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, 2018 |
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer ☑ |
Accelerated filer ☐ |
Non-accelerated filer ☐ |
Smaller reporting company ☐ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of October 29, 2018, there were 884,648,470 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, 2018
Table of Contents
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FORM 10-Q |
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Item Number |
Description |
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Part I — Financial Information |
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Information Provided in Connection with Outstanding Debt and Preference Shares |
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Management’s Discussion and Analysis of Financial Condition and Results of |
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· Cautionary Statement Regarding Forward-Looking Information |
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· Glossary |
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· Acronyms |
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Part II — Other Information |
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Signatures |
191 |
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AIG | Third Quarter 2018 Form 10-Q 1
Part I – Financial Information
Item 1. | Financial Statements
American International Group, Inc.
Condensed Consolidated Balance Sheets (unaudited)
|
|
September 30, |
December 31, |
||
|
(in millions, except for share data) |
|
2018 |
|
2017 |
|
Assets: |
|
|
|
|
|
Investments: |
|
|
|
|
|
Fixed maturity securities: |
|
|
|
|
|
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) |
|
11,420 |
|
12,772 |
|
Equity Securities: |
|
|
|
|
|
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) |
|
1,443 |
|
589 |
|
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 |
|
316,063 |
|
322,292 |
|
|
|
|
|
|
|
Cash |
|
2,741 |
|
2,362 |
|
Accrued investment income |
|
2,524 |
|
2,356 |
|
Premiums and other receivables, net of allowance |
|
12,238 |
|
10,248 |
|
Reinsurance assets, net of allowance |
|
37,178 |
|
33,024 |
|
Deferred income taxes |
|
15,088 |
|
14,033 |
|
Deferred policy acquisition costs |
|
12,683 |
|
10,994 |
|
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 |
|
93,045 |
|
92,798 |
|
Total assets |
$ |
504,860 |
$ |
498,301 |
|
Liabilities: |
|
|
|
|
|
Liability for unpaid losses and loss adjustment expenses |
$ |
81,959 |
$ |
78,393 |
|
Unearned premiums |
|
20,829 |
|
19,030 |
|
Future policy benefits for life and accident and health insurance contracts |
|
44,374 |
|
45,432 |
|
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 |
|
93,045 |
|
92,798 |
|
Total liabilities |
|
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: 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 |
|
81,008 |
|
81,078 |
|
Retained earnings |
|
21,749 |
|
21,457 |
|
Accumulated other comprehensive income (loss) |
|
(536) |
|
5,465 |
|
Total AIG shareholders’ equity |
|
58,586 |
|
65,171 |
|
Non-redeemable noncontrolling interests |
|
591 |
|
537 |
|
Total equity |
|
59,177 |
|
65,708 |
|
Total liabilities and equity |
$ |
504,860 |
$ |
498,301 |
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements. |
||||
2 AIG | Third Quarter 2018 Form 10-Q
American International Group, Inc.
Condensed Consolidated Statements of Income (Loss) (unaudited)
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
|
September 30, |
|
September 30, |
||||||||
|
(dollars in millions, except per share data) |
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
|
$ |
7,668 |
|
$ |
8,063 |
|
$ |
22,150 |
|
$ |
23,459 |
|
Policy fees |
|
|
530 |
|
|
728 |
|
|
2,057 |
|
|
2,177 |
|
Net investment income |
|
|
3,396 |
|
|
3,416 |
|
|
9,722 |
|
|
10,715 |
|
Net realized capital losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments on available for sale securities |
|
|
(13) |
|
|
(66) |
|
|
(116) |
|
|
(138) |
|
Portion of other-than-temporary impairments on available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
|
(35) |
|
|
(74) |
|
|
(158) |
|
|
(195) |
|
Other realized capital losses |
|
|
(476) |
|
|
(848) |
|
|
(207) |
|
|
(911) |
|
Total net realized capital losses |
|
|
(511) |
|
|
(922) |
|
|
(365) |
|
|
(1,106) |
|
Other income |
|
|
403 |
|
|
466 |
|
|
1,265 |
|
|
1,640 |
|
Total revenues |
|
|
11,486 |
|
|
11,751 |
|
|
34,829 |
|
|
36,885 |
|
Benefits, losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and losses incurred |
|
|
8,312 |
|
|
10,322 |
|
|
19,484 |
|
|
22,653 |
|
Interest credited to policyholder account balances |
|
|
933 |
|
|
867 |
|
|
2,784 |
|
|
2,683 |
|
Amortization of deferred policy acquisition costs |
|
|
1,118 |
|
|
912 |
|
|
3,813 |
|
|
3,135 |
|
General operating and other expenses |
|
|
2,325 |
|
|
2,149 |
|
|
6,919 |
|
|
6,774 |
|
Interest expense |
|
|
326 |
|
|
290 |
|
|
902 |
|
|
880 |
|
(Gain) loss on extinguishment of debt |
|
|
1 |
|
|
1 |
|
|
10 |
|
|
(4) |
|
Net (gain) loss on sale of divested businesses |
|
|
(2) |
|
|
13 |
|
|
(35) |
|
|
173 |
|
Total benefits, losses and expenses |
|
|
13,013 |
|
|
14,554 |
|
|
33,877 |
|
|
36,294 |
|
Income (loss) from continuing operations before |
|
|
|
|
|
|
|
|
|
|
|
|
|
income tax expense (benefit) |
|
|
(1,527) |
|
|
(2,803) |
|
|
952 |
|
|
591 |
|
Income tax expense (benefit) |
|
|
(307) |
|
|
(1,091) |
|
|
291 |
|
|
(18) |
|
Income (loss) from continuing operations |
|
|
(1,220) |
|
|
(1,712) |
|
|
661 |
|
|
609 |
|
Income (loss) from discontinued operations, net of income tax expense |
|
|
(39) |
|
|
(1) |
|
|
(40) |
|
|
7 |
|
Net income (loss) |
|
|
(1,259) |
|
|
(1,713) |
|
|
621 |
|
|
616 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
|
|
- |
|
|
26 |
|
|
5 |
|
|
40 |
|
Net income (loss) attributable to AIG |
|
$ |
(1,259) |
|
$ |
(1,739) |
|
$ |
616 |
|
$ |
576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share attributable to AIG: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(1.37) |
|
$ |
(1.91) |
|
$ |
0.72 |
|
$ |
0.60 |
|
Income (loss) from discontinued operations |
|
$ |
(0.04) |
|
$ |
- |
|
$ |
(0.04) |
|
$ |
0.01 |
|
Net income (loss) attributable to AIG |
|
$ |
(1.41) |
|
$ |
(1.91) |
|
$ |
0.68 |
|
$ |
0.61 |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
(1.37) |
|
$ |
(1.91) |
|
$ |
0.71 |
|
$ |
0.59 |
|
Income (loss) from discontinued operations |
|
$ |
(0.04) |
|
$ |
- |
|
$ |
(0.04) |
|
$ |
0.01 |
|
Net income (loss) attributable to AIG |
|
$ |
(1.41) |
|
$ |
(1.91) |
|
$ |
0.67 |
|
$ |
0.60 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
895,237,359 |
|
|
908,667,044 |
|
|
902,081,555 |
|
|
938,130,832 |
|
Diluted |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements. |
|
|
|
|
|
|
|
|
|
|||
AIG | Third Quarter 2018 Form 10-Q 3
American International Group, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
|
September 30, |
|
September 30, |
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|
(in millions) |
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
Net income (loss) |
|
$ |
(1,259) |
|
$ |
(1,713) |
|
$ |
621 |
|
$ |
616 |
|
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 |
|
|
107 |
|
|
97 |
|
|
(1,089) |
|
|
330 |
|
Change in unrealized appreciation (depreciation) of all other investments |
|
|
(758) |
|
|
492 |
|
|
(4,222) |
|
|
1,840 |
|
Change in foreign currency translation adjustments |
|
|
(129) |
|
|
325 |
|
|
(181) |
|
|
447 |
|
Change in retirement plan liabilities adjustment |
|
|
14 |
|
|
63 |
|
|
66 |
|
|
92 |
|
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) |
|
|
(2,025) |
|
|
(736) |
|
|
(4,804) |
|
|
3,325 |
|
Comprehensive income attributable to noncontrolling interests |
|
|
- |
|
|
26 |
|
|
5 |
|
|
40 |
|
Comprehensive income (loss) attributable to AIG |
|
$ |
(2,025) |
|
$ |
(762) |
|
$ |
(4,809) |
|
$ |
3,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements. |
||||||||||||
4 AIG | Third Quarter 2018 Form 10-Q
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 (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 2018 Form 10-Q 5
American International Group, Inc.
Condensed Consolidated Statements of Equity (unaudited)(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
See accompanying Notes to Condensed Consolidated Financial Statements.
6 AIG | Third Quarter 2018 Form 10-Q
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-Q 7
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.
8 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 1. Basis of Presentation
American International Group, Inc. (AIG) is a leading global insurance organization serving customers in more than 80 countries and jurisdictions. AIG companies serve commercial and individual customers through one of the most extensive worldwide property‑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, 2017 (the 2017 Annual Report). The condensed consolidated financial information as of December 31, 2017 included herein has been derived from the audited Consolidated Financial Statements in the 2017 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, 2018 and prior to the issuance of these Condensed Consolidated Financial Statements.
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 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.
AIG | Third Quarter 2018 Form 10-Q 9
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 1. 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.
Accounting Standards Adopted During 2018
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 adopted the standard using the modified retrospective approach on its required effective date of January 1, 2018. Our analysis of revenues indicated that substantially all of our revenues were from sources excluded from the scope of the standard. For those revenue sources within the scope of the standard, there were no material changes in the timing or measurement of revenues based upon the guidance. As substantially all of our revenue sources were excluded from the scope of the standard, the adoption of the standard did not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued an accounting standard that requires 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 are 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 adopted 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.
10 AIG | Third Quarter 2018 Form 10-Q
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. The standard primarily addresses the presentation of the service cost component of net periodic benefit costs in the income statement. AIG’s U.S. pension plans are frozen and no longer accrue benefits, which are reflected as service costs. Therefore, the standard did 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-Q 11
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, January 1, 2019, using the additional (and optional) transition method and recognizing a 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.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued an accounting standard that eliminates the requirement to calculate the implied fair value of goodwill, through a hypothetical purchase price allocation, to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value not to exceed the total amount of goodwill allocated to that reporting unit. An entity should also consider income tax effects from tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
The standard is effective on January 1, 2020, with early adoption permitted. We are evaluating the timing of our adoption. Any impact of the standard will be dependent on the market conditions of the reporting units at the time of adoption.
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.
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.
12 AIG | Third Quarter 2018 Form 10-Q
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 method of adoption and impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures. The adoption of this standard is expected to have a significant impact on our consolidated financial condition, results of operations, cash flows and required disclosures, as well as systems, processes and controls.
AIG | Third Quarter 2018 Form 10-Q 13
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 3. Segment Information
3. Segment Information
We report our results of operations consistent with the manner in which our chief operating decision makers review the business to assess performance and allocate resources, as follows.
General Insurance
General Insurance business is presented as two operating segments:
· North America — consists of insurance businesses in the United States, Canada and Bermuda. 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, Financial Lines, Property and Special Risks.
– Personal Insurance — consists of Personal Lines and Accident and Health.
Life and Retirement
Life and Retirement business is presented as four operating segments:
· Individual Retirement — consists of fixed annuities, fixed index annuities, variable annuities and retail mutual funds.
· Group Retirement — consists of group mutual funds, group 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:
· Income from assets held by AIG Parent and other corporate subsidiaries.
· General operating expenses not attributable to specific reporting segments.
· Interest expense.
· Blackboard — a subsidiary focused on delivering commercial insurance solutions using digital technology, data analytics and automation.
· Fuji Life — consists of term insurance, life insurance, endowment policies and annuities. The sale of this business was completed on April 30, 2017.
14 AIG | Third Quarter 2018 Form 10-Q
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 adjusted revenues and adjusted pre-tax income (loss). Adjusted revenues and adjusted pre-tax income (loss) are derived by excluding certain items from total revenues and net income (loss) attributable to AIG, respectively. For the items excluded from adjusted revenues and adjusted pre-tax income (loss) see the table below.
The following table presents AIG’s continuing operations by operating segment:
|
Three Months Ended September 30, |
2018 |
|
2017 |
||||||
|
|
|
|
|
Adjusted |
|
|
|
|
Adjusted |
|
|
|
Adjusted |
|
Pre-tax |
|
|
Adjusted |
|
Pre-tax |
|
(in millions) |
|
Revenues |
|
Income (Loss) |
|
|
Revenues |
|
Income (Loss) |
|
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 |
|
1,335 |
|
393 |
|
|
1,343 |
|
718 |
|
Group Retirement |
|
718 |
|
242 |
|
|
702 |
|
249 |
|
Life Insurance |
|
809 |
|
16 |
|
|
1,000 |
|
112 |
|
Institutional Markets |
|
284 |
|
62 |
|
|
1,091 |
|
79 |
|
Total Life and Retirement |
|
3,146 |
|
713 |
|
|
4,136 |
|
1,158 |
|
Other Operations |
|
135 |
|
(417) |
|
|
127 |
|
(366) |
|
Legacy Portfolio |
|
814 |
|
84 |
|
|
1,013 |
|
286 |
|
AIG Consolidation and elimination |
|
(42) |
|
29 |
|
|
(119) |
|
(1) |
|
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 |
|
(5) |
|
(14) |
|
|
26 |
|
26 |
|
Changes in benefit reserves and DAC, VOBA and SIA related to |
|
|
|
|
|
|
|
|
|
|
net realized capital gains |
|
- |
|
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 |
|
- |
|
(605) |
|
|
- |
|
7 |
|
Net loss reserve discount benefit (charge) |
|
- |
|
86 |
|
|
- |
|
(48) |
|
Pension expense related to a one-time lump sum payment to former employees |
|
- |
|
- |
|
|
- |
|
(49) |
|
Integration and transaction costs associated with acquired businesses |
|
- |
|
(91) |
|
|
- |
|
- |
|
Restructuring and other costs |
|
- |
|
(35) |
|
|
- |
|
(31) |
|
Revenues and Pre-tax income (loss) |
$ |
11,486 |
$ |
(1,527) |
|
$ |
11,751 |
$ |
(2,803) |
AIG | Third Quarter 2018 Form 10-Q 15
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 3. Segment Information
|
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 |
* 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.
16 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 4. Business 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-Q 17
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 presents details of the identified intangible assets acquired:
|
|
|
|
|
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 Sheet.
(b) Amortization is reported in General operating and other expenses in the Condensed Consolidated Statement of Income (Loss).
(c) Reported in 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).
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.
18 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used:
|
September 30, 2018 |
|
|
|
|
|
|
Counterparty |
Cash |
|
|||
|
(in millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Netting(a) |
Collateral |
|
Total |
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities |
$ |
9 |
$ |
3,084 |
$ |
- |
$ |
- |
$ |
- |
$ |
3,093 |
|
Obligations of states, municipalities and political subdivisions |
|
- |
|
14,516 |
|
1,996 |
|
- |
|
- |
|
16,512 |
|
Non-U.S. governments |
|
19 |
|
15,196 |
|
4 |
|
- |
|
- |
|
15,219 |
|
Corporate debt |
|
- |
|
130,942 |
|
942 |
|
- |
|
- |
|
131,884 |
|
RMBS |
|
- |
|
20,365 |
|
14,861 |
|
- |
|
- |
|
35,226 |
|
CMBS |
|
- |
|
11,990 |
|
701 |
|
- |
|
- |
|
12,691 |
|
CDO/ABS |
|
- |
|
9,263 |
|
8,832 |
|
- |
|
- |
|
18,095 |
|
Total bonds available for sale |
|
28 |
|
205,356 |
|
27,336 |
|
- |
|
- |
|
232,720 |
|
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities |
|
96 |
|
2,538 |
|
- |
|
- |
|
- |
|
2,634 |
|
Non-U.S. governments |
|
- |
|
49 |
|
- |
|
- |
|
- |
|
49 |
|
Corporate debt |
|
- |
|
1,707 |
|
- |
|
- |
|
- |
|
1,707 |
|
RMBS |
|
- |
|
311 |
|
1,349 |
|
- |
|
- |
|
1,660 |
|
CMBS |
|
- |
|
328 |
|
73 |
|
- |
|
- |
|
401 |
|
CDO/ABS |
|
- |
|
511 |
|
4,458 |
|
- |
|
- |
|
4,969 |
|
Total other bond securities |
|
96 |
|
5,444 |
|
5,880 |
|
- |
|
- |
|
11,420 |
|
Other equity securities(b) |
|
1,400 |
|
18 |
|
25 |
|
- |
|
- |
|
1,443 |
|
Mortgage and other loans receivable |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Other invested assets(c) |
|
- |
|
603 |
|
398 |
|
- |
|
- |
|
1,001 |
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
- |
|
2,505 |
|
- |
|
- |
|
- |
|
2,505 |
|
Foreign exchange contracts |
|
- |
|
927 |
|
- |
|
- |
|
- |
|
927 |
|
Equity contracts |
|
16 |
|
220 |
|
104 |
|
- |
|
- |
|
340 |
|
Credit contracts |
|
- |
|
- |
|
1 |
|
- |
|
- |
|
1 |
|
Other contracts |
|
- |
|
- |
|
15 |
|
- |
|
- |
|
15 |
|
Counterparty netting and cash collateral |
|
- |
|
- |
|
- |
|
(1,874) |
|
(964) |
|
(2,838) |
|
Total derivative assets |
|
16 |
|
3,652 |
|
120 |
|
(1,874) |
|
(964) |
|
950 |
|
Short-term investments |
|
2,513 |
|
1,120 |
|
- |
|
- |
|
- |
|
3,633 |
|
Separate account assets |
|
88,092 |
|
4,953 |
|
- |
|
- |
|
- |
|
93,045 |
|
Total |
$ |
92,145 |
$ |
221,146 |
$ |
33,759 |
$ |
(1,874) |
$ |
(964) |
$ |
344,212 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits |
$ |
- |
$ |
- |
$ |
3,376 |
$ |
- |
$ |
- |
$ |
3,376 |
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
1 |
|
2,106 |
|
12 |
|
- |
|
- |
|
2,119 |
|
Foreign exchange contracts |
|
- |
|
1,082 |
|
5 |
|
- |
|
- |
|
1,087 |
|
Equity contracts |
|
2 |
|
2 |
|
1 |
|
- |
|
- |
|
5 |
|
Credit contracts |
|
- |
|
15 |
|
237 |
|
- |
|
- |
|
252 |
|
Other contracts |
|
- |
|
- |
|
3 |
|
- |
|
- |
|
3 |
|
Counterparty netting and cash collateral |
|
- |
|
- |
|
- |
|
(1,874) |
|
(290) |
|
(2,164) |
|
Total derivative liabilities |
|
3 |
|
3,205 |
|
258 |
|
(1,874) |
|
(290) |
|
1,302 |
|
Long-term debt |
|
- |
|
2,311 |
|
- |
|
- |
|
- |
|
2,311 |
|
Other liabilities |
|
165 |
|
24 |
|
- |
|
- |
|
- |
|
189 |
|
Total |
$ |
168 |
$ |
5,540 |
$ |
3,634 |
$ |
(1,874) |
$ |
(290) |
$ |
7,178 |
AIG | Third Quarter 2018 Form 10-Q 19
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
|
December 31, 2017 |
|
|
|
|
|
|
Counterparty |
Cash |
|
|||
|
(in millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Netting(a) |
|
Collateral |
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities |
$ |
201 |
$ |
2,455 |
$ |
- |
$ |
- |
$ |
- |
$ |
2,656 |
|
Obligations of states, municipalities and political subdivisions |
|
- |
|
16,240 |
|
2,404 |
|
- |
|
- |
|
18,644 |
|
Non-U.S. governments |
|
20 |
|
15,631 |
|
8 |
|
- |
|
- |
|
15,659 |
|
Corporate debt |
|
- |
|
133,003 |
|
1,173 |
|
- |
|
- |
|
134,176 |
|
RMBS |
|
- |
|
21,098 |
|
16,136 |
|
- |
|
- |
|
37,234 |
|
CMBS |
|
- |
|
13,217 |
|
624 |
|
- |
|
- |
|
13,841 |
|
CDO/ABS |
|
- |
|
8,131 |
|
8,651 |
|
- |
|
- |
|
16,782 |
|
Total bonds available for sale |
|
221 |
|
209,775 |
|
28,996 |
|
- |
|
- |
|
238,992 |
|
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities |
|
238 |
|
2,564 |
|
- |
|
- |
|
- |
|
2,802 |
|
Non-U.S. governments |
|
- |
|
57 |
|
- |
|
- |
|
- |
|
57 |
|
Corporate debt |
|
- |
|
1,891 |
|
18 |
|
- |
|
- |
|
1,909 |
|
RMBS |
|
- |
|
421 |
|
1,464 |
|
- |
|
- |
|
1,885 |
|
CMBS |
|
- |
|
485 |
|
74 |
|
- |
|
- |
|
559 |
|
CDO/ABS |
|
- |
|
604 |
|
4,956 |
|
- |
|
- |
|
5,560 |
|
Total other bond securities |
|
238 |
|
6,022 |
|
6,512 |
|
- |
|
- |
|
12,772 |
|
Equity securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
1,061 |
|
- |
|
- |
|
- |
|
- |
|
1,061 |
|
Preferred stock |
|
18 |
|
515 |
|
- |
|
- |
|
- |
|
533 |
|
Mutual funds |
|
110 |
|
4 |
|
- |
|
- |
|
- |
|
114 |
|
Total equity securities available for sale |
|
1,189 |
|
519 |
|
- |
|
- |
|
- |
|
1,708 |
|
Other equity securities |
|
589 |
|
- |
|
- |
|
- |
|
- |
|
589 |
|
Mortgage and other loans receivable |
|
- |
|
- |
|
5 |
|
- |
|
- |
|
5 |
|
Other invested assets(c) |
|
- |
|
1 |
|
250 |
|
- |
|
- |
|
251 |
|
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
1 |
|
2,170 |
|
- |
|
- |
|
- |
|
2,171 |
|
Foreign exchange contracts |
|
- |
|
827 |
|
4 |
|
- |
|
- |
|
831 |
|
Equity contracts |
|
188 |
|
252 |
|
82 |
|
- |
|
- |
|
522 |
|
Credit contracts |
|
- |
|
- |
|
1 |
|
- |
|
- |
|
1 |
|
Other contracts |
|
- |
|
- |
|
20 |
|
- |
|
- |
|
20 |
|
Counterparty netting and cash collateral |
|
- |
|
- |
|
- |
|
(1,464) |
|
(1,159) |
|
(2,623) |
|
Total derivative assets |
|
189 |
|
3,249 |
|
107 |
|
(1,464) |
|
(1,159) |
|
922 |
|
Short-term investments |
|
2,078 |
|
537 |
|
- |
|
- |
|
- |
|
2,615 |
|
Separate account assets |
|
87,141 |
|
5,657 |
|
- |
|
- |
|
- |
|
92,798 |
|
Total |
$ |
91,645 |
$ |
225,760 |
$ |
35,870 |
$ |
(1,464) |
$ |
(1,159) |
$ |
350,652 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits |
$ |
- |
$ |
14 |
$ |
4,136 |
$ |
- |
$ |
- |
$ |
4,150 |
|
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
2 |
|
2,176 |
|
22 |
|
- |
|
- |
|
2,200 |
|
Foreign exchange contracts |
|
- |
|
1,241 |
|
4 |
|
- |
|
- |
|
1,245 |
|
Equity contracts |
|
2 |
|
19 |
|
- |
|
- |
|
- |
|
21 |
|
Credit contracts |
|
- |
|
14 |
|
263 |
|
- |
|
- |
|
277 |
|
Other contracts |
|
- |
|
- |
|
5 |
|
- |
|
- |
|
5 |
|
Counterparty netting and cash collateral |
|
- |
|
- |
|
- |
|
(1,464) |
|
(1,249) |
|
(2,713) |
|
Total derivative liabilities |
|
4 |
|
3,450 |
|
294 |
|
(1,464) |
|
(1,249) |
|
1,035 |
|
Long-term debt |
|
- |
|
2,888 |
|
- |
|
- |
|
- |
|
2,888 |
|
Other liabilities |
|
46 |
|
43 |
|
- |
|
- |
|
- |
|
89 |
|
Total |
$ |
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 $5.1 billion and $6.0 billion as of September 30, 2018 and December 31, 2017, respectively.
20 AIG | Third Quarter 2018 Form 10-Q
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. government entities from Level 1 to Level 2, because 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.
AIG | Third Quarter 2018 Form 10-Q 21
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, 2018 and 2017 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, 2018 and 2017:
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
Realized and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains |
|
|
|
|
|
Unrealized |
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
|
(Losses) Included |
|
|
|
Fair Value |
Gains (Losses) |
|
Other |
|
Sales, |
|
Gross |
|
Gross |
|
|
|
|
Fair Value |
|
in Income on |
|
|
|
|
Beginning |
|
Included |
|
Comprehensive |
|
Issuances and |
|
Transfers |
|
Transfers |
|
|
|
|
End |
|
Instruments Held |
|
(in millions) |
|
of Period |
|
in Income |
|
Income (Loss) |
Settlements, Net |
|
In |
|
Out |
|
|
Acquisition |
|
of Period |
|
at End of Period |
|
|
Three Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states, municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and political subdivisions |
$ |
2,056 |
$ |
- |
$ |
(37) |
$ |
(46) |
$ |
54 |
$ |
(31) |
|
$ |
- |
$ |
1,996 |
$ |
- |
|
Non-U.S. governments |
|
- |
|
- |
|
(1) |
|
1 |
|
4 |
|
- |
|
|
- |
|
4 |
|
- |
|
Corporate debt |
|
884 |
|
7 |
|
(10) |
|
(28) |
|
133 |
|
(44) |
|
|
- |
|
942 |
|
- |
|
RMBS |
|
15,377 |
|
213 |
|
5 |
|
(725) |
|
- |
|
(16) |
|
|
7 |
|
14,861 |
|
- |
|
CMBS |
|
605 |
|
14 |
|
(14) |
|
31 |
|
64 |
|
- |
|
|
1 |
|
701 |
|
- |
|
CDO/ABS |
|
6,856 |
|
15 |
|
(31) |
|
320 |
|
1,508 |
|
- |
|
|
164 |
|
8,832 |
|
- |
|
Total bonds available for sale |
|
25,778 |
|
249 |
|
(88) |
|
(447) |
|
1,763 |
|
(91) |
|
|
172 |
|
27,336 |
|
- |
|
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
18 |
|
- |
|
- |
|
(18) |
|
- |
|
- |
|
|
- |
|
- |
|
(2) |
|
RMBS |
|
1,338 |
|
18 |
|
- |
|
(57) |
|
50 |
|
- |
|
|
- |
|
1,349 |
|
(29) |
|
CMBS |
|
71 |
|
(2) |
|
- |
|
- |
|
4 |
|
- |
|
|
- |
|
73 |
|
(2) |
|
CDO/ABS |
|
4,641 |
|
76 |
|
- |
|
(267) |
|
- |
|
- |
|
|
8 |
|
4,458 |
|
(6) |
|
Total other bond securities |
|
6,068 |
|
92 |
|
- |
|
(342) |
|
54 |
|
- |
|
|
8 |
|
5,880 |
|
(39) |
|
Other equity securities(a) |
|
- |
|
1 |
|
- |
|
24 |
|
- |
|
- |
|
|
- |
|
25 |
|
- |
|
Mortgage and other loans receivable |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
Other invested assets |
|
399 |
|
- |
|
- |
|
(1) |
|
- |
|
- |
|
|
- |
|
398 |
|
- |
|
Total |
$ |
32,245 |
$ |
342 |
$ |
(88) |
$ |
(766) |
$ |
1,817 |
$ |
(91) |
|
$ |
180 |
$ |
33,639 |
$ |
(39) |
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
Realized and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains |
|
|
|
|
|
Unrealized |
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
|
(Losses) Included |
|
|
|
Fair Value |
(Gains) Losses |
|
Other |
|
Sales, |
|
Gross |
|
Gross |
|
|
|
|
Fair Value |
|
in Income on |
|
|
|
|
Beginning |
|
Included |
|
Comprehensive |
|
Issuances and |
|
Transfers |
|
Transfers |
|
|
|
|
End |
|
Instruments Held |
|
(in millions) |
|
of Period |
|
in Income |
|
Income (Loss) |
Settlements, Net |
|
In |
|
Out |
|
|
Acquisition |
|
of Period |
|
at End of Period |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits |
$ |
3,534 |
$ |
(242) |
$ |
- |
$ |
84 |
$ |
- |
$ |
- |
|
$ |
- |
$ |
3,376 |
$ |
179 |
|
Derivative liabilities, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
14 |
|
(1) |
|
- |
|
(1) |
|
- |
|
- |
|
|
- |
|
12 |
|
1 |
|
Foreign exchange contracts |
|
5 |
|
2 |
|
- |
|
(2) |
|
- |
|
- |
|
|
- |
|
5 |
|
(5) |
|
Equity contracts |
|
(79) |
|
(12) |
|
- |
|
(12) |
|
- |
|
- |
|
|
- |
|
(103) |
|
10 |
|
Credit contracts |
|
246 |
|
(9) |
|
- |
|
(1) |
|
- |
|
- |
|
|
- |
|
236 |
|
10 |
|
Other contracts |
|
(10) |
|
(19) |
|
- |
|
17 |
|
- |
|
- |
|
|
- |
|
(12) |
|
14 |
|
Total derivative liabilities, net(b) |
|
176 |
|
(39) |
|
- |
|
1 |
|
- |
|
- |
|
|
- |
|
138 |
|
30 |
|
Long-term debt(c) |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
Total |
$ |
3,710 |
$ |
(281) |
$ |
- |
$ |
85 |
$ |
- |
$ |
- |
|
$ |
- |
$ |
3,514 |
$ |
209 |
22 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
Realized and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains |
|
|
|
|
|
Unrealized |
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
|
(Losses) Included |
|
|
|
Fair Value |
Gains (Losses) |
|
Other |
|
Sales, |
|
Gross |
|
Gross |
|
|
|
|
Fair Value |
|
in Income on |
|
|
|
|
Beginning |
|
Included |
|
Comprehensive |
|
Issuances and |
|
Transfers |
|
Transfers |
|
|
|
|
End |
|
Instruments Held |
|
(in millions) |
|
of Period |
|
in Income |
|
Income (Loss) |
Settlements, Net |
|
In |
|
Out |
|
|
Acquisition |
|
of Period |
|
at End of Period |
|
|
Nine Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states, municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and political subdivisions |
$ |
2,404 |
$ |
1 |
$ |
(152) |
$ |
(144) |
$ |
54 |
$ |
(167) |
|
$ |
- |
$ |
1,996 |
$ |
- |
|
Non-U.S. governments |
|
8 |
|
(5) |
|
5 |
|
(3) |
|
4 |
|
(5) |
|
|
- |
|
4 |
|
- |
|
Corporate debt |
|
1,173 |
|
(58) |
|
(7) |
|
(174) |
|
701 |
|
(693) |
|
|
- |
|
942 |
|
- |
|
RMBS |
|
16,136 |
|
632 |
|
5 |
|
(1,877) |
|
8 |
|
(50) |
|
|
7 |
|
14,861 |
|
- |
|
CMBS |
|
624 |
|
18 |
|
(35) |
|
1 |
|
111 |
|
(19) |
|
|
1 |
|
701 |
|
- |
|
CDO/ABS |
|
8,651 |
|
31 |
|
(116) |
|
(334) |
|
1,508 |
|
(1,072) |
|
|
164 |
|
8,832 |
|
- |
|
Total bonds available for sale |
|
28,996 |
|
619 |
|
(300) |
|
(2,531) |
|
2,386 |
|
(2,006) |
|
|
172 |
|
27,336 |
|
- |
|
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
18 |
|
- |
|
- |
|
(18) |
|
- |
|
- |
|
|
- |
|
- |
|
(1) |
|
RMBS |
|
1,464 |
|
73 |
|
- |
|
(238) |
|
50 |
|
- |
|
|
- |
|
1,349 |
|
124 |
|
CMBS |
|
74 |
|
(5) |
|
- |
|
(1) |
|
5 |
|
- |
|
|
- |
|
73 |
|
2 |
|
CDO/ABS |
|
4,956 |
|
283 |
|
- |
|
(780) |
|
- |
|
(9) |
|
|
8 |
|
4,458 |
|
201 |
|
Total other bond securities |
|
6,512 |
|
351 |
|
- |
|
(1,037) |
|
55 |
|
(9) |
|
|
8 |
|
5,880 |
|
326 |
|
Other equity securities(a) |
|
- |
|
(2) |
|
- |
|
27 |
|
- |
|
- |
|
|
- |
|
25 |
|
- |
|
Mortgage and other loans receivable |
|
5 |
|
- |
|
- |
|
(5) |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
Other invested assets |
|
250 |
|
52 |
|
1 |
|
95 |
|
- |
|
- |
|
|
- |
|
398 |
|
56 |
|
Total |
$ |
35,763 |
$ |
1,020 |
$ |
(299) |
$ |
(3,451) |
$ |
2,441 |
$ |
(2,015) |
|
$ |
180 |
$ |
33,639 |
$ |
382 |
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
Realized and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains |
|
|
|
|
|
Unrealized |
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
|
(Losses) Included |
|
|
|
Fair Value |
(Gains) Losses |
|
Other |
|
Sales, |
|
Gross |
|
Gross |
|
|
|
|
Fair Value |
|
in Income on |
|
|
|
|
Beginning |
|
Included |
|
Comprehensive |
|
Issuances and |
|
Transfers |
|
Transfers |
|
|
|
|
End |
|
Instruments Held |
|
(in millions) |
|
of Period |
|
in Income |
|
Income (Loss) |
Settlements, Net |
|
In |
|
Out |
|
|
Acquisition |
|
of Period |
|
at End of Period |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits |
$ |
4,136 |
$ |
(986) |
$ |
- |
$ |
226 |
$ |
- |
$ |
- |
|
$ |
- |
$ |
3,376 |
$ |
1,081 |
|
Derivative liabilities, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
22 |
|
(5) |
|
- |
|
(5) |
|
- |
|
- |
|
|
- |
|
12 |
|
5 |
|
Foreign exchange contracts |
|
- |
|
(2) |
|
- |
|
7 |
|
- |
|
- |
|
|
- |
|
5 |
|
(5) |
|
Equity contracts |
|
(82) |
|
(3) |
|
- |
|
(20) |
|
- |
|
2 |
|
|
- |
|
(103) |
|
2 |
|
Credit contracts |
|
262 |
|
(23) |
|
- |
|
(3) |
|
- |
|
- |
|
|
- |
|
236 |
|
23 |
|
Other contracts |
|
(15) |
|
(51) |
|
- |
|
54 |
|
- |
|
- |
|
|
- |
|
(12) |
|
42 |
|
Total derivative liabilities, net(b) |
|
187 |
|
(84) |
|
- |
|
33 |
|
- |
|
2 |
|
|
- |
|
138 |
|
67 |
|
Long-term debt(c) |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
Total |
$ |
4,323 |
$ |
(1,070) |
$ |
- |
$ |
259 |
$ |
- |
$ |
2 |
|
$ |
- |
$ |
3,514 |
$ |
1,148 |
AIG | Third Quarter 2018 Form 10-Q 23
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
Realized and |
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains |
|
|
|
|
|
Unrealized |
|
|
|
Purchases, |
|
|
|
|
|
|
|
(Losses) Included |
|
|
|
Fair Value |
|
Gains (Losses) |
|
Other |
|
Sales, |
|
Gross |
|
Gross |
|
Fair Value |
|
in Income on |
|
|
|
Beginning |
|
Included |
|
Comprehensive |
|
Issuances and |
|
Transfers |
|
Transfers |
|
End |
|
Instruments Held |
|
(in millions) |
|
of Period |
|
in Income |
|
Income (Loss) |
Settlements, Net |
|
In |
|
Out |
|
of Period |
|
at End of Period |
|
|
Three Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states, municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and political subdivisions |
$ |
2,285 |
$ |
2 |
$ |
38 |
$ |
52 |
$ |
- |
$ |
(6) |
$ |
2,371 |
$ |
- |
|
Non-U.S. governments |
|
12 |
|
(5) |
|
4 |
|
- |
|
- |
|
- |
|
11 |
|
- |
|
Corporate debt |
|
932 |
|
5 |
|
(2) |
|
(53) |
|
449 |
|
(121) |
|
1,210 |
|
- |
|
RMBS |
|
16,393 |
|
253 |
|
495 |
|
(731) |
|
11 |
|
(7) |
|
16,414 |
|
- |
|
CMBS |
|
735 |
|
2 |
|
5 |
|
(77) |
|
- |
|
- |
|
665 |
|
- |
|
CDO/ABS |
|
8,605 |
|
8 |
|
(12) |
|
(166) |
|
- |
|
(21) |
|
8,414 |
|
- |
|
Total bonds available for sale |
|
28,962 |
|
265 |
|
528 |
|
(975) |
|
460 |
|
(155) |
|
29,085 |
|
- |
|
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
28 |
|
1 |
|
- |
|
- |
|
- |
|
(11) |
|
18 |
|
- |
|
RMBS |
|
1,510 |
|
63 |
|
- |
|
(130) |
|
- |
|
- |
|
1,443 |
|
49 |
|
CMBS |
|
66 |
|
2 |
|
- |
|
42 |
|
- |
|
(45) |
|
65 |
|
3 |
|
CDO/ABS |
|
5,234 |
|
111 |
|
- |
|
(505) |
|
- |
|
(6) |
|
4,834 |
|
(34) |
|
Total other bond securities |
|
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 |
|
- |
|
Mortgage and other loans receivable |
|
5 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
5 |
|
- |
|
Other invested assets |
|
225 |
|
- |
|
(2) |
|
36 |
|
- |
|
- |
|
259 |
|
(3) |
|
Total |
$ |
36,037 |
$ |
442 |
$ |
526 |
$ |
(1,534) |
$ |
460 |
$ |
(217) |
$ |
35,714 |
$ |
15 |
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
Realized and |
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains |
|
|
|
|
|
Unrealized |
|
|
|
Purchases, |
|
|
|
|
|
|
|
(Losses) Included |
|
|
|
Fair Value |
|
(Gains) Losses |
|
Other |
|
Sales, |
|
Gross |
|
Gross |
|
Fair Value |
|
in Income on |
|
|
|
Beginning |
|
Included |
|
Comprehensive |
|
Issuances and |
|
Transfers |
|
Transfers |
|
End |
|
Instruments Held |
|
(in millions) |
|
of Period |
|
in Income |
|
Income (Loss) |
Settlements, Net |
|
In |
|
Out |
|
of Period |
|
at End of Period |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits |
$ |
3,518 |
$ |
299 |
$ |
- |
$ |
157 |
$ |
- |
$ |
- |
$ |
3,974 |
$ |
(220) |
|
Derivative liabilities, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
30 |
|
(2) |
|
- |
|
(2) |
|
- |
|
- |
|
26 |
|
1 |
|
Foreign exchange contracts |
|
7 |
|
- |
|
- |
|
(4) |
|
- |
|
- |
|
3 |
|
- |
|
Equity contracts |
|
(63) |
|
(11) |
|
- |
|
5 |
|
- |
|
- |
|
(69) |
|
8 |
|
Credit contracts |
|
293 |
|
(19) |
|
- |
|
(1) |
|
- |
|
- |
|
273 |
|
19 |
|
Other contracts |
|
(16) |
|
(19) |
|
- |
|
19 |
|
- |
|
- |
|
(16) |
|
12 |
|
Total derivative liabilities, net(b) |
|
251 |
|
(51) |
|
- |
|
17 |
|
- |
|
- |
|
217 |
|
40 |
|
Long-term debt(c) |
|
61 |
|
2 |
|
- |
|
(60) |
|
- |
|
- |
|
3 |
|
4 |
|
Total |
$ |
3,830 |
$ |
250 |
$ |
- |
$ |
114 |
$ |
- |
$ |
- |
$ |
4,194 |
$ |
(176) |
24 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
Realized and |
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains |
|
|
|
|
|
Unrealized |
|
|
|
Purchases, |
|
|
|
|
|
|
|
(Losses) Included |
|
|
|
Fair Value |
|
Gains (Losses) |
|
Other |
|
Sales, |
|
Gross |
|
Gross |
|
Fair Value |
|
in Income on |
|
|
|
Beginning |
|
Included |
|
Comprehensive |
|
Issuances and |
|
Transfers |
|
Transfers |
|
End |
|
Instruments Held |
|
(in millions) |
|
of Period |
|
in Income |
|
Income (Loss) |
Settlements, Net |
|
In |
|
Out |
|
of Period |
|
at End of Period |
|
|
Nine Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states, municipalities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and political subdivisions |
$ |
2,040 |
$ |
3 |
$ |
123 |
$ |
221 |
$ |
8 |
$ |
(24) |
$ |
2,371 |
$ |
- |
|
Non-U.S. governments |
|
17 |
|
(5) |
|
5 |
|
(6) |
|
- |
|
- |
|
11 |
|
- |
|
Corporate debt |
|
1,133 |
|
6 |
|
(2) |
|
(219) |
|
655 |
|
(363) |
|
1,210 |
|
- |
|
RMBS |
|
16,906 |
|
806 |
|
992 |
|
(2,270) |
|
19 |
|
(39) |
|
16,414 |
|
- |
|
CMBS |
|
2,040 |
|
25 |
|
12 |
|
(699) |
|
- |
|
(713) |
|
665 |
|
- |
|
CDO/ABS |
|
7,835 |
|
(14) |
|
168 |
|
478 |
|
- |
|
(53) |
|
8,414 |
|
- |
|
Total bonds available for sale |
|
29,971 |
|
821 |
|
1,298 |
|
(2,495) |
|
682 |
|
(1,192) |
|
29,085 |
|
- |
|
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
|
17 |
|
2 |
|
- |
|
10 |
|
- |
|
(11) |
|
18 |
|
1 |
|
RMBS |
|
1,605 |
|
184 |
|
- |
|
(313) |
|
- |
|
(33) |
|
1,443 |
|
116 |
|
CMBS |
|
155 |
|
4 |
|
- |
|
24 |
|
- |
|
(118) |
|
65 |
|
6 |
|
CDO/ABS |
|
5,703 |
|
459 |
|
- |
|
(1,322) |
|
- |
|
(6) |
|
4,834 |
|
91 |
|
Total other bond securities |
|
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 |
|
- |
|
Mortgage and other loans receivable |
|
11 |
|
- |
|
- |
|
(6) |
|
- |
|
- |
|
5 |
|
- |
|
Other invested assets |
|
204 |
|
3 |
|
(5) |
|
58 |
|
- |
|
(1) |
|
259 |
|
1 |
|
Total |
$ |
37,666 |
$ |
1,473 |
$ |
1,293 |
$ |
(4,038) |
$ |
682 |
$ |
(1,362) |
$ |
35,714 |
$ |
215 |
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
Realized and |
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains |
|
|
|
|
|
Unrealized |
|
|
|
Purchases, |
|
|
|
|
|
|
|
(Losses) Included |
|
|
|
Fair Value |
|
(Gains) Losses |
|
Other |
|
Sales, |
|
Gross |
|
Gross |
|
Fair Value |
|
in Income on |
|
|
|
Beginning |
|
Included |
|
Comprehensive |
|
Issuances and |
|
Transfers |
|
Transfers |
|
End |
|
Instruments Held |
|
(in millions) |
|
of Period |
|
in Income |
|
Income (Loss) |
Settlements, Net |
|
In |
|
Out |
|
of Period |
|
at End of Period |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits |
$ |
3,033 |
$ |
594 |
$ |
- |
$ |
347 |
$ |
- |
$ |
- |
$ |
3,974 |
$ |
(405) |
|
Derivative liabilities, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
38 |
|
(3) |
|
- |
|
(9) |
|
- |
|
- |
|
26 |
|
3 |
|
Foreign exchange contracts |
|
11 |
|
1 |
|
- |
|
(9) |
|
- |
|
- |
|
3 |
|
(1) |
|
Equity contracts |
|
(58) |
|
(26) |
|
- |
|
15 |
|
- |
|
- |
|
(69) |
|
22 |
|
Credit contracts |
|
329 |
|
(55) |
|
- |
|
(1) |
|
- |
|
- |
|
273 |
|
53 |
|
Other contracts |
|
(11) |
|
(58) |
|
- |
|
56 |
|
(3) |
|
- |
|
(16) |
|
57 |
|
Total derivative liabilities, net(b) |
|
309 |
|
(141) |
|
- |
|
52 |
|
(3) |
|
- |
|
217 |
|
134 |
|
Long-term debt(c) |
|
71 |
|
16 |
|
- |
|
(84) |
|
- |
|
- |
|
3 |
|
- |
|
Total |
$ |
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.
(c) Includes guaranteed investment agreements (GIAs), notes, bonds, loans and mortgages payable.
AIG | Third Quarter 2018 Form 10-Q 25
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
Net realized and unrealized gains and losses included in income related to Level 3 assets and liabilities shown above are reported in the Condensed Consolidated Statements of Income as follows:
|
|
|
Net |
|
Net Realized |
|
|
|
|
|
|
|
Investment |
|
Capital |
|
Other |
|
|
|
(in millions) |
|
Income |
Gains (Losses) |
|
Income |
|
Total |
|
|
Three Months Ended September 30, 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 |
|
Other bond securities |
|
87 |
|
(2) |
|
92 |
|
177 |
|
Other invested assets |
|
2 |
|
1 |
|
(3) |
|
- |
|
Nine Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
Bonds available for sale |
$ |
849 |
$ |
(28) |
$ |
- |
$ |
821 |
|
Other bond securities |
|
259 |
|
- |
|
390 |
|
649 |
|
Other invested assets |
|
5 |
|
(1) |
|
(1) |
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
Net Realized |
|
|
|
|
|
|
|
Investment |
|
Capital |
|
Other |
|
|
|
(in millions) |
|
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 |
|
Derivative liabilities, net |
|
- |
|
(5) |
|
(46) |
|
(51) |
|
Long-term debt |
|
- |
|
- |
|
2 |
|
2 |
|
Nine Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
Policyholder contract deposits |
$ |
- |
$ |
594 |
$ |
- |
$ |
594 |
|
Derivative liabilities, net |
|
- |
|
(13) |
|
(128) |
|
(141) |
|
Long-term debt |
|
- |
|
- |
|
16 |
|
16 |
26 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
The following table presents the gross components of purchases, sales, issuances and settlements, net, shown above, for the three- and nine-month periods ended September 30, 2018 and 2017 related to Level 3 assets and liabilities in the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
Issuances |
|
Purchases, Sales, |
|
|
|
|
|
|
|
|
and |
|
Issuances and |
|
|
(in millions) |
|
Purchases |
|
Sales |
|
Settlements(a) |
|
Settlements, Net(a) |
|
|
Three Months Ended September 30, 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 2018 Form 10-Q 27
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
|
|
|
|
|
|
|
Issuances |
|
Purchases, Sales, |
|
|
|
|
|
|
|
and |
|
Issuances and |
|
(in millions) |
|
Purchases |
|
Sales |
|
Settlements(a) |
|
Settlements, Net(a) |
|
Nine Months Ended September 30, 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, 2018 and 2017, respectively.
(b) Includes GIAs, notes, bonds, loans and mortgages payable.
28 AIG | Third Quarter 2018 Form 10-Q
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, 2018 and 2017 may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities).
Transfers of Level 3 Assets and Liabilities
We record transfers of assets and liabilities into or out of Level 3 classification at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. The Net realized and unrealized gains (losses) included in income or Other comprehensive income (loss) as shown in the table above excludes $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 includes $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.
Transfers of Level 3 Assets
During the three- and nine-month periods ended September 30, 2018 and 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 periods ended September 30, 2018 and 2017, 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, 2018 and 2017.
AIG | Third Quarter 2018 Form 10-Q 29
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS
The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to us, such as data from independent third-party valuation service providers and from internal valuation models. Because input information from third-parties with respect to certain Level 3 instruments (primarily CDO/ABS) may not be reasonably available to us, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:
|
|
Fair Value at |
|
|
|
|
|
|
September 30, |
Valuation |
|
Range |
|
|
(in millions) |
2018 |
Technique |
Unobservable Input(b) |
(Weighted Average) |
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states, municipalities |
|
|
|
|
|
|
and political subdivisions |
$ |
1,439 |
Discounted cash flow |
Yield |
4.04% - 4.81% (4.42%) |
|
|
|
|
|
|
|
|
Corporate debt |
|
727 |
Discounted cash flow |
Yield |
3.55% - 15.26% (9.40%) |
|
|
|
|
|
|
|
|
RMBS(a) |
|
14,257 |
Discounted cash flow |
Constant prepayment rate |
4.51% - 13.02% (8.76%) |
|
|
|
|
|
Loss severity |
39.83% - 73.69% (56.76%) |
|
|
|
|
|
Constant default rate |
2.69% - 7.58% (5.14%) |
|
|
|
|
|
Yield |
3.17% - 5.38% (4.28%) |
|
|
|
|
|
|
|
|
CDO/ABS(a) |
|
4,792 |
Discounted cash flow |
Yield |
4.09% - 5.38% (4.74%) |
|
|
|
|
|
|
|
|
CMBS |
|
461 |
Discounted cash flow |
Yield |
3.09% - 7.20% (5.15%) |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives within |
|
|
|
|
|
|
Policyholder contract deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed minimum withdrawal benefits (GMWB) |
|
1,046 |
Discounted cash flow |
Equity volatility |
6.15% - 48.35% |
|
|
|
|
|
Base lapse rate |
0.16% - 12.60% |
|
|
|
|
|
Dynamic lapse multiplier |
20.00% - 180.00% |
|
|
|
|
|
Mortality multiplier(c) |
40.00% - 153.00% |
|
|
|
|
|
Utilization |
90.00% - 100.00% |
|
|
|
|
|
Equity / interest-rate correlation |
20.00% - 40.00% |
|
|
|
|
|
|
|
|
Index Annuities |
|
1,890 |
Discounted cash flow |
Lapse rate |
0.50% - 40.00% |
|
|
|
|
|
Mortality multiplier(c) |
42.00% - 162.00% |
|
|
|
|
|
Option Budget |
1.00% - 3.00% |
|
|
|
|
|
|
|
|
Indexed Life |
|
414 |
Discounted cash flow |
Base lapse rate |
0.00% - 13.00% |
|
|
|
|
|
Mortality rate |
0.00% - 100.00% |
30 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
Fair Value at |
|
|
|
|
|
|
December 31, |
Valuation |
|
Range |
|
(in millions) |
|
2017 |
Technique |
Unobservable Input(b) |
(Weighted Average) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states, municipalities |
|
|
|
|
|
|
and political subdivisions |
$ |
1,620 |
Discounted cash flow |
Yield |
3.55% - 4.32% (3.94%) |
|
|
|
|
|
|
|
|
Corporate debt |
|
1,086 |
Discounted cash flow |
Yield |
3.26% - 12.22% (7.74%) |
|
|
|
|
|
|
|
|
RMBS(a) |
|
16,156 |
Discounted cash flow |
Constant prepayment rate |
3.97% - 13.42% (8.69%) |
|
|
|
|
|
Loss severity |
43.15% - 77.15% (60.15%) |
|
|
|
|
|
Constant default rate |
3.31% - 8.30% (5.80%) |
|
|
|
|
|
Yield |
2.73% - 5.19% (3.96%) |
|
|
|
|
|
|
|
|
CDO/ABS(a) |
|
5,254 |
Discounted cash flow |
Yield |
3.38% - 4.78% (4.08%) |
|
|
|
|
|
|
|
|
CMBS |
|
487 |
Discounted cash flow |
Yield |
2.22% - 7.77% (4.99%) |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives within |
|
|
|
|
|
|
Policyholder contract deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
GMWB |
|
1,994 |
Discounted cash flow |
Equity volatility |
6.45% - 51.25% |
|
|
|
|
|
Base lapse rate |
0.35% - 14.00% |
|
|
|
|
|
Dynamic lapse multiplier |
30.00% - 170.00% |
|
|
|
|
|
Mortality multiplier(c) |
40.00% - 153.00% |
|
|
|
|
|
Utilization |
90.00% - 100.00% |
|
|
|
|
|
Equity / interest-rate correlation |
20.00% - 40.00% |
|
|
|
|
|
|
|
|
Index Annuities |
|
1,603 |
Discounted cash flow |
Lapse rate |
0.50% - 40.00% |
|
|
|
|
|
Mortality multiplier(c) |
42.00% - 162.00% |
|
|
|
|
|
Option Budget |
1.00% - 4.00% |
|
|
|
|
|
|
|
|
Indexed Life |
|
515 |
Discounted cash flow |
Base lapse rate |
2.00% - 19.00% |
|
|
|
|
|
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 2018 Form 10-Q 31
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
Obligations of States, Municipalities and Political Subdivisions
The significant unobservable input used in the fair value measurement of certain investments in obligations of states, municipalities and political subdivisions is yield. In general, increases in the yield would decrease the fair value of investments in obligations of states, municipalities and political subdivisions.
Corporate Debt
Corporate debt securities included in Level 3 are primarily private placement issuances that are not traded in active markets or that are subject to transfer restrictions. Fair value measurements consider illiquidity and non‑transferability. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of publicly‑traded debt of the issuer or other comparable securities, considering illiquidity and structure. The significant unobservable input used in the fair value measurement of corporate debt is the yield. The yield is affected by the market movements in credit spreads and U.S. Treasury yields. In addition, the migration in credit quality of a given security generally has a corresponding effect on the fair value measurement of the security. For example, a downward migration of credit quality would increase spreads. Holding U.S. Treasury rates constant, an increase in corporate credit spreads would decrease the fair value of corporate debt.
RMBS and CDO/ABS
The significant unobservable inputs used in fair value measurements of RMBS and certain CDO/ABS valued by third‑party valuation service providers are constant prepayment rates (CPR), loss severity, constant default rates (CDR) and yield. A change in the assumptions used for the probability of default will generally be accompanied by a corresponding change in the assumption used for the loss severity and an inverse change in the assumption used for prepayment rates. In general, increases in CPR, loss severity, CDR and yield, in isolation, would result in a decrease in the fair value measurement. Changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship between the directional change of each input is not usually linear.
CMBS
The significant unobservable input used in fair value measurements for CMBS is the yield. Prepayment assumptions for each mortgage pool are factored into the yield. CMBS generally feature a lower degree of prepayment risk than RMBS because commercial mortgages generally contain a penalty for prepayment. In general, increases in the yield would decrease the fair value of CMBS.
Embedded derivatives within Policyholder contract deposits
Embedded derivatives reported within Policyholder contract deposits include GMWB within variable annuity products and interest crediting rates based on market indices within index annuities, indexed life and GICs. For any given contract, assumptions for unobservable inputs vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. The following unobservable inputs are used for valuing embedded derivatives measured at fair value:
• Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. Increases in assumed volatility will generally increase the fair value of both the projected cash flows from rider fees as well as the projected cash flows related to benefit payments. Therefore, the net change in the fair value of the liability may be either a decrease or an increase, depending on the relative changes in projected rider fees and projected benefit payments.
• Equity / interest rate correlation estimates the relationship between changes in equity returns and interest rates in the economic scenario generator used to value our GMWB embedded derivatives. In general, a higher positive correlation assumes that equity markets and interest rates move in a more correlated fashion, which generally increases the fair value of the liability.
• Base lapse rate assumptions are determined by company experience and are adjusted at the contract level using a dynamic lapse function, which reduces the base lapse rate when the contract is in-the-money (when the contract holder’s guaranteed value, as estimated by the company, is worth more than their underlying account value). Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. Increases in assumed lapse rates will generally decrease the fair value of the liability, as fewer policyholders would persist to collect guaranteed withdrawal amounts.
• Mortality rate assumptions, which vary by age and gender, are based on company experience and include a mortality improvement assumption. Increases in assumed mortality rates will decrease the fair value of the liability, while lower mortality rate assumptions will generally increase the fair value of the liability, because guaranteed payments will be made for a longer period of time.
• 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
32 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
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, 2018 |
|
December 31, 2017 |
||||||
|
|
|
|
Fair Value |
|
|
|
Fair Value |
|
|
|
|
|
|
|
Using NAV |
|
|
|
Using NAV |
|
|
|
|
|
|
|
Per Share (or |
|
Unfunded |
|
Per Share (or |
|
Unfunded |
|
|
(in millions) |
Investment Category Includes |
|
its equivalent) |
|
Commitments |
|
its equivalent) |
|
Commitments |
|
|
Investment Category* |
|
|
|
|
|
|
|
|
|
|
|
Private equity funds: |
|
|
|
|
|
|
|
|
|
|
|
Leveraged buyout |
Debt and/or equity investments made as part of a transaction in which assets of mature companies are acquired from the current shareholders, typically with the use of financial leverage |
$ |
700 |
$ |
646 |
|
$ |
1,243 |
$ |
706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate / Infrastructure |
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 |
|
102 |
|
113 |
|
|
134 |
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 |
|
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 |
|
888 |
|
- |
|
|
1,128 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-short |
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 |
|
871 |
|
- |
|
|
1,011 |
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Distressed |
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 |
|
210 |
|
1 |
|
|
231 |
|
4 |
|
Total hedge funds |
|
|
3,006 |
|
9 |
|
|
3,869 |
|
12 |
|
Total |
|
$ |
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 2018 Form 10-Q 33
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, 2018, assuming average original expected lives of 10 years for the funds, 17 percent of the total fair value using net asset value per share (or its equivalent) presented above would have expected remaining lives of three years or less, 40 percent between four and six years and 43 percent between seven and 10 years.
The hedge fund investments included above, which are carried at fair value, are generally redeemable monthly (34 percent), quarterly (34 percent), semi-annually (9 percent) and annually (23 percent), with redemption notices ranging from one day to 180 days. At September 30, 2018, investments representing approximately 52 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.
The following table presents the gains or losses recorded related to the eligible instruments for which we elected the fair value option:
|
|
Gain (Loss) Three Months Ended September 30, |
Gain (Loss) Nine Months Ended September 30, |
||||||
|
|
||||||||
|
(in millions) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
Assets: |
|
|
|
|
|
|
|
|
|
Bond and equity securities |
$ |
122 |
$ |
289 |
$ |
274 |
$ |
1,088 |
|
Alternative investments(a) |
|
131 |
|
129 |
|
355 |
|
406 |
|
Other, including Short-term investments |
|
- |
|
1 |
|
- |
|
1 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
Long-term debt(b) |
|
6 |
|
(18) |
|
74 |
|
(66) |
|
Other liabilities |
|
- |
|
(1) |
|
- |
|
(2) |
|
Total gain |
$ |
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 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, 2018 |
|
December 31, 2017 |
||||||||||
|
|
|
|
Outstanding |
|
|
|
|
|
Outstanding |
|
|
||
|
(in millions) |
Fair Value |
Principal Amount |
Difference |
|
Fair Value |
Principal Amount |
Difference |
||||||
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other loans receivable |
$ |
- |
$ |
- |
$ |
- |
|
$ |
5 |
$ |
5 |
$ |
- |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt* |
$ |
2,311 |
$ |
1,798 |
$ |
513 |
|
$ |
2,888 |
$ |
2,280 |
$ |
608 |
* Includes GIAs, notes, bonds, loans and mortgages payable.
34 AIG | Third Quarter 2018 Form 10-Q
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(a) |
|||||||||||||||
|
|
Non-Recurring Basis |
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|||||||||||||
|
(in millions) |
Level 1 |
Level 2 |
Level 3 |
|
Total |
|
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|||
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments |
$ |
- |
$ |
- |
$ |
344 |
$ |
344 |
|
$ |
- |
$ |
26 |
|
$ |
89 |
$ |
76 |
|
Investments in life settlements |
|
- |
|
- |
|
- |
|
- |
|
|
- |
|
273 |
|
|
- |
|
360 |
|
Other assets |
|
- |
|
- |
|
2 |
|
2 |
|
|
34 |
|
- |
|
|
35 |
|
35 |
|
Total |
$ |
- |
$ |
- |
$ |
346 |
$ |
346 |
|
$ |
34 |
$ |
299 |
|
$ |
124 |
$ |
471 |
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments |
$ |
- |
$ |
- |
$ |
55 |
$ |
55 |
|
|
|
|
|
|
|
|
|
|
|
Investments in life settlements |
|
- |
|
- |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
- |
|
- |
|
- |
|
- |
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
- |
$ |
- |
$ |
55 |
$ |
55 |
|
|
|
|
|
|
|
|
|
|
(a) Impairments in the nine-month period ended September 30, 2017 included $35 million related to Other 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 |
|||||||
|
(in millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Value |
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other loans receivable |
$ |
- |
$ |
108 |
$ |
41,060 |
$ |
41,168 |
$ |
41,878 |
|
Other invested assets |
|
- |
|
771 |
|
6 |
|
777 |
|
773 |
|
Short-term investments |
|
- |
|
5,230 |
|
- |
|
5,230 |
|
5,230 |
|
Cash |
|
2,741 |
|
- |
|
- |
|
2,741 |
|
2,741 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits associated |
|
|
|
|
|
|
|
|
|
|
|
with investment-type contracts |
|
- |
|
349 |
|
122,487 |
|
122,836 |
|
119,493 |
|
Other liabilities |
|
- |
|
1,465 |
|
1 |
|
1,466 |
|
1,466 |
|
Long-term debt |
|
- |
|
24,147 |
|
8,221 |
|
32,368 |
|
32,283 |
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other loans receivable |
$ |
- |
$ |
117 |
$ |
37,644 |
$ |
37,761 |
$ |
37,018 |
|
Other invested assets |
|
- |
|
590 |
|
6 |
|
596 |
|
593 |
|
Short-term investments |
|
- |
|
7,771 |
|
- |
|
7,771 |
|
7,771 |
|
Cash |
|
2,362 |
|
- |
|
- |
|
2,362 |
|
2,362 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits associated |
|
|
|
|
|
|
|
|
|
|
|
with investment-type contracts |
|
- |
|
387 |
|
121,809 |
|
122,196 |
|
114,326 |
|
Other liabilities |
|
- |
|
4,494 |
|
- |
|
4,494 |
|
4,494 |
|
Long-term debt |
|
- |
|
23,930 |
|
4,313 |
|
28,243 |
|
28,752 |
AIG | Third Quarter 2018 Form 10-Q 35
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
6. Investments
The following table presents the amortized cost or cost and fair value of our available for sale securities(a):
|
|
|
|
|
|
|
|
|
|
|
Other-Than- |
|
|
|
Amortized |
|
Gross |
|
Gross |
|
|
|
Temporary |
|
|
|
Cost or |
|
Unrealized |
|
Unrealized |
|
Fair |
|
Impairments |
|
(in millions) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
in AOCI(b) |
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities |
$ |
3,069 |
$ |
101 |
$ |
(77) |
$ |
3,093 |
$ |
- |
|
Obligations of states, municipalities and political subdivisions |
|
16,030 |
|
632 |
|
(150) |
|
16,512 |
|
4 |
|
Non-U.S. governments |
|
15,021 |
|
478 |
|
(280) |
|
15,219 |
|
- |
|
Corporate debt |
|
130,263 |
|
4,302 |
|
(2,681) |
|
131,884 |
|
(11) |
|
Mortgage-backed, asset-backed and collateralized: |
|
|
|
|
|
|
|
|
|
|
|
RMBS |
|
32,825 |
|
2,961 |
|
(560) |
|
35,226 |
|
1,330 |
|
CMBS |
|
12,821 |
|
182 |
|
(312) |
|
12,691 |
|
28 |
|
CDO/ABS |
|
18,018 |
|
189 |
|
(112) |
|
18,095 |
|
17 |
|
Total mortgage-backed, asset-backed and collateralized |
|
63,664 |
|
3,332 |
|
(984) |
|
66,012 |
|
1,375 |
|
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 |
$ |
2,532 |
$ |
160 |
$ |
(36) |
$ |
2,656 |
$ |
- |
|
Obligations of states, municipalities and political subdivisions |
|
17,377 |
|
1,297 |
|
(30) |
|
18,644 |
|
- |
|
Non-U.S. governments |
|
15,059 |
|
717 |
|
(117) |
|
15,659 |
|
- |
|
Corporate debt |
|
126,310 |
|
8,666 |
|
(800) |
|
134,176 |
|
17 |
|
Mortgage-backed, asset-backed and collateralized: |
|
|
|
|
|
|
|
|
|
|
|
RMBS |
|
34,181 |
|
3,273 |
|
(220) |
|
37,234 |
|
1,568 |
|
CMBS |
|
13,538 |
|
408 |
|
(105) |
|
13,841 |
|
42 |
|
CDO/ABS |
|
16,464 |
|
370 |
|
(52) |
|
16,782 |
|
29 |
|
Total mortgage-backed, asset-backed and collateralized |
|
64,183 |
|
4,051 |
|
(377) |
|
67,857 |
|
1,639 |
|
Total bonds available for sale(c) |
|
225,461 |
|
14,891 |
|
(1,360) |
|
238,992 |
|
1,656 |
|
Equity securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
703 |
|
379 |
|
(21) |
|
1,061 |
|
- |
|
Preferred stock |
|
504 |
|
29 |
|
- |
|
533 |
|
- |
|
Mutual funds |
|
98 |
|
16 |
|
- |
|
114 |
|
- |
|
Total equity securities available for sale |
|
1,305 |
|
424 |
|
(21) |
|
1,708 |
|
- |
|
Total |
$ |
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 (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.
(c) At September 30, 2018 and December 31, 2017, bonds available for sale held by us that were below investment grade or not rated totaled $30.6 billion and $31.5 billion, respectively.
36 AIG | Third Quarter 2018 Form 10-Q
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(a):
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|||||||||
|
|
|
|
|
Gross |
|
|
|
|
Gross |
|
|
|
|
Gross |
|
|
|
Fair |
|
Unrealized |
|
|
Fair |
|
Unrealized |
|
|
Fair |
|
Unrealized |
|
(in millions) |
|
Value |
|
Losses |
|
|
Value |
|
Losses |
|
|
Value |
|
Losses |
|
September 30, 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 |
$ |
770 |
$ |
23 |
|
$ |
332 |
$ |
13 |
|
$ |
1,102 |
$ |
36 |
|
Obligations of states, municipalities and political |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions |
|
586 |
|
6 |
|
|
646 |
|
24 |
|
|
1,232 |
|
30 |
|
Non-U.S. governments |
|
3,511 |
|
54 |
|
|
857 |
|
63 |
|
|
4,368 |
|
117 |
|
Corporate debt |
|
15,578 |
|
453 |
|
|
7,291 |
|
347 |
|
|
22,869 |
|
800 |
|
RMBS |
|
6,212 |
|
99 |
|
|
3,790 |
|
121 |
|
|
10,002 |
|
220 |
|
CMBS |
|
3,408 |
|
46 |
|
|
1,389 |
|
59 |
|
|
4,797 |
|
105 |
|
CDO/ABS |
|
1,455 |
|
24 |
|
|
822 |
|
28 |
|
|
2,277 |
|
52 |
|
Total bonds available for sale |
|
31,520 |
|
705 |
|
|
15,127 |
|
655 |
|
|
46,647 |
|
1,360 |
|
Equity securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
136 |
|
21 |
|
|
- |
|
- |
|
|
136 |
|
21 |
|
Mutual funds |
|
1 |
|
- |
|
|
- |
|
- |
|
|
1 |
|
- |
|
Total equity securities available for sale |
|
137 |
|
21 |
|
|
- |
|
- |
|
|
137 |
|
21 |
|
Total |
$ |
31,657 |
$ |
726 |
|
$ |
15,127 |
$ |
655 |
|
$ |
46,784 |
$ |
1,381 |
(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.
At September 30, 2018, we held 16,950 individual fixed maturity securities that were in an unrealized loss position, of which 3,008 individual fixed maturity securities were in a continuous unrealized loss position for 12 months or more. We did not recognize the unrealized losses in earnings on these fixed maturity securities at September 30, 2018 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-Q 37
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
Contractual Maturities of Fixed Maturity Securities Available for Sale
The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity:
|
|
Total Fixed Maturity Securities |
|
Fixed Maturity Securities in a Loss |
||||||
|
|
Available for Sale |
|
Position Available for Sale |
||||||
|
(in millions) |
|
Amortized Cost |
|
Fair Value |
|
|
Amortized Cost |
|
Fair Value |
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
$ |
8,421 |
$ |
8,559 |
|
$ |
2,043 |
$ |
2,032 |
|
Due after one year through five years |
|
48,626 |
|
49,416 |
|
|
16,406 |
|
16,042 |
|
Due after five years through ten years |
|
42,674 |
|
42,475 |
|
|
26,927 |
|
25,844 |
|
Due after ten years |
|
64,662 |
|
66,258 |
|
|
33,219 |
|
31,489 |
|
Mortgage-backed, asset-backed and collateralized |
|
63,664 |
|
66,012 |
|
|
29,852 |
|
28,868 |
|
Total |
$ |
228,047 |
$ |
232,720 |
|
$ |
108,447 |
$ |
104,275 |
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
$ |
7,932 |
$ |
8,071 |
|
$ |
1,526 |
$ |
1,515 |
|
Due after one year through five years |
|
47,179 |
|
49,093 |
|
|
7,764 |
|
7,571 |
|
Due after five years through ten years |
|
42,617 |
|
43,944 |
|
|
11,559 |
|
11,143 |
|
Due after ten years |
|
63,550 |
|
70,027 |
|
|
9,705 |
|
9,342 |
|
Mortgage-backed, asset-backed and collateralized |
|
64,183 |
|
67,857 |
|
|
17,453 |
|
17,076 |
|
Total |
$ |
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, |
||||||||||||||
|
|
|
2018 |
|
2017 |
2018 |
|
2017 |
|||||||||
|
|
|
Gross |
|
Gross |
|
Gross |
|
Gross |
|
Gross |
|
Gross |
|
Gross |
|
Gross |
|
|
Realized |
Realized |
Realized |
Realized |
Realized |
Realized |
Realized |
Realized |
||||||||
|
(in millions) |
|
Gains |
|
Losses |
|
Gains |
|
Losses |
|
Gains |
|
Losses |
|
Gains |
|
Losses |
|
Fixed maturity securities |
$ |
82 |
$ |
71 |
$ |
93 |
$ |
39 |
$ |
252 |
$ |
244 |
$ |
637 |
$ |
263 |
|
Equity securities |
|
- |
|
- |
|
6 |
|
2 |
|
16 |
|
- |
|
106 |
|
20 |
|
Total |
$ |
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.
38 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
Other Securities Measured at Fair Value
The following table presents the fair value of other securities measured at fair value based on our election of the fair value option:
|
|
|
September 30, 2018 |
|
|
|
December 31, 2017 |
|
||
|
|
|
Fair |
Percent |
|
|
|
Fair |
Percent |
|
|
(in millions) |
|
Value |
of Total |
|
|
|
Value |
of Total |
|
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities |
$ |
2,634 |
21 |
% |
|
$ |
2,802 |
21 |
% |
|
Non-U.S. governments |
|
49 |
- |
|
|
|
57 |
1 |
|
|
Corporate debt |
|
1,707 |
13 |
|
|
|
1,909 |
14 |
|
|
Mortgage-backed, asset-backed and collateralized: |
|
|
|
|
|
|
|
|
|
|
RMBS |
|
1,660 |
13 |
|
|
|
1,885 |
14 |
|
|
CMBS |
|
401 |
3 |
|
|
|
559 |
4 |
|
|
CDO/ABS and other collateralized* |
|
4,969 |
39 |
|
|
|
5,560 |
42 |
|
|
Total mortgage-backed, asset-backed and collateralized |
|
7,030 |
55 |
|
|
|
8,004 |
60 |
|
|
Total fixed maturity securities |
|
11,420 |
89 |
|
|
|
12,772 |
96 |
|
|
Equity securities |
|
1,443 |
11 |
|
|
|
589 |
4 |
|
|
Total |
$ |
12,863 |
100 |
% |
|
$ |
13,361 |
100 |
% |
* Includes $186 million and $251 million of U.S. government agency-backed ABS at September 30, 2018 and December 31, 2017, respectively.
The following table summarizes the carrying amounts of other invested assets:
|
|
|
September 30, |
|
December 31, |
|
(in millions) |
|
2018 |
|
2017 |
|
Alternative investments(a) (b) |
$ |
9,655 |
$ |
11,308 |
|
Investment real estate(c) |
|
8,819 |
|
8,258 |
|
All other investments |
|
1,265 |
|
1,256 |
|
Total |
$ |
19,739 |
$ |
20,822 |
(a) At September 30, 2018, included hedge funds of $4.6 billion, private equity funds of $4.6 billion, and affordable housing partnerships of $434 million. At December 31, 2017, included hedge funds of $5.8 billion, private equity funds of $5.0 billion, and affordable housing partnerships of $543 million.
(b) At September 30, 2018, approximately 52 percent and 21 percent of our hedge fund portfolio is available for redemption in 2018 and 2019, respectively, the remaining 27 percent will be available for redemption between 2020 and 2027.
(c) Net of accumulated depreciation of $553 million and $515 million at September 30, 2018 and December 31, 2017, respectively.
The following table presents the components of Net 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 fair value of all equity securities is included in Net investment income.
AIG | Third Quarter 2018 Form 10-Q 39
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
(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 |
|||||||
|
|
September 30, |
|
September 30, |
|||||||
|
(in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
|
2017 |
|
Sales of fixed maturity securities |
$ |
11 |
$ |
54 |
|
$ |
8 |
|
$ |
374 |
|
Sales of equity securities |
|
- |
|
4 |
|
|
16 |
|
|
86 |
|
Other-than-temporary impairments: |
|
|
|
|
|
|
|
|
|
|
|
Severity |
|
- |
|
- |
|
|
- |
|
|
(2) |
|
Change in intent |
|
(3) |
|
(1) |
|
|
(52) |
|
|
(9) |
|
Foreign currency declines |
|
(1) |
|
(1) |
|
|
(13) |
|
|
(11) |
|
Issuer-specific credit events |
|
(30) |
|
(85) |
|
|
(92) |
|
|
(197) |
|
Adverse projected cash flows |
|
(1) |
|
(1) |
|
|
(1) |
|
|
(4) |
|
Provision for loan losses |
|
(23) |
|
(38) |
|
|
(73) |
|
|
(56) |
|
Foreign exchange transactions |
|
(21) |
|
66 |
|
|
(155) |
|
|
299 |
|
Variable annuity embedded derivatives, net of related hedges |
|
(185) |
|
(430) |
|
|
(2) |
|
|
(1,023) |
|
All other derivatives and hedge accounting |
|
(1) |
|
(136) |
|
|
149 |
|
|
(217) |
|
Impairments on investments in life settlements |
|
- |
|
(273) |
|
|
- |
|
|
(360) |
|
Loss on sale of private equity funds |
|
(311) |
|
- |
|
|
(311) |
|
|
- |
|
Other |
|
54 |
|
(81) |
|
|
161 |
|
|
14 |
|
Net realized capital losses |
$ |
(511) |
$ |
(922) |
|
$ |
(365) |
|
$ |
(1,106) |
Change in Unrealized Appreciation (Depreciation) of Investments
The following table presents the increase (decrease) in unrealized appreciation (depreciation) of our available for sale securities and other investments:
|
|
Three Months Ended |
|
Nine Months Ended |
||||||
|
|
September 30, |
|
September 30, |
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
Increase (decrease) in unrealized appreciation (depreciation) of investments: |
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities |
$ |
(920) |
$ |
1,059 |
|
$ |
(8,858) |
$ |
4,332 |
|
Equity securities(a) |
|
- |
|
9 |
|
|
- |
|
52 |
|
Other investments |
|
(31) |
|
10 |
|
|
(59) |
|
(127) |
|
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 |
40 AIG | Third Quarter 2018 Form 10-Q
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 2017 Annual Report.
Credit Impairments
The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized in earnings for available for sale fixed maturity securities:
|
|
Three Months Ended |
|
Nine Months Ended |
||||||
|
|
September 30, |
|
September 30, |
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
Balance, beginning of period |
$ |
188 |
$ |
762 |
|
$ |
526 |
$ |
1,098 |
|
Increases due to: |
|
|
|
|
|
|
|
|
|
|
Credit impairments on new securities subject to impairment losses |
|
15 |
|
58 |
|
|
32 |
|
116 |
|
Additional credit impairments on previously impaired securities |
|
16 |
|
12 |
|
|
61 |
|
49 |
|
Reductions due to: |
|
|
|
|
|
|
|
|
|
|
Credit impaired securities fully disposed for which there was no |
|
|
|
|
|
|
|
|
|
|
prior intent or requirement to sell |
|
(12) |
|
(44) |
|
|
(143) |
|
(99) |
|
Accretion on securities previously impaired due to credit* |
|
(164) |
|
(147) |
|
|
(433) |
|
(523) |
|
Balance, end of period |
$ |
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 |
|
|
Contractually required payments (principal and interest) |
$ |
36,640 |
|
Cash flows expected to be collected* |
|
30,077 |
|
Recorded investment in acquired securities |
|
20,294 |
* Represents undiscounted expected cash flows, including both principal and interest.
AIG | Third Quarter 2018 Form 10-Q 41
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
|
(in millions) |
September 30, 2018 |
December 31, 2017 |
||
|
Outstanding principal balance |
$ |
13,060 |
$ |
14,718 |
|
Amortized cost |
|
9,087 |
|
10,492 |
|
Fair value |
|
10,941 |
|
12,293 |
The following table presents activity for the accretable yield on PCI securities:
|
|
Three Months Ended |
Nine Months Ended |
||||||
|
|
September 30, |
September 30, |
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
Balance, beginning of period |
$ |
7,461 |
$ |
7,465 |
$ |
7,501 |
$ |
7,498 |
|
Newly purchased PCI securities |
|
5 |
|
16 |
|
32 |
|
117 |
|
Disposals |
|
- |
|
- |
|
- |
|
(18) |
|
Accretion |
|
(176) |
|
(193) |
|
(553) |
|
(609) |
|
Effect of changes in interest rate indices |
|
15 |
|
(74) |
|
189 |
|
(188) |
|
Net reclassification from (to) non-accretable difference, |
|
|
|
|
|
|
|
|
|
including effects of prepayments |
|
93 |
|
172 |
|
229 |
|
586 |
|
Balance, end of period |
$ |
7,398 |
$ |
7,386 |
$ |
7,398 |
$ |
7,386 |
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, 2018 |
|
December 31, 2017 |
|
Fixed maturity securities available for sale |
$ |
1,247 |
$ |
2,911 |
|
Other bond securities, at fair value |
$ |
136 |
$ |
1,585 |
At September 30, 2018 and December 31, 2017, amounts borrowed under repurchase and securities lending agreements totaled $1.5 billion and $4.5 billion, respectively.
42 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 6. Investments
The following table presents the fair value of securities pledged under our repurchase agreements by collateral type and by remaining contractual maturity:
|
|
Remaining Contractual Maturity of the Agreements |
|||||||||||
|
(in millions) |
Overnight and Continuous |
|
up to 30 days |
|
31 - 90 days |
|
91 - 364 days |
|
365 days or greater |
|
Total |
|
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. governments |
$ |
- |
$ |
79 |
$ |
- |
$ |
- |
$ |
- |
$ |
79 |
|
Corporate debt |
|
- |
|
110 |
|
1 |
|
- |
|
- |
|
111 |
|
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities |
|
24 |
|
- |
|
- |
|
- |
|
- |
|
24 |
|
Non-U.S. governments |
|
- |
|
3 |
|
- |
|
- |
|
- |
|
3 |
|
Corporate debt |
|
- |
|
55 |
|
54 |
|
- |
|
- |
|
109 |
|
Total |
$ |
24 |
$ |
247 |
$ |
55 |
$ |
- |
$ |
- |
$ |
326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
- |
|
- |
|
11 |
|
- |
|
- |
|
11 |
|
Corporate debt |
|
- |
|
387 |
|
1,065 |
|
- |
|
- |
|
1,452 |
|
Total |
$ |
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 |
|||||||||||
|
(in millions) |
|
Overnight and Continuous |
|
up to 30 days |
|
31 - 90 days |
|
91 - 364 days |
|
365 days or greater |
|
Total |
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. governments |
$ |
- |
$ |
- |
$ |
82 |
$ |
22 |
$ |
- |
$ |
104 |
|
Corporate debt |
|
- |
|
378 |
|
467 |
|
108 |
|
- |
|
953 |
|
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. governments |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Corporate debt |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Total |
$ |
- |
$ |
378 |
$ |
549 |
$ |
130 |
$ |
- |
$ |
1,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. governments |
$ |
- |
$ |
- |
$ |
18 |
$ |
- |
$ |
- |
$ |
18 |
|
Corporate debt |
|
- |
|
588 |
|
2,231 |
|
- |
|
- |
|
2,819 |
|
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. governments |
|
- |
|
- |
|
22 |
|
- |
|
- |
|
22 |
|
Corporate debt |
|
- |
|
- |
|
56 |
|
- |
|
- |
|
56 |
|
Total |
$ |
- |
$ |
588 |
$ |
2,327 |
$ |
- |
$ |
- |
$ |
2,915 |
AIG | Third Quarter 2018 Form 10-Q 43
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, 2018 |
|
December 31, 2017 |
|
Securities collateral pledged to us |
$ |
1,324 |
$ |
2,227 |
|
Amount sold or repledged by us |
$ |
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 September 30, 2018 and December 31, 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 $205 million and $93 million of stock in FHLBs at September 30, 2018 and December 31, 2017, respectively. In addition, our subsidiaries have pledged securities available for sale and residential loans associated with borrowings and funding agreements from FHLBs, with a fair value of $4.2 billion and $2.0 billion, respectively, at September 30, 2018 and $2.7 billion and $471 million, respectively, at December 31, 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 $1.7 billion and $2.0 billion at September 30, 2018 and December 31, 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 $155 million and $255 million, comprised of bonds available for sale and short term investments at September 30, 2018 and December 31, 2017, respectively.
44 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 7. Lending Activities
7. Lending Activities
The following table presents the composition of Mortgage and other loans receivable, net:
|
|
September 30, |
|
December 31, |
|
|
(in millions) |
|
2018 |
|
2017 |
|
Commercial mortgages* |
$ |
32,082 |
$ |
28,596 |
|
Residential mortgages |
|
6,530 |
|
5,398 |
|
Life insurance policy loans |
|
2,178 |
|
2,295 |
|
Commercial loans, other loans and notes receivable |
|
1,467 |
|
1,056 |
|
Total mortgage and other loans receivable |
|
42,257 |
|
37,345 |
|
Allowance for credit losses |
|
(379) |
|
(322) |
|
Mortgage and other loans receivable, net |
$ |
41,878 |
$ |
37,023 |
* Commercial mortgages primarily represent loans for apartments, offices and retail properties, with exposures in New York and California representing the largest geographic concentrations (aggregating approximately 22 percent and 11 percent, respectively, at September 30, 2018, and 23 percent and 12 percent, respectively, at December 31, 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) |
|||||||
|
(in millions) |
|
>1.20X |
|
1.00X - 1.20X |
|
<1.00X |
|
Total |
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
Loan-to-Value Ratios(b) |
|
|
|
|
|
|
|
|
|
Less than 65% |
$ |
17,986 |
$ |
2,508 |
$ |
239 |
$ |
20,733 |
|
65% to 75% |
|
9,115 |
|
302 |
|
258 |
|
9,675 |
|
76% to 80% |
|
831 |
|
8 |
|
15 |
|
854 |
|
Greater than 80% |
|
572 |
|
106 |
|
142 |
|
820 |
|
Total commercial mortgages |
$ |
28,504 |
$ |
2,924 |
$ |
654 |
$ |
32,082 |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
Loan-to-Value Ratios(b) |
|
|
|
|
|
|
|
|
|
Less than 65% |
$ |
18,000 |
$ |
1,525 |
$ |
351 |
$ |
19,876 |
|
65% to 75% |
|
6,038 |
|
193 |
|
184 |
|
6,415 |
|
76% to 80% |
|
569 |
|
40 |
|
- |
|
609 |
|
Greater than 80% |
|
1,416 |
|
206 |
|
74 |
|
1,696 |
|
Total commercial mortgages |
$ |
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 1.9X and 2.1X at September 30, 2018 and December 31, 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 September 30, 2018, and December 31, 2017, respectively.
AIG | Third Quarter 2018 Form 10-Q 45
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 7. Lending Activities
The following table presents the credit quality performance indicators for commercial mortgages:
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
of |
|
Class |
|
|
of |
|
|||||||||||
|
(dollars in millions) |
Loans |
|
Apartments |
|
Offices |
|
Retail |
Industrial |
|
Hotel |
|
Others |
|
Total(c) |
Total $ |
|
||
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Performance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In good standing |
763 |
|
$ |
10,393 |
$ |
9,257 |
$ |
5,333 |
$ |
3,002 |
$ |
2,531 |
$ |
1,422 |
$ |
31,938 |
100 |
% |
|
Restructured(a) |
4 |
|
|
- |
|
113 |
|
- |
|
15 |
|
16 |
|
- |
|
144 |
- |
|
|
90 days or less delinquent |
- |
|
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
- |
|
|
>90 days delinquent or in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
process of foreclosure |
- |
|
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
- |
|
|
Total(b) |
767 |
|
$ |
10,393 |
$ |
9,370 |
$ |
5,333 |
$ |
3,017 |
$ |
2,547 |
$ |
1,422 |
$ |
32,082 |
100 |
% |
|
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific |
|
|
$ |
- |
$ |
2 |
$ |
- |
$ |
- |
$ |
1 |
$ |
- |
$ |
3 |
- |
% |
|
General |
|
|
|
106 |
|
96 |
|
46 |
|
12 |
|
19 |
|
14 |
|
293 |
1 |
|
|
Total allowance for credit losses |
|
|
$ |
106 |
$ |
98 |
$ |
46 |
$ |
12 |
$ |
20 |
$ |
14 |
$ |
296 |
1 |
% |
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Performance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In good standing |
778 |
|
$ |
8,163 |
$ |
8,585 |
$ |
5,338 |
$ |
2,023 |
$ |
2,373 |
$ |
1,960 |
$ |
28,442 |
99 |
% |
|
Restructured(a) |
5 |
|
|
- |
|
115 |
|
23 |
|
- |
|
16 |
|
- |
|
154 |
1 |
|
|
90 days or less delinquent |
- |
|
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
- |
|
|
>90 days delinquent or in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
process of foreclosure |
- |
|
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
- |
|
|
Total(b) |
783 |
|
$ |
8,163 |
$ |
8,700 |
$ |
5,361 |
$ |
2,023 |
$ |
2,389 |
$ |
1,960 |
$ |
28,596 |
100 |
% |
|
Allowance for credit losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific |
|
|
$ |
- |
$ |
3 |
$ |
1 |
$ |
- |
$ |
1 |
$ |
- |
$ |
5 |
- |
% |
|
General |
|
|
|
72 |
|
94 |
|
37 |
|
6 |
|
15 |
|
18 |
|
242 |
1 |
|
|
Total allowance for credit losses |
|
|
$ |
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 2017 Annual Report.
(b) Does not reflect allowance for credit losses.
(c) Our commercial mortgage loan portfolio is current as to payments of principal and interest, for both periods presented. There were no significant amounts of nonperforming commercial mortgages (defined as those loans where payment of contractual principal or interest is more than 90 days past due) during any of the periods presented.
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 2017 Annual Report
The following table presents a rollforward of the changes in the allowance for losses on Mortgage and other loans receivable:
|
|
|
|
|
2018 |
|
2017 |
|||||||||||||
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
Commercial |
|
Other |
|
|
|
|
Commercial |
|
Other |
|
|
|
(in millions) |
|
|
|
|
|
|
|
Mortgages |
|
Loans |
|
Total |
|
|
Mortgages |
|
Loans |
|
Total |
|
Allowance, beginning of year |
|
|
|
|
|
|
$ |
247 |
$ |
75 |
$ |
322 |
|
$ |
194 |
$ |
103 |
$ |
297 |
|
Loans charged off |
|
|
|
|
|
|
|
(17) |
|
- |
|
(17) |
|
|
(5) |
|
(2) |
|
(7) |
|
Recoveries of loans previously charged off |
|
|
|
|
|
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
|
Net charge-offs |
|
|
|
|
|
|
|
(17) |
|
- |
|
(17) |
|
|
(5) |
|
(2) |
|
(7) |
|
Provision for loan losses |
|
|
|
|
|
|
|
66 |
|
8 |
|
74 |
|
|
75 |
|
(20) |
|
55 |
|
Other |
|
|
|
|
|
|
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
Allowance, end of period |
|
|
|
|
|
|
$ |
296 * |
$ |
83 |
$ |
379 |
|
$ |
264 * |
$ |
81 |
$ |
345 |
* Of the total allowance, $3 million and $35 million relate to individually assessed credit losses on $25 million and $342 million of commercial mortgages at September 30, 2018 and 2017, respectively.
46 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 7. Lending Activities
During the nine-month periods ended September 30, 2018 and 2017, loans with a carrying value of $15 million and $25 million, respectively, were modified in troubled debt restructurings.
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) |
|
Affordable Housing Partnerships |
|
Other |
|
Total |
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale |
$ |
- |
$ |
8,130 |
$ |
- |
$ |
- |
$ |
8,130 |
|
Other bond securities |
|
- |
|
4,010 |
|
- |
|
2 |
|
4,012 |
|
Mortgage and other loans receivable |
|
- |
|
3,424 |
|
- |
|
- |
|
3,424 |
|
Other invested assets |
|
1,696 |
|
- |
|
3,231 |
|
25 |
|
4,952 |
|
Other(a) |
|
259 |
|
1,448 |
|
428 |
|
82 |
|
2,217 |
|
Total assets(b) |
$ |
1,955 |
$ |
17,012 |
$ |
3,659 |
$ |
109 |
$ |
22,735 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
$ |
785 |
$ |
2,858 |
$ |
1,922 |
$ |
5 |
$ |
5,570 |
|
Other (c) |
|
138 |
|
126 |
|
172 |
|
23 |
|
459 |
|
Total liabilities |
$ |
923 |
$ |
2,984 |
$ |
2,094 |
$ |
28 |
$ |
6,029 |
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale |
$ |
- |
$ |
9,632 |
$ |
- |
$ |
- |
$ |
9,632 |
|
Other bond securities |
|
- |
|
4,518 |
|
- |
|
3 |
|
4,521 |
|
Mortgage and other loans receivable |
|
- |
|
2,290 |
|
- |
|
- |
|
2,290 |
|
Other invested assets |
|
1,365 |
|
206 |
|
3,087 |
|
25 |
|
4,683 |
|
Other(a) |
|
302 |
|
1,481 |
|
350 |
|
85 |
|
2,218 |
|
Total assets(b) |
$ |
1,667 |
$ |
18,127 |
$ |
3,437 |
$ |
113 |
$ |
23,344 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
$ |
680 |
$ |
1,624 |
$ |
1,825 |
$ |
5 |
$ |
4,134 |
|
Other(c) |
|
144 |
|
244 |
|
181 |
|
26 |
|
595 |
|
Total liabilities |
$ |
824 |
$ |
1,868 |
$ |
2,006 |
$ |
31 |
$ |
4,729 |
(a) Comprised primarily of Short-term investments and Other assets at September 30, 2018 and December 31, 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, 2018 and December 31, 2017.
(d) At September 30, 2018 and December 31, 2017, off-balance sheet exposure primarily consisting of commitments to real estate and investment entities was $227 million and $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 2018 Form 10-Q 47
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 8. Variable Interest Entities
We calculate our maximum exposure to loss to be (i) the amount invested in the debt or equity of the VIE, (ii) the notional amount of VIE assets or liabilities where we have also provided credit protection to the VIE with the VIE as the referenced obligation, and (iii) other commitments and guarantees to the VIE. Interest holders in VIEs sponsored by us generally have recourse only to the assets and cash flows of the VIEs and do not have recourse to us, except in limited circumstances when we have provided a guarantee to the VIE’s interest holders.
The following table presents total assets of unconsolidated VIEs in which we hold a variable interest, as well as our maximum exposure to loss associated with these VIEs:
|
|
|
|
Maximum Exposure to Loss |
||||||
|
|
|
Total VIE |
|
On-Balance |
|
Off-Balance |
|
|
|
|
(in millions) |
|
Assets |
|
Sheet(b) |
|
Sheet |
|
|
Total |
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
Real estate and investment entities(a) |
$ |
322,117 |
$ |
7,902 |
$ |
1,994 |
|
$ |
9,896 |
|
Affordable housing partnerships |
|
4,116 |
|
606 |
|
- |
|
|
606 |
|
Other |
|
2,705 |
|
260 |
|
1,222 |
(c) |
|
1,482 |
|
Total |
$ |
328,938 |
$ |
8,768 |
$ |
3,216 |
|
$ |
11,984 |
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
Real estate and investment entities(a) |
$ |
380,030 |
$ |
9,253 |
$ |
2,043 |
|
$ |
11,296 |
|
Affordable housing partnerships |
|
4,468 |
|
725 |
|
- |
|
|
725 |
|
Other |
|
2,703 |
|
254 |
|
1,205 |
(c) |
|
1,459 |
|
Total |
$ |
387,201 |
$ |
10,232 |
$ |
3,248 |
|
$ |
13,480 |
(a) Comprised primarily of hedge funds and private equity funds.
(b) At September 30, 2018 and December 31, 2017, $8.5 billion and $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 2017 Annual Report.
We use derivatives and other financial instruments as part of our financial risk management programs and as part of our investment operations.
For a discussion of our accounting policies and procedures regarding derivatives and hedge accounting see Note 11 to the Consolidated Financial Statements in the 2017 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.
48 AIG | Third Quarter 2018 Form 10-Q
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, 2018 |
|
December 31, 2017 |
||||||||||||||||
|
|
Gross Derivative Assets |
|
Gross Derivative Liabilities |
|
Gross Derivative Assets |
|
Gross Derivative Liabilities |
||||||||||||
|
|
|
Notional |
|
Fair |
|
|
Notional |
|
Fair |
|
|
Notional |
|
Fair |
|
|
Notional |
|
Fair |
|
(in millions) |
|
Amount |
|
Value |
|
|
Amount |
|
Value |
|
|
Amount |
|
Value |
|
|
Amount |
|
Value |
|
Derivatives designated as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedging instruments:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
$ |
75 |
$ |
1 |
|
$ |
811 |
$ |
23 |
|
$ |
- |
$ |
- |
|
$ |
838 |
$ |
15 |
|
Foreign exchange contracts |
|
4,323 |
|
241 |
|
|
4,173 |
|
269 |
|
|
2,823 |
|
173 |
|
|
4,783 |
|
350 |
|
Equity contracts |
|
- |
|
- |
|
|
- |
|
- |
|
|
- |
|
- |
|
|
159 |
|
19 |
|
Derivatives not designated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as hedging instruments:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
36,841 |
|
2,504 |
|
|
27,131 |
|
2,096 |
|
|
37,751 |
|
2,171 |
|
|
26,461 |
|
2,185 |
|
Foreign exchange contracts |
|
8,877 |
|
686 |
|
|
8,282 |
|
818 |
|
|
6,305 |
|
658 |
|
|
11,093 |
|
895 |
|
Equity contracts |
|
18,826 |
|
340 |
|
|
1,585 |
|
5 |
|
|
19,975 |
|
522 |
|
|
1,130 |
|
2 |
|
Credit contracts(b) |
|
3 |
|
1 |
|
|
1,418 |
|
252 |
|
|
4 |
|
1 |
|
|
1,365 |
|
277 |
|
Other contracts(c) |
|
38,292 |
|
15 |
|
|
60 |
|
3 |
|
|
39,829 |
|
20 |
|
|
59 |
|
5 |
|
Total derivatives, gross |
$ |
107,237 |
$ |
3,788 |
|
$ |
43,460 |
$ |
3,466 |
|
$ |
106,687 |
$ |
3,545 |
|
$ |
45,888 |
$ |
3,748 |
|
Counterparty netting(d) |
|
|
|
(1,874) |
|
|
|
|
(1,874) |
|
|
|
|
(1,464) |
|
|
|
|
(1,464) |
|
Cash collateral(e) |
|
|
|
(964) |
|
|
|
|
(290) |
|
|
|
|
(1,159) |
|
|
|
|
(1,249) |
|
Total derivatives on condensed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated balance sheets(f) |
|
|
$ |
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, 2018 and December 31, 2017, included CDSs on super senior multi-sector CDOs with a net notional amount of $616 million and $685 million (fair value liability of $232 million and $254 million), respectively. The net notional amount represents the maximum exposure to loss on the portfolio. As of September 30, 2018 and December 31, 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 embedded derivatives. Derivative instrument assets and liabilities are recorded in Other Assets and Liabilities, respectively. Fair value of assets related to bifurcated embedded derivatives was zero at both September 30, 2018 and December 31, 2017. Fair value of liabilities related to bifurcated embedded derivatives was $3.4 billion and $4.1 billion, respectively, at September 30, 2018 and December 31, 2017. A bifurcated embedded derivative is generally presented with the host contract in the Condensed Consolidated Balance Sheets. Embedded derivatives are primarily related to guarantee features in variable annuity products, which include equity and interest rate components.
AIG | Third Quarter 2018 Form 10-Q 49
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.
Collateral posted by us to third parties for derivative transactions was $2.0 billion and $2.9 billion at September 30, 2018 and December 31, 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 $1.2 billion and $1.3 billion at September 30, 2018 and December 31, 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.
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, 2018, we recognized a gain of $28 million and $27 million, respectively, and for the three- and nine-month periods ended September 30, 2017, we recognized losses of $39 million and $87 million, respectively, included in Change in foreign currency translation adjustment in Other comprehensive income related to the net investment hedge relationships.
A qualitative methodology is utilized to assess hedge effectiveness for net investment hedges, while regression analysis is employed for all other hedges.
50 AIG | Third Quarter 2018 Form 10-Q
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: |
||||||||
|
|
Hedging |
Hedged |
|
Hedge |
Excluded |
|
|
||||
|
(in millions) |
Derivatives(a) |
Items |
|
Ineffectiveness |
Components |
Other(b) |
|||||
|
Three Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
$ |
(1) |
$ |
1 |
|
$ |
- |
$ |
- |
$ |
- |
|
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
|
(11) |
|
16 |
|
|
- |
|
5 |
|
- |
|
Other income |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
Equity contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
Three Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
$ |
(1) |
$ |
1 |
|
$ |
- |
$ |
- |
$ |
- |
|
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
|
(157) |
|
142 |
|
|
- |
|
(15) |
|
- |
|
Other income |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
Equity contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
|
(3) |
|
2 |
|
|
- |
|
(1) |
|
- |
|
Nine Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
$ |
(9) |
$ |
10 |
|
$ |
1 |
$ |
- |
$ |
- |
|
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
|
184 |
|
(175) |
|
|
- |
|
9 |
|
- |
|
Other income |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
Equity contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
Nine Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
$ |
1 |
$ |
(1) |
|
$ |
- |
$ |
- |
$ |
- |
|
Foreign exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
|
(318) |
|
332 |
|
|
- |
|
14 |
|
- |
|
Other income |
|
- |
|
4 |
|
|
- |
|
- |
|
4 |
|
Equity contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized capital gains/(losses) |
|
(29) |
|
26 |
|
|
- |
|
(3) |
|
- |
(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 2018 Form 10-Q 51
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 9. Derivatives and Hedge Accounting
Derivatives Not Designated as Hedging Instruments
The following table presents the effect of derivative instruments not designated as hedging instruments in the Condensed Consolidated Statements of Income:
|
|
Gains (Losses) Recognized in Earnings |
||||||||
|
|
Three Months Ended |
|
Nine Months Ended |
||||||
|
|
September 30, |
|
September 30, |
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
By Derivative Type: |
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
$ |
(270) |
$ |
(18) |
|
$ |
(892) |
$ |
81 |
|
Foreign exchange contracts |
|
43 |
|
(98) |
|
|
295 |
|
(220) |
|
Equity contracts |
|
(199) |
|
(233) |
|
|
(386) |
|
(723) |
|
Credit contracts |
|
6 |
|
19 |
|
|
18 |
|
55 |
|
Other contracts |
|
18 |
|
19 |
|
|
52 |
|
55 |
|
Embedded derivatives |
|
229 |
|
(213) |
|
|
1,164 |
|
(326) |
|
Total |
$ |
(173) |
$ |
(524) |
|
$ |
251 |
$ |
(1,078) |
|
By Classification: |
|
|
|
|
|
|
|
|
|
|
Policy fees |
$ |
17 |
$ |
20 |
|
$ |
51 |
$ |
59 |
|
Net investment income |
|
- |
|
(3) |
|
|
(3) |
|
(10) |
|
Net realized capital gains (losses) |
|
(223) |
|
(550) |
|
|
133 |
|
(1,250) |
|
Other income |
|
35 |
|
8 |
|
|
76 |
|
121 |
|
Policyholder benefits and claims incurred |
|
(2) |
|
1 |
|
|
(6) |
|
2 |
|
Total |
$ |
(173) |
$ |
(524) |
|
$ |
251 |
$ |
(1,078) |
Credit Risk-Related Contingent Features
We estimate that at September 30, 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 $49 million. The aggregate fair value of our derivatives that were in a net liability position and that contain such credit risk-related contingencies which can be triggered below our long-term senior debt ratings of BBB+ or Baa1 was approximately $421 million and $572 million at September 30, 2018 and December 31, 2017, respectively. The aggregate fair value of assets posted as collateral under these contracts at September 30, 2018 and December 31, 2017, was approximately $466 million and $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 $4.0 billion and $4.4 billion at September 30, 2018 and December 31, 2017, respectively. These securities have par amounts of $8.6 billion and $9.1 billion at September 30, 2018 and December 31, 2017, respectively, and have remaining stated maturity dates that extend to 2052.
52 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 10. Insurance Liabilities
10. Insurance Liabilities
Liability for Unpaid Losses and Loss Adjustment Expenses (Loss Reserves)
Loss reserves represent the accumulation of estimates of unpaid claims, including estimates for claims incurred but not reported (IBNR) and loss adjustment expenses (LAE), less applicable discount. We regularly review and update the methods used to determine loss reserve estimates. Any adjustments resulting from this review are reflected currently in pre-tax income, except to the extent 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 $12.1 billion and $12.6 billion at September 30, 2018 and December 31, 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, 2018 and December 31, 2017, we held collateral of approximately $9.3 billion and $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-forward of activity in Loss Reserves:
|
|
Three Months Ended |
|
Nine Months Ended |
||||||
|
|
September 30, |
|
September 30, |
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
Liability for unpaid loss and loss adjustment expenses, beginning of period |
$ |
76,713 |
$ |
76,422 |
|
$ |
78,393 |
$ |
77,077 |
|
Reinsurance recoverable |
|
(27,406) |
|
(27,660) |
|
|
(26,708) |
|
(15,532) |
|
Net Liability for unpaid loss and loss adjustment expenses, beginning of period |
|
49,307 |
|
48,762 |
|
|
51,685 |
|
61,545 |
|
Losses and loss adjustment expenses incurred: |
|
|
|
|
|
|
|
|
|
|
Current year |
|
6,670 |
|
7,511 |
|
|
15,800 |
|
16,021 |
|
Prior years, excluding discount and amortization of deferred gain |
|
949 |
|
901 |
|
|
884 |
|
1,354 |
|
Prior years, discount charge (benefit) |
|
3 |
|
48 |
|
|
(174) |
|
283 |
|
Prior years, amortization of deferred gain on retroactive reinsurance(a) |
|
(175) |
|
(75) |
|
|
(283) |
|
(195) |
|
Total losses and loss adjustment expenses incurred |
|
7,447 |
|
8,385 |
|
|
16,227 |
|
17,463 |
|
Losses and loss adjustment expenses paid: |
|
|
|
|
|
|
|
|
|
|
Current year |
|
(1,791) |
|
(1,634) |
|
|
(3,289) |
|
(3,342) |
|
Prior years |
|
(4,526) |
|
(3,395) |
|
|
(14,312) |
|
(12,438) |
|
Total losses and loss adjustment expenses paid |
|
(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 |
|
|
- |
|
- |
|
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 |
|
52,757 |
|
52,478 |
|
|
52,757 |
|
52,478 |
|
Reinsurance recoverable |
|
29,202 |
|
27,609 |
|
|
29,202 |
|
27,609 |
|
Total |
$ |
81,959 |
$ |
80,087 |
|
$ |
81,959 |
$ |
80,087 |
(a) Includes $9 million and $6 million for the retroactive reinsurance agreement with NICO covering U.S. asbestos exposures for the 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 2018 Form 10-Q 53
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 10. Insurance Liabilities
(d) Represents change in loss reserves included in our 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 retained 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. The total paid claims subject to the agreement as of September 30, 2018 were below the attachment point.
At September 30, 2018, the loss reserves reflect a net loss reserve discount of $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. For the Pennsylvania companies, the statute specifies discount factors for accident years 2001 and prior, which are based on a 6 percent interest rate and an industry payout pattern. For accident years 2002 and subsequent, the discount is based on the payout patterns and investment yields of the companies.
In 2013, our Pennsylvania regulator approved use of a consistent discount rate (U.S. Treasury rate plus a liquidity premium) to all of our workers’ compensation reserves in our Pennsylvania-domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers compensation portfolios.
The discount consists of $622 million of tabular discount and $1.4 billion of non-tabular discount for workers’ compensation. During the nine-month periods ended September 30, 2018 and 2017, the benefit/(charge) from changes in discount of $305 million and $(283) million, respectively, were recorded as part of the policyholder benefits and losses incurred in the Consolidated Statement of Income.
The following table presents the components of the loss reserve 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 |
* Excludes $182 million and $173 million of discount related to certain long tail liabilities in the United Kingdom at September 30, 2018 and December 31, 2017, respectively.
54 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 10. Insurance Liabilities
The following tables present the net loss reserve discount benefit (charge):
|
Three Months Ended September 30, |
2018 |
|
2017 |
||||||||||
|
|
North |
|
|
|
|
|
North |
|
|
|
|
||
|
|
America |
|
|
|
|
|
America |
|
|
|
|
||
|
|
Commercial |
|
Legacy |
|
|
|
Commercial |
|
Legacy |
|
|
||
|
(in millions) |
Insurance |
|
Portfolio |
|
Total |
|
Insurance |
|
Portfolio |
|
Total |
||
|
Current accident year |
$ |
89 |
$ |
- |
$ |
89 |
|
$ |
33 |
$ |
- |
$ |
33 |
|
Accretion and other adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to prior year discount |
|
(7) |
|
(12) |
|
(19) |
|
|
(100) |
|
25 |
|
(75) |
|
Effect of interest rate changes |
|
13 |
|
3 |
|
16 |
|
|
(7) |
|
1 |
|
(6) |
|
Net reserve discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit (charge) |
|
95 |
|
(9) |
|
86 |
|
|
(74) |
|
26 |
|
(48) |
|
Change in discount on loss reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ceded under retroactive reinsurance |
|
(46) |
|
- |
|
(46) |
|
|
53 |
|
- |
|
53 |
|
Net change in total reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discount(a) |
$ |
49 |
$ |
(9) |
$ |
40 |
|
$ |
(21) |
$ |
26 |
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
2018 |
|
2017 |
||||||||||
|
|
North |
|
|
|
|
|
North |
|
|
|
|
||
|
|
America |
|
|
|
|
|
America |
|
|
|
|
||
|
|
Commercial |
|
Legacy |
|
|
|
Commercial |
|
Legacy |
|
|
||
|
(in millions) |
Insurance |
|
Portfolio |
|
Total |
|
Insurance |
|
Portfolio |
|
Total |
||
|
Current accident year |
$ |
131 |
$ |
- |
$ |
131 |
|
$ |
94 |
$ |
- |
$ |
94 |
|
Accretion and other adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to prior year discount |
|
(95) |
|
(42) |
|
(137) |
|
|
(205) |
|
(34) |
|
(239) |
|
Effect of interest rate changes |
|
232 |
|
79 |
|
311 |
|
|
(96) |
|
(42) |
|
(138) |
|
Net reserve discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit (charge) |
|
268 |
|
37 |
|
305 |
|
|
(207) |
|
(76) |
|
(283) |
|
Change in discount on loss reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ceded under retroactive reinsurance |
|
(154) |
|
- |
|
(154) |
|
|
(1,494) |
|
- |
|
(1,494) |
|
Net change in total reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discount(b) |
$ |
114 |
$ |
37 |
$ |
151 |
|
$ |
(1,701) |
$ |
(76) |
$ |
(1,777) |
(a) Excludes $12 million and $(18) million discount related to certain long tail liabilities in the United Kingdom for the three-month periods ended September 30, 2018 and 2017, respectively.
(b) Excludes $10 million and $20 million 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 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 2018 Form 10-Q 55
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 11. Contingencies, Commitments and Guarantees
11. Contingencies, Commitments and Guarantees
In the normal course of business, various contingent liabilities and commitments are entered into by AIG and our subsidiaries. In addition, AIG Parent guarantees various obligations of certain subsidiaries.
Although AIG cannot currently quantify its ultimate liability for unresolved litigation and investigation matters, including those referred to below, it is possible that such liability could have a material adverse effect on AIG’s consolidated financial condition or its consolidated results of operations or consolidated cash flows for an individual reporting period.
Legal Contingencies
Overview. In the normal course of business, AIG and our subsidiaries are, like others in the insurance and financial services industries in general, subject to regulatory and government investigations and actions, and litigation and other forms of dispute resolution in a large number of proceedings pending in various domestic and foreign jurisdictions. Certain of these matters involve potentially significant risk of loss due to potential for significant jury awards and settlements, punitive damages or other penalties. Many of these matters are also highly complex and seek recovery on behalf of a class or similarly large number of plaintiffs. It is therefore inherently difficult to predict the size or scope of potential future losses arising from these matters. In our insurance and reinsurance operations, litigation and arbitration concerning the scope of coverage under insurance and reinsurance contracts, and litigation and arbitration in which our subsidiaries defend or indemnify their insureds under insurance contracts, are generally considered in the establishment of our loss reserves. Separate and apart from the foregoing matters involving insurance and reinsurance coverage, AIG, our subsidiaries and their respective officers and directors are subject to a variety of additional types of legal proceedings brought by holders of AIG securities, customers, employees and others, alleging, among other things, breach of contractual or fiduciary duties, bad faith and violations of federal and state statutes and regulations. With respect to these other categories of matters not arising out of claims for insurance or reinsurance coverage, we establish reserves for loss contingencies when it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated. In many instances, we are unable to determine whether a loss is probable or to reasonably estimate the amount of such a loss and, therefore, the potential future losses arising from legal proceedings may exceed the amount of liabilities that we have recorded in our financial statements covering these matters. While such potential future charges could be material, based on information currently known to management, management does not believe, other than may be discussed below, that any such charges are likely to have a material adverse effect on our financial position or results of operation.
Additionally, from time to time, various regulatory and governmental agencies review the transactions and practices of AIG and our subsidiaries in connection with industry-wide and other inquiries into, among other matters, the business practices of current and former operating insurance subsidiaries. We have cooperated, and will continue to cooperate, in producing documents and other information in response to such requests.
Tax Litigation
We are party to pending tax litigation before the Southern District of New York. For additional information see Note 15 to the Condensed Consolidated Financial Statements.
56 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 11. Contingencies, Commitments and Guarantees
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 $3.6 billion at September 30, 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 AIG 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, 2018 was $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.
· For additional disclosures about derivatives see Note 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.
AIG | Third Quarter 2018 Form 10-Q 57
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity
12. Equity
The following table presents a rollforward of outstanding shares:
|
Nine Months Ended September 30, 2018 |
Common |
Treasury |
Common Stock |
|
|
Stock Issued |
Stock |
Outstanding |
|
Shares, beginning of year |
1,906,671,492 |
(1,007,626,835) |
899,044,657 |
|
Shares issued |
- |
4,055,727 |
4,055,727 |
|
Shares repurchased |
- |
(18,452,857) |
(18,452,857) |
|
Shares, end of period |
1,906,671,492 |
(1,022,023,965) |
884,647,527 |
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 |
|
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 2017 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) |
|
2018 |
|
2017 |
|
Aggregate repurchases of common stock |
$ |
994 |
$ |
6,275 |
|
Total number of common shares repurchased |
|
18 |
|
100 |
|
Aggregate repurchases of warrants |
$ |
6 |
$ |
3 |
|
Total number of warrants repurchased* |
|
- |
|
- |
* For the nine-month periods ended September 30, 2018 and 2017, we repurchased 366,253 and 185,000 warrants to purchase shares of AIG Common 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, 2018, approximately $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).
58 AIG | Third Quarter 2018 Form 10-Q
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 (loss):
|
|
|
Unrealized Appreciation |
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
(Depreciation) of Fixed |
|
Unrealized |
|
|
|
|
|
Liabilities Under |
|
|
|
|
|
Maturity Securities on |
|
Appreciation |
|
Foreign |
|
Retirement |
|
Fair Value Option |
|
|
|
|
|
Which Other-Than- |
|
(Depreciation) |
|
Currency |
|
Plan |
|
Attributable to |
|
|
|
|
|
Temporary Credit |
|
of All Other |
|
Translation |
|
Liabilities |
|
Changes in |
|
|
|
(in millions) |
|
Impairments Were Taken |
|
Investments |
|
Adjustments |
|
Adjustment |
|
Own Credit Risk |
|
Total |
|
Balance, June 30, 2018, net of tax |
$ |
(234) |
$ |
3,944 |
$ |
(2,426) |
$ |
(1,062) |
$ |
8 |
$ |
230 |
|
Cumulative effect of change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting principles |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Change in unrealized appreciation (depreciation) |
|
|
|
|
|
|
|
|
|
|
|
|
|
of investments |
|
350 |
|
(1,301) |
|
- |
|
- |
|
- |
|
(951) |
|
Change in deferred policy acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment and other |
|
(205) |
|
216 |
|
- |
|
- |
|
- |
|
11 |
|
Change in future policy benefits |
|
- |
|
340 |
|
- |
|
- |
|
- |
|
340 |
|
Change in foreign currency translation adjustments |
|
- |
|
- |
|
(131) |
|
- |
|
- |
|
(131) |
|
Change in net actuarial loss |
|
- |
|
- |
|
- |
|
16 |
|
- |
|
16 |
|
Change in prior service cost |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Change in deferred tax asset (liability) |
|
(38) |
|
(13) |
|
2 |
|
(2) |
|
- |
|
(51) |
|
Change in fair value of liabilities under fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
option attributable to changes in own credit risk |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Total other comprehensive income (loss) |
|
107 |
|
(758) |
|
(129) |
|
14 |
|
- |
|
(766) |
|
Noncontrolling interests |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Balance, September 30, 2018, net of tax |
$ |
(127) |
$ |
3,186 |
$ |
(2,555) |
$ |
(1,048) |
$ |
8 |
$ |
(536) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017, net of tax |
$ |
793 |
$ |
7,693 |
$ |
(2,090) |
$ |
(931) |
$ |
- |
$ |
5,465 |
|
Cumulative effect of change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting principles |
|
169 |
|
(285) |
|
(284) |
|
(183) |
|
7 |
|
(576) |
|
Change in unrealized depreciation of investments |
|
(1,258) |
|
(7,659) |
|
- |
|
- |
|
- |
|
(8,917) |
|
Change in deferred policy acquisition costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
adjustment and other |
|
(91) |
|
1,121 |
|
- |
|
- |
|
- |
|
1,030 |
|
Change in future policy benefits |
|
- |
|
1,464 |
|
- |
|
- |
|
- |
|
1,464 |
|
Change in foreign currency translation adjustments |
|
- |
|
- |
|
(154) |
|
- |
|
- |
|
(154) |
|
Change in net actuarial loss |
|
- |
|
- |
|
- |
|
54 |
|
- |
|
54 |
|
Change in prior service credit |
|
- |
|
- |
|
- |
|
(2) |
|
- |
|
(2) |
|
Change in deferred tax asset (liability) |
|
260 |
|
852 |
|
(27) |
|
14 |
|
- |
|
1,099 |
|
Change in fair value of liabilities under fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
option attributable to changes in own credit risk |
|
- |
|
- |
|
- |
|
- |
|
1 |
|
1 |
|
Total other comprehensive income (loss) |
|
(1,089) |
|
(4,222) |
|
(181) |
|
66 |
|
1 |
|
(5,425) |
|
Noncontrolling interests |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Balance, September 30, 2018, net of tax |
$ |
(127) |
$ |
3,186 |
$ |
(2,555) |
$ |
(1,048) |
$ |
8 |
$ |
(536) |
AIG | Third Quarter 2018 Form 10-Q 59
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity
|
|
|
Unrealized Appreciation |
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
(Depreciation) of Fixed |
|
Unrealized |
|
|
|
|
|
Liabilities Under |
|
|
|
|
|
Maturity Securities on |
|
Appreciation |
|
Foreign |
|
Retirement |
|
Fair Value Option |
|
|
|
|
|
Which Other-Than- |
|
(Depreciation) |
|
Currency |
|
Plan |
|
Attributable to |
|
|
|
|
|
Temporary Credit |
|
of All Other |
|
Translation |
|
Liabilities |
|
Changes in |
|
|
|
(in millions) |
|
Impairments Were Taken |
|
Investments |
|
Adjustments |
|
Adjustment |
|
Own Credit Risk |
|
Total |
|
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.
60 AIG | Third Quarter 2018 Form 10-Q
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, 2018 and 2017, respectively:
|
|
|
Unrealized Appreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Depreciation) of Fixed |
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
Maturity Investments |
|
Unrealized |
|
|
|
|
|
Liabilities Under |
|
|
|
|
|
on Which Other-Than- |
|
Appreciation |
|
Foreign |
|
Retirement |
|
Fair Value Option |
|
|
|
|
|
Temporary Credit |
|
(Depreciation) |
|
Currency |
|
Plan |
|
Attributable to |
|
|
|
|
|
Impairments Were |
|
of All Other |
|
Translation |
|
Liabilities |
|
Changes in |
|
|
|
(in millions) |
|
Recognized |
|
Investments |
|
Adjustments |
|
Adjustment |
|
Own Credit Risk |
|
Total |
|
Three Months Ended September 30, 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 |
|
Less: Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net income |
|
10 |
|
133 |
|
- |
|
(58) |
|
- |
|
85 |
|
Total other comprehensive income, |
|
|
|
|
|
|
|
|
|
|
|
|
|
before income tax expense |
|
150 |
|
698 |
|
328 |
|
96 |
|
- |
|
1,272 |
|
Less: Income tax expense |
|
53 |
|
206 |
|
3 |
|
33 |
|
- |
|
295 |
|
Total other comprehensive income, |
|
|
|
|
|
|
|
|
|
|
|
|
|
net of income tax expense |
$ |
97 |
$ |
492 |
$ |
325 |
$ |
63 |
$ |
- |
$ |
977 |
|
Nine Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized change arising during period |
$ |
(1,344) |
$ |
(5,055) |
$ |
(154) |
$ |
26 |
$ |
1 |
$ |
(6,526) |
|
Less: Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net income |
|
5 |
|
19 |
|
- |
|
(26) |
|
- |
|
(2) |
|
Total other comprehensive income (loss), |
|
|
|
|
|
|
|
|
|
|
|
|
|
before income tax expense (benefit) |
|
(1,349) |
|
(5,074) |
|
(154) |
|
52 |
|
1 |
|
(6,524) |
|
Less: Income tax expense (benefit) |
|
(260) |
|
(852) |
|
27 |
|
(14) |
|
- |
|
(1,099) |
|
Total other comprehensive income (loss), |
|
|
|
|
|
|
|
|
|
|
|
|
|
net of income tax expense (benefit) |
$ |
(1,089) |
$ |
(4,222) |
$ |
(181) |
$ |
66 |
$ |
1 |
$ |
(5,425) |
|
Nine Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized change arising during period |
$ |
553 |
$ |
2,610 |
$ |
474 |
$ |
62 |
$ |
- |
$ |
3,699 |
|
Less: Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net income |
|
45 |
|
611 |
|
- |
|
(78) |
|
- |
|
578 |
|
Total other comprehensive income, |
|
|
|
|
|
|
|
|
|
|
|
|
|
before income tax expense |
|
508 |
|
1,999 |
|
474 |
|
140 |
|
- |
|
3,121 |
|
Less: Income tax expense |
|
178 |
|
159 |
|
27 |
|
48 |
|
- |
|
412 |
|
Total other comprehensive income, |
|
|
|
|
|
|
|
|
|
|
|
|
|
net of income tax expense |
$ |
330 |
$ |
1,840 |
$ |
447 |
$ |
92 |
$ |
- |
$ |
2,709 |
AIG | Third Quarter 2018 Form 10-Q 61
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 12. Equity
The following table presents the effect of the reclassification of significant items out of Accumulated other comprehensive income on the respective line items in the Condensed Consolidated Statements of Income:
|
|
Amount Reclassified from Accumulated Other Comprehensive Income |
Affected Line Item in the Condensed Consolidated Statements of Income |
||||||
|
|
||||||||
|
|
Three Months Ended September 30, |
|||||||
|
(in millions) |
|
2018 |
2017 |
|||||
|
Unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
$ |
1 |
$ |
10 |
|
|
Other realized capital gains |
|
Total |
|
|
1 |
|
10 |
|
|
|
|
Unrealized appreciation (depreciation) of all other investments |
|
|
|
|
|
|
|
|
|
Investments |
|
|
10 |
|
48 |
|
|
Other realized capital gains |
|
Deferred acquisition costs adjustment |
|
|
30 |
|
85 |
|
|
Amortization of deferred policy acquisition costs |
|
Future policy benefits |
|
|
- |
|
- |
|
|
Policyholder benefits and losses incurred |
|
Total |
|
|
40 |
|
133 |
|
|
|
|
Change in retirement plan liabilities adjustment |
|
|
|
|
|
|
|
|
|
Prior-service credit |
|
|
- |
|
- |
|
|
* |
|
Actuarial losses |
|
|
(9) |
|
(58) |
|
|
* |
|
Total |
|
|
(9) |
|
(58) |
|
|
|
|
Total reclassifications for the period |
|
$ |
32 |
$ |
85 |
|
|
|
|
|
Amount Reclassified from Accumulated Other Comprehensive Income |
Affected Line Item in the Condensed Consolidated Statements of Income |
||||||
|
|
||||||||
|
|
Nine Months Ended September 30, |
|||||||
|
(in millions) |
|
2018 |
2017 |
|||||
|
Unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
$ |
5 |
$ |
45 |
|
|
Other realized capital gains |
|
Total |
|
|
5 |
|
45 |
|
|
|
|
Unrealized appreciation (depreciation) of all other investments |
|
|
|
|
|
|
|
|
|
Investments |
|
|
19 |
|
415 |
|
|
Other realized capital gains |
|
Deferred acquisition costs adjustment |
|
|
- |
|
196 |
|
|
Amortization of deferred policy acquisition costs |
|
Future policy benefits |
|
|
- |
|
- |
|
|
Policyholder benefits and losses incurred |
|
Total |
|
|
19 |
|
611 |
|
|
|
|
Change in retirement plan liabilities adjustment |
|
|
|
|
|
|
|
|
|
Prior-service credit |
|
|
1 |
|
1 |
|
|
* |
|
Actuarial losses |
|
|
(27) |
|
(79) |
|
|
* |
|
Total |
|
|
(26) |
|
(78) |
|
|
|
|
Total reclassifications for the period |
|
$ |
(2) |
$ |
578 |
|
|
|
* These Accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 14.
62 AIG | Third Quarter 2018 Form 10-Q
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 |
||||||
|
|
September 30, |
|
September 30, |
||||||
|
(dollars in millions, except per share data) |
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
Numerator for EPS: |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
$ |
(1,220) |
$ |
(1,712) |
|
$ |
661 |
$ |
609 |
|
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 |
|
(39) |
|
(1) |
|
|
(40) |
|
7 |
|
Net income (loss) attributable to AIG common shareholders |
$ |
(1,259) |
$ |
(1,739) |
|
$ |
616 |
$ |
576 |
|
Denominator for EPS: |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic |
|
895,237,359 |
|
908,667,044 |
|
|
902,081,555 |
|
938,130,832 |
|
Dilutive shares |
|
- |
|
- |
|
|
14,736,714 |
|
23,165,114 |
|
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 |
$ |
(1.37) |
$ |
(1.91) |
|
$ |
0.72 |
$ |
0.60 |
|
Income (loss) from discontinued operations |
$ |
(0.04) |
$ |
- |
|
$ |
(0.04) |
$ |
0.01 |
|
Income (loss) attributable to AIG |
$ |
(1.41) |
$ |
(1.91) |
|
$ |
0.68 |
$ |
0.61 |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
$ |
(1.37) |
$ |
(1.91) |
|
$ |
0.71 |
$ |
0.59 |
|
Income (loss) from discontinued operations |
$ |
(0.04) |
$ |
- |
|
$ |
(0.04) |
$ |
0.01 |
|
Income (loss) attributable to AIG |
$ |
(1.41) |
$ |
(1.91) |
|
$ |
0.67 |
$ |
0.60 |
(a) Shares in the diluted EPS calculation represent basic shares for the three-month periods ended September 30, 2018 and 2017 due to the net losses in those periods. The shares excluded from the calculation were 13,538,168 and 22,459,868 shares, respectively.
(b) Dilutive shares included 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, because the effect of including those shares in the calculation would have been anti-dilutive.
AIG | Third Quarter 2018 Form 10-Q 63
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 |
||||||||||
|
|
|
U.S. |
|
Non-U.S. |
|
|
|
|
U.S. |
|
Non-U.S. |
|
|
|
(in millions) |
|
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 |
|
Interest cost |
|
41 |
|
4 |
|
45 |
|
|
2 |
|
1 |
|
3 |
|
Expected return on assets |
|
(66) |
|
(6) |
|
(72) |
|
|
- |
|
- |
|
- |
|
Amortization of prior service cost |
|
- |
|
- |
|
- |
|
|
- |
|
- |
|
- |
|
Amortization of net loss |
|
6 |
|
3 |
|
9 |
|
|
- |
|
- |
|
- |
|
Curtailment gain |
|
- |
|
(5) |
|
(5) |
|
|
- |
|
- |
|
- |
|
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) |
$ |
(66) |
$ |
17 |
$ |
(49) |
|
$ |
4 |
$ |
2 |
$ |
6 |
|
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 loss |
|
20 |
|
9 |
|
29 |
|
|
- |
|
- |
|
- |
|
Curtailment gain |
|
- |
|
(5) |
|
(5) |
|
|
- |
|
- |
|
- |
|
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.
64 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 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-Q 65
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 Tax 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 of September 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, 2018, the effect of the Tax 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 portion of the disproportionate tax effects is assigned to each individual security lot at the date the amount becomes lodged. When the individual securities are sold, mature, or are otherwise impaired on an other-than-temporary basis, the assigned portion of the disproportionate tax effect is reclassified from AOCI to income from continuing operations.
66 AIG | Third Quarter 2018 Form 10-Q
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, 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.
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 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.
As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed are subject to a one-time deemed repatriation tax. Going forward, certain foreign earnings of our foreign affiliates will be exempt from U.S. tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings. For the nine-month period ended September 30, 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.
AIG | Third Quarter 2018 Form 10-Q 67
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 our net operating loss carryforwards, only a portion (no more than 35 percent) of the U.S. taxable income of our life companies can be offset by those net operating loss carryforwards. The remaining tax liability of our life companies can be offset by the foreign tax credit carryforwards. Accordingly, we 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, 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, 2018, recent changes in market conditions, including rising interest 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 asset related to net unrealized tax capital losses. The deferred tax asset relates to the unrealized losses for which the carryforward period has not yet begun, and as such, when assessing its recoverability, we consider our ability and intent to hold the underlying securities to recovery. As of September 30, 2018, based on all available evidence, we concluded that a valuation allowance should be established on a portion of the deferred tax asset related to unrealized losses that are not more-likely-than-not to be realized. For both the three- and nine-month periods ended September 30, 2018, we 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.
For the three- and nine-month periods ended September 30, 2018, recent changes in market conditions, including rising interest 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 September 30, 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.
68 AIG | Third Quarter 2018 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 15. Income Taxes
Tax Examinations and Litigation
On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions in the Southern District of New York. The Southern District of New York denied our summary judgment motion and upon AIG’s appeal, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) affirmed the denial. AIG’s petition for certiorari to the U.S. Supreme Court from the decision of the Second Circuit was denied on March 7, 2016. As a result, the case has been remanded back to the Southern District of New York for a jury trial.
In January 2018, the parties reached non-binding agreements in principle on issues presented in the dispute and are currently reviewing the computations reflecting the settlement terms. The resolution is not final and is subject to various reviews. The litigation has been stayed pending the outcome of the review process. We can provide no assurance regarding the outcome of any such litigation or whether binding compromised settlements with the parties will ultimately be reached. We currently believe that we have adequate reserves for the potential liabilities that may result from these matters.
Accounting for Uncertainty in Income Taxes
At both September 30, 2018 and December 31, 2017, our unrecognized tax benefits, excluding interest and penalties were $4.7 billion. At September 30, 2018 and December 31, 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 $45 million and $28 million, respectively. Accordingly, at both September 30, 2018 and December 31, 2017, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.7 billion.
Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At September 30, 2018 and December 31, 2017, we had accrued liabilities of $2.2 billion and $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, we accrued expense (benefit) of $148 million and $102 million, respectively, for the payment of interest and penalties.
We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next 12 months by as much as $3.9 billion, principally as a result of potential resolutions or settlements of prior years’ tax items. The prior years’ tax items include unrecognized tax benefits related to the deductibility of certain expenses and matters related to cross border financing transactions.
AIG | Third Quarter 2018 Form 10-Q 69
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
Validus |
|
|
|
|
|
Reclassifications |
|
|
|
|
|
Group, Inc. |
|
Holdings, |
|
|
|
Other |
|
and |
Consolidated |
|
|
(in millions) |
(As Guarantor) |
|
Ltd. |
|
AIGLH |
|
Subsidiaries |
|
Eliminations |
|
AIG |
|
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
5,475 |
|
15 |
|
- |
|
312,321 |
|
(1,748) |
|
316,063 |
|
Cash |
|
3 |
|
66 |
|
3 |
|
2,669 |
|
- |
|
2,741 |
|
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 |
$ |
92,914 |
$ |
6,490 |
$ |
27,211 |
$ |
484,982 |
$ |
(106,737) |
$ |
504,860 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance liabilities |
$ |
- |
$ |
- |
$ |
- |
$ |
291,391 |
$ |
- |
$ |
291,391 |
|
Long-term debt |
|
22,459 |
|
710 |
|
643 |
|
10,782 |
|
- |
|
34,594 |
|
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 |
|
34,328 |
|
1,126 |
|
775 |
|
448,305 |
|
(38,851) |
|
445,683 |
|
Total AIG shareholders’ equity |
|
58,586 |
|
5,364 |
|
26,436 |
|
36,086 |
|
(67,886) |
|
58,586 |
|
Non-redeemable noncontrolling interests |
|
- |
|
- |
|
- |
|
591 |
|
- |
|
591 |
|
Total equity |
|
58,586 |
|
5,364 |
|
26,436 |
|
36,677 |
|
(67,886) |
|
59,177 |
|
Total liabilities and equity |
$ |
92,914 |
$ |
6,490 |
$ |
27,211 |
$ |
484,982 |
$ |
(106,737) |
$ |
504,860 |
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments(a) |
$ |
2,541 |
$ |
- |
$ |
- |
$ |
11,559 |
$ |
(3,714) |
$ |
10,386 |
|
Other investments(b) |
|
6,004 |
|
- |
|
- |
|
305,902 |
|
- |
|
311,906 |
|
Total investments |
|
8,545 |
|
- |
|
- |
|
317,461 |
|
(3,714) |
|
322,292 |
|
Cash |
|
3 |
|
- |
|
20 |
|
2,339 |
|
- |
|
2,362 |
|
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 |
$ |
99,703 |
$ |
- |
$ |
30,549 |
$ |
479,911 |
$ |
(111,862) |
$ |
498,301 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance liabilities |
$ |
- |
$ |
- |
$ |
- |
$ |
282,105 |
$ |
- |
$ |
282,105 |
|
Long-term debt |
|
21,557 |
|
- |
|
642 |
|
9,441 |
|
- |
|
31,640 |
|
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 |
|
34,532 |
|
- |
|
785 |
|
438,825 |
|
(41,549) |
|
432,593 |
|
Total AIG shareholders’ equity |
|
65,171 |
|
- |
|
29,764 |
|
40,549 |
|
(70,313) |
|
65,171 |
|
Non-redeemable noncontrolling interests |
|
- |
|
- |
|
- |
|
537 |
|
- |
|
537 |
|
Total equity |
|
65,171 |
|
- |
|
29,764 |
|
41,086 |
|
(70,313) |
|
65,708 |
|
Total liabilities and equity |
$ |
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.
(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.
70 AIG | Third Quarter 2018 Form 10-Q
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
Validus |
|
|
|
|
|
Reclassifications |
|
|
|
|
|
Group, Inc. |
|
Holdings, |
|
|
|
Other |
|
and |
|
Consolidated |
|
(in millions) |
|
(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 |
$ |
- |
|
Other income |
|
225 |
|
- |
|
- |
|
11,455 |
|
71 |
|
11,751 |
|
Total revenues |
|
(1,873) |
|
- |
|
1,138 |
|
11,455 |
|
1,031 |
|
11,751 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
236 |
|
- |
|
12 |
|
44 |
|
(2) |
|
290 |
|
(Gain) loss on extinguishment of debt |
|
2 |
|
- |
|
- |
|
(1) |
|
- |
|
1 |
|
Other expenses |
|
177 |
|
- |
|
1 |
|
14,154 |
|
(69) |
|
14,263 |
|
Total expenses |
|
415 |
|
- |
|
13 |
|
14,197 |
|
(71) |
|
14,554 |
|
Income (loss) from continuing operations before income |
|
|
|
|
|
|
|
|
|
|
|
|
|
tax benefit |
|
(2,288) |
|
- |
|
1,125 |
|
(2,742) |
|
1,102 |
|
(2,803) |
|
Income tax benefit |
|
(549) |
|
- |
|
(4) |
|
(538) |
|
- |
|
(1,091) |
|
Income (loss) from continuing operations |
|
(1,739) |
|
- |
|
1,129 |
|
(2,204) |
|
1,102 |
|
(1,712) |
|
Loss from discontinued operations, |
|
|
|
|
|
|
|
|
|
|
|
|
|
net of income taxes |
|
- |
|
- |
|
- |
|
(1) |
|
- |
|
(1) |
|
Net income (loss) |
|
(1,739) |
|
- |
|
1,129 |
|
(2,205) |
|
1,102 |
|
(1,713) |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to noncontrolling interests |
|
- |
|
- |
|
- |
|
26 |
|
- |
|
26 |
|
Net income (loss) attributable to AIG |
$ |
(1,739) |
$ |
- |
$ |
1,129 |
$ |
(2,231) |
$ |
1,102 |
$ |
(1,739) |
AIG | Third Quarter 2018 Form 10-Q 71
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 16. Information Provided in Connection with Outstanding Debt and Preference Shares
|
|
|
American |
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
Validus |
|
|
|
|
|
Reclassifications |
|
|
|
|
|
Group, Inc. |
|
Holdings, |
|
|
|
Other |
|
and |
|
Consolidated |
|
(in millions) |
|
(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) |
$ |
- |
|
Other income |
|
653 |
|
- |
|
- |
|
36,085 |
|
147 |
|
36,885 |
|
Total revenues |
|
1,447 |
|
- |
|
2,553 |
|
36,085 |
|
(3,200) |
|
36,885 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
719 |
|
- |
|
37 |
|
129 |
|
(5) |
|
880 |
|
(Gain) loss on extinguishment of debt |
|
2 |
|
- |
|
- |
|
(6) |
|
- |
|
(4) |
|
Other expenses |
|
693 |
|
- |
|
2 |
|
34,865 |
|
(142) |
|
35,418 |
|
Total expenses |
|
1,414 |
|
- |
|
39 |
|
34,988 |
|
(147) |
|
36,294 |
|
Income (loss) from continuing operations before income |
|
|
|
|
|
|
|
|
|
|
|
|
|
tax expense (benefit) |
|
33 |
|
- |
|
2,514 |
|
1,097 |
|
(3,053) |
|
591 |
|
Income tax expense (benefit) |
|
(544) |
|
- |
|
(12) |
|
538 |
|
- |
|
(18) |
|
Income (loss) from continuing operations |
|
577 |
|
- |
|
2,526 |
|
559 |
|
(3,053) |
|
609 |
|
Income (loss) from discontinued operations, |
|
|
|
|
|
|
|
|
|
|
|
|
|
net of income taxes |
|
(1) |
|
- |
|
- |
|
8 |
|
- |
|
7 |
|
Net income (loss) |
|
576 |
|
- |
|
2,526 |
|
567 |
|
(3,053) |
|
616 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to noncontrolling interests |
|
- |
|
- |
|
- |
|
40 |
|
- |
|
40 |
|
Net income (loss) attributable to AIG |
$ |
576 |
$ |
- |
$ |
2,526 |
$ |
527 |
$ |
(3,053) |
$ |
576 |
* Eliminated in consolidation.
72 AIG | Third Quarter 2018 Form 10-Q
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
Validus |
|
|
|
|
|
Reclassifications |
|
|
|
|
|
Group, Inc. |
|
Holdings, |
|
|
|
Other |
|
and |
|
Consolidated |
|
(in millions) |
|
(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) |
|
Other comprehensive income (loss) |
|
977 |
|
- |
|
1,274 |
|
(30,625) |
|
29,351 |
|
977 |
|
Comprehensive income (loss) |
|
(762) |
|
- |
|
2,403 |
|
(32,830) |
|
30,453 |
|
(736) |
|
Total comprehensive income attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
|
- |
|
- |
|
- |
|
26 |
|
- |
|
26 |
|
Comprehensive income (loss) attributable to AIG |
$ |
(762) |
$ |
- |
$ |
2,403 |
$ |
(32,856) |
$ |
30,453 |
$ |
(762) |
|
Nine Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
$ |
616 |
$ |
(82) |
$ |
2,459 |
$ |
921 |
$ |
(3,293) |
$ |
621 |
|
Other comprehensive income (loss) |
|
(5,425) |
|
- |
|
3,139 |
|
12,568 |
|
(15,707) |
|
(5,425) |
|
Comprehensive income (loss) |
|
(4,809) |
|
(82) |
|
5,598 |
|
13,489 |
|
(19,000) |
|
(4,804) |
|
Total comprehensive income attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
|
- |
|
- |
|
- |
|
5 |
|
- |
|
5 |
|
Comprehensive income (loss) attributable to AIG |
$ |
(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 |
|
Other comprehensive income (loss) |
|
2,709 |
|
- |
|
7,056 |
|
18,864 |
|
(25,920) |
|
2,709 |
|
Comprehensive income (loss) |
|
3,285 |
|
- |
|
9,582 |
|
19,431 |
|
(28,973) |
|
3,325 |
|
Total comprehensive income attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
|
- |
|
- |
|
- |
|
40 |
|
- |
|
40 |
|
Comprehensive income (loss) attributable to AIG |
$ |
3,285 |
$ |
- |
$ |
9,582 |
$ |
19,391 |
$ |
(28,973) |
$ |
3,285 |
AIG | Third Quarter 2018 Form 10-Q 73
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
Validus |
|
|
|
|
Reclassifications |
|
|
|
|
|
|
Group, Inc. |
|
Holdings, |
|
|
|
Other |
|
and |
|
Consolidated |
|
(in millions) |
(As Guarantor) |
|
Ltd. |
|
AIGLH |
|
Subsidiaries |
|
Eliminations |
|
AIG |
|
|
Nine Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
$ |
1,389 |
$ |
(40) |
$ |
2,003 |
$ |
(433) |
$ |
(2,957) |
$ |
(38) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of investments |
|
4,641 |
|
- |
|
- |
|
45,218 |
|
(3,326) |
|
46,533 |
|
Sales of divested businesses, net |
|
- |
|
- |
|
- |
|
10 |
|
- |
|
10 |
|
Purchase of investments |
|
(1,680) |
|
- |
|
- |
|
(45,574) |
|
3,326 |
|
(43,928) |
|
Loans to subsidiaries - net |
|
878 |
|
- |
|
- |
|
(50) |
|
(828) |
|
- |
|
Contributions from (to) subsidiaries - net |
|
22 |
|
- |
|
- |
|
- |
|
(22) |
|
- |
|
Acquisition of businesses, net of cash and |
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted cash acquired |
|
(5,475) |
|
112 |
|
- |
|
311 |
|
- |
|
(5,052) |
|
Net change in short-term investments |
|
1,267 |
|
- |
|
- |
|
1,144 |
|
- |
|
2,411 |
|
Other, net |
|
(55) |
|
- |
|
- |
|
(836) |
|
- |
|
(891) |
|
Net cash (used in) provided by investing activities |
|
(402) |
|
112 |
|
- |
|
223 |
|
(850) |
|
(917) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt |
|
2,470 |
|
- |
|
- |
|
1,589 |
|
- |
|
4,059 |
|
Repayments of long-term debt |
|
(1,493) |
|
- |
|
- |
|
(1,295) |
|
- |
|
(2,788) |
|
Purchase of common stock |
|
(994) |
|
- |
|
- |
|
- |
|
- |
|
(994) |
|
Intercompany loans - net |
|
50 |
|
- |
|
- |
|
(878) |
|
828 |
|
- |
|
Cash dividends paid |
|
(858) |
|
(6) |
|
(2,020) |
|
(931) |
|
2,957 |
|
(858) |
|
Other, net |
|
(165) |
|
- |
|
- |
|
2,057 |
|
22 |
|
1,914 |
|
Net cash (used in) provided by financing activities |
|
(990) |
|
(6) |
|
(2,020) |
|
542 |
|
3,807 |
|
1,333 |
|
Effect of exchange rate changes on cash and |
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted cash |
|
- |
|
- |
|
- |
|
8 |
|
- |
|
8 |
|
Change in cash and restricted cash |
|
(3) |
|
66 |
|
(17) |
|
340 |
|
- |
|
386 |
|
Cash and restricted cash at beginning of year |
|
8 |
|
- |
|
20 |
|
2,709 |
|
- |
|
2,737 |
|
Cash and restricted cash at end of period |
$ |
5 |
$ |
66 |
$ |
3 |
$ |
3,049 |
$ |
- |
$ |
3,123 |
|
Nine Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
$ |
793 |
$ |
- |
$ |
1,105 |
$ |
(8,440) |
$ |
(2,320) |
$ |
(8,862) |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of investments |
|
5,428 |
|
- |
|
- |
|
58,592 |
|
(3,508) |
|
60,512 |
|
Sales of divested businesses, net |
|
40 |
|
- |
|
- |
|
565 |
|
- |
|
605 |
|
Purchase of investments |
|
(1,781) |
|
- |
|
- |
|
(49,675) |
|
3,508 |
|
(47,948) |
|
Loans to subsidiaries - net |
|
38 |
|
- |
|
- |
|
5 |
|
(43) |
|
- |
|
Contributions from (to) subsidiaries - net |
|
990 |
|
- |
|
- |
|
- |
|
(990) |
|
- |
|
Net change in short-term investments |
|
1,926 |
|
- |
|
- |
|
889 |
|
- |
|
2,815 |
|
Other, net |
|
(17) |
|
- |
|
(4) |
|
(1,488) |
|
- |
|
(1,509) |
|
Net cash (used in) provided by investing activities |
|
6,624 |
|
- |
|
(4) |
|
8,888 |
|
(1,033) |
|
14,475 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt |
|
1,108 |
|
- |
|
- |
|
1,297 |
|
- |
|
2,405 |
|
Repayments of long-term debt |
|
(1,354) |
|
- |
|
- |
|
(1,397) |
|
- |
|
(2,751) |
|
Purchase of common stock |
|
(6,275) |
|
- |
|
- |
|
- |
|
- |
|
(6,275) |
|
Intercompany loans - net |
|
(5) |
|
- |
|
- |
|
(38) |
|
43 |
|
- |
|
Cash dividends paid |
|
(884) |
|
- |
|
(1,133) |
|
(1,187) |
|
2,320 |
|
(884) |
|
Other, net |
|
(5) |
|
- |
|
- |
|
1,394 |
|
990 |
|
2,379 |
|
Net cash (used in) provided by financing activities |
|
(7,415) |
|
- |
|
(1,133) |
|
69 |
|
3,353 |
|
(5,126) |
|
Effect of exchange rate changes on cash 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 |
74 AIG | Third Quarter 2018 Form 10-Q
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
International |
|
Validus |
|
|
|
|
Reclassifications |
|
|
|
|
|
|
Group, Inc. |
|
Holdings, |
|
|
|
Other |
|
and |
|
Consolidated |
|
(in millions) |
(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) |
|
Intercompany |
|
(1) |
|
- |
|
(1) |
|
2 |
|
- |
|
- |
|
Taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax authorities |
$ |
(324) |
$ |
- |
$ |
- |
$ |
(166) |
$ |
- |
$ |
(490) |
|
Intercompany |
|
1,852 |
|
- |
|
- |
|
(1,852) |
|
- |
|
- |
American International Group, Inc. (As Guarantor) Supplementary Disclosure of Non-Cash Activities:
|
Nine Months Ended September 30, |
|
|
|
|
|
(in millions) |
|
2018 |
|
2017 |
|
Intercompany non-cash financing and investing activities: |
|
|
|
|
|
Capital contributions |
$ |
2,339 |
$ |
198 |
|
Dividends received in the form of securities |
|
745 |
|
735 |
|
Return of capital |
|
2,706 |
|
26 |
AIG | Third Quarter 2018 Form 10-Q 75
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 17. Subsequent Events
17. Subsequent Events
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 October 31, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on December 26, 2018 to shareholders of record on December 12, 2018.
76 AIG | Third Quarter 2018 Form 10-Q
ITEM 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations
Glossary and Acronyms of Selected Insurance Terms and References
Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), we use certain terms and abbreviations, which are summarized in the Glossary and Acronyms.
American International Group, Inc. (AIG) has incorporated into this discussion a number of cross-references to additional information included throughout this Quarterly Report on Form 10-Q, in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018 and in our Annual Report on Form 10-K for the year ended December 31, 2017 (the 2017 Annual Report) to assist readers seeking additional information related to a particular subject.
In this Quarterly Report on Form 10-Q, unless otherwise mentioned or unless the context indicates otherwise, we use the terms “AIG,” the “Company,” “we,” “us” and “our” to refer to American International Group, Inc., a Delaware corporation, and its consolidated subsidiaries. We use the term “AIG Parent” to refer solely to American International Group, Inc., and not to any of its consolidated subsidiaries.
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q and other publicly available documents may include, and officers and representatives of AIG may from time to time make and discuss, projections, goals, assumptions and statements that may constitute “forward‑looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These projections, goals, assumptions and statements are not historical facts but instead represent only a belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These projections, goals, assumptions and statements include statements preceded by, followed by or including words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” "goal" or “estimate.” These projections, goals, assumptions and statements may relate to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, anticipated organizational, business or regulatory changes, anticipated sales, monetization and/or acquisitions of businesses or assets or successful integration of acquired businesses, management succession and retention plans, exposure to risk, trends in operations and financial results.
AIG | Third Quarter 2018 Form 10-Q 77
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:
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• 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; • our ability to successfully reorganize our businesses, as well as improve profitability, without negatively impacting client relationships or our competitive position; • our ability to successfully dispose of, monetize and/or acquire businesses or assets or successfully integrate acquired businesses; • changes in judgments concerning insurance underwriting and insurance liabilities; • changes in judgments concerning potential cost saving opportunities; • the impact of potential information technology, cybersecurity or data security breaches, including as a result of cyber-attacks or security vulnerabilities; |
• disruptions in the availability of our electronic data systems or those of third parties; • 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 the global regulatory framework to which we are subject, including as a global systemically important insurer (G-SII); • significant legal, regulatory or governmental proceedings; • changes in judgments concerning the recognition of deferred tax assets; 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 Report on Form 10-Q for the quarterly period ended June 30, 2018; and - Part I, Item 1A. Risk Factors and Part II, Item 7. MD&A of the 2017 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.
78 AIG | Third Quarter 2018 Form 10-Q
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INDEX TO ITEM 2 |
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Investment Highlights in the Nine Months Ended September 30, 2018 |
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Liquidity and Capital Resources of AIG Parent and Subsidiaries |
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AIG | Third Quarter 2018 Form 10-Q 79
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.
80 AIG | Third Quarter 2018 Form 10-Q
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:
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• 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-Q 81
The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a significant degree of judgment.
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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: |
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• 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; • allowances for loan losses; • liability for legal contingencies; • fair value measurements of certain financial assets and liabilities; and • income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset and 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.
82 AIG | Third Quarter 2018 Form 10-Q
Executive Summary
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-Q 83
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
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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.
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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.
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General Insurance includes the following major operating companies: National Union Fire Insurance Company of Pittsburgh, Pa. (National Union); American Home Assurance Company (American Home); Lexington Insurance Company (Lexington); AIG General Insurance Company, Ltd. (AIG Sonpo); AIG Asia Pacific Insurance, Pte, Ltd.; AIG Europe 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. |
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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. |
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84 AIG | Third Quarter 2018 Form 10-Q
Financial Performance Summary
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Net Income (Loss) Attributable To AIG Three Months Ended September 30, (in millions) |
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Quarterly 2018 and 2017 Comparison Decrease in Net loss attributable to AIG 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. The decrease in Net loss attributable to AIG 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; and • higher general operating and other expenses, partially due to the acquisition of Validus. For further discussion see Consolidated Results of Operations. |
AIG | Third Quarter 2018 Form 10-Q 85
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Net Income Attributable To AIG Nine Months Ended September 30, (in millions) |
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Year-to-Date 2018 and 2017 Comparison Increase in net income attributable to AIG 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; 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 same period in the prior year. This increase was 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 National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc. (Berkshire) 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. For further discussion see Consolidated Results of Operations. |
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Adjusted Pre-Tax Income (Loss)* Three Months Ended September 30, (in millions) |
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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. |
* Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
86 AIG | Third Quarter 2018 Form 10-Q
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Adjusted Pre-Tax Income* Nine Months Ended September 30, (in millions) |
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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.
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General Operating and Other Expenses Three Months Ended September 30, (in millions) |
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Quarterly 2018 and 2017 Comparison Increased due to the acquisition of Validus, business growth and 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 2018 and 2017 included approximately $35 million and $31 million of pre-tax restructuring and other costs, respectively, which were primarily related to asset impairment and employee severance charges in connection with efficiency initiatives.
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AIG | Third Quarter 2018 Form 10-Q 87
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General Operating and Other Expenses Nine Months Ended September 30, (in millions) |
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Year-to-Date 2018 and 2017 Comparison Increased due to the acquisition of Validus, business growth and 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 nine-month periods ended September 30, 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.
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Return on Equity |
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Adjusted Return on Equity* |
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* Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
88 AIG | Third Quarter 2018 Form 10-Q
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Book Value Per Share |
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Book Value Per Share, excluding AOCI* |
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* 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 2018, characterized by factors such as the impact of historically low interest rates, uncertainties in the annuity marketplace resulting from legislative and regulatory initiatives aimed at re-evaluating the standard of care for sales of investment products and services, historically high levels of catastrophic events, slowing growth in China and Euro-Zone economies, and the UK’s pending withdrawal from its membership in the European Union (the EU) (commonly referred to as Brexit). Brexit has also affected the U.S. dollar/British pound exchange rate and increased the volatility of exchange rates among the euro, British pound and the Japanese yen (the Major Currencies), which may continue for some time.
Impact of Changes in the Interest Rate Environment
While interest rates remain low by historical standards, during the first nine months of 2018 interest rates, particularly in the United States, have risen, in some 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. Rapidly rising interest rates could create the potential for increased sales, but may also drive higher surrenders. Customers are, however, currently buying fixed annuities with surrender charge periods of four to seven years in pursuit of higher returns, which may help mitigate increased early surrenders in a 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 income features and the value of the related hedging portfolio.
AIG | Third Quarter 2018 Form 10-Q 89
Reinvestment and Spread Management
We actively monitor fixed income markets, including the level of interest rates, credit spreads and the shape of the yield curve. We also frequently review our interest rate assumptions and actively manage the crediting rates used for new and in-force business. Business strategies continue to evolve to maintain profitability of the overall business in light of the interest rate environment. A low interest rate environment puts margin pressure on pricing of new business and on existing products, due to the challenge of investing new money or recurring premiums and deposits, and reinvesting investment portfolio cash flows, in the low interest rate environment. In addition, there is investment risk associated with future premium receipts from certain in‑force business. Specifically, the investment of these future premium receipts may be at a yield below that required to meet future policy liabilities.
The contractual provisions for renewal of crediting rates and guaranteed minimum crediting rates included in products may reduce spreads in a sustained low interest rate environment and thus reduce future profitability. Although this interest rate risk is partially mitigated through the asset‑liability management process, product design elements and crediting rate strategies, a sustained low interest rate environment may negatively affect future profitability.
For additional information on our investment and asset-liability management strategies see Investments.
For investment-oriented products in our Individual Retirement, Group Retirement, Life Insurance and Institutional Markets businesses, our spread management strategies include disciplined pricing and product design for new business, modifying or limiting the sale of products that do not achieve targeted spreads, using asset-liability management to match assets to liabilities to the extent practicable, and actively managing crediting rates to help mitigate some of the pressure on investment spreads. Renewal crediting rate management is done under contractual provisions that were designed to allow crediting rates to be reset at pre-established intervals in accordance with state and federal laws and subject to minimum crediting rate guarantees. We will continue to adjust crediting rates on in-force business to mitigate the pressure on spreads from declining base yields, but our ability to lower crediting rates may be limited by the competitive environment, contractual minimum crediting rates, and provisions that allow rates to be reset only at pre-established intervals. As interest rates rise, we may need to raise crediting rates on in-force business for competitive and other reasons potentially reducing the impact of investing in a higher interest rate environment.
Of the aggregate fixed account values of our Individual Retirement and Group Retirement annuity products, 68 percent were crediting at the contractual minimum guaranteed interest rate at September 30, 2018. The percentage of fixed account values of our annuity products that are currently crediting at rates above one percent was 67 percent and 69 percent at September 30, 2018 and December 31, 2017, respectively. These businesses continue to focus on pricing discipline and strategies to manage the minimum guaranteed interest crediting rates offered on new sales in the context of regulatory requirements and competitive positioning. In the core universal life business in our Life Insurance business, 71 percent of the account values were crediting at the contractual minimum guaranteed interest rate at September 30, 2018.
90 AIG | Third Quarter 2018 Form 10-Q
The following table presents fixed annuity and universal life account values of our Individual Retirement, Group Retirement and Life Insurance operating segments by contractual minimum guaranteed interest rate and current crediting rates:
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Current Crediting Rates |
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September 30, 2018 |
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1-50 Basis |
More than 50 |
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Contractual Minimum Guaranteed |
At Contractual |
Points Above |
Basis Points |
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Interest Rate |
Minimum |
Minimum |
Above Minimum |
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(in millions) |
Guarantee |
Guarantee |
Guarantee |
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Total |
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Individual Retirement* |
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1% |
$ |
2,619 |
$ |
4,768 |
$ |
16,748 |
$ |
24,135 |
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> 1% - 2% |
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6,849 |
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137 |
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1,114 |
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8,100 |
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> 2% - 3% |
|
12,892 |
|
284 |
|
83 |
|
13,259 |
|
|
> 3% - 4% |
|
9,775 |
|
43 |
|
7 |
|
9,825 |
|
|
> 4% - 5% |
|
616 |
|
- |
|
4 |
|
620 |
|
|
> 5% - 5.5% |
|
34 |
|
- |
|
5 |
|
39 |
|
|
Total Individual Retirement |
$ |
32,785 |
$ |
5,232 |
$ |
17,961 |
$ |
55,978 |
|
|
Group Retirement* |
|
|
|
|
|
|
|
|
|
|
1% |
$ |
1,582 |
$ |
3,158 |
$ |
2,181 |
$ |
6,921 |
|
|
> 1% - 2% |
|
6,152 |
|
793 |
|
215 |
|
7,160 |
|
|
> 2% - 3% |
|
15,328 |
|
- |
|
- |
|
15,328 |
|
|
> 3% - 4% |
|
859 |
|
- |
|
- |
|
859 |
|
|
> 4% - 5% |
|
7,131 |
|
- |
|
- |
|
7,131 |
|
|
> 5% - 5.5% |
|
179 |
|
- |
|
- |
|
179 |
|
|
Total Group Retirement |
$ |
31,231 |
$ |
3,951 |
$ |
2,396 |
$ |
37,578 |
|
|
Universal life insurance |
|
|
|
|
|
|
|
|
|
|
1% |
$ |
- |
$ |
- |
$ |
10 |
$ |
10 |
|
|
> 1% - 2% |
|
120 |
|
95 |
|
224 |
|
439 |
|
|
> 2% - 3% |
|
605 |
|
472 |
|
995 |
|
2,072 |
|
|
> 3% - 4% |
|
1,667 |
|
355 |
|
7 |
|
2,029 |
|
|
> 4% - 5% |
|
3,172 |
|
222 |
|
- |
|
3,394 |
|
|
> 5% - 5.5% |
|
303 |
|
- |
|
- |
|
303 |
|
|
Total universal life insurance |
$ |
5,867 |
$ |
1,144 |
$ |
1,236 |
$ |
8,247 |
|
|
Total |
$ |
69,883 |
$ |
10,327 |
$ |
21,593 |
$ |
101,803 |
|
|
Percentage of total |
|
69 |
% |
10 |
% |
21 |
% |
100 |
% |
* Individual Retirement and Group Retirement amounts shown include fixed options within variable annuity products.
General Insurance
The impact of low interest rates on our General Insurance segment is primarily on our long-tail Casualty line of business. We expect limited impacts on our existing long-tail Casualty business as the duration of our assets is slightly longer than that of our liabilities. Sustained low interest rates would potentially impact new and renewal business for the long-tail Casualty line as we may not be able to adjust our future pricing consistent with our profitability objectives to fully offset the impact of investing at lower rates. However, we will continue to maintain pricing discipline and risk selection.
In addition, for our General Insurance segment and General Insurance Run-Off Lines reported within the Legacy Portfolio, sustained low interest rates may unfavorably affect the net loss reserve discount for workers’ compensation, and to a lesser extent could favorably impact assumptions about future medical costs, the combined net effect of which could result in higher net loss reserves.
Standard of Care Developments
The SEC, federal and state lawmakers and state insurance regulators continue their efforts at evaluating what is an appropriate regulatory framework around a standard of care for the sale of investment products and services. 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-Q 91
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, specifically in its broadening of the scope of “investment advice” fiduciary and in the terms of the best interest contract exemption. Following the Fifth Circuit’s decision, the DOL announced on March 16, 2018, that it was suspending enforcement of the DOL Fiduciary Rule pending further review. On May 22, 2018, the Fifth Circuit subsequently denied a motion to reconsider the panel’s decision and 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 in its entirety.
We continue to closely follow relevant federal and state-level regulatory developments in this area. While we cannot predict the long-term impact of these developments on our Life and Retirement businesses, we believe our diverse product offerings and distribution relationships position us to compete effectively in this evolving marketplace.
Impact of Currency Volatility
Currency volatility remains acute. Such volatility affected line item components of income for those businesses with substantial international operations. In particular, growth trends in net premiums written reported in U.S. dollars can differ significantly from those measured in original currencies. The net effect on underwriting results, however, is significantly mitigated, as both revenues and expenses are similarly affected.
These currencies may continue to fluctuate, in either direction, especially as a result of the UK’s announced exit from the EU, and such fluctuations will affect net premiums written growth trends reported in U.S. dollars, as well as financial statement line item comparability.
General Insurance businesses are transacted in most major foreign currencies. The following table presents the average of the quarterly weighted average exchange rates of the Major Currencies, which have the most significant impact on our businesses:
|
|
Three Months Ended |
|
|
|
|
Nine Months Ended |
|
|
|
||
|
|
September 30, |
|
Percentage |
|
|
September 30, |
|
Percentage |
|
||
|
Rate for 1 USD |
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 |
111.48 |
110.99 |
|
- |
% |
|
109.95 |
112.51 |
|
(2) |
% |
Unless otherwise noted, references to the effects of foreign exchange in the General Insurance discussion of results of operations are with respect to movements in the Major Currencies included in the preceding table.
Other Industry Developments
On September 7, 2017, the UK Ministry of Justice announced a proposal to increase the Ogden rate from negative 0.75 percent to between zero and one percent. This proposal has to be passed by Parliament. We will continue to monitor the progress with this potential change.
92 AIG | Third Quarter 2018 Form 10-Q
The following section provides a comparative discussion of our Consolidated Results of Operations on a reported basis for the three- and nine-month periods ended September 30, 2018 and 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&A and Part II, Item 7. MD&A — Critical Accounting Estimates in the 2017 Annual Report.
The following table presents our consolidated results of operations and other key financial metrics:
|
|
Three Months Ended |
|
|
|
|
Nine Months Ended |
|
|
|
||||||
|
|
September 30, |
|
Percentage |
|
|
September 30, |
|
Percentage |
|
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
Change |
|
|
|
2018 |
|
2017 |
|
Change |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
$ |
7,668 |
$ |
8,063 |
|
(5) |
% |
|
$ |
22,150 |
$ |
23,459 |
|
(6) |
% |
|
Policy fees |
|
530 |
|
728 |
|
(27) |
|
|
|
2,057 |
|
2,177 |
|
(6) |
|
|
Net investment income |
|
3,396 |
|
3,416 |
|
(1) |
|
|
|
9,722 |
|
10,715 |
|
(9) |
|
|
Net realized capital losses |
|
(511) |
|
(922) |
|
45 |
|
|
|
(365) |
|
(1,106) |
|
67 |
|
|
Other income |
|
403 |
|
466 |
|
(14) |
|
|
|
1,265 |
|
1,640 |
|
(23) |
|
|
Total revenues |
|
11,486 |
|
11,751 |
|
(2) |
|
|
|
34,829 |
|
36,885 |
|
(6) |
|
|
Benefits, losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and losses incurred |
|
8,312 |
|
10,322 |
|
(19) |
|
|
|
19,484 |
|
22,653 |
|
(14) |
|
|
Interest credited to policyholder account balances |
|
933 |
|
867 |
|
8 |
|
|
|
2,784 |
|
2,683 |
|
4 |
|
|
Amortization of deferred policy acquisition costs |
|
1,118 |
|
912 |
|
23 |
|
|
|
3,813 |
|
3,135 |
|
22 |
|
|
General operating and other expenses |
|
2,325 |
|
2,149 |
|
8 |
|
|
|
6,919 |
|
6,774 |
|
2 |
|
|
Interest expense |
|
326 |
|
290 |
|
12 |
|
|
|
902 |
|
880 |
|
3 |
|
|
(Gain) loss on extinguishment of debt |
|
1 |
|
1 |
|
- |
|
|
|
10 |
|
(4) |
|
NM |
|
|
Net (gain) loss on sale of divested businesses |
|
(2) |
|
13 |
|
NM |
|
|
|
(35) |
|
173 |
|
NM |
|
|
Total benefits, losses and expenses |
|
13,013 |
|
14,554 |
|
(11) |
|
|
|
33,877 |
|
36,294 |
|
(7) |
|
|
Income (loss) from continuing operations before |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income tax expense (benefit) |
|
(1,527) |
|
(2,803) |
|
46 |
|
|
|
952 |
|
591 |
|
61 |
|
|
Income tax expense (benefit) |
|
(307) |
|
(1,091) |
|
72 |
|
|
|
291 |
|
(18) |
|
NM |
|
|
Income (loss) from continuing operations |
|
(1,220) |
|
(1,712) |
|
29 |
|
|
|
661 |
|
609 |
|
9 |
|
|
Income (loss) from discontinued operations, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of income tax expense (benefit) |
|
(39) |
|
(1) |
|
NM |
|
|
|
(40) |
|
7 |
|
NM |
|
|
Net income (loss) |
|
(1,259) |
|
(1,713) |
|
27 |
|
|
|
621 |
|
616 |
|
1 |
|
|
Less: Net income (loss) attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
|
- |
|
26 |
|
NM |
|
|
|
5 |
|
40 |
|
(88) |
|
|
Net income (loss) attributable to AIG |
$ |
(1,259) |
$ |
(1,739) |
|
28 |
% |
|
$ |
616 |
$ |
576 |
|
7 |
% |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
(in millions, except per share data) |
|
|
|
|
|
|
|
|
2018 |
|
|
2017 |
|
|
Balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
|
|
$ |
504,860 |
|
$ |
498,301 |
|
|
Long-term debt |
|
|
|
|
|
|
|
|
34,594 |
|
|
31,640 |
|
|
Total AIG shareholders’ equity |
|
|
|
|
|
|
|
|
58,586 |
|
|
65,171 |
|
|
Book value per common share |
|
|
|
|
|
|
|
|
66.23 |
|
|
72.49 |
|
|
Book value per common share, excluding AOCI |
|
|
|
|
|
|
|
|
66.83 |
|
|
66.41 |
|
|
Adjusted book value per common share |
|
|
|
|
|
|
|
|
55.58 |
|
|
54.74 |
|
AIG | Third Quarter 2018 Form 10-Q 93
The following table presents a reconciliation of Book value per common share to Book value per common share, excluding AOCI and Book value per common share, excluding AOCI and DTA (Adjusted book value per common share), which are non-GAAP measures. For additional information see Use of Non‑GAAP Measures.
|
|
|
|
September 30, |
|
December 31, |
|
(in millions, except per share data) |
|
|
2018 |
|
2017 |
|
Total AIG shareholders' equity |
|
$ |
58,586 |
$ |
65,171 |
|
Accumulated other comprehensive income (loss) |
|
|
(536) |
|
5,465 |
|
Total AIG shareholders' equity, excluding AOCI |
|
|
59,122 |
|
59,706 |
|
Deferred tax assets |
|
|
9,953 |
|
10,492 |
|
Adjusted shareholders' equity |
|
$ |
49,169 |
$ |
49,214 |
|
|
|
|
|
|
|
|
Total common shares outstanding |
|
|
884,647,527 |
|
899,044,657 |
|
Book value per common share |
|
$ |
66.23 |
$ |
72.49 |
|
Book value per common share, excluding AOCI |
|
|
66.83 |
|
66.41 |
|
Adjusted book value per common share |
|
|
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) |
|
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 |
% |
94 AIG | Third Quarter 2018 Form 10-Q
The following table presents a reconciliation of pre-tax income/net income (loss) attributable to AIG to adjusted pre-tax income/adjusted after-tax income attributable to AIG:
|
Three Months Ended September 30, |
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-Q 95
|
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 periods ended September 30, 2018 and 2017, because we reported net losses and after-tax operating 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, respectively.
96 AIG | Third Quarter 2018 Form 10-Q
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-Q 97
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.
98 AIG | Third Quarter 2018 Form 10-Q
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, 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 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.
AIG | Third Quarter 2018 Form 10-Q 99
Business Segment Operations
Our business operations consist of General Insurance, Life and Retirement, Other Operations, and a Legacy Portfolio.
General Insurance consists of two operating segments: North America and International. Life and Retirement consists of four operating segments: Group Retirement, Individual Retirement, Life Insurance and Institutional Markets. Other Operations consists of businesses and items not allocated to our other businesses, which are primarily AIG Parent, Blackboard and Fuji Life, which was sold on April 30, 2017. Our Legacy Portfolio consists of our Legacy Life and Retirement Run-Off Lines, Legacy General Insurance Run-Off Lines, and Legacy Investments. Effective February 2018, Fortitude Re is included in our Legacy Portfolio.
The following table summarizes Adjusted pre-tax income (loss) from our business segment operations. See also Note 3 to the Condensed Consolidated Financial Statements.
|
|
Three Months Ended |
|
Nine Months Ended |
||||||
|
|
September 30, |
|
September 30, |
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
Core business: |
|
|
|
|
|
|
|
|
|
|
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 |
|
393 |
|
718 |
|
|
1,354 |
|
1,815 |
|
Group Retirement |
|
242 |
|
249 |
|
|
774 |
|
758 |
|
Life Insurance |
|
16 |
|
112 |
|
|
243 |
|
272 |
|
Institutional Markets |
|
62 |
|
79 |
|
|
196 |
|
204 |
|
Life and Retirement |
|
713 |
|
1,158 |
|
|
2,567 |
|
3,049 |
|
Other Operations |
|
(417) |
|
(366) |
|
|
(1,133) |
|
(1,039) |
|
Consolidations, eliminations and other adjustments |
|
29 |
|
(1) |
|
|
28 |
|
75 |
|
Total Core |
|
(500) |
|
(2,142) |
|
|
1,715 |
|
1,259 |
|
Legacy Portfolio |
|
84 |
|
286 |
|
|
363 |
|
1,059 |
|
Adjusted pre-tax income (loss) |
$ |
(416) |
$ |
(1,856) |
|
$ |
2,078 |
$ |
2,318 |
100 AIG | Third Quarter 2018 Form 10-Q
|
General Insurance |
General Insurance is managed by our geographic markets of North America and International. Our global presence is reflected in our multinational capabilities to provide our Commercial Lines and Personal Insurance products within these geographic markets.
|
PRODUCTS AND DISTRIBUTION |
||||
|
|
||||
 |
 |
|||
|
|
||||
|
|
Liability: Products include general liability, environmental, commercial automobile liability, workers’ compensation, excess casualty and crisis management insurance products. Casualty also includes risk-sharing and other customized structured programs for large corporate and multinational customers. Financial Lines: Products include professional liability insurance for a range of businesses and risks, including directors and officers liability (D&O), mergers and acquisitions, 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 crop 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. |
|||
|
|
||||
BUSINESS STRATEGY
Profitable Growth: Deploy capital efficiently to act opportunistically and optimize diversity within the portfolio to grow in profitable lines, geographies and customer segments. Look to inorganic growth opportunities in profitable markets and segments to expand our capabilities and footprint.
Reinsurance Optimization: Strategically partner with reinsurers to reduce exposure to losses arising from frequency of large catastrophic events and the severity from individual risk losses. We optimize our reinsurance program to manage volatility and protect the balance sheet from tail events and unpredictable net losses in support of our profitable growth objectives.
Underwriting Excellence: Empower and increase accountability of the underwriter and continue to integrate underwriting, claims and actuarial to enable better decision making. Focus on enhancing risk selection, driving consistent underwriting best practices and building robust monitoring standards to improve underwriting results.
AIG | Third Quarter 2018 Form 10-Q 101
COMPETITION and challenges
Operating in a highly competitive industry, General Insurance competes against several hundred companies, specialty insurance organizations, mutual companies and other underwriting organizations in the U.S. In international markets, we compete for business with the foreign insurance operations of large global insurance groups and local companies in specific market areas and product types. Insurance companies compete through a combination of risk acceptance criteria, product pricing, service and terms and conditions. General Insurance seeks to distinguish itself in the insurance industry primarily based on its well-established brand, global franchise, multinational capabilities, financial and capital strength, innovative products, claims expertise to handle complex claims, expertise in providing specialized coverages and customer service.
We serve our business and individual customers on a global basis — from the largest multinational corporations to local businesses and individuals. Our clients benefit from our substantial underwriting expertise.
Our challenges include:
• long-tail Commercial Lines exposures that create added complexity 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 operating segments:
General Insurance – North America
Commercial Lines over recent years has experienced challenging market conditions, with widespread excess capacity increasing competition and suppressing rates across multiple classes of business. Following the 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 across a number of 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 profitable 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 all regions and are maintaining market leadership in key developed and developing markets. We are maintaining our underwriting discipline and continuing our risk selection strategy to improve profitability.
Personal Insurance focuses on individual customers, as well as group and corporate clients. Although market competition within Personal Insurance has increased, we continue to benefit from the underwriting quality, portfolio diversity, and low volatility of the short-tailed risk in these business lines. We expect our newly formed entity in Japan – AIG Sonpo – to provide the necessary scale and platform to compete more efficiently in the Japanese market. Outside of Japan, Personal Insurance continues to invest selectively in international markets, which we believe have higher potential for sustainable profitability and lower volatility across the entire portfolio.
102 AIG | Third Quarter 2018 Form 10-Q
General INSURANCE RESULTS
|
|
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) |
|
88.6 |
|
124.1 |
|
(35.5) |
|
|
|
74.2 |
|
84.7 |
|
(10.5) |
|
|
Acquisition ratio |
|
21.7 |
|
19.2 |
|
2.5 |
|
|
|
21.5 |
|
19.8 |
|
1.7 |
|
|
General operating expense ratio |
|
14.1 |
|
13.8 |
|
0.3 |
|
|
|
14.5 |
|
14.0 |
|
0.5 |
|
|
Expense ratio |
|
35.8 |
|
33.0 |
|
2.8 |
|
|
|
36.0 |
|
33.8 |
|
2.2 |
|
|
Combined ratio(b) |
|
124.4 |
|
157.1 |
|
(32.7) |
|
|
|
110.2 |
|
118.5 |
|
(8.3) |
|
|
Adjustments for accident year loss ratio, as adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and accident year combined ratio, as adjusted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophe losses and reinstatement premiums |
|
(22.0) |
|
(45.4) |
|
23.4 |
|
|
|
(10.3) |
|
(17.4) |
|
7.1 |
|
|
Prior year development, net of (additional) return premium on loss sensitive business |
|
(2.7) |
|
(12.7) |
|
10.0 |
|
|
|
(0.2) |
|
(4.8) |
|
4.6 |
|
|
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 |
|
63.6 |
|
66.0 |
|
(2.4) |
|
|
|
64.0 |
|
62.3 |
|
1.7 |
|
|
Accident year combined ratio, as adjusted |
|
99.4 |
|
99.0 |
|
0.4 |
|
|
|
100.0 |
|
96.1 |
|
3.9 |
|
(a) 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 APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.
The following table presents General Insurance net premiums written by operating segment, showing change on both reported and constant dollar basis:
|
|
Three Months Ended September 30, |
|
Percentage Change in |
|
Nine Months Ended September 30, |
|
Percentage Change in |
||||||||||||
|
(in millions) |
|
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 2018 Form 10-Q 103
The following tables present General Insurance accident year catastrophes and severe losses by geography(a) and number of events:
Catastrophes(b)
|
|
# of |
|
|
North |
|
|
|
|
|
(in millions) |
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) |
$ |
1,039 |
$ |
172 |
$ |
1,211 |
|
Windstorms and hailstorms |
7 |
|
|
1,235 |
|
529 |
|
1,764 |
|
Earthquakes |
1 |
|
|
1 |
|
40 |
|
41 |
|
Total catastrophe-related charges |
8 |
|
$ |
2,275 |
$ |
741 |
$ |
3,016 |
|
Nine Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
Flooding |
1 |
|
$ |
4 |
$ |
106 |
$ |
110 |
|
Windstorms and hailstorms |
19 |
|
|
1,126 |
|
708 |
|
1,834 |
|
Wildfire |
3 |
|
|
37 |
|
- |
|
37 |
|
Earthquakes |
2 |
|
|
13 |
|
81 |
|
94 |
|
Volcanic eruptions |
1 |
|
|
17 |
|
1 |
|
18 |
|
Total catastrophe-related charges |
26 |
|
$ |
1,197 |
$ |
896 |
$ |
2,093 |
|
Nine Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
Flooding |
- |
(c) |
$ |
1,039 |
$ |
172 |
$ |
1,211 |
|
Windstorms and hailstorms |
17 |
|
|
1,573 |
|
533 |
|
2,106 |
|
Tropical cyclone |
1 |
|
|
- |
|
66 |
|
66 |
|
Earthquakes |
1 |
|
|
1 |
|
40 |
|
41 |
|
Total catastrophe-related charges |
19 |
|
$ |
2,613 |
$ |
811 |
$ |
3,424 |
(a) Geography: North America primarily includes insurance businesses in the United States, Canada and Bermuda. International includes insurance businesses in Japan, the United Kingdom, Europe, the Asia Pacific region, Latin America, Puerto Rico, Australia, the Middle East and Africa. Geography results are presented before consideration of internal reinsurance agreements.
(b) Natural and man-made catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and also include certain man-made events, such as terrorism and civil disorders that exceed the $10 million threshold.
(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 |
|
North |
|
|
|
|
|
(in millions) |
Events |
|
America |
|
International |
|
Total |
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
2018(e) |
9 |
$ |
88 |
$ |
65 |
$ |
153 |
|
2017 |
13 |
$ |
111 |
$ |
132 |
$ |
243 |
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
2018(e) |
34 |
$ |
284 |
$ |
297 |
$ |
581 |
|
2017 |
22 |
$ |
216 |
$ |
209 |
$ |
425 |
(d) Severe losses are defined as non-catastrophe individual first party losses, surety losses and trade 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.
104 AIG | Third Quarter 2018 Form 10-Q
North america Results
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||||||
|
(in millions) |
|
2018 |
|
2017 |
|
Change |
|
|
|
2018 |
|
2017 |
|
Change |
|
|
Underwriting results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
$ |
3,164 |
$ |
2,942 |
|
8 |
% |
|
$ |
8,439 |
$ |
8,390 |
|
1 |
% |
|
(Increase) decrease in unearned premiums(a) |
|
138 |
|
(55) |
|
NM |
|
|
|
447 |
|
338 |
|
32 |
|
|
Net premiums earned |
|
3,302 |
|
2,887 |
|
14 |
|
|
|
8,886 |
|
8,728 |
|
2 |
|
|
Losses and loss adjustment expenses incurred(b) |
|
3,264 |
|
5,053 |
|
(35) |
|
|
|
7,532 |
|
9,382 |
|
(20) |
|
|
Acquisition expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs |
|
534 |
|
307 |
|
74 |
|
|
|
1,322 |
|
970 |
|
36 |
|
|
Other acquisition expenses |
|
92 |
|
127 |
|
(28) |
|
|
|
348 |
|
402 |
|
(13) |
|
|
Total acquisition expenses |
|
626 |
|
434 |
|
44 |
|
|
|
1,670 |
|
1,372 |
|
22 |
|
|
General operating expenses |
|
399 |
|
340 |
|
17 |
|
|
|
1,126 |
|
1,035 |
|
9 |
|
|
Underwriting loss(a) |
|
(987) |
|
(2,940) |
|
66 |
|
|
|
(1,442) |
|
(3,061) |
|
53 |
|
|
Net investment income |
|
827 |
|
747 |
|
11 |
|
|
|
2,009 |
|
2,417 |
|
(17) |
|
|
Adjusted pre-tax income (loss) |
$ |
(160) |
$ |
(2,193) |
|
93 |
% |
|
$ |
567 |
$ |
(644) |
|
NM |
% |
|
Loss ratio(b) |
|
98.8 |
|
175.0 |
|
(76.2) |
|
|
|
84.8 |
|
107.5 |
|
(22.7) |
|
|
Acquisition ratio |
|
19.0 |
|
15.0 |
|
4.0 |
|
|
|
18.8 |
|
15.7 |
|
3.1 |
|
|
General operating expense ratio |
|
12.1 |
|
11.8 |
|
0.3 |
|
|
|
12.7 |
|
11.9 |
|
0.8 |
|
|
Expense ratio |
|
31.1 |
|
26.8 |
|
4.3 |
|
|
|
31.5 |
|
27.6 |
|
3.9 |
|
|
Combined ratio(b) |
|
129.9 |
|
201.8 |
|
(71.9) |
|
|
|
116.3 |
|
135.1 |
|
(18.8) |
|
|
Adjustments for accident year loss ratio, as adjusted |
|
|
|
|
|
|
|
|
|
|
|
|
|
||
|
and accident year combined ratio, as adjusted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
(4.8) |
|
(19.0) |
|
14.2 |
|
|
|
(0.5) |
|
(5.9) |
|
5.4 |
|
|
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 |
|
69.8 |
|
77.2 |
|
(7.4) |
|
|
|
71.7 |
|
71.4 |
|
0.3 |
|
|
Accident year combined ratio, as adjusted |
|
100.9 |
|
104.0 |
|
(3.1) |
|
|
|
103.2 |
|
99.0 |
|
4.2 |
|
(a) 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 APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.
Business and Financial Highlights
The North America General Insurance business is focused on making progress towards improved underwriting results and efficiencies. This includes strengthening our talent base; ongoing investment in pricing and monitoring tools; 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 loss 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 in 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 development see Insurance Reserves.
Net premiums written increased in the three- and nine-month periods ended September 30, 2018 compared to the same periods in the prior year primarily due to growth in Personal Insurance, lower ceded premiums driven by changes in the 2018 reinsurance programs and the inclusion 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 Annual Report.
AIG | Third Quarter 2018 Form 10-Q 105
|
North America Adjusted Pre-Tax Loss Three Months Ended September 30, (in millions) |
|
|
|
Quarterly 2018 and 2017 Comparison Adjusted pre-tax loss decreased primarily due to: • significantly lower catastrophe losses; • lower unfavorable prior year loss reserve development; • lower current accident year loss ratio, as adjusted as discussed in the Combined Ratios section below; and • higher net investment income primarily driven by the inclusion 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 loss reserve development. These were partially offset by: • lower investment returns on alternative investments, primarily driven by less robust private equity and hedge fund performance compared to the same period in 2017, and a decline in income from securities for which the fair value 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 • higher general operating expenses due to the inclusion of the Validus acquisition.
|
106 AIG | Third Quarter 2018 Form 10-Q
|
North America Net Premiums Written Three Months Ended September 30, (in millions) |
|
|
|
Quarterly 2018 and 2017 Comparison Net premiums written increased primarily due to: • the inclusion of the Validus acquisition; • lower 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 the Property and Programs business mainly due to underwriting actions taken to strengthen our portfolio and to maintain pricing discipline; and • exit of certain businesses in Accident & Health in prior year. |
|
North America Net Premiums Written Nine Months Ended September 30, (in millions) |
|
|
|
Year-to-Date 2018 and 2017 Comparison Net premiums written increased primarily due to: • growth in the Travel and Private Client Group businesses within Personal Insurance; • lower ceded premiums due to changes in the 2018 reinsurance programs; and • the inclusion of the Validus acquisition. This increase was partially offset by: • 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 certain businesses in Accident & Health in prior year. |
AIG | Third Quarter 2018 Form 10-Q 107
|
North America Combined Ratios Three Months Ended September 30, |
|
|
|
Quarterly 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; • 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. |
108 AIG | Third Quarter 2018 Form 10-Q
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-Q 109
|
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 performance of 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. |
110 AIG | Third Quarter 2018 Form 10-Q
|
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-Q 111
|
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 significantly lower unfavorable prior year loss reserve development and lower severe losses. The decrease in the loss ratio was partially offset 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; and • higher catastrophe losses. The increase in the expense ratio was primarily driven by higher acquisition ratio mainly due to changes in business mix combined with changes in 2018 reinsurance programs. |
|
International Combined Ratios Nine Months Ended September 30, |
|
|
|
Year-to-Date 2018 and 2017 Comparison The combined ratio remained flat due to a lower loss ratio entirely offset by a slightly higher expense ratio. This decrease in the loss ratio was primarily driven by significantly 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 additional reinsurance protection added for international locations on a global basis and the 2018 catastrophe reinsurance program; and • higher severe losses. |
112 AIG | Third Quarter 2018 Form 10-Q
|
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. Retail Mutual Funds are distributed primarily through broker-dealers. |
|
|
Group Retirement: Products and 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 The 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 include term life and universal life insurance distributed through independent marketing organizations, independent insurance agents, financial advisors and direct marketing. International operations include the distribution of life and health products in the U.K. and Ireland. |
|
|
Institutional Markets: Products primarily include stable value wrap products, structured settlement and pension risk transfer annuities, corporate- and bank-owned life insurance and guaranteed investment contracts (GICs). Institutional Markets products are primarily distributed through specialized marketing and consulting firms and structured settlement brokers. |
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 2018 Form 10-Q 113
BUSINESS STRATEGY
Deliver client-centric solutions through our unique franchise by bringing together a broad portfolio of life insurance, retirement and institutional products offered through an extensive, multichannel distribution network. Life and Retirement focuses on ease of doing business, offering valuable solutions, and expanding and deepening its distribution relationships across multiple channels.
Position market leading businesses to serve growing needs by continually enhancing product solutions, service delivery and digital capabilities while using data and analytics in an innovative manner to improve customer experience.
|
|
|
|
|
|
|
|
|
Individual Retirement will continue to capitalize on the opportunity to meet consumer demand for guaranteed income by maintaining innovative variable and index annuity products, while also managing risk from guarantee features through risk-mitigating product design and well-developed economic hedging capabilities. Our fixed annuity products provide diversity in our annuity product suite by offering stable returns for retirement savings. |
|
|
Group Retirement continues to enhance its technology platform to improve the customer experience for plan sponsors and individual participants. VALIC’s self-service tools paired with its career financial advisors provide a compelling service platform. Group Retirement’s strategy also involves providing financial planning services for its clients and meeting their need for income in retirement. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance in the U.S. will continue to position itself for growth and changing market dynamics while continuing to execute strategies to enhance returns. Our focus is on materializing success from a multi-year effort of building state-of-the-art platforms and underwriting innovations, which are expected to bring process improvements and cost efficiencies. In the U.K., AIG Life Insurance will continue to focus on growing the business organically and through potential acquisition opportunities. |
|
|
Institutional Markets continues to grow its assets under management across multiple product lines, including stable value wrap, GICs and pension risk transfer annuities. Our growth strategy is opportunistic and allows us to pursue select transactions that meet our risk-adjusted return requirements. |
|
|
|
|
|
|
|
|
Enhance Operational Effectiveness by simplifying processes and operating environments to increase competitiveness, improve service and product capabilities and facilitate delivery of our target customer experience. We continue to invest in technology to improve operating efficiency and ease of doing business for our distribution partners and customers. We believe that simplifying our operating models will enhance productivity and support further profitable growth.
Manage our Balance Sheet through a rigorous approach to our products and portfolio. We match our product design and high quality investments with our asset and liability exposures to maximize our ability to meet cash and liquidity needs under various operating scenarios.
Deliver Value Creation and Manage Capital by striving to deliver solid earnings through disciplined pricing, sustainable underwriting improvements, expense reductions, and diversification of risk, while optimizing capital allocation and efficiency within insurance entities to enhance return on equity.
114 AIG | Third Quarter 2018 Form 10-Q
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 leading Americans to seek additional financial security as they approach retirement. The strong demand for individual variable and fixed index annuities with guaranteed income features has attracted increased competition in this product space. In response to the continued low interest rate environment, which has added pressure to profit margins, we have developed guaranteed income benefits for both variable and fixed index annuities with margins that are less sensitive to the level of interest rates.
Changes in the interest rate environment can have a significant impact on sales, surrender rates, investment returns, guaranteed income features, and spreads in the annuity industry.
Group Retirement
Group Retirement competes in the defined contribution market under the VALIC brand. VALIC is a leading retirement plan provider in the U.S. for K-12 schools and school districts, higher education, healthcare, government and other not-for-profit institutions. The defined contribution market is a highly efficient and competitive market that requires support for both plan sponsors and individual participants. To meet this challenge, VALIC is investing in a client-focused technology platform to support improved compliance and self-service functionality. VALIC’s service model pairs self-service tools with its career financial advisors who provide individual plan participants with enrollment support and comprehensive financial planning services.
Changes in the interest rate environment can have a significant impact on investment returns, guaranteed income features, and spreads, and a moderate impact on sales and surrender rates.
AIG | Third Quarter 2018 Form 10-Q 115
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.
116 AIG | Third Quarter 2018 Form 10-Q
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 |
Business and Financial Highlights
The market environment continues to reflect uncertainties in the annuity business resulting from a sustained low interest rate environment. While interest rates continue to increase, rates remain low relative to historical levels. Premiums and deposits improved in the three- and nine-month periods ended September 30, 2018 compared to the same periods in the prior year. Premiums and deposits in the nine-month period ended September 30, 2018 included deposits from the FHLB funding agreement. Net flows in the three-month period ended September 30, 2018 improved compared to the same period in the prior year due to growth in the Fixed and Index Annuity business. Net flows in the nine-month period ended September 30, 2018 deteriorated compared to the same period in the prior year and 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.
AIG | Third Quarter 2018 Form 10-Q 117
|
Individual Retirement 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 $52 million compared to a net favorable adjustment of $242 million 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, lower bond call and tender income, and lower alternative investment returns, partially offset by higher commercial mortgage loan prepayment income; and • a decline in Fixed Annuity base spread income driven by lower reinvestment yields and volumes, partially offset by increases from accretion and other investment income. Partially offsetting these decreases were: • higher Index Annuity base portfolio income reflecting growth in assets; and • higher policy fees and advisory fees, net of expenses, primarily driven by asset growth in Index and Variable 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. |
118 AIG | Third Quarter 2018 Form 10-Q
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, 2018 compared to the same periods in the prior year, primarily due to competitive market 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:
|
|
Three Months Ended |
|
Nine Months Ended |
||||||
|
|
September 30, |
|
September 30, |
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
Premiums |
$ |
9 |
$ |
22 |
|
$ |
37 |
$ |
81 |
|
Deposits |
|
3,609 |
|
2,504 |
|
|
11,364 |
|
8,723 |
|
Other |
|
(2) |
|
- |
|
|
(5) |
|
(4) |
|
Premiums and deposits |
$ |
3,616 |
$ |
2,526 |
|
$ |
11,396 |
$ |
8,800 |
The following table presents surrenders as a percentage of average reserves:
|
|
Three Months Ended |
|
Nine Months Ended |
||||||
|
|
September 30, |
|
September 30, |
||||||
|
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
|
Surrenders as a percentage of average reserves |
|
|
|
|
|
|
|
|
|
|
Fixed Annuities |
8.2 |
% |
5.9 |
% |
|
7.9 |
% |
6.6 |
% |
|
Variable and Index Annuities |
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, 2018 |
|
December 31, 2017 |
|||||||
|
|
|
|
|
Variable |
|
|
|
|
Variable |
|
|
|
|
Fixed |
|
and Index |
|
|
Fixed |
|
and Index |
|
|
(in millions) |
|
Annuities |
|
Annuities |
|
|
Annuities |
|
Annuities |
|
|
No surrender charge |
$ |
30,707 |
$ |
20,924 |
|
$ |
32,299 |
$ |
18,896 |
|
|
Greater than 0% - 2% |
|
1,265 |
|
6,809 |
|
|
1,704 |
|
6,045 |
|
|
Greater than 2% - 4% |
|
2,039 |
|
11,465 |
|
|
1,560 |
|
9,470 |
|
|
Greater than 4% |
|
14,324 |
|
32,838 |
|
|
13,329 |
|
34,677 |
|
|
Non-surrenderable |
|
1,610 |
|
470 |
|
|
1,665 |
|
429 |
|
|
Total reserves |
$ |
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, 2018 has decreased compared to December 31, 2017 due to normal aging of the business and continued decline in sales. The increase in reserves with no surrender charge contributed to the increase in the surrender rate for Variable and Index Annuities in the three- and nine-month periods ended September 30, 2018 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 2018 Form 10-Q 119
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 2018 and 2017 Comparison • Fixed Annuities premiums and deposits increased primarily due to higher broker dealer and bank distribution sales driven by favorable market conditions. Net flows continued to be negative but improved primarily due to higher premiums and deposits, partially offset by increased surrenders. • Variable and Index Annuities premiums and deposits increased primarily due to higher index annuity sales driven by expanded distribution and market growth, and increased variable annuity deposits driven by improved bank and broker dealer distribution sales. Sales were also positively impacted by removing the industry uncertainty caused by the DOL Fiduciary Rule, 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, partially offset by improved sales. • Retail Mutual Funds net flows remained negative and deteriorated reflecting lower deposits and higher withdrawals due to continued negative industry trends in U.S. equity actively managed funds and the impact of underperformance within our largest fund. |
|
Individual Retirement Premiums and Deposits (P&D) and Net Flows Nine Months Ended September 30, (in millions) |
|
|
|
Year-to-Date 2018 and 2017 Comparison • Fixed Annuities premiums and deposits increased primarily due to higher broker dealer and bank distribution sales driven by favorable market conditions. Net flows continued to be negative but improved primarily due to higher premiums and deposits, partially offset by increased surrenders. • Variable and Index Annuities premiums and deposits increased primarily due to higher index annuity sales driven by expanded distribution and market growth, partially offset by lower variable annuity sales driven by lower bank and broker dealer distribution sales. Sales were also positively impacted by removing the industry uncertainty caused by the DOL Fiduciary Rule, 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 lower sales and higher surrenders. • Funding Agreements premiums and deposits in the nine-month period ended September 30, 2018 reflected deposits from the FHLB funding agreement, which were excluded from reported net flows. • Retail Mutual Funds net flows remained negative and deteriorated reflecting lower deposits and higher withdrawals due to continued negative industry trends in U.S. equity actively managed funds and the impact of underperformance within our largest fund. |
120 AIG | Third Quarter 2018 Form 10-Q
Group 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 |
$ |
8 |
|
13 |
% |
|
$ |
30 |
$ |
21 |
|
43 |
% |
|
Policy fees |
|
115 |
|
113 |
|
2 |
|
|
|
339 |
|
313 |
|
8 |
|
|
Net investment income |
|
531 |
|
524 |
|
1 |
|
|
|
1,655 |
|
1,614 |
|
3 |
|
|
Advisory fee and other income |
|
63 |
|
57 |
|
11 |
|
|
|
185 |
|
168 |
|
10 |
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and losses incurred |
|
25 |
|
10 |
|
150 |
|
|
|
63 |
|
36 |
|
75 |
|
|
Interest credited to policyholder account balances |
|
275 |
|
283 |
|
(3) |
|
|
|
826 |
|
845 |
|
(2) |
|
|
Amortization of deferred policy acquisition costs |
|
7 |
|
12 |
|
(42) |
|
|
|
58 |
|
59 |
|
(2) |
|
|
Non deferrable insurance commissions |
|
30 |
|
28 |
|
7 |
|
|
|
87 |
|
80 |
|
9 |
|
|
Advisory fee expenses |
|
26 |
|
22 |
|
18 |
|
|
|
67 |
|
59 |
|
14 |
|
|
General operating expenses |
|
101 |
|
88 |
|
15 |
|
|
|
301 |
|
256 |
|
18 |
|
|
Interest expense |
|
12 |
|
10 |
|
20 |
|
|
|
33 |
|
23 |
|
43 |
|
|
Adjusted pre-tax income |
$ |
242 |
$ |
249 |
|
(3) |
% |
|
$ |
774 |
$ |
758 |
|
2 |
% |
|
Base net investment spread: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base yield |
|
4.49 |
% |
4.50 |
% |
(1) |
bps |
|
|
4.53 |
% |
4.55 |
% |
(2) |
bps |
|
Cost of funds |
|
2.68 |
|
2.78 |
|
(10) |
|
|
|
2.70 |
|
2.80 |
|
(10) |
|
|
Base net investment spread |
|
1.81 |
% |
1.72 |
% |
9 |
bps |
|
|
1.83 |
% |
1.75 |
% |
8 |
bps |
Business and Financial Highlights
Group Retirement is 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, 2018 compared to the same periods in the prior year. Premiums and deposits in the nine-month period ended September 30, 2018 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, partially offset by increased deposits.
Adjusted pre-tax income decreased in the three-month period ended September 30, 2018 as improvements in base net investment spread, higher policy fees and net 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, 2018 compared to the same periods in the prior year primarily due to effective crediting rate management, partially offset by lower reinvestment yields. Base spread income for the nine-month period ended September 30, 2018, included higher accretion and other investment income.
AIG | Third Quarter 2018 Form 10-Q 121
|
Group Retirement Adjusted Pre-Tax Income Three Months Ended September 30, (in millions) |
|
|
|
Quarterly 2018 and 2017 Comparison Adjusted pre-tax income decreased primarily due to: · higher general operating expenses primarily due to continued investments in people and technology. Partially offsetting these decreases were: · an increase in net investment spread primarily due to effective crediting rate management, partially offset by lower reinvestment yields; · higher net investment income primarily due to increased income from bond call and tender and other investment income, partially offset by 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 returns on alternative 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 result of credit spread widening and rising interest rates; • an increase in net investment spread primarily due to effective crediting rate management, higher accretion and other investment income, partially offset by lower reinvestment yields; and • higher policy fees and advisory fees, net of expenses, primarily driven 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 continued investments in people and technology. |
122 AIG | Third Quarter 2018 Form 10-Q
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, 2018, which primarily represent immediate annuities, increased compared to the same periods in the prior 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 administration.
Net flows for annuity products included in Group Retirement represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals. 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:
|
|
Three Months Ended |
|
Nine Months Ended |
||||||
|
|
September 30, |
|
September 30, |
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
Premiums |
$ |
9 |
$ |
8 |
|
$ |
30 |
$ |
21 |
|
Deposits |
|
2,107 |
|
1,852 |
|
|
6,503 |
|
5,681 |
|
Premiums and deposits |
$ |
2,116 |
$ |
1,860 |
|
$ |
6,533 |
$ |
5,702 |
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, |
||||||
|
|
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, |
|
|
(in millions) |
|
2018 |
(a) |
|
2017 |
(a) |
|
No surrender charge(b) |
$ |
70,133 |
|
$ |
69,006 |
|
|
Greater than 0% - 2% |
|
747 |
|
|
1,087 |
|
|
Greater than 2% - 4% |
|
1,308 |
|
|
1,344 |
|
|
Greater than 4% |
|
5,943 |
|
|
5,270 |
|
|
Non-surrenderable |
|
625 |
|
|
439 |
|
|
Total reserves |
$ |
78,756 |
|
$ |
77,146 |
|
(a) Excludes mutual fund assets under administration of $20.2 billion, at both September 30, 2018 and December 31, 2017.
(b) Group Retirement amounts in this category include reserves of approximately $6.3 billion, at both September 30, 2018 and December 31, 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. At September 30, 2018, Group Retirement annuity reserves increased compared to December 31, 2017 primarily due to increased deposits. The surrender rate in the three- and nine-month periods ended September 30, 2018 increased compared to the same periods in the prior year primarily due to higher surrenders, including approximately $1.5 billion of large group plan surrenders.
AIG | Third Quarter 2018 Form 10-Q 123
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 2018 and 2017 Comparison Premiums and deposits increased primarily due to higher in-plan and individual sales, partially offset by lower group acquisition deposits. Net flows deteriorated and continued to be negative primarily due to higher surrenders driven mainly by the consolidation of healthcare providers, partially offset by improvements in premiums and deposits.
|
|
Group Retirement Premiums and Deposits and Net Flows Nine Months Ended September 30, (in millions) |
|
|
|
Year-to-Date 2018 and 2017 Comparison Net flows deteriorated and continued to be negative primarily due to higher surrenders driven mainly by the consolidation of healthcare providers, including approximately $1.5 billion of large group plan surrenders, 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 excluded from reported net flows.
|
124 AIG | Third Quarter 2018 Form 10-Q
Life Insurance Results
|
|
Three Months Ended |
|
|
|
|
Nine Months Ended |
|
|
|
||||||
|
|
September 30, |
|
Percentage |
|
|
September 30, |
|
Percentage |
|
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
Change |
|
|
|
2018 |
|
2017 |
|
Change |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
$ |
379 |
$ |
384 |
|
(1) |
% |
|
$ |
1,176 |
$ |
1,168 |
|
1 |
% |
|
Policy fees |
|
141 |
|
343 |
|
(59) |
|
|
|
895 |
|
1,060 |
|
(16) |
|
|
Net investment income |
|
275 |
|
260 |
|
6 |
|
|
|
850 |
|
781 |
|
9 |
|
|
Other income |
|
14 |
|
13 |
|
8 |
|
|
|
41 |
|
34 |
|
21 |
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and losses incurred |
|
780 |
|
587 |
|
33 |
|
|
|
1,997 |
|
1,795 |
|
11 |
|
|
Interest credited to policyholder account balances |
|
92 |
|
93 |
|
(1) |
|
|
|
281 |
|
281 |
|
- |
|
|
Amortization of deferred policy acquisition costs |
|
(265) |
|
37 |
|
NM |
|
|
|
(111) |
|
161 |
|
NM |
|
|
Non deferrable insurance commissions |
|
27 |
|
32 |
|
(16) |
|
|
|
69 |
|
88 |
|
(22) |
|
|
General operating expenses |
|
152 |
|
135 |
|
13 |
|
|
|
464 |
|
437 |
|
6 |
|
|
Interest expense |
|
7 |
|
4 |
|
75 |
|
|
|
19 |
|
9 |
|
111 |
|
|
Adjusted pre-tax income |
$ |
16 |
$ |
112 |
|
(86) |
% |
|
$ |
243 |
$ |
272 |
|
(11) |
% |
Business and Financial Highlights
Life Insurance is focused on selling profitable new products through strategic channels to enhance future returns. Premiums in the three- and nine-month periods ended September 30, 2018 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 due to net unfavorable actuarial assumption updates compared to a net favorable adjustment in the three- and nine-month periods ended September 30, 2017. General operating expenses increased due to business growth in international life and increased distribution cost in the U.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 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 2018 Form 10-Q 125
|
Life Insurance 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; 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: • favorable actuarial adjustments to universal life and favorable reinsurance adjustments in term life; • higher net investment income primarily due to increases in base portfolio income driven by growth in invested assets and higher income from alternative investments; and • favorable mortality in the U.S. |
Life Insurance GAAP Premiums and Premiums and Deposits
Premiums for Life Insurance represent amounts received on traditional life insurance policies, primarily term life, international life and health and group benefits. Premiums, excluding the effect of foreign exchange, decreased in the three- and nine-month periods ended September 30, 2018 compared to the same periods in the prior year as lower domestic group benefits and term life premiums more than offset the growth in international life and health 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.
126 AIG | Third Quarter 2018 Form 10-Q
The following table presents a reconciliation of Life Insurance GAAP premiums to premiums and deposits:
|
|
Three Months Ended |
|
Nine Months Ended |
||||||
|
|
September 30, |
|
September 30, |
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
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 2018 Form 10-Q 127
Institutional markets Results
|
|
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) |
% |
Business and Financial Highlights
Institutional 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 business is focused on maintaining pricing discipline to achieve attractive risk adjusted 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. |
128 AIG | Third Quarter 2018 Form 10-Q
|
Institutional Markets 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 decrease in policy fees primarily due to lower stable value wrap notional amount; and • higher general operating expenses due to growth in business.
|
Institutional markets GAAP Premiums and Premiums and Deposits
Premiums for Institutional Markets primarily represent amounts received on pension risk transfer or structured settlement annuities with life contingencies. Premiums 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 2018 Form 10-Q 129
A discussion of the significant variances in premiums and deposits follows:
|
Institutional Markets Premiums and Deposits Three Months Ended September 30, (in millions) |
|
|
|
Quarterly 2018 and 2017 Comparison Premiums and deposits decreased primarily due to lower GIC deposits and pension risk transfer sales.
|
|
Institutional Markets Premiums and Deposits Nine Months Ended September 30, (in millions) |
|
|
|
Year-to-Date 2018 and 2017 Comparison Premiums and deposits decreased slightly due to lower sales in pension risk transfer and structured settlements, significantly offset by $1.4 billion in FHLB funding agreements. |
130 AIG | Third Quarter 2018 Form 10-Q
|
|
The following table presents Other Operations results:
|
|
Three Months Ended |
|
|
|
|
Nine Months Ended |
|
|
|
||||||
|
|
September 30, |
|
Percentage |
|
|
September 30, |
|
Percentage |
|
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
Change |
|
|
|
2018 |
|
2017 |
|
Change |
|
|
Adjusted pre-tax income (loss) by activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuji Life |
$ |
- |
$ |
- |
|
NM |
% |
|
$ |
- |
$ |
43 |
|
NM |
% |
|
Parent and Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate general operating expenses |
|
(182) |
|
(172) |
|
(6) |
|
|
|
(519) |
|
(563) |
|
8 |
|
|
Interest expense |
|
(289) |
|
(243) |
|
(19) |
|
|
|
(785) |
|
(729) |
|
(8) |
|
|
Other income, net |
|
54 |
|
49 |
|
10 |
|
|
|
171 |
|
210 |
|
(19) |
|
|
Total Parent and Other |
|
(417) |
|
(366) |
|
(14) |
|
|
|
(1,133) |
|
(1,082) |
|
(5) |
|
|
Adjusted pre-tax loss before eliminations |
|
(417) |
|
(366) |
|
(14) |
|
|
|
(1,133) |
|
(1,039) |
|
(9) |
|
|
Consolidation, eliminations and other adjustments |
|
29 |
|
(1) |
|
NM |
|
|
|
28 |
|
75 |
|
(63) |
|
|
Adjusted pre-tax loss |
$ |
(388) |
$ |
(367) |
|
(6) |
% |
|
$ |
(1,105) |
$ |
(964) |
|
(15) |
% |
Quarterly 2018 and 2017 Comparison
Parent and Other adjusted pre-tax loss increased compared to the same period in the prior year primarily due to higher interest 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 purchased under reverse repurchase agreements, partially offset by lower income from investments accounted for under the fair value option and lower income on available for sale investments.
Year-to-date 2018 and 2017 Comparison
Parent and Other adjusted pre-tax loss increased compared to the same period in the prior year. General operating expenses decreased primarily due to one-time payments in the second quarter of 2017 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 decreased as a result of lower income from investments accounted for under the fair value option and lower income on available for sale investments, offset by investment income for equity securities and income on securities purchased under reverse repurchase agreements.
Fuji Life was sold on April 30, 2017.
AIG | Third Quarter 2018 Form 10-Q 131
|
|
Legacy Portfolio 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 Life and Retirement Run-Off Lines - Reserves consist of certain structured settlements, pension risk transfer annuities and single premium immediate annuities written prior to April 2012. Also includes exposures to whole life, long-term care and exited accident & health product lines.
• Legacy General Insurance Run-Off Lines - Reserves consist of excess workers’ compensation, environmental exposures and exposures to other products within General Insurance that are no longer actively marketed. Also includes the remaining reserves in Eaglestone Reinsurance Company (Eaglestone).
• Legacy Investments – Includes investment classes that we have placed into run-off including holdings in direct investments as well as investments in global capital markets and global real estate.
BUSINESS STRATEGY
For Legacy insurance lines, securing the interests of our policyholders and insureds is paramount. We have considered and continue to evaluate the following strategies for these lines:
• Third party and affiliated reinsurance and retrocessions to improve capital efficiency
• Commutations of assumed reinsurance and direct policy buy-backs
• Enhance insured policyholder options and claims resolution strategies
• Enhanced asset liability management and expense management
For Legacy investments, our business strategy is to maximize liquidity to AIG Parent and minimize book value impairments while sourcing for our insurance companies attractive assets for their portfolios.
SALE OF NON-CONTROLLING INTEREST IN FORTITUDE
Fortitude Re was formed during the first quarter of 2018 in connection with a series of affiliated reinsurance transactions related to our Legacy Portfolio. Those reinsurance transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines into a single legal entity. As of September 30, 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.
132 AIG | Third Quarter 2018 Form 10-Q
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-Q 133
LEGACY PORTFOLIO RESULTS
|
|
Three Months Ended |
|
|
|
|
Nine Months Ended |
|
|
|
||||||
|
|
September 30, |
|
Percentage |
|
|
September 30, |
|
Percentage |
|
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
Change |
|
|
|
2018 |
|
2017 |
|
Change |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums |
$ |
131 |
$ |
136 |
|
(4) |
% |
|
$ |
406 |
$ |
449 |
|
(10) |
% |
|
Policy fees |
|
30 |
|
38 |
|
(21) |
|
|
|
92 |
|
105 |
|
(12) |
|
|
Net investment income |
|
610 |
|
690 |
|
(12) |
|
|
|
1,798 |
|
2,142 |
|
(16) |
|
|
Other income (loss) |
|
43 |
|
149 |
|
(71) |
|
|
|
135 |
|
539 |
|
(75) |
|
|
Total adjusted revenues |
|
814 |
|
1,013 |
|
(20) |
|
|
|
2,431 |
|
3,235 |
|
(25) |
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and losses and loss adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses incurred |
|
545 |
|
500 |
|
9 |
|
|
|
1,504 |
|
1,470 |
|
2 |
|
|
Interest credited to policyholder account balances |
|
57 |
|
61 |
|
(7) |
|
|
|
179 |
|
181 |
|
(1) |
|
|
Amortization of deferred policy acquisition costs |
|
25 |
|
28 |
|
(11) |
|
|
|
62 |
|
70 |
|
(11) |
|
|
General operating and other expenses |
|
96 |
|
105 |
|
(9) |
|
|
|
300 |
|
352 |
|
(15) |
|
|
Interest expense |
|
7 |
|
33 |
|
(79) |
|
|
|
23 |
|
103 |
|
(78) |
|
|
Total benefits and expenses |
|
730 |
|
727 |
|
- |
|
|
|
2,068 |
|
2,176 |
|
(5) |
|
|
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 |
|
53 |
|
144 |
|
(63) |
|
|
|
140 |
|
544 |
|
(74) |
|
|
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, 2018, Fortitude Re disbursed $444 million of tax sharing payments to AIG Parent.
134 AIG | Third Quarter 2018 Form 10-Q
|
Legacy Portfolio Adjusted Pre-Tax Income 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 lower gain on fair value option portfolios in the three-month period ended September 30, 2018. |
|
Legacy Portfolio Adjusted Pre-Tax Income Nine Months Ended September 30, (in millions) |
|
|
|
Year-to-Date 2018 and 2017 Comparison Adjusted pre-tax income decreased due to: · lower Legacy Life and Retirement earnings compared to the nine-month period ended September 30, 2017 due to lower net investment income and lower mortality gains than in the same period in the prior year; · lower 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 earnings 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 and lower gain on fair value option portfolios in the nine-month period ended September 30, 2018. |
AIG | Third Quarter 2018 Form 10-Q 135
Our investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are driven by the respective operating 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 in the Nine Months Ended September 30, 2018 |
|
• A rise in interest rates and widening 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 loss in our investment portfolio. Net unrealized gains in our available for sale portfolio decreased to approximately $4.7 billion as of September 30, 2018 from approximately $13.9 billion as of December 31, 2017. • We continued to make investments in structured securities and other fixed maturity securities and increased lending activities in mortgage loans with favorable risk compared to return characteristics to improve yields and increase net investment income. • Lower investment returns in our hedge fund portfolio and a decline in income from fixed maturity securities for which the fair value option was elected as a result of credit spread widening and rising interest rates, as well as negative performance of our fair value option securities portfolio. • During the nine-month period ended September 30, 2018, we reduced our hedge fund portfolio by approximately $1.7 billion as a result of redemptions consistent with our planned reduction of exposure. • Blended investment yields on new investments were lower than blended rates on investments that were sold, matured or called. • In the first quarter of 2018, we sold our remaining interest in Arch Capital, 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 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 General Insurance consist of a mix of instruments that meet our current risk-return, tax, liquidity, credit quality and diversification objectives.
• Outside of the U.S., fixed maturity securities held by General Insurance companies consist primarily of high-grade securities generally denominated in the currencies of the countries in which we operate.
• While more of a focus is placed on asset-liability management in Life 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.
136 AIG | Third Quarter 2018 Form 10-Q
Attribution of Net Investment Income to Operating Segments
Net investment income is attributed to our businesses based on internal models consistent with the nature of the underlying businesses.
For General Insurance — North America and International and Legacy General Insurance Run-Off Lines, we estimate investable funds based primarily on loss reserves and unearned premiums. The allocation of net investment income of the General Insurance companies to segments is calculated based on these estimated investable funds, consistent with the approximate duration of the liabilities and the required economic capital allocation for each segment
For Life and Retirement — Individual Retirement, Group Retirement, Life Insurance, and Institutional Markets and Legacy Life and Retirement Run-Off Lines, net investment income is attributed based on invested assets from segregated product line portfolios held in our Life and Retirement companies. All invested assets of the Life and Retirement companies in excess of liabilities are allocated based on estimates of required economic capital allocation for each segment.
Asset Liability Measurement
For the General Insurance companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As a result, the investment strategy within the General Insurance companies focuses on growth of surplus and preservation of capital, subject to liability and other business considerations.
The General Insurance companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies and also invest in structured securities collateralized by, among other assets, residential and commercial real estate and commercial mortgage loans. While invested assets backing reserves of the General Insurance companies are primarily invested in conventional fixed maturity securities, we have continued to allocate a portion of our investment activity into asset classes that offer higher yields, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments for their risk-return attributes, as well as to manage our exposure to potential changes in interest rates. This asset diversification has maintained stable average yields while the overall credit ratings of our fixed maturity securities were largely unchanged. We expect to continue to pursue this investment strategy to meet the General Insurance companies’ liquidity, duration and credit quality objectives as well as current risk‑return and tax objectives.
In addition, the General Insurance companies seek to enhance returns through selective investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader portfolio.
Fixed maturity securities of the General Insurance companies’ domestic operations, with an average duration of 3.9 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 General Insurance companies’ foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 3.4 years.
The investment strategy of the Life and Retirement companies is to maximize net investment income and portfolio value, subject to liquidity requirements, capital constraints, diversification requirements, asset‑liability management and available investment opportunities.
The Life and Retirement companies use asset‑liability management as a primary tool to monitor and manage risk in their businesses. The Life and Retirement companies' 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 and Retirement companies invest primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans.
In addition, the Life and Retirement companies seek to enhance returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields. While a diversified portfolio of alternative investments remains a fundamental component of the investment strategy of the Life and Retirement companies, we have reduced the overall size of the hedge fund
AIG | Third Quarter 2018 Form 10-Q 137
portfolio, in light of changing market conditions and perceived market opportunities, and to continue reducing the size of the private equity portfolio.
Fixed maturity securities of the Life and Retirement companies domestic operations, with an average duration of 7.2 years, are comprised primarily of taxable corporate bonds, as well as taxable municipal and government bonds, and agency and non‑agency structured securities. The majority of these investments are held in the available for sale portfolio and are rated investment grade based on its composite ratings.
Fixed maturity securities held in the Life and Retirement companies foreign operations are of high quality, primarily rated A or higher based on composite ratings, with an average duration of 21.1 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 Credit Ratings.
The following table presents the fixed maturity security portfolio categorized by NAIC Designation, at fair value:
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Below |
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
NAIC Designation |
|
1 |
|
2 |
|
Grade |
|
|
3 |
|
4 |
|
5 |
|
6 |
|
Grade |
|
Total |
|
Other fixed maturity securities |
$ |
85,079 |
$ |
69,520 |
$ |
154,599 |
|
$ |
5,982 |
$ |
6,089 |
$ |
1,698 |
$ |
135 |
$ |
13,904 |
$ |
168,503 |
|
Mortgage-backed, asset-backed and collateralized |
|
64,493 |
|
2,993 |
|
67,486 |
|
|
538 |
|
332 |
|
162 |
|
4,247 |
|
5,279 |
|
72,765 |
|
Total* |
$ |
149,572 |
$ |
72,513 |
$ |
222,085 |
|
$ |
6,520 |
$ |
6,421 |
$ |
1,860 |
$ |
4,382 |
$ |
19,183 |
$ |
241,268 |
* Excludes $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 categorized by composite AIG credit rating, at fair value:
|
September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
Below |
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
CCC and |
|
Investment |
|
|
|
Composite AIG Credit Rating |
|
AAA/AA/A |
|
BBB |
|
Grade |
|
|
BB |
|
B |
|
Lower |
|
Grade |
|
Total |
|
Other fixed maturity securities |
$ |
85,352 |
$ |
69,571 |
$ |
154,923 |
|
$ |
5,804 |
$ |
6,546 |
$ |
1,230 |
$ |
13,580 |
$ |
168,503 |
|
Mortgage-backed, asset-backed and collateralized |
|
48,278 |
|
4,229 |
|
52,507 |
|
|
1,184 |
|
588 |
|
18,486 |
|
20,258 |
|
72,765 |
|
Total* |
$ |
133,630 |
$ |
73,800 |
$ |
207,430 |
|
$ |
6,988 |
$ |
7,134 |
$ |
19,716 |
$ |
33,838 |
$ |
241,268 |
* Excludes $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.
At September 30, 2018, approximately 87 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 16 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.
138 AIG | Third Quarter 2018 Form 10-Q
Moody’s Investors Service Inc. (Moody’s), Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc. (S&P), or similar foreign rating services rate a significant portion of our foreign entities’ fixed maturity securities portfolio. Rating services are not available for some foreign-issued securities. Our Credit Risk Management department closely reviews the credit quality of the foreign portfolio’s non-rated fixed maturity securities. At September 30, 2018, approximately 21 percent of such investments were either rated AAA or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities rated AAA, and approximately 7 percent were below investment grade or not rated. Approximately 33 percent of the foreign entities’ fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.
Composite AIG Credit Ratings
With respect to our fixed maturity securities, the credit ratings in the table below and in subsequent tables reflect: (a) a composite of the ratings of the three major rating agencies, or when agency ratings are not available, the rating assigned by the NAIC SVO (over 99 percent of total fixed maturity securities), or (b) our equivalent internal ratings when these investments have not been rated by any of the major rating agencies or the NAIC. The “Non-rated” category in those tables consists of fixed maturity securities that have not been rated by any of the major rating agencies, the NAIC or us.
For a discussion of credit risks associated with Investments see Enterprise Risk Management.
The following table presents the composite AIG credit ratings of our fixed maturity securities calculated on the basis of their fair value:
|
|
Available for Sale |
|
Other |
|
Total |
|
||||||||||||
|
|
September 30, |
|
December 31, |
|
September 30, |
|
December 31, |
|
September 30, |
|
December 31, |
|
||||||
|
(in millions) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
|
Rating: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other fixed maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
$ |
11,367 |
|
$ |
11,644 |
|
$ |
2,563 |
|
$ |
2,656 |
|
$ |
13,930 |
|
$ |
14,300 |
|
|
AA |
|
28,147 |
|
|
29,560 |
|
|
132 |
|
|
212 |
|
|
28,279 |
|
|
29,772 |
|
|
A |
|
42,056 |
|
|
45,049 |
|
|
1,538 |
|
|
1,745 |
|
|
43,594 |
|
|
46,794 |
|
|
BBB |
|
69,729 |
|
|
70,636 |
|
|
157 |
|
|
138 |
|
|
69,886 |
|
|
70,774 |
|
|
Below investment grade |
|
14,088 |
|
|
13,173 |
|
|
- |
|
|
17 |
|
|
14,088 |
|
|
13,190 |
|
|
Non-rated |
|
1,321 |
|
|
1,073 |
|
|
- |
|
|
- |
|
|
1,321 |
|
|
1,073 |
|
|
Total |
$ |
166,708 |
|
$ |
171,135 |
|
$ |
4,390 |
|
$ |
4,768 |
|
$ |
171,098 |
|
$ |
175,903 |
|
|
Mortgage-backed, asset- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
backed and collateralized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
$ |
29,188 |
|
$ |
30,306 |
|
$ |
438 |
|
$ |
818 |
|
$ |
29,626 |
|
$ |
31,124 |
|
|
AA |
|
10,394 |
|
|
8,158 |
|
|
890 |
|
|
610 |
|
|
11,284 |
|
|
8,768 |
|
|
A |
|
7,155 |
|
|
7,760 |
|
|
222 |
|
|
382 |
|
|
7,377 |
|
|
8,142 |
|
|
BBB |
|
4,070 |
|
|
4,414 |
|
|
159 |
|
|
163 |
|
|
4,229 |
|
|
4,577 |
|
|
Below investment grade |
|
15,007 |
|
|
17,194 |
|
|
5,202 |
|
|
6,004 |
|
|
20,209 |
|
|
23,198 |
|
|
Non-rated |
|
198 |
|
|
25 |
|
|
119 |
|
|
27 |
|
|
317 |
|
|
52 |
|
|
Total |
$ |
66,012 |
|
$ |
67,857 |
|
$ |
7,030 |
|
$ |
8,004 |
|
$ |
73,042 |
|
$ |
75,861 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
$ |
40,555 |
|
$ |
41,950 |
|
$ |
3,001 |
|
$ |
3,474 |
|
$ |
43,556 |
|
$ |
45,424 |
|
|
AA |
|
38,541 |
|
|
37,718 |
|
|
1,022 |
|
|
822 |
|
|
39,563 |
|
|
38,540 |
|
|
A |
|
49,211 |
|
|
52,809 |
|
|
1,760 |
|
|
2,127 |
|
|
50,971 |
|
|
54,936 |
|
|
BBB |
|
73,799 |
|
|
75,050 |
|
|
316 |
|
|
301 |
|
|
74,115 |
|
|
75,351 |
|
|
Below investment grade |
|
29,095 |
|
|
30,367 |
|
|
5,202 |
|
|
6,021 |
|
|
34,297 |
|
|
36,388 |
|
|
Non-rated |
|
1,519 |
|
|
1,098 |
|
|
119 |
|
|
27 |
|
|
1,638 |
|
|
1,125 |
|
|
Total |
$ |
232,720 |
|
$ |
238,992 |
|
$ |
11,420 |
|
$ |
12,772 |
|
$ |
244,140 |
|
$ |
251,764 |
|
AIG | Third Quarter 2018 Form 10-Q 139
Available‑for‑Sale Investments
The following table presents the fair value of our available‑for‑sale securities:
|
|
|
|
|
|
|
|
|
Fair Value at |
|
Fair Value at |
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
(in millions) |
|
|
|
|
|
|
|
2018 |
|
2017 |
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities |
|
|
|
|
|
|
$ |
3,093 |
$ |
2,656 |
|
Obligations of states, municipalities and political subdivisions |
|
|
|
|
|
|
|
16,512 |
|
18,644 |
|
Non-U.S. governments |
|
|
|
|
|
|
|
15,219 |
|
15,659 |
|
Corporate debt |
|
|
|
|
|
|
|
131,884 |
|
134,176 |
|
Mortgage-backed, asset-backed and collateralized: |
|
|
|
|
|
|
|
|
|
|
|
RMBS |
|
|
|
|
|
|
|
35,226 |
|
37,234 |
|
CMBS |
|
|
|
|
|
|
|
12,691 |
|
13,841 |
|
CDO/ABS |
|
|
|
|
|
|
|
18,095 |
|
16,782 |
|
Total mortgage-backed, asset-backed and collateralized |
|
|
|
|
|
|
|
66,012 |
|
67,857 |
|
Total bonds available for sale(a) |
|
|
|
|
|
|
|
232,720 |
|
238,992 |
|
Equity securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
- |
|
1,061 |
|
Preferred stock |
|
|
|
|
|
|
|
- |
|
533 |
|
Mutual funds |
|
|
|
|
|
|
|
- |
|
114 |
|
Total equity securities available for sale(b) |
|
|
|
|
|
|
|
- |
|
1,708 |
|
Total |
|
|
|
|
|
|
$ |
232,720 |
$ |
240,700 |
(a) At September 30, 2018 and December 31, 2017, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $30.6 billion and $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, |
||
|
(in millions) |
|
2018 |
|
|
2017 |
|
Japan |
$ |
1,706 |
|
$ |
1,791 |
|
Germany |
|
1,139 |
|
|
1,623 |
|
Canada |
|
1,026 |
|
|
1,051 |
|
France |
|
968 |
|
|
923 |
|
United Kingdom |
|
882 |
|
|
1,214 |
|
Netherlands |
|
610 |
|
|
608 |
|
United Arab Emirates |
|
466 |
|
|
432 |
|
Mexico |
|
459 |
|
|
513 |
|
Indonesia |
|
446 |
|
|
493 |
|
Norway |
|
383 |
|
|
409 |
|
Other |
|
7,183 |
|
|
6,659 |
|
Total |
$ |
15,268 |
|
$ |
15,716 |
140 AIG | Third Quarter 2018 Form 10-Q
The following table presents the fair value of our aggregate European credit exposures by major sector for our fixed maturity securities:
|
|
September 30, 2018 |
|
|
|||||||||
|
|
|
|
|
|
|
Non- |
|
|
|
|
December 31, |
|
|
|
|
|
|
Financial |
|
Financial |
|
Structured |
|
|
|
2017 |
|
(in millions) |
|
Sovereign |
|
Institution |
|
Corporates |
|
Products |
|
Total |
|
Total |
|
Euro-Zone countries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
France |
$ |
968 |
$ |
1,642 |
$ |
1,894 |
$ |
- |
$ |
4,504 |
$ |
4,169 |
|
Germany |
|
1,139 |
|
162 |
|
2,339 |
|
- |
|
3,640 |
|
3,803 |
|
Netherlands |
|
610 |
|
866 |
|
1,080 |
|
89 |
|
2,645 |
|
2,868 |
|
Ireland |
|
67 |
|
- |
|
489 |
|
836 |
|
1,392 |
|
1,071 |
|
Belgium |
|
286 |
|
134 |
|
868 |
|
- |
|
1,288 |
|
1,216 |
|
Spain |
|
32 |
|
208 |
|
818 |
|
- |
|
1,058 |
|
1,009 |
|
Italy |
|
- |
|
208 |
|
415 |
|
- |
|
623 |
|
694 |
|
Luxembourg |
|
- |
|
38 |
|
357 |
|
2 |
|
397 |
|
436 |
|
Finland |
|
120 |
|
52 |
|
74 |
|
- |
|
246 |
|
163 |
|
Austria |
|
135 |
|
9 |
|
- |
|
1 |
|
145 |
|
37 |
|
Other - EuroZone |
|
623 |
|
90 |
|
237 |
|
- |
|
950 |
|
1,013 |
|
Total Euro-Zone |
$ |
3,980 |
$ |
3,409 |
$ |
8,571 |
$ |
928 |
$ |
16,888 |
$ |
16,479 |
|
Remainder of Europe: |
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
$ |
882 |
$ |
3,610 |
$ |
8,113 |
$ |
3,544 |
$ |
16,149 |
$ |
16,975 |
|
Switzerland |
|
32 |
|
1,091 |
|
922 |
|
- |
|
2,045 |
|
2,299 |
|
Sweden |
|
125 |
|
377 |
|
138 |
|
- |
|
640 |
|
658 |
|
Norway |
|
383 |
|
54 |
|
153 |
|
- |
|
590 |
|
618 |
|
Russian Federation |
|
102 |
|
18 |
|
123 |
|
- |
|
243 |
|
284 |
|
Other - Remainder of Europe |
|
129 |
|
41 |
|
105 |
|
- |
|
275 |
|
287 |
|
Total - Remainder of Europe |
$ |
1,653 |
$ |
5,191 |
$ |
9,554 |
$ |
3,544 |
$ |
19,942 |
$ |
21,121 |
|
Total |
$ |
5,633 |
$ |
8,600 |
$ |
18,125 |
$ |
4,472 |
$ |
36,830 |
$ |
37,600 |
Investments in Municipal Bonds
At September 30, 2018, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-exempt bonds with 93 percent of the portfolio rated A or higher.
AIG | Third Quarter 2018 Form 10-Q 141
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, 2018 |
|
|
|||||||
|
|
|
State |
|
Local |
|
|
|
Total |
December 31, |
|
|
|
|
General |
|
General |
|
|
|
Fair |
|
2017 |
|
(in millions) |
|
Obligation |
|
Obligation |
|
Revenue |
|
Value |
|
Total Fair Value |
|
State: |
|
|
|
|
|
|
|
|
|
|
|
New York |
$ |
20 |
$ |
438 |
$ |
2,659 |
$ |
3,117 |
$ |
3,562 |
|
California |
|
640 |
|
392 |
|
1,855 |
|
2,887 |
|
3,275 |
|
Texas |
|
186 |
|
612 |
|
995 |
|
1,793 |
|
1,992 |
|
Illinois |
|
96 |
|
121 |
|
710 |
|
927 |
|
908 |
|
Massachusetts |
|
415 |
|
- |
|
429 |
|
844 |
|
966 |
|
Florida |
|
50 |
|
- |
|
576 |
|
626 |
|
666 |
|
Virginia |
|
8 |
|
1 |
|
544 |
|
553 |
|
639 |
|
Washington |
|
234 |
|
- |
|
286 |
|
520 |
|
650 |
|
Ohio |
|
64 |
|
- |
|
409 |
|
473 |
|
575 |
|
Washington D.C. |
|
36 |
|
- |
|
434 |
|
470 |
|
497 |
|
Georgia |
|
102 |
|
86 |
|
269 |
|
457 |
|
566 |
|
Pennsylvania |
|
126 |
|
22 |
|
238 |
|
386 |
|
418 |
|
Maryland |
|
156 |
|
89 |
|
82 |
|
327 |
|
380 |
|
All other states(a) |
|
383 |
|
281 |
|
2,468 |
|
3,132 |
|
3,550 |
|
Total(b)(c) |
$ |
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 $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 |
|
|
Industry Category |
|
September 30, |
|
December 31, |
|
|
(in millions) |
|
2018 |
|
2017 |
|
|
Financial institutions: |
|
|
|
|
|
|
Money Center/Global Bank Groups |
$ |
9,703 |
$ |
9,295 |
|
|
Regional banks — other |
|
652 |
|
562 |
|
|
Life insurance |
|
3,300 |
|
3,603 |
|
|
Securities firms and other finance companies |
|
374 |
|
386 |
|
|
Insurance non-life |
|
4,620 |
|
4,893 |
|
|
Regional banks — North America |
|
6,472 |
|
6,320 |
|
|
Other financial institutions |
|
10,113 |
|
9,906 |
|
|
Utilities |
|
17,676 |
|
18,655 |
|
|
Communications |
|
9,287 |
|
9,756 |
|
|
Consumer noncyclical |
|
16,566 |
|
15,873 |
|
|
Capital goods |
|
7,387 |
|
7,797 |
|
|
Energy |
|
12,629 |
|
13,171 |
|
|
Consumer cyclical |
|
9,479 |
|
9,166 |
|
|
Basic |
|
5,481 |
|
6,123 |
|
|
Other |
|
18,145 |
|
18,670 |
|
|
Total* |
$ |
131,884 |
$ |
134,176 |
|
* At September 30, 2018 and December 31, 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 5.4 and 5.5 percent at September 30, 2018 and December 31, 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.
142 AIG | Third Quarter 2018 Form 10-Q
Investments in RMBS
The following table presents AIG’s RMBS available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at |
|
Fair Value at |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
2018 |
|
2017 |
|
Agency RMBS |
|
|
|
|
|
|
|
|
|
$ |
14,827 |
$ |
15,002 |
|
Alt-A RMBS |
|
|
|
|
|
|
|
|
|
|
10,426 |
|
11,624 |
|
Subprime RMBS |
|
|
|
|
|
|
|
|
|
|
2,859 |
|
2,947 |
|
Prime non-agency |
|
|
|
|
|
|
|
|
|
|
6,379 |
|
6,891 |
|
Other housing related |
|
|
|
|
|
|
|
|
|
|
735 |
|
770 |
|
Total RMBS(a)(b) |
|
|
|
|
|
|
|
|
|
$ |
35,226 |
$ |
37,234 |
(a) Includes approximately $10.9 billion and $12.3 billion at September 30, 2018, and December 31, 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.
(b) The weighted average expected life was seven years at September 30, 2018 and six years at December 31, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|||
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 |
|
2017 |
|
|
CMBS (traditional) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,134 |
$ |
11,092 |
|
Agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,987 |
|
2,093 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
570 |
|
656 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,691 |
$ |
13,841 |
The fair value of CMBS holdings remained stable during the third quarter of 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 |
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
(in millions) |
|
|
|
|
|
|
|
|
2018 |
|
2017 |
|
Collateral Type: |
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans (CLO) |
|
|
|
|
|
|
|
$ |
8,327 |
$ |
8,112 |
|
Other |
|
|
|
|
|
|
|
|
59 |
|
94 |
|
Total |
|
|
|
|
|
|
|
$ |
8,386 |
$ |
8,206 |
Commercial Mortgage Loans
At September 30, 2018, we had direct commercial mortgage loan exposure of $32.1 billion. All commercial mortgage loans were current or performing according to their restructured terms.
AIG | Third Quarter 2018 Form 10-Q 143
The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized cost:
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
of |
|
Class |
|
|
of |
|
|||||||||||
|
(dollars in millions) |
Loans |
|
Apartments |
|
Offices |
|
Retail |
Industrial |
Hotel |
|
Others |
|
Total |
Total |
|
|||
|
September 30, 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 |
|
$ |
1,673 |
$ |
3,716 |
$ |
556 |
$ |
265 |
$ |
105 |
$ |
177 |
$ |
6,492 |
23 |
% |
|
California |
86 |
|
|
438 |
|
1,055 |
|
301 |
|
313 |
|
845 |
|
360 |
|
3,312 |
12 |
|
|
Texas |
55 |
|
|
327 |
|
934 |
|
160 |
|
83 |
|
154 |
|
38 |
|
1,696 |
6 |
|
|
Massachusetts |
21 |
|
|
701 |
|
384 |
|
410 |
|
- |
|
- |
|
27 |
|
1,522 |
5 |
|
|
New Jersey |
42 |
|
|
667 |
|
46 |
|
486 |
|
41 |
|
28 |
|
32 |
|
1,300 |
4 |
|
|
Florida |
81 |
|
|
319 |
|
84 |
|
435 |
|
227 |
|
19 |
|
69 |
|
1,153 |
4 |
|
|
Pennsylvania |
25 |
|
|
74 |
|
22 |
|
577 |
|
47 |
|
26 |
|
- |
|
746 |
3 |
|
|
Illinois |
15 |
|
|
315 |
|
304 |
|
11 |
|
25 |
|
- |
|
23 |
|
678 |
2 |
|
|
Ohio |
26 |
|
|
163 |
|
11 |
|
205 |
|
240 |
|
- |
|
5 |
|
624 |
2 |
|
|
Washington D.C. |
11 |
|
|
232 |
|
359 |
|
- |
|
- |
|
19 |
|
- |
|
610 |
2 |
|
|
Other states |
253 |
|
|
1,790 |
|
964 |
|
1,466 |
|
696 |
|
564 |
|
160 |
|
5,640 |
20 |
|
|
Foreign |
71 |
|
|
1,464 |
|
821 |
|
754 |
|
86 |
|
629 |
|
1,069 |
|
4,823 |
17 |
|
|
Total* |
783 |
|
$ |
8,163 |
$ |
8,700 |
$ |
5,361 |
$ |
2,023 |
$ |
2,389 |
$ |
1,960 |
$ |
28,596 |
100 |
% |
* Does not reflect allowance for credit losses.
For additional discussion on commercial mortgage loans see Note 7 to the Consolidated Financial Statements in the 2017 Annual Report.
144 AIG | Third Quarter 2018 Form 10-Q
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-Q 145
The following tables present other-than-temporary impairment charges recorded in earnings on fixed maturity securities, equity securities, private equity funds and hedge funds.
Other-than-temporary impairment charges by investment type and impairment type:
|
|
|
|
|
|
|
Other Fixed |
Equities/Other |
|
|
|||
|
(in millions) |
RMBS |
CDO/ABS |
CMBS |
Maturity |
Invested Assets* |
|
Total |
|||||
|
Three Months Ended September 30, 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 |
|
Foreign currency declines |
|
- |
|
- |
|
- |
|
1 |
|
- |
|
1 |
|
Issuer-specific credit events |
|
5 |
|
- |
|
7 |
|
57 |
|
16 |
|
85 |
|
Adverse projected cash flows |
|
1 |
|
- |
|
- |
|
- |
|
- |
|
1 |
|
Total |
$ |
6 |
$ |
- |
$ |
7 |
$ |
59 |
$ |
16 |
$ |
88 |
|
Nine Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment Type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Severity |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
|
Change in intent |
|
- |
|
- |
|
- |
|
52 |
|
- |
|
52 |
|
Foreign currency declines |
|
- |
|
- |
|
- |
|
13 |
|
- |
|
13 |
|
Issuer-specific credit events |
|
49 |
|
2 |
|
14 |
|
27 |
|
- |
|
92 |
|
Adverse projected cash flows |
|
1 |
|
- |
|
- |
|
- |
|
- |
|
1 |
|
Total |
$ |
50 |
$ |
2 |
$ |
14 |
$ |
92 |
$ |
- |
$ |
158 |
|
Nine Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment Type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Severity |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
2 |
$ |
2 |
|
Change in intent |
|
- |
|
- |
|
- |
|
9 |
|
- |
|
9 |
|
Foreign currency declines |
|
- |
|
- |
|
- |
|
11 |
|
- |
|
11 |
|
Issuer-specific credit events |
|
21 |
|
33 |
|
28 |
|
79 |
|
36 |
|
197 |
|
Adverse projected cash flows |
|
4 |
|
- |
|
- |
|
- |
|
- |
|
4 |
|
Total |
$ |
25 |
$ |
33 |
$ |
28 |
$ |
99 |
$ |
38 |
$ |
223 |
* 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.
146 AIG | Third Quarter 2018 Form 10-Q
We recorded other-than-temporary impairment charges in the nine-months ended September 30, 2018 and 2017 related to:
• issuer-specific credit events;
• securities that we intend to sell or for which it is more likely than not that we will be required to sell;
• declines due to foreign exchange rates;
• adverse changes in estimated cash flows on certain structured securities; and
• securities that experienced severe market valuation declines.
In addition, impairments are recorded on real estate 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 $164 million and $147 million in the three-month periods ended September 30, 2018 and 2017, respectively, and $433 million and $523 million in the nine-month periods ended September 30, 2018 and 2017, respectively.
For a discussion of our other-than-temporary impairment accounting policy see Note 6 to the Consolidated Financial Statements in the 2017 Annual Report.
The following table shows the aging of the pre-tax unrealized losses of fixed maturity securities, the extent to which the fair value is less than amortized cost or cost, and the number of respective items in each category:
|
September 30, 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 |
||||||||||||
|
Aging(a) |
|
|
Unrealized |
|
|
|
|
Unrealized |
|
|
|
|
Unrealized |
|
|
|
|
Unrealized |
|
||||
|
(dollars in millions) |
|
Cost(c) |
|
Loss |
Items(e) |
|
|
Cost(c) |
|
Loss |
Items(e) |
|
|
Cost(c) |
|
Loss |
Items(e) |
|
|
Cost(c) |
|
Loss(d) |
Items(e) |
|
Investment grade |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months |
$ |
44,703 |
$ |
805 |
6,982 |
|
$ |
26 |
$ |
10 |
2 |
|
$ |
5 |
$ |
3 |
2 |
|
$ |
44,734 |
$ |
818 |
6,986 |
|
7-11 months |
|
33,977 |
|
1,550 |
4,182 |
|
|
84 |
|
19 |
4 |
|
|
- |
|
- |
- |
|
|
34,061 |
|
1,569 |
4,186 |
|
12 months or more |
|
20,615 |
|
1,217 |
2,473 |
|
|
39 |
|
11 |
10 |
|
|
18 |
|
12 |
5 |
|
|
20,672 |
|
1,240 |
2,488 |
|
Total |
$ |
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 |
$ |
4,492 |
$ |
97 |
1,844 |
|
$ |
76 |
$ |
22 |
31 |
|
$ |
15 |
$ |
13 |
13 |
|
$ |
4,583 |
$ |
132 |
1,888 |
|
7-11 months |
|
1,968 |
|
86 |
863 |
|
|
427 |
|
143 |
19 |
|
|
- |
|
- |
- |
|
|
2,395 |
|
229 |
882 |
|
12 months or more |
|
1,828 |
|
129 |
481 |
|
|
151 |
|
39 |
28 |
|
|
23 |
|
16 |
11 |
|
|
2,002 |
|
184 |
520 |
|
Total |
$ |
8,288 |
$ |
312 |
3,188 |
|
$ |
654 |
$ |
204 |
78 |
|
$ |
38 |
$ |
29 |
24 |
|
$ |
8,980 |
$ |
545 |
3,290 |
|
Total bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months |
$ |
49,195 |
$ |
902 |
8,826 |
|
$ |
102 |
$ |
32 |
33 |
|
$ |
20 |
$ |
16 |
15 |
|
$ |
49,317 |
$ |
950 |
8,874 |
|
7-11 months |
|
35,945 |
|
1,636 |
5,045 |
|
|
511 |
|
162 |
23 |
|
|
- |
|
- |
- |
|
|
36,456 |
|
1,798 |
5,068 |
|
12 months or more |
|
22,443 |
|
1,346 |
2,954 |
|
|
190 |
|
50 |
38 |
|
|
41 |
|
28 |
16 |
|
|
22,674 |
|
1,424 |
3,008 |
|
Total(e) |
$ |
107,583 |
$ |
3,884 |
16,825 |
|
$ |
803 |
$ |
244 |
94 |
|
$ |
61 |
$ |
44 |
31 |
|
$ |
108,447 |
$ |
4,172 |
16,950 |
(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, 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 period ended September 30, 2018 was primarily attributable to decreases in the fair value of fixed maturity securities. For the nine-month period ended September 30, 2018, net unrealized losses related to fixed maturity securities decreased by $8.9 billion due primarily to an increase in rates and a widening of credit spreads.
AIG | Third Quarter 2018 Form 10-Q 147
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, net unrealized gains related to fixed maturity and equity securities increased by $4.4 billion 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.
Net Realized Capital Gains and Losses
The following table presents the components of Net realized capital gains (losses):
|
|
Three Months Ended |
|
Nine Months Ended |
|||||||
|
|
September 30, |
|
September 30, |
|||||||
|
(in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
|
2017 |
|
Sales of fixed maturity securities |
$ |
11 |
$ |
54 |
|
$ |
8 |
|
$ |
374 |
|
Sales of equity securities |
|
- |
|
4 |
|
|
16 |
|
|
86 |
|
Other-than-temporary impairments: |
|
|
|
|
|
|
|
|
|
|
|
Severity |
|
- |
|
- |
|
|
- |
|
|
(2) |
|
Change in intent |
|
(3) |
|
(1) |
|
|
(52) |
|
|
(9) |
|
Foreign currency declines |
|
(1) |
|
(1) |
|
|
(13) |
|
|
(11) |
|
Issuer-specific credit events |
|
(30) |
|
(85) |
|
|
(92) |
|
|
(197) |
|
Adverse projected cash flows |
|
(1) |
|
(1) |
|
|
(1) |
|
|
(4) |
|
Provision for loan losses |
|
(23) |
|
(38) |
|
|
(73) |
|
|
(56) |
|
Foreign exchange transactions |
|
(21) |
|
66 |
|
|
(155) |
|
|
299 |
|
Variable annuity embedded derivatives, net of related hedges |
|
(185) |
|
(430) |
|
|
(2) |
|
|
(1,023) |
|
All other derivatives and hedge accounting |
|
(1) |
|
(136) |
|
|
149 |
|
|
(217) |
|
Impairments on investments in life settlements |
|
- |
|
(273) |
|
|
- |
|
|
(360) |
|
Loss on sale of private equity funds |
|
(311) |
|
- |
|
|
(311) |
|
|
- |
|
Other |
|
54 |
|
(81) |
|
|
161 |
|
|
14 |
|
Net realized capital losses |
$ |
(511) |
$ |
(922) |
|
$ |
(365) |
|
$ |
(1,106) |
Net realized capital losses in the three- and nine-month periods ended September 30, 2018 decreased compared to the same periods in the prior year due primarily to lower derivative losses in the three-month period ended September 30, 2018 compared to the same period in the prior year, and derivative gains in the nine-month period ended September 30, 2018 compared to derivative losses in the same period in the prior year. Net realized capital losses in the three-month period ended September 30, 2018 were primarily related to derivative losses and a loss on the sale of 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 were primarily related to derivative and hedge accounting losses, and impairments, which were higher than the foreign exchange gains and the gains recognized on the sales of securities.
Variable annuity embedded derivatives, net of related hedges, reflected gains in the three- and nine-month periods ended September 30, 2018 compared to losses in the same periods in the prior year primarily due to changes in the non-performance or “own credit” risk adjustment used in the valuation of the variable annuities with guaranteed minimum withdrawal benefits (GMWB) embedded derivative, which are not hedged as part of our economic hedging program.
For additional discussion of market risk management related to these product features see MD&A – Enterprise Risk Management – Insurance Risks – Life and Retirement Companies’ Key Risks – Variable Annuity Risk Management and Hedging Programs in the 2017 Annual Report. For more information on the economic hedging target and the impact to pre-tax income of this program see Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results in this MD&A.
For further discussion of our investment portfolio see also Note 6 to the Condensed Consolidated Financial Statements.
148 AIG | Third Quarter 2018 Form 10-Q
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, 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 as of September 30, 2018 and December 31, 2017, respectively. For discussion of loss reserve discount see Note 10 to the Condensed Consolidated Financial Statements.
AIG | Third Quarter 2018 Form 10-Q 149
PRIOR YEAR DEVELOPMENT
The following table summarizes incurred (favorable) unfavorable prior year development net of reinsurance by segment:
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||
|
|
|
September 30, |
|
September 30, |
||||
|
(in millions) |
|
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 for the nine-month periods ended September 30, 2018 and 2017, respectively. Consistent with our definition of APTI, 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 for the nine-month periods ended September 30, 2018 and 2017, respectively. The related changes in amortization of the deferred gain were $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.
150 AIG | Third Quarter 2018 Form 10-Q
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 Europe Casualty and Financial Lines – We observed a significant increase in large claims activity in 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 emerged higher than expected, driven by an increase in the frequency of large claims. We similarly strengthened our estimates 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 exceeded initial expectations and coincided with increased loss severity in the underlying primary auto and general liability segments; and
· Higher than expected losses in Property and Special Risks – We observed unfavorable results in U.S. programs commercial auto business in accident years 2015 and 2016 primarily from discontinued 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:
· We observed unfavorable claim experience in the U.S. primary general liability and U.S. excess casualty segments, notably due to construction defects and wrap business. The majority of this activity came from accident years 2015 and prior, including a significant proportion from accident years 2006 and prior;
· We also observed higher than expected losses in both U.S. and Europe Property and Special Risks driven by unexpected development on several large claims including aviation, marine and trade credit primarily from accident year 2016; and
· 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. This discount rate change primarily impacted the Europe Casualty and Financial Lines.
AIG | Third Quarter 2018 Form 10-Q 151
The following tables summarize incurred (favorable) unfavorable prior year development net of reinsurance, by segment and major lines of business, and by accident year groupings:
|
Three Months Ended September 30, 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 |
152 AIG | Third Quarter 2018 Form 10-Q
|
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 |
We note that for certain categories of claims (e.g., construction defect claims and environmental claims) and for reinsurance recoverable, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of occurrence becomes available to us. 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.
Significant Reinsurance Agreements
In the first quarter of 2017, we entered into an adverse development reinsurance agreement with NICO, under which we transferred to NICO 80 percent of the reserve risk on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of the losses on subject business paid on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion. We account for this transaction as retroactive reinsurance. This transaction resulted in a gain, which under U.S. GAAP retroactive reinsurance accounting is deferred and amortized into income over the settlement period. NICO created a collateral trust account as security for their claim payment obligations to us, into which they deposited the consideration paid under the agreement, and Berkshire Hathaway Inc. has provided a parental guarantee to secure NICO’s obligations under the agreement.
AIG | Third Quarter 2018 Form 10-Q 153
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 from the adverse development reinsurance agreement:
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||
|
|
|
September 30, |
|
September 30, |
||||
|
(in millions) |
|
2018 |
|
2017 |
|
2018 |
|
2017 |
|
Balance at beginning of year, net of discount |
$ |
957 |
$ |
1,277 |
$ |
1,167 |
$ |
- |
|
Gain at inception |
|
- |
|
- |
|
- |
|
1,116 |
|
Unfavorable prior year reserve development ceded to NICO(a) |
|
723 |
|
- |
|
716 |
|
284 |
|
Amortization attributed to deferred gain at inception(b) |
|
(57) |
|
(62) |
|
(176) |
|
(165) |
|
Amortization attributed to changes in deferred gain(c) |
|
(109) |
|
(7) |
|
(85) |
|
(19) |
|
Changes in discount on ceded loss reserves |
|
(46) |
|
53 |
|
(154) |
|
45 |
|
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 APTI.
(c) Excluded from APTI and included in U.S. GAAP.
The lines of business subject to this agreement have been the source of the majority of the prior year adverse development charges over the past several years. The agreement is expected to result in lower capital charges for reserve risks at our U.S. insurance subsidiaries. In addition, we would expect future net investment income to decline as a result of lower invested assets.
For a summary of significant reinsurers see Item 7. MD&A – Enterprise Risk Management – Insurance Operations Risks – General Insurance Companies Key Insurance Risks – Reinsurance Recoverable in our 2017 Annual Report.
154 AIG | Third Quarter 2018 Form 10-Q
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 are recalculated using the new projections, and any resulting adjustment is included in income. Updating such projections may result in acceleration of amortization in some products and deceleration of amortization in other products.
The Life Insurance Companies also review assumptions related to their respective GMWB living benefits that are accounted for as embedded derivatives and measured at fair value. The fair value of these embedded derivatives is based on actuarial assumptions, including policyholder behavior, as well as capital market assumptions.
Various assumptions were updated, including the following effective September 30, 2018:
• we decreased 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 remained unchanged at 7.0 percent; and
• we lowered our ultimate projected yields on invested assets by approximately three to six basis 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 assets to a weighted average yield based on the duration of the assets excluding assets that mature during the grading period. The grading period is three years for annuity products and five years for life insurance products.
For long-duration traditional products, which include whole life insurance, term life insurance, accident and health insurance, long-term care insurance, and life-contingent single premium immediate annuities and structured settlements, a “lock-in” principle applies. The assumptions used to calculate the benefit liabilities and DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs. Loss recognition occurs if observed changes in actual experience or estimates result in projected future losses under loss recognition testing. Underlying assumptions are reviewed periodically and updated as appropriate.
The net increases (decreases) to Adjusted pre-tax income and pre-tax income as a result of the update of actuarial assumptions for the three- and nine-month periods ended September 30, 2018 and 2017 are shown in the following tables.
AIG | Third Quarter 2018 Form 10-Q 155
The following table presents the increase (decrease) in Adjusted pre-tax income resulting from the update of actuarial assumptions for the domestic life insurance companies, by segment and product line:
|
Three Months and Nine Months Ended September 30, |
|
|
|
|
|
(in millions) |
|
2018 |
|
2017 |
|
Life and Retirement: |
|
|
|
|
|
Individual Retirement |
|
|
|
|
|
Fixed Annuities |
$ |
40 |
$ |
130 |
|
Variable and Indexed Annuities |
|
(92) |
|
112 |
|
Total Individual Retirement |
|
(52) |
|
242 |
|
Group Retirement |
|
17 |
|
13 |
|
Life Insurance |
|
(63) |
|
29 |
|
Institutional Markets |
|
- |
|
- |
|
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) |
|
2018 |
|
2017 |
|
Policy fees |
$ |
(237) |
$ |
(2) |
|
Interest credited to policyholder account balances |
|
- |
|
49 |
|
Amortization of deferred policy acquisition costs |
|
301 |
|
184 |
|
Policyholder benefits and losses incurred |
|
(167) |
|
39 |
|
Increase (decrease) in adjusted pre-tax income |
|
(103) |
|
270 |
|
Change in DAC related to net realized capital gains (losses) |
|
35 |
|
44 |
|
Net realized capital gains (losses) |
|
(55) |
|
(246) |
|
Increase (decrease) in pre-tax income |
$ |
(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 income included a net favorable 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 favorable 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.
The adjustments related to the update of actuarial assumptions in each period are discussed by business segment below.
Update of Actuarial Assumptions by Business Segment
Individual Retirement
The update of actuarial assumptions resulted in a net unfavorable adjustment to Adjusted pre-tax income of Individual Retirement of $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.
156 AIG | Third Quarter 2018 Form 10-Q
In Variable and Index Annuities, the update of estimated gross profit assumptions resulted in a net unfavorable adjustment of $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 favorable 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 an unfavorable adjustment in connection with the conversion to a new modeling platform for Index Annuities.
Group Retirement
In Group Retirement, the update of estimated gross profit assumptions resulted in a favorable adjustment of $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 favorable 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.
Life Insurance
In Life Insurance, the update of actuarial assumptions resulted in a net unfavorable adjustment of $63 million in the three- and nine-month periods ended September 30, 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 update of actuarial assumptions resulted in a net unfavorable adjustment of $5 million in the three- and nine-month periods ended September 30, 2018, reflecting updates to mortality and lapse assumptions.
The update of actuarial assumptions resulted in a net unfavorable 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.
Variable Annuity Guaranteed Benefits and Hedging Results
Our Individual Retirement and Group Retirement businesses offer variable annuity products with GMWB riders that provide guaranteed living benefit features. The liabilities for GMWB are accounted for as embedded derivatives measured at fair value. The fair value of the embedded derivatives may fluctuate significantly based on market interest rates, equity prices, credit spreads, market volatility, policyholder behavior and other factors.
In addition to risk-mitigating features in our variable annuity product design, we have an economic hedging program designed to manage market risk from GMWB, including exposures to changes in interest rates, equity prices, credit spreads and volatility. The hedging program utilizes derivative instruments, including but not limited to equity options, futures contracts and interest rate swap and swaption contracts, as well as fixed maturity securities with a fair value election.
For additional discussion of market risk management related to these product features see Enterprise Risk Management – Insurance Risks – Life and Retirement Companies Key Risks – Variable Annuity Risk Management and Hedging Programs in our 2017 Annual Report.
AIG | Third Quarter 2018 Form 10-Q 157
Differences in Valuation of Embedded Derivatives and Economic Hedge Target
The variable annuity hedging program utilizes an economic hedge target, which represents an estimate of the underlying economic risks in our GMWB riders. The economic hedge target differs from the U.S. GAAP valuation of the GMWB embedded derivatives primarily due to the following:
• The economic hedge target includes 100 percent of rider fees in present value calculations; the U.S. GAAP valuation reflects only those fees attributed to the embedded derivative such that the initial value at contract issue equals zero;
• The economic hedge target uses best estimate actuarial assumptions and excludes explicit risk margins used for U.S. GAAP valuation, such as margins for policyholder behavior, mortality, and volatility; and
• The economic hedge target excludes the non-performance or “own credit” risk adjustment used in the U.S. GAAP valuation, which reflects a market participant’s view of our claims-paying ability by incorporating an additional spread (the NPA spread) to the swap curve used to discount projected benefit cash flows. Because the discount rate includes the NPA spread and other explicit risk margins, the U.S. GAAP valuation is generally less sensitive to movements in interest rates and other market factors, and to changes from actuarial assumption updates, than the economic hedge target. For more information on our valuation methodology for embedded derivatives within policyholder contract deposits see Note 5 to the Condensed Consolidated Financial Statements.
The market value of the hedge portfolio compared to the economic hedge target at any point in time may be different and is not expected to be fully offsetting. In addition to the derivatives held in conjunction with the variable annuity hedging program, the Life and Retirement companies have cash and invested assets available to cover future claims payable under these guarantees. The primary sources of difference between the change in the fair value of the hedging portfolio and the economic hedge target include:
• Basis risk due to the variance between expected and actual fund returns, which may be either positive or negative;
• Realized volatility versus implied volatility;
• Actual versus expected changes in the hedge target driven by assumptions not subject to hedging, particularly policyholder behavior; and
• Risk exposures that we have elected not to explicitly or fully hedge.
The following table presents a reconciliation between the fair value of the U.S. GAAP embedded derivatives and the value of our economic hedge target:
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
(in millions) |
|
|
|
|
|
|
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 income of Individual Retirement and Group Retirement.
The change in the fair value of the embedded derivatives and the change in the value of the hedging portfolio are not expected to be fully offsetting, primarily due to the differences in valuation between the economic hedge target, the U.S. GAAP embedded derivatives and the fair value of the hedging portfolio, as discussed above. When corporate credit spreads widen, the change in the NPA spread generally reduces the fair value of the embedded derivative liabilities, resulting in a gain, and when corporate credit spreads narrow or tighten, the change in the NPA spread generally increases the fair value of the embedded derivative liabilities, resulting in a loss. In addition to changes driven by credit market-related movements in the NPA spread, the NPA balance also reflects changes in business activity and in the net amount at risk from the underlying guaranteed living benefits.
158 AIG | Third Quarter 2018 Form 10-Q
The following table presents the net increase (decrease) to consolidated pre-tax income (loss) from changes in the fair value of the GMWB embedded derivatives and related hedges, excluding related DAC amortization:
|
|
|
Three Months Ended |
|
Nine Months Ended |
|||||
|
|
|
September 30, |
|
September 30, |
|||||
|
(in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
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 |
|
(13) |
|
26 |
|
|
(127) |
|
117 |
|
Interest rate derivative contracts |
|
(257) |
|
(20) |
|
|
(847) |
|
10 |
|
Equity derivative contracts |
|
(332) |
|
(310) |
|
|
(412) |
|
(978) |
|
Change in fair value of variable annuity hedging portfolio |
|
(602) |
|
(304) |
|
|
(1,386) |
|
(851) |
|
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 |
|
(168) |
|
(82) |
|
|
4 |
|
(485) |
|
Change in fair value of embedded derivatives due to change in NPA volume |
|
(19) |
|
(114) |
|
|
(262) |
|
(238) |
|
Change in fair value of embedded derivatives due to update of actuarial assumptions |
|
38 |
|
(188) |
|
|
38 |
|
(188) |
|
Total change due to update of actuarial assumptions and NPA |
|
(149) |
|
(384) |
|
|
(220) |
|
(911) |
|
Net impact on pre-tax income (loss) |
$ |
(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 net impact on pre-tax income from the GMWB embedded derivatives and related hedges in the three -month period ended September 30, 2018 (excluding related DAC amortization) was primarily driven by losses from the impact of tightening credit spreads on the NPA spread, partially offset by higher interest rates, and equity market volatility. In the three- and nine-month periods ended September 30, 2018, increases in interest rates resulted in NPA volume losses from lower expected GMWB payments. The net impact on pre-tax income from the GMWB and related hedges in the three- and nine-month periods ended September 30, 2017 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.
The change in the fair value of the GMWB embedded derivatives, excluding NPA and update of actuarial assumptions, in the three- and nine-month periods ended September 30, 2018 reflected gains from equity market volatility and reductions in risk margins due to decreased GMWB claims driven by higher interest rates, partially offset by losses from the related hedging portfolio in the three- and nine-month periods ended September 30, 2018. In the nine-month period ended September 30, 2018, fair value gains on embedded derivatives, excluding NPA and actuarial assumption update, was fully offset by fair value losses on the related hedging portfolio. The change in the fair value of GMWB embedded derivatives excluding NPA and update of actuarial assumptions in the three- and nine-month periods ended September 30, 2017 was largely offset by the related hedging portfolio.
Fair value gains or losses in the hedging portfolio are typically not fully offset by increases or decreases in liabilities on a U.S. GAAP basis, due to the NPA and other risk margins used for U.S. GAAP valuation that cause the embedded derivatives to be less sensitive to changes in market rates than the hedge portfolio. On an economic basis, the changes in the fair value of the hedge portfolio were partially offset by the decrease in the economic hedge target, as discussed below.
Change in Economic Hedge Target
The decrease in the economic hedge target liability in the first nine months of 2018 was primarily due to higher interest rates and equity market volatility.
AIG | Third Quarter 2018 Form 10-Q 159
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 periods 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 were primarily due to tightening of credit spreads. The change in the fair value of the hedging bonds, which is excluded from the adjusted pre-tax income of the Individual Retirement and Group Retirement segments, is reported in net investment income on the Consolidated Statements of Income (Loss).
• Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions and futures, resulted in 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 a net gain in the nine-month period ended September 30, 2017.
• The change in the fair value of equity derivative contracts, which included futures and options, reflected lower losses in the three- and nine-month periods ended September 30, 2018 compared to the same periods in the prior year, which varied based on the relative change in equity market returns in the respective periods.
DAC
The following table summarizes the major components of the changes in DAC, including VOBA, within the Life and Retirement companies, excluding DAC of the Legacy Portfolio:
|
Nine Months Ended September 30, |
|
|
|
|
|
(in millions) |
|
2018 |
|
2017 |
|
Balance, beginning of year |
$ |
7,637 |
$ |
7,571 |
|
Acquisition costs deferred |
|
850 |
|
696 |
|
Amortization expense: |
|
|
|
|
|
Update of assumptions included in adjusted pre-tax income |
|
307 |
|
194 |
|
Related to realized capital gains and losses |
|
47 |
|
190 |
|
All other operating amortization |
|
(718) |
|
(652) |
|
Increase (decrease) in DAC due to foreign exchange |
|
(14) |
|
49 |
|
Change related to unrealized depreciation (appreciation) of investments |
|
873 |
|
(495) |
|
Balance, end of period* |
$ |
8,982 |
$ |
7,553 |
* DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $9.4 billion and $8.8 billion at September 30, 2018 and 2017, respectively.
DAC and Reserves Related to Unrealized Appreciation of Investments
DAC and Reserves for universal life and investment-type products (collectively, investment-oriented products) are adjusted at each balance sheet date to reflect the change in DAC, unearned revenue, and benefit reserves with an offset to Other comprehensive income (OCI) as if securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (shadow Investment-Oriented Adjustments). Similarly, for long-duration traditional products, significant unrealized appreciation of investments in a sustained low interest rate environment may cause additional future policy benefit liabilities (shadow Loss Adjustments) with an offset to OCI to be recorded.
Shadow adjustments to DAC and unearned revenue generally move in the opposite direction of the change in unrealized appreciation of the available for sale securities portfolio, reducing the reported DAC and unearned revenue balance when market interest rates decline. Conversely, shadow adjustments to benefit reserves generally move in the same direction as the change in unrealized appreciation of the available for sale securities portfolio, increasing reported future policy benefit liabilities balance when market interest rates decline.
Market interest rates increased in the nine-month period ended September 30,2018, which resulted in a $7.4 billion decrease in the unrealized appreciation of fixed maturity securities held to support businesses in the Life and Retirement companies at September 30, 2018 compared to December 31, 2017. At September 30, 2018, the shadow Investment-Oriented Adjustments reflected increases in DAC and unearned revenues and a decrease in future policy benefit liabilities compared to December 31, 2017, while the shadow Loss Adjustments reflected a decrease in future policy benefit liabilities.
160 AIG | Third Quarter 2018 Form 10-Q
Reserves
The following table presents a rollforward of insurance reserves by operating segments for Life and Retirement, including future policy benefits, policyholder contract deposits, other policy funds, and separate account liabilities, as well as Retail Mutual Funds and Group Retirement mutual fund assets under administration:
|
|
Three Months Ended |
|
Nine Months Ended |
||||||
|
|
September 30, |
|
September 30, |
||||||
|
(in millions) |
|
2018 |
|
2017 |
|
|
2018 |
|
2017 |
|
Individual Retirement |
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period, gross |
$ |
137,134 |
$ |
133,211 |
|
$ |
138,571 |
$ |
129,321 |
|
Premiums and deposits |
|
3,616 |
|
2,526 |
|
|
11,396 |
|
8,800 |
|
Surrenders and withdrawals |
|
(3,369) |
|
(2,499) |
|
|
(10,106) |
|
(8,135) |
|
Death and other contract benefits |
|
(792) |
|
(745) |
|
|
(2,556) |
|
(2,369) |
|
Subtotal |
|
(545) |
|
(718) |
|
|
(1,266) |
|
(1,704) |
|
Change in fair value of underlying assets and reserve accretion, net of |
|
|
|
|
|
|
|
|
|
|
policy fees |
|
2,215 |
|
2,735 |
|
|
941 |
|
6,999 |
|
Cost of funds* |
|
386 |
|
384 |
|
|
1,141 |
|
1,147 |
|
Other reserve changes |
|
(26) |
|
(152) |
|
|
(223) |
|
(303) |
|
Balance at end of period |
|
139,164 |
|
135,460 |
|
|
139,164 |
|
135,460 |
|
Reinsurance ceded |
|
(319) |
|
(324) |
|
|
(319) |
|
(324) |
|
Total Individual Retirement insurance reserves and mutual fund assets |
$ |
138,845 |
$ |
135,136 |
|
$ |
138,845 |
$ |
135,136 |
|
Group Retirement |
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period, gross |
$ |
97,548 |
$ |
92,649 |
|
$ |
97,306 |
$ |
88,622 |
|
Premiums and deposits |
|
2,116 |
|
1,860 |
|
|
6,533 |
|
5,702 |
|
Surrenders and withdrawals |
|
(2,957) |
|
(1,740) |
|
|
(8,062) |
|
(5,863) |
|
Death and other contract benefits |
|
(145) |
|
(135) |
|
|
(462) |
|
(417) |
|
Subtotal |
|
(986) |
|
(15) |
|
|
(1,991) |
|
(578) |
|
Change in fair value of underlying assets and reserve accretion, net of |
|
|
|
|
|
|
|
|
|
|
policy fees |
|
2,129 |
|
2,078 |
|
|
2,841 |
|
6,115 |
|
Cost of funds* |
|
275 |
|
280 |
|
|
816 |
|
833 |
|
Other reserve changes |
|
4 |
|
- |
|
|
(2) |
|
- |
|
Balance at end of period |
|
98,970 |
|
94,992 |
|
|
98,970 |
|
94,992 |
|
Total Group Retirement insurance reserves and mutual fund assets |
$ |
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 2018 Form 10-Q 161
|
Institutional Markets |
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period, gross |
$ |
19,694 |
$ |
15,445 |
|
$ |
18,580 |
$ |
15,385 |
|
Premiums and deposits |
|
69 |
|
1,476 |
|
|
2,184 |
|
2,199 |
|
Surrenders and withdrawals |
|
(183) |
|
(37) |
|
|
(1,189) |
|
(800) |
|
Death and other contract benefits |
|
(112) |
|
(72) |
|
|
(387) |
|
(275) |
|
Subtotal |
|
(226) |
|
1,367 |
|
|
608 |
|
1,124 |
|
Change in fair value of underlying assets and reserve accretion, net of |
|
|
|
|
|
|
|
|
|
|
policy fees |
|
81 |
|
86 |
|
|
158 |
|
189 |
|
Cost of funds* |
|
90 |
|
66 |
|
|
246 |
|
186 |
|
Other reserve changes |
|
63 |
|
27 |
|
|
110 |
|
107 |
|
Balance at end of period |
|
19,702 |
|
16,991 |
|
|
19,702 |
|
16,991 |
|
Reinsurance ceded |
|
(43) |
|
(3) |
|
|
(43) |
|
(3) |
|
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 |
$ |
274,023 |
$ |
259,999 |
|
$ |
273,881 |
$ |
251,725 |
|
Premiums and deposits |
|
6,688 |
|
6,722 |
|
|
22,776 |
|
19,301 |
|
Surrenders and withdrawals |
|
(6,795) |
|
(4,419) |
|
|
(19,957) |
|
(15,235) |
|
Death and other contract benefits |
|
(1,189) |
|
(1,103) |
|
|
(3,751) |
|
(3,502) |
|
Subtotal |
|
(1,296) |
|
1,200 |
|
|
(932) |
|
564 |
|
Change in fair value of underlying assets and reserve accretion, net of |
|
|
|
|
|
|
|
|
|
|
policy fees |
|
4,196 |
|
4,657 |
|
|
3,169 |
|
12,628 |
|
Cost of funds* |
|
843 |
|
823 |
|
|
2,484 |
|
2,447 |
|
Other reserve changes |
|
128 |
|
(400) |
|
|
(708) |
|
(1,085) |
|
Balance at end of period |
|
277,894 |
|
266,279 |
|
|
277,894 |
|
266,279 |
|
Reinsurance ceded |
|
(1,594) |
|
(1,376) |
|
|
(1,594) |
|
(1,376) |
|
Total insurance reserves and mutual fund assets |
$ |
276,300 |
$ |
264,903 |
|
$ |
276,300 |
$ |
264,903 |
* Excludes amortization of deferred sales inducements.
Insurance reserves of Life and Retirement, as well as Retail Mutual Funds and Group Retirement mutual fund assets under administration, were comprised of the following balances:
|
|
|
|
|
September 30, |
|
December 31, |
|
(in millions) |
|
|
|
2018 |
|
2017 |
|
Future policy benefits |
|
|
$ |
13,853 |
$ |
13,592 |
|
Policyholder contract deposits |
|
|
|
135,916 |
|
130,735 |
|
Other policy funds |
|
|
|
476 |
|
401 |
|
Separate account liabilities |
|
|
|
91,041 |
|
90,819 |
|
Total insurance reserves* |
|
|
|
241,286 |
|
235,547 |
|
Mutual fund assets |
|
|
|
36,608 |
|
38,334 |
|
Total insurance reserves and mutual fund assets |
|
|
$ |
277,894 |
$ |
273,881 |
* Excludes reserves related to the Legacy Portfolio.
162 AIG | Third Quarter 2018 Form 10-Q
Liquidity and Capital Resources
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 months under a liquidity stress scenario.
See Part II, Item 7. MD&A — Enterprise Risk Management — Risk Appetite, Limits, Identification, and Measurement in the 2017 Annual Report and Enterprise Risk Management — Liquidity Risk Management below for additional information.
Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth, and cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital generation is derived from the profitability of our insurance subsidiaries. We must comply with numerous constraints on our minimum capital positions. These constraints drive the requirements for capital adequacy at AIG and the individual businesses and are based on internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual capital levels are monitored on a regular basis, and using ERM’s stress testing methodology, we evaluate the capital impact of potential macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of both AIG and our insurance subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or events.
Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable capital resources. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in significant additional cash or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.
Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability and capital management actions. Liability management actions may include, but are not limited to, repurchasing or redeeming outstanding debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not limited to, paying dividends to our shareholders and share and/or warrant repurchases.
AIG | Third Quarter 2018 Form 10-Q 163
|
LIQUIDITY AND CAPITAL RESOURCES ACTIVITY FOR the nine-MONTH PERIOD ENDED September 30, 2018 Sources AIG Parent Funding from Subsidiaries During the nine-month period ended September 30, 2018, AIG Parent received $3.8 billion in dividends from subsidiaries. Of this amount, $1.6 billion consisted of dividends in the form of cash and fixed maturity securities from our General Insurance companies, $2.1 billion consisted of dividends and loan repayments in the form of cash from our Life and Retirement companies and $48 million consisted of dividends in the form of cash from our Other category. AIG Parent also received a net amount of $1.1 billion in tax sharing payments in the form of cash from our insurance businesses in the nine-month period ended September 30, 2018, including $238 million of such payments in the third quarter of 2018. The tax sharing payments may be subject to adjustment in future periods. Debt Issuance In March 2018, we issued $750 million aggregate principal amount of 4.200% Notes Due 2028; $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 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 $2.9 billion during the nine-month period ended September 30, 2018. AIG Parent made interest payments on our debt instruments totaling $706 million during the nine-month period ended September 30, 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 2018 totaling $858 million. Repurchase of Common Stock We repurchased approximately 18.5 million shares of AIG Common Stock during the nine-month period ended September 30, 2018, for an aggregate purchase price of approximately $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.
164 AIG | Third Quarter 2018 Form 10-Q
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) |
|
|
|
2018 |
|
2017 |
|
Sources: |
|
|
|
|
|
|
|
Net cash provided by other investing activities |
|
|
|
4,135 |
|
14,475 |
|
Changes in policyholder contract balances |
|
|
|
5,146 |
|
1,801 |
|
Issuance of long-term debt |
|
|
|
4,059 |
|
2,405 |
|
Net cash provided by other financing activities |
|
|
|
- |
|
578 |
|
Total sources |
|
|
|
13,340 |
|
19,259 |
|
Uses: |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
|
(38) |
|
(8,862) |
|
Acquisition of businesses, net of cash and restricted cash acquired |
|
|
|
(5,052) |
|
- |
|
Repayments of long-term debt |
|
|
|
(2,788) |
|
(2,751) |
|
Purchases of AIG Common Stock |
|
|
|
(994) |
|
(6,275) |
|
Dividends paid |
|
|
|
(858) |
|
(884) |
|
Net cash used in other financing activities |
|
|
|
(3,232) |
|
- |
|
Total uses |
|
|
|
(12,962) |
|
(18,772) |
|
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) |
|
|
|
|
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 the nine-month period ended September 30, 2018 compared to $1.0 billion in the same period in the prior year. Excluding interest payments, AIG had operating cash inflows of $980 million in nine-month period ended September 30, 2018 compared to operating cash outflows of $7.8 billion in the same period 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 2018 Form 10-Q 165
Investing Cash Flow Activities
Net cash used in investing activities in the nine-month period ended September 30, 2018 was $917 million compared to investing cash inflows of $14.5 billion in the nine-month period ended September 30, 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 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, 2018, AIG Parent had approximately $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.
166 AIG | Third Quarter 2018 Form 10-Q
The following table presents AIG Parent's liquidity sources:
|
|
As of |
As of |
||
|
(In millions) |
September 30, 2018 |
December 31, 2017 |
||
|
Cash and short-term investments(a) |
$ |
851 |
$ |
2,114 |
|
Unencumbered fixed maturity securities(b) |
|
3,663 |
|
5,172 |
|
Total AIG Parent liquidity |
|
4,514 |
|
7,286 |
|
Available capacity under syndicated credit facility(c) |
|
4,500 |
|
4,500 |
|
Total AIG Parent liquidity sources |
$ |
9,014 |
$ |
11,786 |
(a) Cash and short-term investments include reverse repurchase agreements totaling $631 million and $1.7 billion as of September 30, 2018 and December 31, 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 below.
Insurance Companies
We expect that our insurance companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Our insurance companies’ liquidity resources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.
Each of our material insurance companies’ liquidity is monitored through various internal liquidity risk measures. The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income and maturities. The primary uses of liquidity are paid losses, reinsurance payments, benefit claims, surrenders, withdrawals, interest payments, dividends, expenses, investment purchases and collateral requirements.
Our General Insurance companies may require additional funding to meet capital or liquidity needs under certain circumstances. Large catastrophes may require us to provide additional support to our affected operations. Downgrades in our credit ratings could put pressure on the insurer financial strength ratings of our subsidiaries, which could result in non‑renewals or cancellations by policyholders and adversely affect 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.
Management believes that because of the size and liquidity of our Life and Retirement companies’ investment portfolios, normal deviations from projected claim or surrender experience would not create significant liquidity risk. Furthermore, our Life and Retirement companies’ products contain certain features that mitigate surrender risk, including surrender charges. However, in times of extreme capital markets disruption, liquidity needs could outpace resources. As part of their risk management framework, our Life and Retirement companies continue to evaluate and, where appropriate, pursue strategies and programs to improve their liquidity position and facilitate their ability to maintain a fully invested asset portfolio.
Certain of our U.S. insurance companies are members of the Federal Home Loan Banks (FHLBs) in their respective districts. Borrowings from the FHLBs are used to supplement liquidity or for other uses deemed appropriate by management. Our U.S. General Insurance companies had outstanding borrowings from the FHLBs in an aggregate amount of approximately $200 million and $190 million at September 30, 2018 and December 31, 2017, respectively. The increase was primarily due to borrowings of approximately $110 million by Validus companies, partially offset by a decrease in borrowings from other U.S. General Insurance companies. Our U.S. Life and Retirement companies had outstanding borrowings in the form of cash advances from the FHLBs in an aggregate amount of $30 million at September 30, 2018 and had no outstanding borrowings at December 31, 2017. In addition, $3.4 billion and $606 million were due to the FHLBs in the respective districts of our U.S. Life and Retirement companies at September 30, 2018 and December 31, 2017, respectively, under funding agreements issued through our Individual Retirement, Group Retirement and Institutional Markets operating segments, which were reported in Policyholder contract deposits.
Certain of our U.S. Life and Retirement companies have programs, which began in 2012, that lend securities from their investment portfolio to supplement liquidity or for other uses as deemed appropriate by management. Under these programs, these U.S. Life and Retirement companies lend securities to financial institutions and receive cash as collateral equal to 102 percent of the fair value of the loaned securities. Cash collateral received is invested in short-term investments. Additionally, the aggregate amount of securities that a Life and Retirement company is able to lend under its program at any time is limited to five percent of its general account statutory-basis admitted assets. Our U.S. Life and Retirement companies had $1.1 billion and $2.9 billion of securities subject to
AIG | Third Quarter 2018 Form 10-Q 167
these agreements at September 30, 2018 and December 31, 2017, respectively, and $1.1 billion and $3.0 billion of liabilities to borrowers for collateral received at September 30, 2018 and December 31, 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 entered into a CMA with Fortitude Re. Among other things, the CMA provides that AIG Parent will maintain available statutory capital and surplus of Fortitude Re’s long term business fund and its general business account at or above a stress threshold percentage of its projected enhanced capital requirement in respect of the applicable fund, as defined under Bermuda law. As of September 30, 2018, the stress threshold percentage under this CMA was 125 percent.
AIG Parent and/or certain subsidiaries are parties to several letter of credit agreements with various financial institutions, which issue letters of credit from time to time in support of our insurance companies. Letters of credit issued in support of the General Insurance companies totaled approximately $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 October 31, 2018, substantially all of our international operations have been transferred to AIGIH. We will continue to monitor our international holding company structure in light of regulatory, tax and other developments, to ensure that this strategy continues to be effective.
In the nine-month period ended September 30, 2018, our General Insurance companies collectively paid a total of approximately $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, 2018, our Life and Retirement companies collectively paid a total of approximately $2.1 billion in dividends and loan repayments in the form of cash to AIG Parent.
Tax Matters
If the settlement agreements in principle are concluded in our ongoing dispute related to the disallowance of foreign tax credits associated with cross border financing transactions, we will be required to make a payment to the U.S. Treasury. Although we can provide no assurance regarding whether the non-binding settlements will be finalized, the amount we currently expect to pay based on current proposed settlement terms is approximately $1.7 billion, including obligations of AIG Parent and subsidiaries. This amount is net of payments previously made with respect to cross border financing transactions involving matters dating back to 1997 and other matters largely related to the same tax years. There remains uncertainty with regard to whether the settlements in principle will ultimately be approved by the relevant authorities as well as the amount and timing of any potential payments, which are not likely to be made before sometime in 2019.
For additional information regarding this matter see Note 15 to the Condensed Consolidated Financial Statements.
We maintain a committed, revolving syndicated credit facility (the Facility) as a potential source of liquidity for general corporate purposes. The Facility provides for aggregate commitments by the bank syndicate to provide unsecured revolving loans and/or standby letters of credit of up to $4.5 billion without any limits on the type of borrowings and is scheduled to expire in June 2022.
As of September 30, 2018, a total of $4.5 billion remains available under the Facility. Our ability to utilize the Facility is not contingent on our credit ratings. However, our ability to utilize the Facility is conditioned on the satisfaction of certain legal, operating, administrative and financial covenants and other requirements contained in the Facility. These include covenants relating to our maintenance of a specified total consolidated net worth and total consolidated debt to total consolidated capitalization. Failure to satisfy these and other requirements contained in the Facility would restrict our access to the Facility and could have a material adverse effect on our financial condition, results of operations and liquidity. We expect to utilize the Facility from time to time, and may use the proceeds for general corporate purposes.
168 AIG | Third Quarter 2018 Form 10-Q
Contractual Obligations
The following table summarizes contractual obligations in total, and by remaining maturity:
|
September 30, 2018 |
|
|
Payments due by Period |
|||||||||
|
|
|
Total |
Remainder of |
|
2019 - |
|
2021 - |
|
|
|
|
|
|
(in millions) |
|
Payments |
|
2018 |
|
2020 |
|
2022 |
|
2023 |
|
Thereafter |
|
Insurance operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss reserves |
$ |
83,954 |
$ |
19,047 |
$ |
24,100 |
$ |
13,468 |
$ |
4,402 |
$ |
22,937 |
|
Insurance and investment contract liabilities |
|
222,828 |
|
6,486 |
|
30,165 |
|
28,086 |
|
12,167 |
|
145,924 |
|
Borrowings(a) |
|
1,342 |
|
- |
|
117 |
|
222 |
|
- |
|
1,003 |
|
Interest payments on borrowings |
|
853 |
|
1 |
|
99 |
|
99 |
|
50 |
|
604 |
|
Other long-term obligations |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Total |
$ |
308,977 |
$ |
25,534 |
$ |
54,481 |
$ |
41,875 |
$ |
16,619 |
$ |
170,468 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
$ |
24,771 |
$ |
136 |
$ |
2,643 |
$ |
3,208 |
$ |
1,736 |
$ |
17,048 |
|
Interest payments on borrowings |
|
15,751 |
|
472 |
|
2,071 |
|
1,798 |
|
821 |
|
10,589 |
|
Other long-term obligations |
|
409 |
|
21 |
|
180 |
|
171 |
|
1 |
|
36 |
|
Total |
$ |
40,931 |
$ |
629 |
$ |
4,894 |
$ |
5,177 |
$ |
2,558 |
$ |
27,673 |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss reserves |
$ |
83,954 |
$ |
19,047 |
$ |
24,100 |
$ |
13,468 |
$ |
4,402 |
$ |
22,937 |
|
Insurance and investment contract liabilities |
|
222,828 |
|
6,486 |
|
30,165 |
|
28,086 |
|
12,167 |
|
145,924 |
|
Borrowings(a) |
|
26,113 |
|
136 |
|
2,760 |
|
3,430 |
|
1,736 |
|
18,051 |
|
Interest payments on borrowings |
|
16,604 |
|
473 |
|
2,170 |
|
1,897 |
|
871 |
|
11,193 |
|
Other long-term obligations(b) |
|
409 |
|
21 |
|
180 |
|
171 |
|
1 |
|
36 |
|
Total(c) |
$ |
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.
(c) Does not reflect unrecognized tax benefits of $4.7 billion. For additional information see Note 15 to the Condensed Consolidated Financial Statements.
Loss Reserves
Loss reserves relate to our General Insurance companies 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 General Insurance companies maintain adequate financial resources to meet the actual required payments under these obligations.
Insurance and Investment Contract Liabilities
Insurance and investment contract liabilities, including GIC liabilities, relate to our Life and Retirement companies. These liabilities include various investment-type products with contractually scheduled maturities, including periodic payments. These liabilities also include benefit and claim liabilities, of which a significant portion represents policies and contracts that do not have stated contractual maturity dates and may not result in any future payment obligations. For these policies and contracts (i) we are not currently making payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or (iii) payment may occur due to a surrender or other non-scheduled event beyond our control.
We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits. These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts presented could be materially different from actual required payments. The amounts presented in this table are undiscounted and exceed the future policy benefits and policyholder contract deposits included in the Consolidated Balance Sheets.
We believe that our Life and Retirement companies have adequate financial resources to meet the payments actually required under these obligations. These subsidiaries have substantial liquidity in the form of cash and short-term investments. In addition, our Life and Retirement companies maintain significant levels of 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 2018 Form 10-Q 169
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, 2018 |
|
|
|
Amount of Commitment Expiring |
||||||||
|
|
|
Total Amounts |
|
Remainder |
|
2019 - |
|
2021 - |
|
|
|
|
|
(in millions) |
|
Committed |
|
of 2018 |
|
2020 |
|
2022 |
|
2023 |
|
Thereafter |
|
Insurance operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
$ |
173 |
$ |
161 |
$ |
2 |
$ |
- |
$ |
- |
$ |
10 |
|
Guarantees of indebtedness |
|
59 |
|
59 |
|
- |
|
- |
|
- |
|
- |
|
All other guarantees(a) |
|
79 |
|
7 |
|
14 |
|
16 |
|
14 |
|
28 |
|
Commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment commitments(b) |
|
3,274 |
|
1,757 |
|
1,138 |
|
344 |
|
- |
|
35 |
|
Commitments to extend credit |
|
2,115 |
|
975 |
|
609 |
|
305 |
|
140 |
|
86 |
|
Letters of credit |
|
5 |
|
- |
|
5 |
|
- |
|
- |
|
- |
|
Total(c) |
$ |
5,705 |
$ |
2,959 |
$ |
1,768 |
$ |
665 |
$ |
154 |
$ |
159 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity facilities(d) |
$ |
74 |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
74 |
|
Standby letters of credit |
|
85 |
|
85 |
|
- |
|
- |
|
- |
|
- |
|
All other guarantees |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment commitments(b) |
|
300 |
|
1 |
|
27 |
|
75 |
|
80 |
|
117 |
|
Commitments to extend credit |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Letters of credit |
|
16 |
|
16 |
|
- |
|
- |
|
- |
|
- |
|
Total(c)(e) |
$ |
475 |
$ |
102 |
$ |
27 |
$ |
75 |
$ |
80 |
$ |
191 |
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity facilities(d) |
$ |
74 |
$ |
- |
$ |
- |
$ |
- |
$ |
- |
$ |
74 |
|
Standby letters of credit |
|
258 |
|
246 |
|
2 |
|
- |
|
- |
|
10 |
|
Guarantees of indebtedness |
|
59 |
|
59 |
|
- |
|
- |
|
- |
|
- |
|
All other guarantees(a) |
|
79 |
|
7 |
|
14 |
|
16 |
|
14 |
|
28 |
|
Commitments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment commitments(b) |
|
3,574 |
|
1,758 |
|
1,165 |
|
419 |
|
80 |
|
152 |
|
Commitments to extend credit |
|
2,115 |
|
975 |
|
609 |
|
305 |
|
140 |
|
86 |
|
Letters of credit |
|
21 |
|
16 |
|
5 |
|
- |
|
- |
|
- |
|
Total(c)(e) |
$ |
6,180 |
$ |
3,061 |
$ |
1,795 |
$ |
740 |
$ |
234 |
$ |
350 |
(a) Includes construction guarantees connected to affordable housing investments by our Life 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 Statements.
(b) Includes commitments to invest in private equity funds, hedge funds and other funds and commitments to purchase and develop real estate in the United States and abroad. The commitments to invest in private equity funds, hedge funds and other funds are called at the discretion of each fund, as needed for funding new investments or expenses of the fund. The expiration of these commitments is estimated in the table above based on the expected life cycle of the related fund, consistent with past trends of requirements for funding. Investors under these commitments are primarily insurance and real estate subsidiaries.
(c) Does not include guarantees, CMAs or other support arrangements among AIG consolidated entities.
(d) Primarily represents liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.
(e) Excludes commitments with respect to pension plans. The remaining annual pension contribution for 2018 is expected to be approximately $13 million for U.S. and non-U.S. plans.
170 AIG | Third Quarter 2018 Form 10-Q
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.
The following table provides the rollforward of AIG’s total debt outstanding:
|
|
|
Balance at |
|
|
|
Maturities |
|
Effect of |
|
|
|
|
Balance at |
|
Nine Months Ended September 30, 2018 |
|
December 31, |
|
|
|
and |
|
Foreign |
|
Other |
|
September 30, |
|
|
(in millions) |
|
2017 |
|
Issuances |
Repayments |
|
Exchange |
|
Changes |
|
|
2018 |
|
|
Debt issued or guaranteed by AIG: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIG general borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and bonds payable |
$ |
20,339 |
$ |
1,727 |
$ |
(1,107) |
$ |
(95) |
$ |
23 |
|
$ |
20,887 |
|
Junior subordinated debt |
|
841 |
|
742 |
|
(22) |
|
(10) |
|
1 |
|
|
1,552 |
|
AIG Japan Holdings Kabushiki Kaisha |
|
334 |
|
- |
|
- |
|
5 |
|
- |
|
|
339 |
|
Validus notes and bonds payable |
|
- |
|
- |
|
- |
|
- |
|
360 |
|
|
360 |
|
AIGLH notes and bonds payable |
|
281 |
|
- |
|
- |
|
- |
|
1 |
|
|
282 |
|
AIGLH junior subordinated debt |
|
361 |
|
- |
|
- |
|
- |
|
- |
|
|
361 |
|
Total AIG general borrowings |
|
22,156 |
|
2,469 |
|
(1,129) |
|
(100) |
|
385 |
|
|
23,781 |
|
AIG borrowings supported by assets:(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MIP notes payable |
|
356 |
|
- |
|
(364) |
|
8 |
|
- |
|
|
- |
|
Series AIGFP matched notes and bonds payable |
|
21 |
|
- |
|
- |
|
- |
|
- |
|
|
21 |
|
GIAs, at fair value |
|
2,707 |
|
118 |
|
(518) |
|
- |
|
(44) |
(b) |
|
2,263 |
|
Notes and bonds payable, at fair value |
|
181 |
|
- |
|
(129) |
|
- |
|
(4) |
(b) |
|
48 |
|
Total AIG borrowings supported by assets |
|
3,265 |
|
118 |
|
(1,011) |
|
8 |
|
(48) |
|
|
2,332 |
|
Total debt issued or guaranteed by AIG |
|
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) |
|
190 |
|
30 |
|
(196) |
|
- |
|
206 |
|
|
230 |
|
Debt of consolidated investments(d) |
|
6,029 |
|
1,442 |
|
(549) |
|
(27) |
|
817 |
(e) |
|
7,712 |
|
Total debt not guaranteed by AIG |
|
6,219 |
|
1,472 |
|
(745) |
|
(27) |
|
1,562 |
|
|
8,481 |
|
Total debt |
$ |
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 $1.6 billion and $2.0 billion at September 30, 2018 and December 31, 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 $2.5 billion, affordable housing partnership investments of $1.8 billion and other securitization vehicles of $1.7 billion.
AIG | Third Quarter 2018 Form 10-Q 171
(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, 2018 of AIG (excluding $7.7 billion of borrowings of consolidated investments) for the next four quarters:
|
|
|
Fourth |
|
First |
|
Second |
|
Third |
|
|
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
|
|
(in millions) |
|
2018 |
|
2019 |
|
2019 |
|
2019 |
|
Total |
|
AIG general borrowings |
$ |
- |
$ |
- |
$ |
- |
$ |
999 |
$ |
999 |
|
AIG borrowings supported by assets |
|
136 |
|
17 |
|
17 |
|
143 |
|
313 |
|
Validus junior subordinated debt(a) |
|
89 |
|
- |
|
- |
|
- |
|
89 |
|
Other subsidiaries' notes, bonds, loans and |
|
|
|
|
|
|
|
|
|
|
|
mortgages payable |
|
120 |
|
110 |
|
- |
|
- |
|
230 |
|
Total |
$ |
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.
172 AIG | Third Quarter 2018 Form 10-Q
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 $7.7 billion in borrowings of debt of consolidated investments:
|
September 30, 2018 |
|
|
|
Remainder |
Year Ending |
||||||||||||
|
(in millions) |
|
|
Total |
|
of 2018 |
|
2019 |
|
2020 |
|
2021 |
|
2022 |
|
2023 |
Thereafter |
|
|
Debt issued or guaranteed by AIG: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AIG general borrowings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and bonds payable |
|
$ |
20,887 |
$ |
- |
$ |
999 |
$ |
1,344 |
$ |
1,497 |
$ |
1,508 |
$ |
1,625 |
$ |
13,914 |
|
Junior subordinated debt |
|
|
1,552 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
1,552 |
|
AIG Japan Holdings Kabushiki Kaisha |
|
|
339 |
|
- |
|
- |
|
117 |
|
222 |
|
- |
|
- |
|
- |
|
Validus notes and bonds payable |
|
|
360 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
360 |
|
AIGLH notes and bonds payable |
|
|
282 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
282 |
|
AIGLH junior subordinated debt |
|
|
361 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
361 |
|
Total AIG general borrowings |
|
|
23,781 |
|
- |
|
999 |
|
1,461 |
|
1,719 |
|
1,508 |
|
1,625 |
|
16,469 |
|
AIG borrowings supported by assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MIP notes payable |
|
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Series AIGFP matched notes and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bonds payable |
|
|
21 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
21 |
|
GIAs, at fair value |
|
|
2,263 |
|
136 |
|
269 |
|
31 |
|
156 |
|
47 |
|
111 |
|
1,513 |
|
Notes and bonds payable, at fair value |
|
|
48 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
- |
|
48 |
|
Total AIG borrowings supported by assets |
|
2,332 |
|
136 |
|
269 |
|
31 |
|
156 |
|
47 |
|
111 |
|
1,582 |
|
|
Total debt issued or guaranteed by AIG |
|
|
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 |
|
|
230 |
|
120 |
|
110 |
|
- |
|
- |
|
- |
|
- |
|
- |
|
Total debt not guaranteed by AIG |
|
769 |
|
209 |
|
110 |
|
- |
|
- |
|
- |
|
- |
|
450 |
|
|
Total |
|
$ |
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 estimate a company’s ability to meet its obligations and may directly affect the cost and availability of financing to that company. The following table presents the credit ratings of AIG and certain of its subsidiaries as of October 29, 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) |
|
American International Group, Inc. |
P-2 (2nd of 3) |
A-2 (2nd of 8) |
|
Baa 1 (4th of 9) |
BBB+ (4th of 9) |
BBB+ (4th of 9) |
|
|
Stable Outlook |
|
|
Stable Outlook |
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-Q 173
We are party to some agreements that contain “ratings triggers.” Depending on the ratings maintained by one or more rating agencies, these triggers could result in (i) the termination or limitation of credit availability or a requirement for accelerated repayment, (ii) the termination of business contracts or (iii) a requirement to post collateral for the benefit of counterparties.
In the event of a downgrade of AIG’s long-term senior debt ratings, AIGFP and certain other AIG entities would be required to post additional collateral under some derivative and other transactions, or certain of the counterparties of AIGFP or of such other AIG entities would be permitted to terminate such transactions early.
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 2017 Annual Report.
Financial Strength ratings estimate an insurance company’s ability to pay its obligations under an insurance policy. The following table presents the ratings of our significant insurance subsidiaries as of October 29, 2018.
|
|
A.M. Best |
S&P |
Fitch |
Moody’s |
|
National Union Fire Insurance Company of Pittsburgh, Pa. |
A |
A+ |
A |
A2 |
|
Lexington Insurance Company |
A |
A+ |
A |
A2 |
|
American Home Assurance Company (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 |
|
AIG General Insurance Co. Ltd. |
NR |
A+ |
NR |
NR |
|
Validus Reinsurance, Ltd. |
A |
A |
A |
A2 |
These financial strength ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances.
For a discussion of the effects of downgrades in our financial strength ratings see Note 9 to the Condensed Consolidated Financial Statements herein and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit in our 2017 Annual Report.
For a discussion of our regulation and supervision by different regulatory authorities in the United States and abroad, including with respect to our liquidity and capital resources see Part I, Item 1. Business — Regulation and Part I, Item 1A. Risk Factors — Regulation in our 2017 Annual Report, and Regulatory Environment below in this Quarterly Report on Form 10-Q.
Dividends and Repurchases of AIG Common Stock
On February 8, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 29, 2018 to shareholders of record on March 15, 2018. On May 2, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on June 28, 2018 to shareholders of record on June 14, 2018. On August 2, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on September 28, 2018 to shareholders of record on September 17, 2018. On October 31, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on December 26, 2018 to shareholders of record on December 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 October 31, 2018, approximately $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
174 AIG | Third Quarter 2018 Form 10-Q
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 2017 Annual Report.
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.
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, 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 2017 Annual Report.
Credit risk is defined as the risk that our customers or counterparties are unable or unwilling to repay their contractual obligations when they become due. Credit risk may also result from a downgrade of a counterparty’s credit ratings or a widening of its credit spreads.
We devote considerable resources to managing our direct and indirect credit exposures. These exposures may arise from, but are not limited to, fixed income investments, equity securities, deposits, commercial paper investments, reverse repurchase agreements and repurchase agreements, corporate and consumer loans, leases, reinsurance recoverables, counterparty risk arising from derivatives activities, collateral extended to counterparties, insurance risk cessions to third parties, financial guarantees, letters of 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 Investments.
AIG | Third Quarter 2018 Form 10-Q 175
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 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 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 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 on- and off-balance sheet exposures. The Risk Officer within each business is responsible for creating a framework to properly identify these risks, then ensuring that they are appropriately measured, monitored and managed in accordance with the risk governance framework established by the Chief Market Risk Officer.
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.
Many of our market risk exposures 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 risk governance framework noted above.
176 AIG | Third Quarter 2018 Form 10-Q
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 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 term. In the short term, quickly rising spreads will cause a loss in the value of existing fixed maturity securities, which is largely reported in Other comprehensive income. A precipitous widening of credit spreads may also signal a fundamental weakness in the credit worthiness of bond obligors, potentially resulting in default losses. |
|
Foreign exchange (FX) rates |
We are a globally diversified enterprise with income, assets and liabilities denominated in, and capital deployed in, a variety of currencies. Changes in FX rates can affect the valuation of a broad range of balance sheet and income statement items as well as the settlement of cash flows exchanged in specific transactions. |
|
Commodity prices |
Changes in commodity prices (the value of commodities) can affect the valuation of publicly‑traded commodities, commodity indices and derivatives on commodities and commodity indices. We are exposed to commodity prices primarily through their impact on the prices and credit quality of commodity producers’ debt and equity securities in our investment portfolio. |
|
Inflation |
Changes in inflation can affect the valuation of fixed maturity securities, including AIG-issued debt obligations, derivatives and other contracts explicitly linked to inflation indices, and insurance contracts where the claims are linked to inflation either explicitly, via indexing, or implicitly, through medical costs or wage levels. |
AIG | Third Quarter 2018 Form 10-Q 177
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.
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. |
178 AIG | Third Quarter 2018 Form 10-Q
Market Risk Sensitivities
The following table provides estimates of our sensitivity to changes in yield curves, equity prices and foreign currency exchange rates on our financial instruments:
|
|
Balance Sheet Exposure |
|
|
Economic Effect |
||||||||
|
|
September 30, |
|
December 31, |
|
|
September 30, |
|
December 31, |
||||
|
(dollars in millions) |
|
2018 |
|
|
2017 |
|
|
|
2018 |
|
|
2017 |
|
Sensitivity factor |
|
|
|
|
|
|
100 bps parallel increase in all yield curves |
|||||
|
Interest rate sensitive assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities |
$ |
241,086 |
|
$ |
248,195 |
|
|
$ |
(14,175) |
|
$ |
(14,998) |
|
Mortgage and other loans receivable(a) |
|
31,987 |
|
|
28,799 |
|
|
|
(1,623) |
|
|
(1,566) |
|
Preferred stock |
|
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 |
$ |
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 alternative |
||||
|
|
|
|
|
|
|
|
|
investments |
||||
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity contracts(e) |
|
335 |
|
|
501 |
|
|
|
835 |
(f) |
|
1,228 (f) |
|
Equity and alternative investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
exposure: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate investments |
|
8,819 |
|
|
8,258 |
|
|
|
(1,764) |
|
|
(1,652) |
|
Private equity |
|
5,040 |
|
|
5,540 |
|
|
|
(1,008) |
|
|
(1,108) |
|
Hedge funds |
|
4,615 |
|
|
5,768 |
|
|
|
(923) |
|
|
(1,153) |
|
Common equity |
|
928 |
|
|
1,215 |
|
|
|
(186) |
|
|
(243) |
|
PICC Investment |
|
501 |
|
|
549 |
|
|
|
(100) |
|
|
(110) |
|
Other investments |
|
635 |
|
|
761 |
|
|
|
(127) |
|
|
(152) |
|
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 |
||||
|
|
|
|
|
|
|
|
|
exchange rates against the U.S. dollar |
||||
|
Foreign currency-denominated net |
|
|
|
|
|
|
|
|
|
|
|
|
|
asset position: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Great Britain pound |
$ |
2,196 |
|
$ |
2,026 |
|
|
$ |
(220) |
|
$ |
(203) |
|
Euro |
|
1,154 |
|
|
1,349 |
|
|
|
(115) |
|
|
(135) |
|
Japanese yen |
|
681 |
|
|
651 |
|
|
|
(68) |
|
|
(65) |
|
All other foreign currencies |
|
2,426 |
|
|
2,533 |
|
|
|
(242) |
|
|
(253) |
|
Total foreign currency-denominated net |
|
|
|
|
|
|
|
|
|
|
|
|
|
asset position(g) |
$ |
6,457 |
|
$ |
6,559 |
|
|
$ |
(645) |
|
$ |
(656) |
AIG | Third Quarter 2018 Form 10-Q 179
(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, 2018, remained relatively flat compared to December 31, 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.
180 AIG | Third Quarter 2018 Form 10-Q
Liquidity Risk Management
Liquidity risk is defined as the risk that our financial condition will be adversely affected by the inability or perceived inability to meet our short-term cash, collateral or other financial obligations. Failure to appropriately manage liquidity risk can result in insolvency, reduced operating flexibility, increased costs, reputational harm and regulatory action.
AIG and its legal entities seek to maintain sufficient liquidity both during the normal course of business and under defined liquidity stress scenarios to ensure that sufficient cash will be available to meet the obligations as they come due.
AIG Parent liquidity risk tolerance levels are designed to allow 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 stress conditions. If we project that we will breach these tolerances, we will assess and determine appropriate liquidity management actions. However, the market conditions in effect at that time may not permit us to achieve an increase in liquidity sources or a reduction in liquidity requirements.
Risk Identification
The following sources of liquidity and funding risks could impact our ability to meet short-term financial obligations as they come due.
|
Market/Monetization Risk |
Assets 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. |
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 order 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 stressed 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-Q 181
Our operations around the world are subject to regulation by many different types of regulatory authorities, including insurance, securities, derivatives, investment advisory and thrift regulators in the United States and abroad. The insurance and financial services industries generally have been subject to heightened regulatory scrutiny and supervision in recent years.
Our insurance subsidiaries are subject to regulation and supervision by the states and jurisdictions in which they do business. We expect that the domestic and international regulations applicable to us and our regulated entities will continue to evolve for the foreseeable future.
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.
182 AIG | Third Quarter 2018 Form 10-Q
Accident year The annual calendar accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.
Accident year combined ratio, as adjusted The combined ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting.
Accident year loss ratio, as adjusted The loss ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting.
Acquisition ratio Acquisition costs divided by net premiums earned. Acquisition costs are those costs incurred to acquire new and renewal insurance contracts and also include the amortization of VOBA and DAC. Acquisition costs vary with sales and include, but are not limited to, commissions, premium taxes, direct marketing costs and certain costs of personnel engaged in sales support activities such as underwriting.
Additional premium represents a premium on an insurance policy over and above the initial premium imposed at the beginning of the policy. An additional premium may be assessed if the insured’s risk is found to have increased significantly.
Adjusted revenues exclude Net realized capital gains (losses), income from non-operating litigation settlements (included in Other income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net investment income for GAAP purposes).
Assets under administration include assets under management and Retail Mutual Funds and Group Retirement mutual fund assets that we sell or administer.
Assets under management include assets in the general and separate accounts of our subsidiaries that support liabilities and surplus related to our life and annuity insurance products and the notional value of stable value wrap contracts.
Base Spread Net investment income excluding income from alternative investments and other enhancements, less interest credited excluding amortization of sales inducement assets.
Base Yield Net investment income excluding income from alternative investments and other enhancements, as a percentage of average base invested asset portfolio, which excludes alternative investments, other bond securities and certain other investments for which the fair value option has been elected.
Book value per common share, excluding accumulated other comprehensive income (AOCI) and Book value per common share, excluding AOCI and deferred tax assets (DTA) (Adjusted book value per common share) are non-GAAP measures and are used to show the amount of our net worth on a per-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.
AIG | Third Quarter 2018 Form 10-Q 183
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 (collectively referred to as “shadow Investment-Oriented Adjustments”).
For long-duration traditional products, significant unrealized appreciation of investments in a sustained low interest rate environment may cause additional future policy benefit liabilities to be recorded (shadow loss reserves).
Deferred Gain on Retroactive Reinsurance Retroactive reinsurance is a reinsurance contract in which an assuming entity agrees to reimburse a ceding entity for liabilities incurred as a result of past insurable events. If the amount of premium paid by the ceding reinsurer is less than the related ceded loss reserves, the resulting gain is deferred and amortized over the settlement period of the reserves. Any related development on the ceded loss reserves recoverable under the contract would increase the deferred gain if unfavorable, or decrease the deferred gain if favorable.
Expense ratio Sum of acquisition expenses and general operating expenses, divided by net premiums earned.
General operating expense ratio General operating expenses divided by net premiums earned. General operating expenses are those costs that are generally attributed to the support infrastructure of the organization and include but are not limited to personnel costs, projects and bad debt expenses. General operating expenses exclude losses and loss adjustment expenses incurred, acquisition expenses, and investment expenses.
GIC/GIA Guaranteed Investment Contract/Guaranteed Investment Agreement A contract whereby the seller provides a guaranteed repayment of principal and a fixed or floating interest rate for a predetermined period of time.
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.
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 and also include certain man-made events, such as terrorism and civil disorders that exceed the $10 million threshold.
Net premiums written represent the sales of an insurer, adjusted for reinsurance premiums assumed and ceded, during a given period. Net premiums earned are the revenue of an insurer for covering risk during a given period. Net premiums written are a measure of performance for a sales period, while Net premiums earned are a measure of performance for a coverage period.
184 AIG | Third Quarter 2018 Form 10-Q
Noncontrolling interest The portion of equity ownership in a consolidated subsidiary not attributable to the controlling parent company.
Policy fees An amount added to a policy premium, or deducted from a policy cash value or contract holder account, to reflect the cost of issuing a policy, establishing the required records, sending premium notices and other related expenses.
Pool A reinsurance arrangement whereby all of the underwriting results of the pool members are combined and then shared by each member in accordance with its pool participation percentage.
Premiums and deposits – Life and Retirement include direct and assumed amounts received on traditional life insurance policies and group benefit policies, and deposits on life-contingent payout annuities, as well as deposits received on universal life, investment-type annuity contracts, FHLB funding agreements and mutual funds.
Prior year development See Loss reserve development.
RBC Risk-Based Capital A formula designed to measure the adequacy of an insurer’s statutory surplus compared to the risks inherent in its business.
Reinstatement premiums Additional premiums payable to reinsurers or receivable from insurers to restore coverage limits that have been reduced or exhausted as a result of reinsured losses under certain excess of loss reinsurance treaties.
Reinsurance The practice whereby one insurer, the reinsurer, in consideration of a premium paid to that insurer, agrees to indemnify another insurer, the ceding company, for part or all of the liability of the ceding company under one or more policies or contracts of insurance which it has issued.
Retroactive Reinsurance See Deferred Gain on Retroactive Reinsurance.
Return on equity – Adjusted after-tax income excluding AOCI and DTA (Adjusted Return on equity) is a non-GAAP measure and is used to show the rate of return on shareholders’ equity. Adjusted Return on equity is derived by dividing actual or annualized adjusted after-tax 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.
Salvage The amount that can be recovered by an insurer for the sale of damaged goods for which a policyholder has been indemnified (and to which title was transferred).
Severe losses are defined as non-catastrophic individual first-party losses, surety and trade credit losses greater than $10 million, net of related reinsurance and salvage and subrogation.
SIA Sales Inducement Asset Represents enhanced crediting rates or bonus payments to contract holders on certain annuity and investment contract products that meet the criteria to be deferred and amortized over the life of the contract.
Solvency II Legislation in the European Union which reforms the insurance industry’s solvency framework, including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards. The Solvency II Directive (2009/138/EEC) was adopted on November 25, 2009 and became effective on January 1, 2016.
Subrogation The amount of recovery for claims we have paid our policyholders, generally from a negligent third party or such party’s insurer.
Surrender charge A charge levied against an investor for the early withdrawal of funds from a life insurance or annuity contract, or for the cancellation of the agreement.
Surrender rate represents annualized surrenders and withdrawals as a percentage of average reserves and Group Retirement mutual fund assets under administration.
Unearned premium reserve Liabilities established by insurers and reinsurers to reflect unearned premiums, which are usually refundable to policyholders if an insurance or reinsurance contract is canceled prior to expiration of the contract term.
VOBA Value of Business Acquired Present value of projected future gross profits from in-force policies of acquired businesses.
AIG | Third Quarter 2018 Form 10-Q 185
|
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 |
|
|
VIE Variable Interest Entity |
|
|
|
|
|
|
186 AIG | Third Quarter 2018 Form 10-Q
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, 2018.
Validus 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, 2018, that has materially affected, or is reasonably likely to materially affect, AIG’s internal control over financial reporting.
AIG | Third Quarter 2018 Form 10-Q 187
Part II – Other Information
For a discussion of legal proceedings see Note 11 to the Condensed Consolidated Financial Statements, which is incorporated herein by reference.
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 2017 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, 2018:
|
|
Total Number |
|
Average |
Total Number of Shares |
Approximate Dollar Value of Shares |
|
||
|
|
of Shares |
|
Price Paid |
Purchased as Part of Publicly |
that May Yet Be Purchased Under the |
|
||
|
Period |
Repurchased |
|
per Share |
Announced Plans or Programs |
Plans or Programs (in millions) |
|
||
|
July 1 – 31 |
2,770,400 |
$ |
53.63 |
2,770,400 |
|
$ |
1,462 |
|
|
August 1 – 31 |
2,396,492 |
|
52.53 |
2,396,492 |
|
|
1,336 |
|
|
September 1 – 30(a) |
1,407,715 |
|
52.77 |
1,407,715 |
|
|
1,262 |
(b) |
|
Total(c) |
6,574,607 |
$ |
53.05 |
6,574,607 |
|
$ |
1,262 |
|
(a) During this period, we also repurchased 99.800 warrants to purchase shares of AIG Common Stock, at an average purchase price per warrant of $14.96, for an aggregate purchase price of $2 million.
(b) Reflects the purchase of 99,800 warrants to purchase shares of AIG Common Stock, 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 October 31, 2018, approximately $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 three-month period ended September 30, 2018, we repurchased approximately 6.6 million shares of AIG Common Stock under this authorization for an aggregate purchase price of approximately $348 million. We also repurchased 99,800 warrants to purchase shares of AIG Common Stock during the three-month period ended September 30, 2018 for an aggregate purchase price of $2 million.
ITEM 4 | Mine Safety Disclosures
188 AIG | Third Quarter 2018 Form 10-Q
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.
AIG | Third Quarter 2018 Form 10-Q 189
|
Exhibit |
Description |
Location |
|
4 |
(1) Certificate of Designations of 5.875% Non-Cumulative Preference Shares, Series A |
Incorporated by reference to Exhibit 4.1 to Validus’ 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 26, 2018 (File No. 1-33606). |
|
|
(8) Indenture, dated January 26, 2010, 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 January 26, 2010 (File No. 1-33606). |
|
|
|
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) |
|
|
|
Incorporated by reference to Exhibit 4.1 to Validus’ Current Report on Form 8-K filed with the SEC on July 26, 2018 (File No. 1-33606). |
|
|
|
(12) Guarantee, dated July 26, 2018, by AIG, relating to the Notes |
Incorporated by reference to Exhibit 4.3 to Validus’ Current Report on Form 8-K filed with the SEC on July 26, 2018 (File No. 1-33606). |
|
10 |
Filed herewith. |
|
|
11 |
Included in Note 13 to the Condensed Consolidated Financial Statements. |
|
|
12 |
Filed herewith. |
|
|
31 |
Filed herewith. |
|
|
32 |
Filed herewith. |
|
|
101 |
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, (ii) the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017, (iii) the Condensed Consolidated Statements of Equity for the nine months ended September 30, 2018 and 2017, (iv) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017, (v) the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 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.
190 AIG | Third Quarter 2018 Form 10-Q
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/ JONATHAN WISMER |
|
|
Jonathan Wismer |
|
|
Senior Vice President |
|
|
Deputy Chief Financial Officer and |
|
|
Chief Accounting Officer |
|
|
(Principal Accounting Officer) |
|
|
|
Dated: November 2, 2018
AIG | Third Quarter 2018 Form 10-Q 191