, 2018, we repurchased approximately 18.5 million shares of AIG Common Stock for an aggregate purchase price of approximately $994 million pursuant to this authorization.

Dividend Restrictions

Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by regulatory authorities.

For a discussion of restrictions on payments of dividends by our subsidiaries see Note 19 to the Consolidated Financial Statements in the 20162017 Annual Report.

 

Enterprise Risk Management

Risk management includes the identification and measurement of various forms of risk, the establishment of risk thresholds and the creation of processes intended to maintain risks within these thresholds while optimizing returns. We consider risk management an integral part of managing our core businesses and a key element of our approach to corporate governance.

Overview

We have an integrated process for managing risks throughout our organization in accordance with our firm‑wide risk appetite. Our Board of Directors has oversight responsibility for the management of risk. Our Enterprise Risk Management (ERM) Department supervises and integrates the risk management functions in each of our business units, providing senior management with a consolidated view of AIG’s major risk positions. Within each business unit, senior leaders and executives approve risk‑taking policies and targeted risk tolerance within the framework provided by ERM. ERM supports our businesses and management in the embedding of risk management in our key day-to-day business processes and in identifying, assessing, quantifying, managing, monitoring, and reporting, and mitigating the risks taken by us and our businesses. Nevertheless, our risk management efforts may not always be successful and material adverse effects on our business, results of operations, cash flows, liquidity or financial condition may occur.

For a further discussion of AIG’s risk management program see Part II, Item 7. MD&A ─ Enterprise Risk Management in the 20162017 Annual Report.

Credit Risk Management

Overview

Credit risk is defined as the risk that our customers or counterparties are unable or unwilling to repay their contractual obligations when they become due. Credit risk may also result from a downgrade of a counterparty’s credit ratings or a widening of its credit spreads.spreads.

We devote considerable resources to managing our direct and indirect credit exposures. These exposures may arise from, but are not limited to, fixed income investments, equity securities, deposits, commercial paper investments, reverse repurchase agreements and repurchase agreements, corporate and consumer loans, leases, reinsurance recoverables, counterparty risk arising from derivatives activities, collateral extended to counterparties, insurance risk cessions to third parties, financial guarantees, and letters of credit.credit, and certain General Insurance businesses.

We monitor and control our company-wide credit risk concentrations and attempt to avoid unwanted or excessive risk accumulations, whether funded or unfunded. To minimize the level of credit risk in some circumstances, we may require mitigants, such as third‑party guarantees, reinsurance or collateral, including commercial bank-issued letters of credit and trust collateral accounts. We treat these guarantees, reinsurance recoverables, and letters of credit as credit exposure and include them in our risk concentration exposure data. We also monitor closely the quality of any trust collateral accounts.

For further information on our credit concentrations and credit exposures see Investments – Available for Sale Securities.Available-for-Sale Investments.

AIG | Third Quarter 20172018 Form 10-Q          168175


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Our credit risk management framework incorporates the following elements:

Risk Identification

including the ongoing capture and monitoring of all existing, contingent, potential and emerging credit risk exposures, whether funded or unfunded

Risk Measurement

comprising risk ratings, default probabilities, loss given default and expected loss parameters, exposure calculations, stress testing and other risk analytics

Risk Limits

including, but not limited to, a system of single obligor or risk group-based AIG-wide house limits and sub-limits for corporates, financial institutions, sovereigns and sub-sovereigns when appropriate and a defined process for identifying, evaluating, documenting and approving, if appropriate, breaches of and exceptions to such limits

Risk Delegations

a comprehensive credit risk delegation framework from the AIG Chief Credit Officer (CCO) to authorized credit professionals throughout the company

Risk Evaluation, Monitoring and Reporting

including the ongoing analysis and assessment of credit risks, trending of those risks and reporting of other key risk metrics and limits to the AIG CCO and senior management, as may be required

Credit Reserving

including but not limited to development of a proper framework, policies and procedures for establishing accurate identification of (i) Allowance for Loan and Lease Losses, and (ii) other-than-temporary impairments for securities portfolios

Market Risk Management

Market risk is defined as the risk of adverse impact due to systemic movements in one or more of the following market risk drivers:  equity and commodity prices, residential and commercial real estate values, interest rates, credit spreads, foreign exchange, inflation, and their levels of volatility.

We are engaged in a variety of insurance, investment and other financial services businesses that expose us to market risk, directly and indirectly. We are exposed to market risks primarily within our insurance and capital markets activities, on both the asset and liability side of our balance sheet through onon- and off-balance sheet exposures. The chief risk officerRisk Officer within each business is responsible for creating a framework to properly identify these risks, then ensuring that they are appropriately measured, monitored and managed in accordance with the risk governance framework established by the Chief Market Risk Officer (CMRO).Officer.

The scope and magnitude of our market risk exposures is managed under a robust framework that contains defined risk limits and minimum standards for managing market risk in a manner consistent with our risk appetite statement. Our market risk management framework focuses on quantifying the financial repercussions of changes in these broad market observables, as opposed to the idiosyncratic risks associated with individual assets that are addressed through our credit risk management function.

Risk Identification

MarketMany of our market risk focuses on quantifyingexposures related to interest rates and equity returns are associated with our Life and Retirement companies and relate to both asset and liability exposures. In addition, these exposures are long-term in nature. Examples of liability-related exposures include interest rate sensitive surrenders in our fixed deferred annuity product portfolio. Also, we have equity market risk sensitive surrenders in our variable annuity product portfolio. These interactive asset-liability types of risk exposures are regularly monitored in accordance with the financial repercussions of changes in broad, external, predominantly market observable risks. Financial repercussions can include an adverse impact on results of operations, financial condition, liquidity and capital.risk governance framework noted above.

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Risk Identification

Market risk focuses on quantifying the financial repercussions of changes in broad, external, predominantly market-observable risks. Financial repercussions can include an adverse impact on results of operations, financial condition, liquidity and capital.

Each of the following systemic risks is considered a market risk:

Equity prices

We are exposed to changes in equity market prices affecting a variety of instruments. Changes in equity prices can affect the valuation of publicly-tradedpublicly traded equity shares, investments in private equity, hedge funds and mutual funds, exchange-traded funds, and other equity-linked capital market instruments as well as equity-linked insurance products, including but not limited to index annuities, variable annuities, indexed universal life insurance and variable universal life insurance.

Residential and commercial real estate values

Our investment portfolios are exposed to the risk of changing values in a variety of residential and commercial real estate investments. Changes in residential/commercial real estate prices can affect the valuation of residential/commercial mortgages, residential/commercial mortgage‑backed securities and other structured securities with underlying assets that include residential/commercial mortgages, trusts that include residential/commercial real estate and/or mortgages, residential mortgage insurance and reinsurance contracts and commercial real estate investments.

Interest rates

Interest rate risk can arise from a mismatch in the interest rate exposure of assets versus liabilities. Lower interest rates generally result in lower investment income and make some of our product offerings less attractive to investors. Conversely, higher interest rates are typically beneficial for the opposite reasons. However, when rates rise quickly, there can be a temporary asymmetric GAAP accounting effect where the existing securities lose market value, which is largely reported in Other comprehensive income, and the offsetting decrease in the value of related liabilities may not be recognized. Changes in interest rates can affect the valuation of fixed maturity securities, financial liabilities, insurance contracts including but not limited to universal life, fixed rate annuities, variable annuities and derivative contracts.

Credit spreads

Credit spreads measure an instrument’s risk premium or yield relative to that of a comparable duration, default‑free instrument. Changes in credit spreads can affect the valuation of fixed maturity securities, including but not limited to corporate bonds, ABS, mortgage-backed securities, AIG-issued debt obligations, credit derivatives and derivative credit valuation adjustments. Much like higher interest rates, wider credit spreads with unchanged default losses mean more investment income in the long‑long term. In the short term, quickly rising spreads will cause a loss in the value of existing fixed maturity securities, which is largely reported in Other comprehensive income. A precipitous widening of credit spreads may also signal a fundamental weakness in the credit‑credit worthiness of bond obligors, potentially resulting in default losses.

Foreign exchange (FX) rates

We are a globally diversified enterprise with income, assets and liabilities denominated in, and capital deployed in, a variety of currencies. Changes in FX rates can affect the valuation of a broad range of balance sheet and income statement items as well as the settlement of cash flows exchanged in specific transactions.

Commodity Pricesprices

Changes in commodity prices (the value of commodities) can affect the valuation of publicly‑traded commodities, commodity indices and derivatives on commodities and commodity indices. We are exposed to commodity prices primarily through their impact on the prices and credit quality of commodity producers’ debt and equity securities in our investment portfolio.

Inflation

Changes in inflation can affect the valuation of fixed maturity securities, including AIG-issued debt obligations, derivatives and other contracts explicitly linked to inflation indices, and insurance contracts where the claims are linked to inflation either explicitly, via indexing, or implicitly, through medical costs or wage levels.

AIG | Third Quarter 2018 Form 10-Q177


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ITEM 2 | Enterprise Risk Management

Risk Measurement

Our market risk measurement framework was developed with the main objective of communicating the range and scale of our market risk exposures. At the firm‑wide level market risk is measured in a manner that is consistent with AIG’s risk appetite statement. This is designed to ensure that we remain within our stated risk tolerance levels and can determine how much additional market risk taking capacity is available within our framework. Our risk appetite is currently defined in terms of capital and liquidity levels. At the market risk level, the framework measures our overall exposure to each systemic market risk change on an economic basis.

In addition, we continue to use enhanced economic, GAAP accounting and statutory capital‑based risk measures at the market risk level, business‑unit level and firm‑wide levels. This process aims to ensure that we have a comprehensive view of the impact of our market risk exposures.

AIG | Third Quarter 2017 Form 10-Q170


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ITEM 2 | Enterprise Risk Management

We use a number of approaches to measure our market risk exposure, including:

 

 

Examples include:

Sensitivity analysis

measures the impact from a unit change in a market risk input

      a one basis point increase in yield on fixed maturity securities,

      a one basis point increase in credit spreads of fixed maturity securities, and

      a one percent increase in prices of equity securities.

Scenario analysis

uses historical, hypothetical, or forward‑looking macroeconomic scenarios to assess and report exposures

      a 100 basis point parallel shift in the yield curve, or

      a 20 percent immediate and simultaneous decrease in world‑wide equity markets.

Scenarios may also utilize a stochastic framework to arrive at a probability distribution of losses.

Stress testing

a special form of scenario analysis in which the scenarios are designed to lead to a material adverse outcome

      the stock market crash of October 1987 or the widening of yields or spreads of RMBS or CMBS during 2008.

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Market Risk Sensitivities

The following table provides estimates of our sensitivity to changes in yield curves, equity prices and foreign currency exchange rates:rates on our financial instruments:

Balance Sheet Exposure

 

 

 

Balance Sheet Effect

Balance Sheet Exposure

 

 

Economic Effect

September 30,

 

December 31,

 

 

 

September 30,

 

December 31,

September 30,

 

December 31,

 

 

September 30,

 

December 31,

(dollars in millions)

 

2017

 

2016

 

 

 

2017

 

 

2016

 

2018

 

 

2017

 

 

2018

 

2017

Sensitivity factor

 

 

 

 

 

 

100 bps parallel increase in all yield curves

 

 

 

 

 

 

100 bps parallel increase in all yield curves

Interest rate sensitive assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities

 

247,330

 

 

251,784

 

 

 

(14,776)

 

 

(14,745)

$

241,086

 

$

248,195

 

$

(14,175)

 

$

(14,998)

Mortgage and other loans receivable(a)

 

27,382

 

25,113

 

 

 

(1,479)

 

 

(1,352)

 

31,987

 

 

28,799

 

 

(1,623)

 

 

(1,566)

Preferred stock

 

14

 

17

 

 

 

(1)

 

 

(1)

 

14

 

 

14

 

 

(1)

 

 

(1)

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

386

 

 

(29)

 

 

(1,117)

 

 

(1,343)

Equity contracts

 

335

 

 

501

 

 

41

 

 

36

Foreign exchange contracts

 

(160)

 

 

(416)

 

 

47

 

 

42

Credit contracts

 

(251)

 

 

(276)

 

 

-

 

 

-

Other contracts

 

12

 

 

17

 

 

-

 

 

-

Total interest rate sensitive assets

$

274,726

(a)

$

276,914

(a)

 

 

$

(16,256)

 

$

(16,098)

$

273,409

(b)

$

276,805

(b)

 

$

(16,828)

 

$

(17,830)

Interest rate sensitive liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits:

 

 

 

 

 

 

 

 

 

 

 

Investment-type contracts(a)

$

(119,493)

 

$

(114,326)

 

$

6,356

(c)

$

 7,363 (c)

Variable annuity and other embedded

 

 

 

 

 

 

 

 

 

 

 

derivatives

 

(3,377)

 

 

(4,148)

 

 

1,154

 

 

2,175

Long-term debt(a) (d)

 

(24,771)

 

 

(24,445)

 

 

1,892

 

 

1,803

Total interest rate sensitive liabilities

$

(147,641)

 

$

(142,919)

 

 

$

9,402

 

$

11,341

Sensitivity factor

 

 

 

 

 

 

 

 

20% decline in stock prices and value of

 

 

 

 

 

 

 

20% decline in stock prices and alternative

 

 

 

 

 

 

 

 

alternative investments

 

 

 

 

 

 

 

investments

Equity and alternative investments exposure:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

Equity contracts(e)

 

335

 

 

501

 

 

 

835

(f)

 

 1,228 (f)

Equity and alternative investments

 

 

 

 

 

 

 

 

 

 

 

 

exposure:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate investments

 

7,465

 

 

6,900

 

 

 

 

(1,493)

 

 

(1,380)

 

8,819

 

 

8,258

 

 

 

(1,764)

 

 

(1,652)

Private equity

 

5,040

 

 

5,540

 

 

 

(1,008)

 

 

(1,108)

Hedge funds

 

6,321

 

 

7,249

 

 

 

 

(1,264)

 

 

(1,450)

 

4,615

 

 

5,768

 

 

 

(923)

 

 

(1,153)

Private equity

 

5,721

 

 

6,130

 

 

 

 

(1,144)

 

 

(1,226)

Common equity

 

1,170

 

 

1,369

 

 

 

 

(234)

 

 

(274)

 

928

 

 

1,215

 

 

 

(186)

 

 

(243)

PICC Investment

 

497

 

 

439

 

 

 

 

(99)

 

 

(88)

 

501

 

 

549

 

 

 

(100)

 

 

(110)

Aircraft asset investments

 

218

 

 

321

 

 

 

 

(44)

 

 

(64)

Other investments

 

554

 

 

946

 

 

 

 

(111)

 

 

(189)

 

635

 

 

761

 

 

 

(127)

 

 

(152)

Total equity and alternative investments

 

 

 

 

 

 

 

 

 

 

 

 

 

exposure

$

21,946

 

$

23,354

 

 

 

$

(4,389)

 

$

(4,671)

Total derivatives, equity and alternative

 

 

 

 

 

 

 

 

 

 

 

 

investments exposure

$

20,873

 

$

22,592

 

 

$

(3,273)

 

$

(3,190)

 

 

 

 

 

 

 

 

 

 

 

 

Policyholder contract deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Variable annuity and other

 

 

 

 

 

 

 

 

 

 

 

 

embedded derivatives(e)

$

(3,377)

 

$

(4,148)

 

 

$

(651)

 

$

(982)

Total liability exposure

$

(3,377)

 

$

(4,148)

 

 

$

(651)

 

$

(982)

Sensitivity factor

 

 

 

 

 

 

 

 

10% depreciation of all foreign currency

 

 

 

 

 

 

 

10% depreciation of all foreign currency

 

 

 

 

 

 

 

 

exchange rates against the U.S. dollar

 

 

 

 

 

 

 

exchange rates against the U.S. dollar

Foreign currency-denominated net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

asset position:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Great Britain pound

 

2,382

 

 

2,274

 

 

 

 

(238)

 

 

(227)

$

2,196

 

$

2,026

 

 

$

(220)

 

$

(203)

Euro

 

1,154

 

 

1,349

 

 

 

(115)

 

 

(135)

Japanese yen

 

952

 

 

2,345

 

 

 

 

(95)

 

 

(235)

 

681

 

 

651

 

 

 

(68)

 

 

(65)

Euro

 

945

 

 

2,000

 

 

 

 

(95)

 

 

(200)

All other foreign currencies

 

2,122

 

 

3,210

 

 

 

 

(212)

 

 

(321)

 

2,426

 

 

2,533

 

 

 

(242)

 

 

(253)

Total foreign currency-denominated net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

asset position(b)

$

6,401

 

$

9,829

 

 

 

$

(640)

 

$

(983)

asset position(g)

$

6,457

 

$

6,559

 

 

$

(645)

 

$

(656)

(a)  At September 30, 2017, the analysis covered $274.7 billion of $289.4 billion interest-rate sensitive assets. Excluded were $8.7 billion of loans and $1.8 billion of investments in life settlements. In addition, $4.2 billion of assets across various asset categories were excluded due to modeling limitations. At December 31, 2016, the analysis covered $276.9 billion of $292.5 billion interest-rate sensitive assets. Excluded were $8.1 billion of loans and $2.5 billion of investments in life settlements. In addition, $5.0 billion of assets across various asset categories were excluded due to modeling limitations.

(b)  The majority of the foreign currency exposure is reported on a one quarter lag.

AIG | Third Quarter 20172018 Form 10-Q          171179


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(a)  The economic effect is the difference between the estimated fair value and the effect of a 100 bps parallel increase in all yield curves on the estimated fair value. The estimated fair values for Mortgage and other loans receivable, Policyholder contract deposits (Investment-type contracts) and Long-term debt were $31,405 million, $122,836 million and $24,780 million at September 30, 2018, respectively. The estimated fair values for Mortgage and other loans receivable, Policyholder contract deposits (Investment-type contracts) and Long-term debt were $29,523 million, $122,196 million and $25,970 million at December 31, 2017, respectively.

(b)  At September 30, 2018, the analysis covered $273.4 billion of $287.0 billion interest-rate sensitive assets. Excluded were $9.9 billion of loans. In addition, $3.7 billion of assets across various asset categories were excluded due to modeling limitations. At December 31, 2017, the analysis covered $276.8 billion of $289.6 billion interest-rate sensitive assets. Excluded were $8.2 billion of loans. In addition, $4.6 billion of assets across various asset categories were excluded due to modeling limitations.

(c)  Beginning in the third quarter of 2018, the economic effect presented for Policyholder contract deposits - investment-type contracts has been refined to better reflect the economic effect on the balance sheet and is calculated as the change to the estimated fair value from a 100 bps parallel increase in all yield curves on the estimated fair value. Historically, the calculation was the change between the carrying value and the estimated fair value from a 100 bps parallel increase in all yield curves on the estimated fair value.  Prior period presentation has been revised to conform to the current period approach.

(d)  At September 30, 2018, the analysis excluded $7.7 billion of long-term debt related to debt of consolidated investments, $643 million of AIGLH borrowings, $899 million of Validus borrowings, $230 million of borrowings from FHLB and $339 million of AIG Japan Holdings loans. At December 31, 2017, the analysis excluded $6.0 billion of long-term debt related to debt of consolidated investments, $642 million of AIGLH borrowings, $190 million of borrowings from the FHLB and $334 million of AIG Japan Holdings loans.

(e)  The balance sheet exposures for equity contracts and variable annuity and other embedded derivatives are also reflected under “Interest rate sensitive liabilities” above, and are not additive.

(f)  Beginning in the third quarter of 2018, the economic effect calculation presented for Derivatives - equity contracts is calculated using an internal risk calculation model. The prior period presentation of the economic effect was calculated as the effect of a 20 percent decline on the estimated fair value. Prior period presentation has been revised to conform to the current period approach.  

(g)  The majority of the foreign currency exposure is reported on a one quarter lag.

The sensitivity analysis is an estimate and should not be viewed as predictive of our future financial performance. We cannot ensure that our actual losses in any particular period will not exceed the amounts indicated above.

We use duration and convexity metrics to measure price sensitivity to interest rate changes for interest rate sensitive assets excluding derivatives and long-term debt. Duration measures the relative sensitivity of the fair value of a financial instrument to changes in interest rates. Convexity measures the rate of change of duration with respect to changes in interest rates.

Interest rate sensitivity of a derivative is calculated as change in its value with respect to plus a 100 basis point change in the interest rate environment, calculated as: scenario value minus base value, where base value is the value of the derivative under the yield curves as of the period end and scenario value is the value reflecting a 100 basis point parallel increase in all yield curves

We evaluate our interest rate risk without the effect of any correlation among other key market risks or other assumptions used for calculating the fair value of our financial liabilities and embedded derivatives. This scenario does not measure changes in value resulting from non-parallel shifts in the yield curve, which could produce different results.

We evaluate our equity price risk without the effect of any correlation among other key market risks or other assumptions used for calculating the fair value of our financial liabilities and embedded derivatives. This scenario considers the direct impact of declines in equity prices and not changes in asset-based fees, changes in the estimated gross profits used for amortizing DAC, or changes in any other assumptions used to calculate the fair value of the embedded derivatives related to the living benefit features within variable annuity products. In addition, this scenario does not reflect the impact of basis risk, such as projections about the future performance of the underlying contract holder funds and actual fund returns, which we use as a basis for developing our hedging strategy.

Foreign currency-denominated net asset position reflects our consolidated non‑U.S. dollar assets less our consolidated non‑U.S dollar liabilities on a GAAP basis, with certain adjustments. We use a bottom-up approach in managing our foreign currency exchange rate exposures with the objective of protecting statutory capital at the regulated insurance entity level. At the AIG Parent level, we monitor our foreign currency exposures against single currency and aggregate currency portfolio limits.

Our foreign currency-denominated net asset position at September 30, 2017, decreased by $3.4 billion2018, remained relatively flat compared to December 31, 2016. The decrease was primarily due to a $1.4 billion decrease in our Japanese yen position primarily due to the sale of Fuji Life and a $1.1 billion decrease in our euro position primarily due to the issuance of 1.0 billion euro denominated debt.2017.

For illustrative purposes, we modeled our sensitivities based on a 100 basis point increase in yield curves, a 20 percent decline in equities and alternative assets, and a 10 percent depreciation of all foreign currency exchange rates against the U.S. dollar. The estimated results presented in the table above should not be taken as a prediction, but only as a demonstration of the potential effects of such events.

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ITEM 2 | Enterprise Risk Management

Liquidity Risk Management

Liquidity risk is defined as the risk that our financial condition will be adversely affected by the inability or perceived inability to meet our short-term cash, collateral or other financial obligations. Failure to appropriately manage liquidity risk can result in insolvency, reduced operating flexibility, increased costs, reputational harm and regulatory action.action.

AIG and its legal entities seek to maintain sufficient liquidity both during both the normal course of business and under defined liquidity stress scenarios to ensure that sufficient cash will be available to meet the obligations as they come due.due.

AIG Parent liquidity risk tolerance levels are designed to allow us to meet our financial obligations for a minimum of six months under a liquidity stress scenario. We maintain liquidity limits and minimum coverage ratios designed to ensure that funding needs are met under varying marketstress conditions. If we project that we will breach these tolerances, we will assess and determine appropriate liquidity management actions. However, the market conditions in effect at that time may not permit us to achieve an increase in liquidity sources or a reduction in liquidity requirements.requirements.

Risk Identification

The following sources of liquidity and funding risks could impact our ability to meet short-term financial obligations as they come due.

Market/Monetization Risk

Assets may not be readily transformed into cash due to unfavorable market conditions. Market liquidity risk may limit our ability to sell assets at reasonable values to meet liquidity needs.

Cash Flow Mismatch Risk

Discrete and cumulative cash flow mismatches or gaps over short-term horizons under both expected and adverse business conditions may create future liquidity shortfalls.

Event Funding Risk

Additional funding may be required as the result of a trigger event. Event funding risk comes in many forms and may result from a downgrade in credit ratings, a market event, or some other event that creates a funding obligation or limits existing funding options.

Financing Risk

We may be unable to raise additional cash on a secured or unsecured basis due to unfavorable market conditions, AIG-specific issues, or any other issue that impedes access to additional funding.

AIG | Third Quarter 2017 Form 10-Q172


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ITEM 2 | Enterprise Risk Management

Risk Measurement

Comprehensive cash flow projections under normal conditions are the primary component for identifying and measuring liquidity risk. We produce comprehensive liquidity projections over varying time horizons that incorporate all relevant liquidity sources and uses and include known and likely cash inflows and outflows. In addition, we perform stress testing by identifying liquidity stress scenarios and assessing the effects of these scenarios on our cash flow and liquidity.

We use a number of approaches to measure our liquidity risk exposure, including:

Minimum Liquidity Limits

Minimum Liquidity Limits specify the amount of assets required to be maintained in specific liquidity portfoliosorder to meet obligations as they arise over a specified time horizon under stressed liquidity conditions.

Coverage Ratios

Coverage Ratios measure the adequacy of available liquidity sources, including the ability to monetize assets to meet the forecasted cash flows over a specified time horizon. The portfolio of assets is selected based on our ability to convert those assets into cash under the assumed marketstressed conditions and within the specified time horizon.

Cash Flow Forecasts

Cash Flow Forecasts measure the liquidity needed for a specific legal entity over a specified time horizon.

Stress Testing

Asset liquidity and Coverage Ratios are re-measured under defined liquidity stress scenarios that will impact net cash flows, liquid assets and/or other funding sources.

Relevant liquidity reporting is produced and reported regularly to AIG Parent and business unit risk committees. The frequency, content, and nature of reporting will vary for each business unit and legal entity, based on its complexity, risk profile, activities and size.

AIG | Third Quarter 2018 Form 10-Q181


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ITEM 2 | Regulatory Environment

Regulatory Environment

Overview

Our operations around the world are subject to regulation by many different types of regulatory authorities, including insurance, securities, derivatives, investment advisory and thrift regulators in the United States and abroad. The insurance and financial services industries generally have been subject to heightened regulatory scrutiny and supervision in recent years.

Our insurance subsidiaries are subject to regulation and supervision by the states and other jurisdictions in which they do business.

Regulatory developments

On September 29, 2017, the Financial Stability Oversight Council (Council) rescinded its determination that material financial distress at AIG could pose a threat to U.S. financial stability and as a result, AIG is no longer designated as a nonbank systemically important financial institution (nonbank SIFI).  With the rescission of its designation as a nonbank SIFI, AIG is no longer subject to the consolidated supervision of the Board of Governors of the Federal Reserve System (FRB) or subject to the enhanced prudential standards set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and its implementing regulations.

AIG | Third Quarter 2017 Form 10-Q173


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ITEM 2 | Regulatory Environment

U.S. REGULATION

Dodd-Frank

On July 21, 2010, Dodd-Frank, which brought about the most extensive changes to financial regulation in the United States in many years, was signed into law.  Although the Council has rescinded its designation of AIG as a nonbank SIFI, certain provisions of Dodd-Frank remain relevant to insurance groups generally.

·The Council has authority to determine, subject to certain statutory and regulatory standards, that any nonbank financial company be designated as a nonbank SIFI subject to supervision by the FRB and enhanced prudential standards. The Council may also recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices that we and other insurers or other financial services companies engage in.

·Title II of Dodd-Frank (Orderly Liquidation Authority) provides that a financial company whose largest United States subsidiary is an insurer may be subject to a special orderly liquidation process outside the Bankruptcy Code. That process is to be administered by the FDIC upon a determination that the company is: (i) in default or in danger of default, (ii) would have serious adverse effects on U.S. financial stability were it to fail and be resolved, (iii) is not likely to attract private sector alternatives to default and (iv) is not suitable for resolution under the Bankruptcy Code. Dodd-Frank authorizes possible assessments to cover the costs of any special resolution of a financial company conducted under Title II. U.S. insurance subsidiaries of any such financial company, however, would be subject to rehabilitation and liquidation proceedings under state insurance law.

·Title VII of Dodd-Frank provides for significantly increased regulation of and restrictions on derivatives markets and transactions that have affected and, as additional regulations come into effect, could affect various activities of insurance and other financial services companies, including (i) regulatory reporting for swaps and security-based swaps, (ii) mandated clearing through central counterparties and execution through regulated swap execution facilities for certain swaps and security-based swaps and (iii) margin and collateral requirements.  Although the Commodities Futures Trading Commission (CFTC), which oversees and regulates the U.S. swap, commodities and futures markets, has finalized most of its requirements, the SEC has yet to finalize the majority of rules comprising its security-based swap regulatory regime. Increased regulation of and restrictions on derivatives markets and transactions could increase the cost of our trading and hedging activities, reduce liquidity and reduce the availability of customized hedging solutions and derivatives.

·Dodd-Frank mandated a study to determine whether stable value contracts should be included in the definition of "swap." If that study concludes that stable value contracts are swaps, Dodd-Frank authorizes certain federal regulators to determine whether an exemption from the definition of a swap for stable value contracts is appropriate and in the public interest. Certain of our affiliates participate in the stable value contract business. We cannot predict what regulations might emanate from the aforementioned study or be promulgated applicable to this business in the future.

·Title V of Dodd-Frank authorizes the United States to enter into covered agreements with foreign governments or entities regarding the business of insurance and reinsurance and on September 22, 2017, the U.S. and EU entered into such an agreement.  For additional information, see —International Regulation

·Dodd-Frank established the Consumer Financial Protection Bureau (CFPB) within the FRB to regulate consumer financial products and services offered primarily for personal, family or household purposes. Insurance products and services are not within the CFPB's general jurisdiction. Broker-dealers and investment advisers are not subject to the CFPB's jurisdiction when acting in their registered capacity.  The CFPB does have authority to regulate certain non-insurance consumer services.

·The Federal Insurance Office (FIO), an office within the Department of the Treasury, itself is not a regulator but performs certain duties related to the business of insurance.  Among other things, FIO is a non-voting member of the Council and has authority to collect information on the insurance industry, recommend prudential standards, participate in negotiations of international agreements affecting insurance, determine, after consulting with the relevant State and the United States Trade Representative, if certain regulations are preempted by covered agreements, and assist the Secretary in administering the Terrorism Insurance Program under the Terrorism Risk Insurance Act of 2002.

AIG | Third Quarter 2017 Form 10-Q174


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ITEM 2 | Regulatory Environment

On February 3, 2017, the President of the United States signed an Executive Order that directed the Secretary of the Treasury, in consultation with federal financial regulators, to assess all laws, rules and policies that regulate the U.S. financial system, including requirements put into place under Dodd-Frank since 2010, and to recommend necessary changes to make sure they conform to certain core principles.  Treasury divided its review into four parts and has published three reports to date: Banks and Credit Unions (June 12, 2017), Capital Markets (October 6, 2017), and Asset Management and Insurance (October 26, 2017).  A fourth report on other nonbank financial institutions, financial technology, and financial innovation is to appear later.  In its report on insurance regulation, Treasury identified several areas for improvement at the federal and state levels and defined the role it intends for federal agencies.  Among its recommendations, Treasury expressed support for an activities-based approach to regulating systemic risk in the insurance industry rather than designating individual entities; it recommended continued U.S. engagement in international standard setting forums and charged FIO with coordinating the efforts of the federal government, state regulators, the National Association of Insurance Commissioners (NAIC), and other stakeholders on the issues within its scope, such as covered agreements, matters related to the Terrorism Risk Insurance Program, and standard setting at the International Association of Insurance Supervisors (IAIS), including discussions regarding capital and liquidity requirements; Treasury expressed support for robust liquidity risk management programs for insurers and encouraged regulators to continue work on addressing potential liquidity risk in the insurance sector; Treasury also supported the DOL in delaying full implementation of the DOL Fiduciary Rule until relevant issues are further evaluated and addressed by the DOL, SEC, and state insurance regulators working together.  For additional information regarding the DOL Fiduciary Rule, see Executive Summary — AIG’s Outlook — Industry and Economic Factors — Department of Labor Fiduciary Rule. We will monitor developments resulting from these recommendations closely.

Insurance Regulation

Certain states and other jurisdictions require registration and periodic reporting by insurance companies that are licensed in such jurisdictions and are controlled by other entities. Applicable legislation typically requires periodic disclosure concerning the entity that controls the registered insurer and the other companies in the holding company system and prior approval of intercompany transactions and transfers of assets, including in some instances payment of dividends by the insurance subsidiary, within the holding company system. This legislation also requires any person or entity desiring to purchase more than a specified percentage (commonly 10 percent) of our outstanding voting securities to obtain regulatory approval prior to such purchase. Our subsidiaries are registered under such legislation in those jurisdictions that have such requirements.

Our U.S. insurance subsidiaries are subject to regulation and supervision by the states and other jurisdictions in which they do business. The method of such regulation varies but generally has its source in statutes that delegate regulatory and supervisory powers to a state insurance official. The regulation and supervision relate primarily to the financial condition of the insurers and their corporate conduct and market conduct activities. This includes approval of policy forms and rates, the standards of solvency that must be met and maintained, including with respect to risk-based capital, the standards on transactions between insurance company subsidiaries and their affiliates, including restrictions and limitations on the amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies, the licensing of insurers and their agents, the nature of and limitations on investments, restrictions on the size of risks that may be insured under a single policy, deposits of securities for the benefit of policyholders, requirements for acceptability of reinsurers, periodic examinations of the affairs of insurance companies, the form and content of reports of financial condition required to be filed, reserves for unearned premiums, losses and other purposes and enterprise risk management and corporate governance requirements. Our insurance subsidiaries are also subject to requirements on investments, which prescribe the kind, quality and concentration of investments they can make. In general, such regulation is for the protection of policyholders rather than the creditors or equity owners of these companies.

U.S. states have state insurance guaranty associations in which insurers doing business in the state are required by law to be members.  Member insurers may be assessed by the associations for certain obligations of insolvent insurance companies to policyholders and claimants. Typically, states assess member insurers in amounts related to the member’s proportionate share of the business written by all members in the state. The protection afforded by a state’s guaranty association to policyholders of insolvent insurers varies from state to state.

AIG | Third Quarter 2017 Form 10-Q175


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ITEM 2 | Regulatory Environment

In the U.S., the NAIC is a standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. The NAIC itself is not a regulator, but, with assistance from the NAIC, state insurance regulators establish standards and best practices, conduct peer review and coordinate regulatory oversight. Virtually every state has adopted, in substantial part, the Risk-Based Capital (RBC) Model Law promulgated by the NAIC, which allows states to act upon the results of RBC calculations, and provides four incremental levels of regulatory action regarding insurers whose RBC calculations fall below specific thresholds. Those levels of action range from the requirement to submit a plan describing how an insurer would regain a specified RBC ratio to a mandatory regulatory takeover of the company. The RBC formula is designed to measure the adequacy of an insurer’s statutory surplus in relation to the risks inherent in its business and computes a risk-adjusted surplus level by applying discrete factors to various asset, premium, reserve and other financial statement items. These factors are developed to be risk-sensitive so that higher factors are applied to items exposed to greater risk.  The statutory surplus of each of our U.S. based insurance companies exceeded RBC minimum required levels as of December 31, 2016.

If any of our insurance entities fell below prescribed levels of statutory surplus, it would be our intention to provide appropriate capital or other types of support to that entity. For additional information, see Liquidity and Capital Resources — Liquidity and Capital Resources of AIG Parent and Subsidiaries — Insurance Companies.

The NAIC’s Model Regulation “Valuation of Life Insurance Policies” (Regulation XXX) requires insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and universal life policies with secondary guarantees (ULSGs). NAIC Actuarial Guideline 38 (Guideline AXXX) clarifies the application of Regulation XXX as to these guarantees, including certain ULSGs. See Part I, Item 1A – Risk Factors and Note 18 to the Consolidated Financial Statements in our 2016 Annual Report for risks and additional information related to these statutory reserving requirements. In December 2012, the NAIC approved a new valuation manual containing a principle-based approach to life insurance company reserves. Principle-based reserving (PBR) is designed to tailor the reserving process to specific products in an effort to create a principle-based modeling approach to reserving rather than the factor-based approach historically employed. PBR became effective on January 1, 2017, after NAIC’s model Standard Valuation Law was enacted by the requisite number of states representing the required premium volume, replacing Regulation XXX and Guideline AXXX with respect to new life insurance business issued after that date. Two of our domiciliary states (Missouri and Texas) have adopted the regulations necessary to implement PBR. We have up to three years after January 1, 2017 to implement PBR, and have currently elected to defer implementation.

The NAIC has adopted revisions to the NAIC Insurance Holding Company System Regulatory Act (the Model Holding Company Act) and the Insurance Holding Company System Model Regulation.  The revised models include provisions authorizing NAIC commissioners to act as global group-wide supervisors for internationally active insurance groups and participate in international supervisory colleges, and the requirement that the ultimate controlling person of a U.S. insurer file an annual enterprise risk report with its lead state regulator identifying risks likely to have a material adverse effect upon the financial condition or liquidity of its licensed insurers or the insurance holding company system as a whole. All of the states where AIG has domestic insurers have enacted a version of the revised Model Holding Company Act, including the enterprise risk reporting requirement. The NAIC has also adopted the Risk Management and Own Risk and Solvency Assessment Model Act (ORSA).  ORSA requires that insurers maintain a risk management framework and conduct an internal own risk and solvency assessment of the insurer’s material risks in normal and stressed environments. All of the states where AIG has domestic insurers have enacted a version of ORSA.

ERISA Considerations

We provide products and services to certain employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), or the Internal Revenue Code of 1986, as amended (the Internal Revenue Code).  Plans subject to ERISA include pension and profit sharing plans and welfare plans, including health, life and disability plans.  As a result, our activities are subject to the restrictions imposed by ERISA and the Internal Revenue Code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries, and that fiduciaries may not cause a covered plan to engage in certain prohibited transactions.  ERISA also provides for civil and criminal penalties and enforcement.

For additional information regarding the DOL Fiduciary Rule, see Executive Summary — AIG’s Outlook — Industry and Economic Factors — Department of Labor Fiduciary Rule.

AIG | Third Quarter 2017 Form 10-Q176


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ITEM 2 | Regulatory Environment

Investment Adviser, Broker-Dealer and Investment Company Regulation

Our investment products and services are subject to federal and state securities, fiduciary, including ERISA, and other laws and regulations. The SEC, Financial Industry Regulatory Authority, CFTC, state securities commissions, state insurance departments and the DOL are the principal U.S. regulators of these operations.

The subsidiaries that manage the operations of our investment products are registered as investment advisers with the SEC under the Investment Advisers Act of 1940 and are required to supervise the activities of their personnel.  Our affiliates that offer interests in insurance company separate accounts, mutual funds and other pooled investment products, and that provide other financial services to customers, are registered as broker-dealers with the SEC under the Exchange Act and with certain states, and are also members of the Financial Industry Regulatory Authority (FINRA).  Our broker-dealer subsidiaries and their personnel are subject to examination by the SEC, FINRA, and the states for compliance with law, and certain personnel of these broker-dealers are also required to pass qualification examinations.  Sales to retirement accounts are subject to the DOL Fiduciary Rule.  The investment products that are offered by our affiliates may be registered under the Securities Act, which regulates disclosure regarding the products, and/or the Investment Company of 1940, which imposes substantive regulation on the structure and governance of the products, as well as being subject to insurance regulation in the case of separate accounts.  Some products may also be qualified for sale in various states, the District of Columbia and Puerto Rico.

Consumer Protection and Cybersecurity

We are subject to laws and regulations that require financial institutions and other businesses to protect the security and confidentiality of sensitive consumer information and to notify their customers and other stakeholders of their policies and practices relating to the collection and disclosure of health-related and customer information. In addition, we must comply with international privacy laws and regulations concerning the cross border transfer or use of employee and customer personal information. These laws and regulations also (i) require specific safeguards around the use of sensitive information such as social security numbers and require notice to affected individuals and regulators in the case of a breach of security, (ii) require the adoption of processes to prevent and mitigate the effects of identity theft and (iii) establish permissible uses of protected personal and consumer information.

The NAIC has been developing an Insurance Data Security Model Law, which would require insurers, insurance producers and other entities required to be licensed under state insurance laws to develop and maintain a written information security program, conduct risk assessments, and oversee the data security practices of third-party vendors.  It is not clear whether or not, or in what form, the Insurance Data Security Model Law will be adopted by states in which we have licensed insurers and other licensed subsidiaries.

In February 2017, the NY DFS announced the adoption of a new cybersecurity regulation requiring financial services institutions to implement a cybersecurity program designed to protect consumers’ private data. The regulation includes specific technical safeguards as well as governance, incident planning, data management, system testing and regulator notification requirements. The regulation went into effect on March 1, 2017, providing for a 180 day transitional period with compliance required in stages thereafter.

Thrift Regulator

AIG Federal Savings Bank, our trust-only federal thrift subsidiary, is supervised and regulated by the Office of the Comptroller of the Currency.

INTERNATIONAL REGULATION

Insurance Regulation

A substantial portion of our business is conducted in foreign countries. The degree of regulation and supervision in foreign jurisdictions varies. Generally, our subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements; licenses issued by foreign authorities to our subsidiaries are subject to modification or revocation by such authorities, and therefore these subsidiaries could be prevented from conducting business in certain of the jurisdictions where they currently operate.

Certain jurisdictions require registration and periodic reporting by insurance companies that are licensed in such jurisdictions and are controlled by other entities. Applicable legislation typically requires periodic disclosure concerning the entity that controls the registered insurer and the other companies in the holding company system and prior approval of intercompany transactions and transfers of assets, including in some instances payment of dividends by the insurance subsidiary within the holding company system. Our subsidiaries are registered under such legislation in those jurisdictions that have such requirements.

AIG | Third Quarter 2017 Form 10-Q177


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ITEM 2 | Regulatory Environment

In addition to these licensing and other requirements, our foreign operations are also regulated in various jurisdictions with respect to currency, policy language and terms, advertising, amount and type of security deposits, amount and type of reserves, amount and type of capital to be held, amount and type of local investment and the share of profits to be returned to policyholders on participating policies. Some foreign countries regulate rates on various types of policies. Certain countries have established reinsurance institutions, wholly or partially owned by the local government, to which admitted insurers are obligated to cede a portion of their business on terms that may not always allow foreign insurers, including our subsidiaries, full compensation. In some countries, regulations governing constitution of technical reserves and remittance balances may hinder remittance of profits and repatriation of assets.

Legislation in the EU could also affect our international insurance operations. The European Parliament issues Directives on a wide range of topics that impact financial services. Insurance companies operating in the EU are subject to the Solvency II framework. The Prudential Regulatory Authority, the United Kingdom’s (UK’s) prudential regulator, is our lead EU prudential supervisor. For information on the UK’s pending withdrawal of its membership in the EU, see —Brexit. The UK’s Financial Conduct Authority has oversight of AIG’s operations for consumer protection and competition matters within the UK. In addition, financial companies that operate in the EU are subject to a range of regulations enforced by the national regulators in each member state in which that firm operates. The EU has also established a set of regulatory requirements under the European Market Infrastructure Regulation (EMIR) that include, among other things, risk mitigation, risk management, regulatory reporting and clearing requirements. Solvency II governs the insurance industry’s solvency framework, including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards. In accordance with Solvency II, the European Commission is required to make a determination as to whether a supervisory regime outside of the EU is “equivalent.”

On September 22, 2017, the U.S. Treasury Department and the Office of the U.S. Trade Representative, on behalf of the U.S., and the European Union signed the bilateral Covered Agreement, which is intended to address issues regarding the application of Solvency II requirements to U.S.-based insurance groups as well as other (re)insurance regulatory issues. While the signatures by both parties will allow for the provisional application of the agreement, the agreement is still subject to approval by the European Parliament before it enters into force. Other aspects of the agreement remain subject to an implementation timetable in the U.S. and the European Union, which may delay or even prevent the agreement from being fully implemented.  In particular, the U.S. states will be given a period of five years to comply with the agreement’s reinsurance collateral provisions.  After 42 months, FIO must begin evaluating a potential preemption determination with respect to any state law not in compliance with the aim of assuring full compliance within the five-year timeframe.  The agreement may be terminated (following mandatory consultation) by notice from one party to the other effective in 180 days, or at such time as the parties may agree.

The agreement provides that AIG will be supervised at the worldwide group level only by its relevant U.S. insurance supervisors, and that it will not have to satisfy EU Solvency II group capital, reporting and governance requirements for its worldwide group. The agreement, however, would permit the imposition of EU Solvency II group capital requirements if, after five years from the signing of the agreement, a U.S. insurer is not subject to a group capital assessment by its applicable state regulator. The NAIC is in the process of developing a group capital calculation that, once adopted by the states, is expected to satisfy this condition. The agreement further provides that if the summary risk reports submitted to the supervisory authority of a host jurisdiction expose any serious threat to policyholder protection or financial stability in such host state, the host supervisor may request further information from the insurance group and/or impose preventive or corrective measures with respect to the (re)insurer in its jurisdiction. The agreement also seeks to impose equal treatment of U.S. and EU-based reinsurers that meet certain qualifications.  In the U.S., once fully implemented, the agreement requires U.S. states to lift reinsurance collateral requirements on qualifying EU-based reinsurers and provide them equal treatment with U.S. reinsurers or be subject to federal preemption. While this provision does not preclude AIG from continuing to request collateral from an EU reinsurer that is party to a bilateral reinsurance transaction, it is unclear how much collateral AIG will be able to obtain from EU reinsurers going forward.

FSB and IAIS

The Financial Stability Board (FSB) consists of representatives of national financial authorities of the G20 countries. The FSB itself is not a regulator but is focused primarily on promoting international financial stability. It does so by coordinating the work of national financial authorities and international standard-setting bodies as well as developing and promoting the implementation of regulatory, supervisory and other financial policies. The FSB has issued a series of frameworks and recommendations intended to produce significant changes in how financial companies, particularly global systemically important financial institutions, should be regulated. These frameworks and recommendations address such issues as systemic financial risk, financial group supervision, capital and solvency standards, corporate governance including compensation, and a number of related issues associated with responses to the financial crisis.

AIG | Third Quarter 2017 Form 10-Q178


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ITEM 2 | Regulatory Environment

The IAIS represents insurance regulators and supervisors of more than 200 jurisdictions (including regions and states) in nearly 140 countries and seeks to promote globally consistent insurance industry supervision. The IAIS itself is not a regulator, but one of its activities is to develop insurance regulatory standards for use by local authorities across the globe. The FSB has charged the IAIS with developing a framework for measuring systemic risks posed by insurance groups and has directed the IAIS to create standards relative to many of the areas of focus of the FSB, which go beyond the IAIS’ basic Insurance Core Principles (ICPs). The IAIS is developing ComFrame, a Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs). ComFrame sets out qualitative and quantitative standards in order to assist supervisors in collectively addressing an IAIG’s activities and risks, identifying and avoiding regulatory gaps and coordinating supervisory activities.  ComFrame is expected to include standards for group supervision, governance and internal controls, enterprise risk management, and recovery and resolution planning.  Also in connection with ComFrame, the IAIS is in the process of developing a risk-based global insurance capital standard (ICS) applicable to IAIGs.  We currently meet the parameters set forth to define an IAIG.  ComFrame standards are expected to be finalized in 2019, and the IAIS is conducting field testing of ComFrame, including the ICS, ahead of that deadline.  It is expected that the ComFrame and ICS standards finally adopted by the IAIS would be ready for adoption by implementing member jurisdictions beginning in 2020.

Based on the IAIS’ assessment methodology for identifying global systemically important insurers (G-SIIs), the FSB has identified nine G-SIIs, including us. The IAIS intends G-SIIs to be subject to a policy framework that includes recovery and resolution planning, enhanced group-wide supervision, enhanced liquidity and systemic risk management planning; and group-wide capital standards, including higher loss absorbency (HLA) capital. The IAIS’ basic capital requirement (BCR) was endorsed by the FSB in October 2014 and by the G20 countries in November 2014.  The BCR covers all group activities, and we report our BCR ratios to supervisory authorities annually on a confidential basis.  The BCR serves as the initial foundation for the application of HLA requirements.  In October 2015, the IAIS announced that it had concluded initial development of the HLA requirements, according to which we reported on a confidential basis to supervisors in 2016.  In February 2017, the IAIS announced the adoption of a three-year systemic risk assessment and policy workplan due to be finalized by year-end 2019. This initiative is comprised of a new macroprudential activities-based approach to regulating systemic risk which will be developed in conjunction with the IAIS’ previously announced work in finalizing ComFrame, including the global insurance capital standard, as well as any improvements to the existing G-SII methodology. Expected revisions to the HLA requirements will occur once the systemic risk assessment and policy workplan have been finalized and adopted. It is not known what effect the removal of AIG’s designation as a nonbank SIFI will have on its status as a G-SII or how any standards that might result from the IAIS’ initiatives might be implemented in the U.S. and other jurisdictions around the world, or how they might apply to AIG.

The standards issued by the FSB and/or the IAIS are not binding on the United States or other jurisdictions around the world unless and until the appropriate local governmental bodies or regulators adopt appropriate laws and regulations.  At this time, it is not known how the IAIS’ frameworks and/or standards might be implemented in the United States and other jurisdictions around the world, or how they might apply to us.

Brexit

On June 23, 2016, the UK held a referendum in which a majority voted for the UK to withdraw its membership in the EU, commonly referred to as Brexit. The terms of withdrawal are subject to a formal negotiation period which was initiated on March 29, 2017 through the invocation of Article 50 of the Treaty on European Union. Negotiations on Brexit could, by treaty, last up to two years. It is not clear at this stage (and may not be for some time) what form the UK’s future relationship with the remaining EU member states will take. We have significant operations and employees in the UK and other EU member states, including AIG Europe Ltd., which enjoys certain benefits based on the UK’s membership in the EU. In order to adapt to Brexit, on March 8, 2017, we announced plans to reorganize our operations and legal entity structure in the UK and the EU through the establishment of a new European subsidiary in Luxembourg. The reorganization is expected to be completed in the fourth quarter of 2018, subject to regulatory approvals.

Derivatives

Regulation of and restrictions on derivatives markets and transactions have been proposed or adopted outside the United States.  For instance, the EU has also established a set of new regulatory requirements for EU derivatives activities under EMIR. These requirements include, among other things, various risk mitigation, risk management, margin posting and regulatory reporting requirements that have already become effective and clearing requirements that were outlined in EU delegated legislation at the end of 2015 and are phased in over three years. These requirements could result in increased administrative costs with respect to our EU derivatives activities and overlapping or inconsistent regulation depending on the ultimate application of cross-border regulatory requirements between and among U.S. and non-U.S. jurisdictions.

We expect that the domestic and international regulations applicable to us and our regulated entities will continue to evolve for the foreseeable future.

For updated information on the impact of legislative and regulatory developments regarding a standard of care for the sale of investment products and services, see Executive Summary – AIG’s Outlook – Industry and Economic Factors – Standard of Care Developments.

In addition to the information set forth in this Quarterly Report on Form 10-Q, our regulatory status is also discussed in Part I, Item 2. MD&A – Regulatory Environment in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 and in Part I, Item 1. Business – Regulation, Part I, Item 1A. Risk Factors – Regulation and Note 19 to the Consolidated Financial Statements in the 2017 Annual Report.

182AIG | Third Quarter 20172018 Form 10-Q179


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Glossary 

 

Glossary

Accident year  The annual calendar accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.

Accident year combined ratio, as adjusted  The combined ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting.

Accident year loss ratio, as adjusted The loss ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting.

Acquisition ratio  Acquisition costs divided by net premiums earned.  Acquisition costs are those costs incurred to acquire new and renewal insurance contracts and also include the amortization of VOBA and DAC. Acquisition costs vary with sales and include, but are not limited to, commissions, premium taxes, direct marketing costs and certain costs of personnel engaged in sales support activities such as underwriting.

Additional premium Representsrepresents 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).

Assets under administration  include assets under management and Retail Mutual Funds and Group Retirement mutual fund assets that we sell or administer.

Assets under management include assets in the general and separate accounts of our subsidiaries that support liabilities and surplus related to our life and annuity insurance products and the notional value of stable value wrap contracts.

Base Spread   Net investment income excluding income from alternative investments and other enhancements, less interest credited excluding amortization of sales inducement assets.

Base Yield  Net investment income excluding income from alternative investments and other enhancements, as a percentage of average base invested asset portfolio, which excludes alternative investments, other bond securities and certain other investments for which the fair value option has been elected.

Book value per common share, excluding accumulated other comprehensive income (AOCI) and Book value per common share, excluding AOCI and deferred tax assets (DTA) (Adjusted book value per common share) are non-GAAP measures and are used to show the amount of our net worth on a per-share basis. Book value per common share excluding AOCI is derived by dividing total AIG shareholders’ equity, excluding AOCI, by total common shares outstanding. Adjusted book value per common share is derived by dividing total AIG shareholders’ equity, excluding AOCI and DTA (Adjusted Shareholders’ Equity), by total common shares outstanding.

Casualty insurance  Insurance that is primarily associated with the losses caused by injuries to third persons, i.e., not the insured, and the legal liability imposed on the insured as a result.

Combined ratio  Sum of the loss ratio and the acquisition and general operating expense ratios.

CSA  Credit Support Annex  A legal document generally associated with an ISDA Master Agreement that provides for collateral postings which could vary depending on ratings and threshold levels.

CVA  Credit Valuation Adjustment  The CVA adjusts the valuation of derivatives to account for nonperformance risk of our counterparty with respect to all net derivative assets positions. Also, the CVA reflects the fair value movement in AIGFP's asset portfolio that is attributable to credit movements only, without the impact of other market factors such as interest rates and foreign exchange rates. Finally, the CVA also accounts for our own credit risk in the fair value measurement of all derivative net liability positions and liabilities where AIG has elected the fair value option, when appropriate.

DAC  Deferred Policy Acquisition Costs  Deferred costs that are incremental and directly related to the successful acquisition of new business or renewal of existing business.

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Glossary

DAC Related to Unrealized Appreciation (Depreciation) of Investments  An adjustment to DAC and Reserves for investment-oriented products, equal to the change in DAC and Unearned Revenue amortization that would have been recorded if fixed maturity and equity securities available for sale 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 and equity securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (also(collectively referred to as “shadow DAC”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).

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Glossary

Deferred Gain on Retroactive Reinsurance   Retroactive reinsurance is a reinsurance contract in which an assuming entity agrees to reimburse a ceding entity for liabilities incurred as a result of past insurable events. If the amount of premium paid by the ceding reinsurer is less than the related ceded loss reserves, the resulting gain is deferred and amortized over the settlement period of the reserves. Any related development on the ceded loss reserves recoverable under the contract would increase the deferred gain if unfavorable, or decrease the deferred gain if favorable.

Expense ratio  Sum of acquisition expenses and general operating expenses, divided by net premiums earned.

General operating expense ratio  General operating expenses divided by net premiums earned. General operating expenses are those costs that are generally attributed to the support infrastructure of the organization and include but are not limited to personnel costs, projects and bad debt expenses. General operating expenses exclude losses and loss adjustment expenses incurred, acquisition expenses, and investment expenses.

GIC/GIA  Guaranteed Investment Contract/Guaranteed Investment Agreement  A contract whereby the seller provides a guaranteed repayment of principal and a fixed or floating interest rate for a predetermined period of time.

G-SII  Global Systemically Important Insurer  An insurer that is deemed globally systemically important (that is, of such size, market importance and global interconnectedness that the distress or failure of the insurer would cause significant dislocation in the global financial system and adverse economic consequences across a range of countries) by the Financial Stability Board, in consultation with and based on a methodology developed by the International Association of Insurance Supervisors.

IBNR  Incurred But Not Reported  Estimates of claims that have been incurred but not reported to us.

ISDA Master Agreement  An agreement between two counterparties, which may have multiple derivative transactions with each other governed by such agreement, that generally provides for the net settlement of all or a specified group of these derivative transactions, as well as pledged collateral, through a single payment, in a single currency, in the event of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions.

LAE  Loss Adjustment Expenses  The expenses directly attributed to settling and paying claims of insureds and include, but are not limited to, legal fees, adjuster’s fees and the portion of general expenses allocated to claim settlement costs.

Life Insurance Companies include the following major operating companies: American General, VALIC and U.S. Life.

Loss Ratio  Losses and loss adjustment expenses incurred divided by net premiums earned.

Loss reserve development The increase or decrease in incurred losses and loss adjustment expenses related to prior years  as a result of the re-estimation of loss reserves at successive valuation dates for a given group of claims.

Loss reserves  Liability for unpaid losses and loss adjustment expenses. The estimated ultimate cost of settling claims relating to insured events that have occurred on or before the balance sheet date, whether or not reported to the insurer at that date.

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

Net premiums written Representrepresent 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.

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Glossary

Noncontrolling interest The portion of equity ownership in a consolidated subsidiary not attributable to the controlling parent company.

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

Policy fees An amount added to a policy premium, or deducted from a policy cash value or contract holder account, to reflect the cost of issuing a policy, establishing the required records, sending premium notices and other related expenses.

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.

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Glossary

Premiums and deposits – IndividualLife and Retirement Group Retirement and Life Insurance include direct and assumed amounts received on traditional life insurance policies and group benefit policies, and deposits on life-contingent payout annuities, as well as deposits received on universal life, investment-type annuity contracts, FHLB funding agreements and mutual funds.

Prior year development See Loss reserve development.

Property Casualty Insurance Companies include the following major operating companies: National Union; American Home; Lexington; Fuji Fire; American Home Japan; AIG Asia Pacific Insurance, Pte, Ltd.; and AIG Europe Limited.

RBC Risk-Based Capital  A formula designed to measure the adequacy of an insurer’s statutory surplus compared to the risks inherent in its business.

Reinstatement premiumpremiums Additional premiums payable to reinsurers or receivable from insurers to restore coverage limits that have been reduced or exhausted as a result of reinsured losses under certain excess of loss reinsurance treaties.

Reinsurance The practice whereby one insurer, the reinsurer, in consideration of a premium paid to that insurer, agrees to indemnify another insurer, the ceding company, for part or all of the liability of the ceding company under one or more policies or contracts of insurance which it has issued.

Retroactive ReinsuranceSee Deferred Gain on Retroactive Reinsurance.

Return on equity – After-tax operatingAdjusted after-tax income excluding AOCI and DTA (Adjusted Return on Equity)equity)  is a non-GAAP measure and is used to show the rate of return on shareholders’ equity. Adjusted Return on Equityequity is derived by dividing actual or annualized adjusted after-tax operating income attributable to AIG by average Adjusted 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.

SalvageThe 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).

Severe losses Individual non-catastrophe first partyare defined as non-catastrophic individual first-party losses, surety and suretytrade credit losses greater than $10 million, net of related reinsurance and salvage and subrogation.  Severe losses include claims related to satellite explosions, plane crashes, and shipwrecks.

SIA Sales Inducement Asset  Represents enhanced crediting rates or bonus payments to contract holders on certain annuity and investment contract products that meet the criteria to be deferred and amortized over the life of the contract.

Solvency II   Legislation in the European Union which reforms the insurance industry’s solvency framework, including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards.  The Solvency II Directive (2009/138/EEC) was adopted on November 25, 2009 and became effective on January 1, 2016.

Subrogation   The amount of recovery for claims we have paid our policyholders, generally from a negligent third party or such party’s insurer.  

Surrender charge  A charge levied against an investor for the early withdrawal of funds from a life insurance or annuity contract, or for the cancellation of the agreement.

Surrender rate represents annualized surrenders and withdrawals as a percentage of average reserves and Group Retirement mutual fund assets under administration.

Unearned premium reserve   Liabilities established by insurers and reinsurers to reflect unearned premiums, which are usually refundable to policyholders if an insurance or reinsurance contract is canceled prior to expiration of the contract term.

VOBAValue of Business Acquired  Present value of projected future gross profits from in-force policies of acquired businesses.

 

AIG | Third Quarter 20172018 Form 10-Q  ��             185182


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Acronyms 

Acronyms

A&H Accident and Health Insurance

GMWB  Guaranteed Minimum Withdrawal Benefits

ABS  Asset-Backed Securities

ISDA  International Swaps and Derivatives Association, Inc.

CDO  Collateralized Debt Obligations

Moody's Moody's Investors’ Service Inc.

CDS  Credit Default Swap

NAIC  National Association of Insurance Commissioners

CMA  Capital Maintenance Agreement

NM  Not Meaningful

CMBS  Commercial Mortgage-Backed Securities

OTC Over-the-Counter

EGPs  Estimated gross profits

OTTI  Other-Than-Temporary Impairment

FASB  Financial Accounting Standards Board

RMBS  Residential Mortgage-Backed Securities

FRBNY  Federal Reserve Bank of New York

S&P  Standard & Poor’s Financial Services LLC

GAAP  Accounting principles generally accepted in the United States of America

SEC  Securities and Exchange Commission

GMDB  Guaranteed Minimum Death Benefits

URR  Unearned revenue reserve

GMIB  Guaranteed Minimum Income Benefits

VIE  Variable Interest Entity

 

 

 

 

186AIG | Third Quarter 20172018 Form 10-Q183


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ITEM 3 | Quantitative and Qualitative Disclosures About Market Risk

 

ITEM 3 | Quantitative and Qualitative Disclosures About Market Risk

Included in Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations – Enterprise Risk Management.

ITEM 4 | Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. In connection with the preparation of this Quarterly Report on Form 10-Q, an evaluation, which excluded the impact of the acquisition of Validus Holdings, Ltd. (Validus) as discussed below, was carried out by AIG’s management, with the participation of AIG’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of AIG’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, AIG’s Chief Executive Officer and Chief Financial Officer have concluded that AIG’s disclosure controls and procedures were effective as of September 30, 2017.2018.

ThereValidus represented approximately 7 percent and 2 percent of consolidated revenues for the three -and nine-month periods ended September 30, 2018, respectively. We currently exclude, and are in the process of integrating, Validus in our evaluation of internal controls over financial reporting and related disclosure controls and procedures.

Other than integrating Validus, there has been no change in AIG’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2017,2018, that has materially affected, or is reasonably likely to materially affect, AIG’s internal control over financial reporting.

 

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Part II – Other Information

ITEM 1 | Legal Proceedings

For a discussion of legal proceedings see Note 11 to the Condensed Consolidated Financial Statements, which is incorporated herein by reference.

 

ITEM 1A | Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part II, Item 1A. Risk Factors in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 and in Part I, Item 1A. Risk Factors in our 20162017 Annual Report.

ITEM 2 | Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides the information with respect to purchases made by or on behalf of AIG or any “affiliated purchaser” (as defined in Rule 10b‑18(a)(3) under the Securities Exchange Act of 1934) of AIG Common Stock and warrants to purchase AIG Common Stock during the three months ended September 30, 2017:2018:

Total Number

 

Average

Total Number of Shares

Approximate Dollar Value of Shares

 

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

 

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)

 

Repurchased

 

per Share

Announced Plans or Programs

Plans or Programs (in millions)

 

July 1 – 31

-

$

-

-

 

$

2,540

 

2,770,400

$

53.63

2,770,400

 

$

1,462

 

August 1 – 31(a)

 3,255,000  

 

60.59

3,255,000

 

 

2,341

(b)

2,396,492

 

52.53

2,396,492

 

 

1,336

 

September 1 – 30(a)

 1,290,000  

 

60.22

1,290,000

 

 

2,241

(b)

1,407,715

 

52.77

1,407,715

 

 

1,262

(b)

Total(c)

 4,545,000  

$

60.49

4,545,000

 

$

2,241

 

6,574,607

$

53.05

6,574,607

 

$

1,262

 

(a)  During the August 1-31this period, we also repurchased 115,00099.800 warrants to purchase shares of AIG Common Stock, at an average purchase price per warrant of $18.43,$14.96, for an aggregate purchase price of $2 million. During

(b)  Reflects the September 1-30 period, we also repurchased 70,000purchase of 99,800 warrants to purchase shares of AIG Common Stock, at an average purchase price per warrant of $18.24, for an aggregate purchase price of $1 million.

(b)  Reflects the purchase of 115,000 and 70,000 warrants to purchase shares of AIG Common Stock in the August 1-31 and September 1-30 periods, respectively, which reduced the dollar value of the remaining repurchase authorization.

(c)  On May 3, 2017, our Board of Directors authorized an additional increase of $2.5 billion to the share repurchase authorization.  As of November 2, 2017,October 31, 2018, approximately $2.2$1.3 billion remained under the authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants).  Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The timing of any future share repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors, including the regulatory framework applicable to us.factors.

During the three-month period ended September 30, 2017,2018, we repurchased approximately 56.6 million shares of AIG Common Stock under this authorization for an aggregate purchase price of approximately $275$348 million. We also repurchased 185,00099,800 warrants to purchase shares of AIG Common Stock during the three-monthperiod ended September 30, 20172018 for an aggregate purchase price of $3$2 million.

 

ITEM 4 | Mine Safety Disclosures

Not applicable.

 

188AIG | Third Quarter 2018 Form 10-Q


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ITEM 5 | Other Information

Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934

Section 13(r) of the Securities Exchange Act of 1934, as amended, requires an issuer to disclose in its annual or quarterly reports whether it or an affiliate knowingly engaged in certain activities described in that section, including certain activities related to Iran during the period covered by the report.

On January 16, 2016, as part of the United States’ entry into the Joint Comprehensive Plan of Action (JCPOA) with Iran, the Office of Foreign Assets Control of the U.S. Department of the Treasury issued General License H which authorized the non-U.S. subsidiaries of U.S. parent companies to engage in certain activities with or involving Iran, subject to certain conditions. 

As previously disclosed by Validus, certain of Validus’ non-U.S. subsidiaries provide global marine hull, war, cargo and liability policies that provide coverage for vessels navigating into and out of ports worldwide, and certain policyholders under these lines of business ship cargo to and from Iran, including transporting crude oil from Iran to another country and transporting refined petroleum products to Iran. Additionally, certain of Validus’ other non-U.S. subsidiaries write policies that provide excess of loss reinsurance coverage for various risks worldwide, and certain cedants under such reinsurance policies provide aviation spare parts coverage or marine and hull, war and related coverage for certain risks involving Iran. 

As part of the U.S. withdrawal from the JCPOA, OFAC revoked General License H on June 27,  2018, replacing it with a new license authorizing the wind down of activities involving Iran prior to November 4, 2018.  In accordance with U.S. sanctions, AIG is currently winding down all activities previously undertaken by Validus and AIG entities pursuant to General License H.  AIG is unable to attribute gross revenues and net profits from policies involving Iran during the pendency of General License H, but such revenues/profits are de minimis. 

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ITEM 6 | Exhibits

Exhibit Index

Exhibit
Number

Description

Location

104

(1) Letter Agreement, dated July 3, 2017, between American International Group, Inc. and Peter Zaffino*Certificate of Designations of 5.875% Non-Cumulative Preference Shares, Series A

Incorporated by reference to Exhibit 10.14.1 to AIG’sValidus’ Current Report on Form 8-K filed with the SEC on June 13, 2016 (File No. 1-33606).

(2) Form of share certificate evidencing 5.875% Non-Cumulative Preference Shares, Series A

Incorporated by reference to Exhibit 4.2 to Validus’ Current Report on Form 8-K filed with the SEC on June 13, 2016 (File No. 1-33606).

(3) Form of depositary receipt for the 5.875% Non-Cumulative Preference Shares, Series A

Incorporated by reference to Exhibit 4.4 to Validus’ Current Report on Form 8-K filed with the SEC on June 13, 2016 (File No. 1-33606).

(4) Certificate of Designations of 5.800% Non-Cumulative Preference Shares, Series B

Incorporated by reference to Exhibit 4.1 to Validus’ Current Report on Form 8-K filed with the SEC on June 20, 2017 (File No. 1-33606).

(5) Form of share certificate evidencing 5.800% Non-Cumulative Preference Shares, Series B

Incorporated by reference to Exhibit 4.2 to Validus’ Current Report on Form 8-K filed with the SEC on June 20, 2017 (File No. 1-33606).

(6) Form of depositary receipt for the 5.800% Non-Cumulative Preference Shares, Series B

Incorporated by reference to Exhibit 4.4 to Validus’ Current Report on Form 8-K filed with the SEC on June 20, 2017 (File No. 1-33606).

(7) Guarantee, dated July 26, 2018, by AIG, relating to the Preference Shares

Incorporated by reference to Exhibit 4.2 to Validus’ Current Report on Form 8-K filed with the SEC on July 6, 201726, 2018 (File No. 1-8787)1-33606).

 

(2)(8) Non-SolicitationIndenture, dated January 26, 2010, between Validus and Non-Disclosure Agreement, dated July 5, 2017, between American International Group, Inc. and Peter Zaffino*The Bank of New York Mellon, as Trustee

Incorporated by reference to Exhibit 10.14.1 to AIG’sValidus’ Current Report on Form 8-K filed with the SEC on January 26, 2010 (File No. 1-33606).

(9) First Supplemental Indenture, dated January 26, 2010, between Validus and The Bank of New York Mellon, as Trustee

Incorporated by reference to Exhibit 4.2 to Validus’ Current Report on Form 8-K filed with the SEC on January 26, 2010 (File No. 1-33606).

(10) Form of 8.875% Senior Note due 2040 (included in Exhibit 4.9)

(11) Second Supplemental Indenture, dated July 26, 2018, between Validus and The Bank of New York Mellon, as Trustee

Incorporated by reference to Exhibit 4.1 to Validus’ Current Report on Form 8-K filed with the SEC on July 6, 201726, 2018 (File No. 1-8787)1-33606).

 

(3)(12) Form of Stock Option Award Agreement, between American International Group, Inc. and Peter Zaffino*Guarantee, dated July 26, 2018, by AIG, relating to the Notes

Incorporated by reference to Exhibit 10.24.3 to AIG’sValidus’ Current Report on Form 8-K filed with the SEC on July 6, 201726, 2018 (File No. 1-8787)1-33606).

10

(4) Letter Agreement, dated June 28, 2017, between American International Group, Inc.(1) AIG Long Term Incentive Plan (as amended and Seraina Macia*restated)*

Incorporated by reference to Exhibit 10.1 to AIG’s Current Report on Form 8-K filed with the SEC on July 18, 2017 (File No. 1-8787).

(5) Non-Solicitation and Non-Disclosure Agreement, dated July 12, 2017, between American International Group, Inc. and Seraina Macia*

Incorporated by reference to Exhibit 10.2 to AIG’s Current Report on Form 8-K filed with the SEC on July 18, 2017 (File No. 1-8787).Filed herewith.

11

Statement re: Computation of Per Share Earnings

Included in Note 13 to the Condensed Consolidated Financial Statements.

12

Computation of Ratios of Earnings to Fixed Charges

Filed herewith.

31

Rule 13a-14(a)/15d-14(a) Certifications

Filed herewith.

32

Section 1350 Certifications*Certifications**

Filed herewith.

101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 20172018 and December 31, 2016,2017, (ii) the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 20172018 and 2016,2017, (iii) the Condensed Consolidated Statements of Equity for the nine months ended  September 30, 20172018 and 2016,2017, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20172018 and 2016,2017, (v) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended  September 30, 20172018 and 20162017 and (vi) the Notes to the Condensed Consolidated Financial Statements

Filed herewith.

*    This exhibit is a management contract or a compensatory plan or arrangement.

**   This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

  

190AIG | Third Quarter 20172018 Form 10-Q186 


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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

AMERICAN INTERNATIONAL GROUP, INC.

 

(Registrant)

 

/S/ SIDDHARTHA SANKARAN

 

Siddhartha Sankaran

 

Executive Vice President

 

Chief Financial Officer

 

(Principal Financial Officer)

 

 

 

 

 

 

 

 

 

/S/ ELIAS F. HABAYEBJONATHAN WISMER

 

Elias F. HabayebJonathan Wismer

 

Senior Vice President

 

Deputy Chief Financial Officer and

 

Group ControllerChief Accounting Officer

 

(Principal Accounting Officer)

 

 

 

Dated: November 3, 20172, 2018

 

AIG | Third Quarter 20172018 Form 10-Q          187191