AMERICAN INTERNATIONAL GROUP, INC. Cautionary Statement Regarding Forward-Looking Information
This Annual Report on Form 10-K and other publicly available documents may include, and officers and representatives of AIG may from time to time make and discuss, projections, goals, assumptions and statements that may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These projections, goals, assumptions and statements are not historical facts but instead represent only a belief regarding future events, many of which, by their nature, are inherently uncertain and outside AIG's control. These projections, goals, assumptions and statements 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. It is possible that AIG's actual results and financial condition will differ, possibly materially, from the results and financial condition indicated in these projections, goals, assumptions and statements. Factors that could cause AIG's actual results to differ, possibly materially, from those in the specific projections, goals, assumptions and statements include:
?changes in market and industry ?disruptions in the availability of AIG's conditions;
electronic data systems or those of third
?the occurrence of catastrophic parties; events, both natural and man-made, and ?the effectiveness of strategies to the effects of climate change; recruit and retain key personnel and to ?AIG's ability to effectively execute implement effective succession plans; on AIG 200 operational programs ?the requirements, which may change from designed to achieve underwriting time to time, of the global regulatory excellence, modernization of AIG's framework to which AIG is subject; operating infrastructure, enhanced ?significant legal, regulatory or user and customer experiences and governmental proceedings; unification of AIG; ?concentrations in AIG's investment
?AIG's ability to consummate the sale portfolios;
of its controlling interest in ?changes to the valuation of
of, monetize and/or acquire businesses or
?changes in judgments concerning assets or successfully integrate acquired
potential cost saving opportunities; businesses;
?actions by credit rating agencies; ?changes in judgments concerning the
?changes in judgments concerning recognition of deferred tax assets and
insurance underwriting and insurance goodwill impairment; and
liabilities; ?such other factors discussed in:
?the impact of potential information -Part I, Item 1A. Risk Factors of this technology, cybersecurity or data Annual Report; and security breaches, including as a -this Part II, Item 7. Management's result of cyber-attacks or security Discussion and Analysis of Financial vulnerabilities;
Condition and Results of Operations
(MD&A) of this Annual Report.
We are not under any obligation (and expressly disclaim any obligation) to
update or alter any projections, goals, assumptions or other statements, whether
written or oral, that may be made from time to time, whether as a result of new
information, future events or otherwise.
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TABLE OF CONTENTS
ITEM 7 | Index to Item 7
INDEX TO ITEM 7
Page
Use of Non-GAAP Measures 43
Critical Accounting Estimates 45
Executive Summary 60
Overview 60
Financial Performance Summary 61
AIG's Outlook - Industry and Economic Factors 64
Consolidated Results of Operations 67
Business Segment Operations 73
General Insurance 74
Life and Retirement 86
Other Operations 104
Legacy Portfolio 106
Investments 109
Overview 109
Investment Highlights in 2019 109
Investment Strategies 109
Credit Ratings 111
Impairments 118
Insurance Reserves 122
Loss Reserves 122
Life and Annuity Reserves and DAC 125
Liquidity and Capital Resources 134
Overview 134
Analysis of Sources and Uses of Cash 136
Liquidity and Capital Resources of AIG Parent and Subsidiaries 137
Credit Facilities 139
Contractual Obligations 140
Off-Balance Sheet Arrangements and Commercial Commitments 141
Debt 142
Credit Ratings 144
Financial Strength Ratings 144
Regulation and Supervision 145
Dividends 145
Repurchases of AIG Common Stock 145
Dividend Restrictions 145
Enterprise Risk Management 146
Overview 146
Risk Governance Structure 146
Risk Appetite, Limits, Identification, and Measurement 147
Credit Risk Management 149
Market Risk Management 150
Liquidity Risk Management 155
Operational Risk Management 156
Insurance Risk s 158
Other Business Risks 166
Glossary 167
Acronyms 170
Throughout the MD&A, we use certain terms and abbreviations, which are summarized in the Glossary and Acronyms.
We have incorporated into this discussion a number of cross-references to additional information included throughout this Annual Report to assist readers seeking additional information related to a particular subject.
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ITEM 7 | Use of Non-GAAP Measures
Use of Non-GAAP Measures
In Item 1. Business, Item 6. Selected Financial Data and 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-common share basis. We believe these measures are useful to
investors because they eliminate items that can fluctuate significantly from
period to period, including changes in fair value of our available for sale
securities portfolio, foreign currency translation adjustments and U.S. tax
attribute deferred tax assets. These measures also eliminate the asymmetrical
impact resulting from changes in fair value of our available for sale securities
portfolio wherein there is largely no offsetting impact for certain related
insurance liabilities. We exclude deferred tax assets representing U.S. tax
attributes related to net operating loss carryforwards and foreign tax credits
as they have not yet been utilized. Amounts for interim periods are estimates
based on projections of full-year attribute utilization. As net operating loss
carryforwards and foreign tax credits are utilized, the portion of the DTA
utilized is included in these book value per common share metrics. Book value
per common share, excluding AOCI, is derived by dividing total AIG common
shareholders' equity, excluding AOCI, by total common shares outstanding.
Adjusted book value per common share is derived by dividing total AIG common
shareholders' equity, excluding AOCI and DTA (Adjusted Common Shareholders'
Equity), by total common shares outstanding. The reconciliation to book value
per common share, the most comparable GAAP measure, is presented in Item 6.
Selected Financial Data.
Return on common equity - Adjusted after-tax income excluding AOCI and DTA
(Adjusted return on common equity) is used to show the rate of return on common
shareholders' equity. We believe this measure is useful to investors because it
eliminates items that can fluctuate significantly from period to period,
including changes in fair value of our available for sale securities portfolio,
foreign currency translation adjustments and U.S. tax attribute deferred tax
assets. This measure also eliminates the asymmetrical impact resulting from
changes in fair value of our available for sale securities portfolio wherein
there is largely no offsetting impact for certain related insurance liabilities.
We exclude deferred tax assets representing U.S. tax attributes related to net
operating loss carryforwards and foreign tax credits as they have not yet been
utilized. Amounts for interim periods are estimates based on projections of
full-year attribute utilization. As net operating loss carryforwards and foreign
tax credits are utilized, the portion of the DTA utilized is included in
Adjusted return on common equity. Adjusted return on common equity is derived by
dividing actual or annualized adjusted after-tax income attributable to AIG
common shareholders by average Adjusted Common Shareholders' Equity. The
reconciliation to return on common equity, the most comparable GAAP measure, is
presented in Item 6. Selected Financial Data.
Adjusted after-tax income attributable to AIG common shareholders is derived by
excluding the tax effected adjusted pre-tax income (APTI) adjustments described
below, dividends on preferred stock, and the following tax items from net income
attributable to AIG:
?deferred income tax valuation allowance releases and charges;
?changes in uncertain tax positions and other tax items related to legacy matters having no relevance to our current businesses or operating performance; and
?net tax charge related to the enactment of the Tax Cuts and Jobs Act (Tax Act);
and by excluding the net realized capital gains (losses) from noncontrolling interests.
We use the following operating performance measures because we believe they enhance the understanding of the underlying profitability of continuing operations and trends of our business segments. We believe they also allow for more meaningful comparisons with our insurance competitors. When we use these measures, reconciliations to the most comparable GAAP measure are provided on a consolidated basis in the Consolidated Results of Operations section of this MD&A.
Adjusted revenues exclude Net realized capital gains (losses), income from non-operating litigation settlements (included in Other income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net investment income for GAAP purposes). Adjusted revenues is a GAAP measure for our operating segments.
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ITEM 7 | Use of Non-GAAP Measures
Adjusted pre-tax income is derived by excluding the items set forth below from
income from continuing operations before income tax. This definition is
consistent across our segments. These items generally fall into one or more of
the following broad categories: legacy matters having no relevance to our
current businesses or operating performance; adjustments to enhance transparency
to the underlying economics of transactions; and measures that we believe to be
common to the industry. APTI is a GAAP measure for our segments. Beginning in
the first quarter of 2019, on a prospective basis, the changes in the fair value
of equity securities are excluded from adjusted pre-tax income (loss). Excluded
items include the following:
?changes in fair value of securities ?pension expense related to a one-time
used to hedge guaranteed living lump sum payment to former employees;
benefits; ?income and loss from divested
?changes in benefit reserves and businesses;
deferred policy acquisition costs (DAC), ?non-operating litigation reserves and
value of business acquired (VOBA), and settlements;
sales inducement assets (SIA) related to ?restructuring and other costs related
net realized capital gains and losses; to initiatives designed to reduce
?changes in the fair value of equity operating expenses, improve efficiency
securities; and simplify our organization;
?loss (gain) on extinguishment of debt; ?the portion of favorable or unfavorable
?all net realized capital gains and prior year reserve development for which
losses except earned income (periodic we have ceded the risk under retroactive
settlements and changes in settlement reinsurance agreements and related
accruals) on derivative instruments used changes in amortization of the deferred
for non-qualifying (economic) hedging or gain;
for asset replication. Earned income on ?integration and transaction costs
such economic hedges is reclassified associated with acquired businesses;
from net realized capital gains and ?losses from the impairment of goodwill;
losses to specific APTI line items based and
on the economic risk being hedged (e.g. ?non-recurring external costs associated
net investment income and interest with the implementation of non-ordinary
credited to policyholder account course legal or regulatory changes or
balances); changes to accounting principles.
?income or loss from discontinued
operations;
?net loss reserve discount benefit
(charge);
?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 catastrophe losses are generally
weather or seismic events having a net impact on AIG in excess of $10 million
each and man-made catastrophe losses, such as terrorism and civil disorders that
exceed the $10 million threshold. We believe that as adjusted ratios are
meaningful measures of our underwriting results on an ongoing basis as they
exclude catastrophes and the impact of reserve discounting which are outside of
management's control. We also exclude prior year development to provide
transparency related to current accident year results.
?Life and Retirement
-Premiums and deposits: includes direct and assumed amounts received and earned on traditional life insurance policies, group benefit policies and life-contingent payout annuities, as well as deposits received on universal life, investment-type annuity contracts,Federal Home Loan Bank (FHLB) funding agreements and mutual funds.
Results from discontinued operations are excluded from all of these measures.
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ITEM 7 | Critical Accounting Estimates
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires the
application of accounting policies that often involve a significant degree of
judgment.
The accounting policies that we believe are most dependent on the application of
estimates and assumptions, which are critical accounting estimates, are related
to the determination of:
?loss reserves;
?valuation of future policy benefit liabilities and timing and extent of loss
recognition;
?valuation of liabilities for guaranteed benefit features of variable annuity
products;
?valuation of embedded derivatives for fixed index annuity and life products;
?estimated gross profits to value deferred acquisition costs for
investment-oriented products;
?reinsurance assets;
?impairment charges, including other-than-temporary impairments on available for
sale securities, impairments on other invested assets, including investments in
life settlements, allowances for loan losses, and goodwill impairment;
?liability for legal contingencies;
?fair value measurements of certain financial assets and liabilities; and
?income tax assets and liabilities, including recoverability of our net deferred
tax asset and the predictability of future tax operating profitability of the
character necessary to realize the net deferred tax asset and 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.
Insurance Liabilities Loss Reserves
The estimate of the loss reserves relies on several key judgments:
?the determination of the actuarial models used as the basis for these estimates;
?the relative weights given to these models by product line;
?the underlying assumptions used in these models; and
?the determination of the appropriate groupings of similar product lines and, in some cases, the disaggregation of dissimilar losses within a product line.
We use numerous assumptions in determining the best estimate of reserves for
each line of business. The importance of any specific assumption can vary by
both line of business and accident year. Because actual experience can differ
from key assumptions used in establishing reserves, there is potential for
significant variation in the development of loss reserves. This is particularly
true for long-tail classes of business.
All of our methods to calculate net reserves include assumptions about estimated
reinsurance recoveries and their collectability. Reinsurance collectability is
evaluated independently of the reserving process and appropriate allowances for
uncollectible reinsurance are established.
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ITEM 7 | Critical Accounting Estimates
Overview of Loss Reserving Process and Methods
Our loss reserves can generally be categorized into two distinct groups. Short-tail reserves consists principally ofU.S. Property and Special Risks, Europe Property and Special Risks,U.S. Personal Insurance , andEurope andJapan Personal Insurance . Long-tail reserves includeU.S. Workers' Compensation,U.S. Excess Casualty,U.S. Other Casualty,U.S. Financial Lines, Europe Casualty and Financial Lines, andU.S. Run-Off Long Tail Insurance Lines.
Short-Tail Reserves
For our short-tail coverages, such as property, where the nature of claims is generally high frequency with short reporting periods, with volatility arising from occasional severe events, the process for recording non-catastrophe quarterly loss reserves is geared toward maintaining IBNR based on percentages of net earned premiums for that business, rather than projecting ultimate loss ratios based on reported losses. For example, the IBNR reserve required for the latest accident quarter for a product line such as homeowners might be approximately 20 percent of the quarter's earned premiums. This level of reserve would generally be recorded regardless of the actual losses reported in the current quarter, thus recognizing severe events as they occur. The percent of premium factor reflects both our expectation of the ultimate loss costs associated with the line of business and the expectation of the percentage of ultimate loss costs that have not yet been reported. The expected ultimate loss costs generally reflect the average loss costs from a period of preceding accident quarters that have been adjusted for changes in rate and loss cost levels, mix of business, known exposure to unreported losses, or other factors affecting the particular line of business. The expected percentage of ultimate loss costs that have not yet been reported would be derived from historical loss emergence patterns. For more mature quarters, specific loss development methods would be used to determine the IBNR. For other product lines where the nature of claims is high frequency but low severity, methods including loss development, frequency/severity or a multiple of average monthly losses may be used to determine IBNR reserves. IBNR for claims arising from catastrophic events or events of unusual severity would be determined in close collaboration with the claims department's knowledge of known information, using alternative techniques or expected percentages of ultimate loss cost emergence based on historical loss emergence of similar claim types.
Long-Tail Reserves
Estimation of ultimate net losses and loss adjustment expenses (net losses) for our long-tail casualty lines of business is a complex process and depends on a number of factors, including the product line and volume of business, as well as estimates of reinsurance recoveries. Experience in the more recent accident years generally provides limited statistical credibility of reported net losses on long-tail casualty lines of business. That is because in the more recent accident years, a relatively low proportion of estimated ultimate net incurred losses are reported or paid. Therefore, IBNR reserves constitute a relatively high proportion of net losses. For our longer-tail lines, we generally make actuarial and other assumptions with respect to the following: ?Loss cost trend factors are used to establish expected loss ratios for subsequent accident years based on the projected loss ratios for prior accident years. ?Expected loss ratios are used for the latest accident year (i.e., accident year 2019 for the year-end 2019 loss reserve analysis) and, in some cases for accident years prior to the latest accident year. The expected loss ratio generally reflects the projected loss ratio from prior accident years, adjusted for the loss cost trend and the effect of rate changes and other quantifiable factors on the loss ratio. For low-frequency, high-severity lines of business such as excess casualty, expected loss ratios generally are used for at least the three most recent accident years. ?Loss development factors are used to project the reported losses for each accident year to an ultimate basis. Generally, the actual loss development factors observed from prior accident years would be used as a basis to determine the loss development factors for the subsequent accident years. ?Tail factors are development factors used for certain longer tailed lines of business (for example, excess casualty, workers' compensation and general liability),to project future loss development for periods that extend beyond the available development data. The development of losses to the ultimate loss for a given accident year for these lines may take decades and the projection of ultimate losses for an accident year is very sensitive to the tail factors selected beyond a certain age.
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ITEM 7 | Critical Accounting Estimates
We record quarterly changes in loss reserves for each product line of business.
The overall change in our loss reserves is based on the sum of the changes for
all product lines of business. For most long-tail product lines of business, the
quarterly loss reserve changes are based on the estimated current loss ratio for
each subset of coverage less any amounts paid. Also, any change in estimated
ultimate losses from prior accident years deemed to be necessary based on the
results of our latest detailed valuation reviews, large loss analyses, or other
analytical techniques, either positive or negative, is reflected in the loss
reserve and incurred losses for the current quarter. Differences between actual
loss emergence in a given period and our expectations based on prior loss
reserve estimates are used to monitor reserve adequacy between detailed
valuation reviews and may also influence our judgment with respect to adjusting
reserve estimates.
Details of the Loss Reserving Process
The process of determining the current loss ratio for each product line of
business is based on a variety of factors. These include considerations such as:
prior accident year and policy year loss ratios; rate changes; and changes in
coverage, reinsurance, or mix of business. Other considerations include actual
and anticipated changes in external factors such as trends in loss costs,
inflation, employment rates or unemployment duration or in the legal and claims
environment. The current loss ratio for each product line of business is
intended to represent our best estimate after reflecting all of the relevant
factors. At the close of each quarter, the assumptions and data underlying the
loss ratios are reviewed to determine whether the loss ratios remain
appropriate. This process includes a review of the actual loss experience in the
quarter, actual rate changes achieved, actual changes in reinsurance,
quantifiable changes in coverage or mix of business, and changes in other
factors that may affect the loss ratio. When this review suggests that the
previously determined loss ratio is no longer appropriate, the loss ratio is
changed to reflect the revised estimates.
We conduct a comprehensive loss detailed valuation review at least annually for
each product line of business in accordance with Actuarial Standards of
Practice. These standards provide that the unpaid loss estimate may be presented
in a variety of ways, such as a point estimate, a range of estimates, a point
estimate based on the expected value of several reasonable estimates, or a
probability distribution of the unpaid loss amount. Our actuarial best estimate
for each product line of business represents an expected value generally
considering a range of reasonably possible outcomes.
The reserve analysis for each product line of business is performed by a
credentialed actuarial team in collaboration with claims, underwriting, business
unit management, risk management and senior management. Our actuaries consider
the ongoing applicability of prior data groupings and update numerous
assumptions, including the analysis and selection of loss development and loss
trend factors. They also determine and select the appropriate actuarial or other
methods used to estimate reserve adequacy for each business product line, and
may employ multiple methods and assumptions for each product line. These data
groupings, accident year weights, method selections and assumptions necessarily
change over time as business mix changes, development factors mature and become
more credible and loss characteristics evolve. In the course of these detailed
valuation reviews an actuarial best estimate of the loss reserve is determined.
The sum of these estimates for each product line of business yields an overall
actuarial best estimate for that line of business.
For certain product lines, we measure sensitivities and determine explicit
ranges around the actuarial best estimate using multiple methodologies and
varying assumptions. Where we have ranges, we use them to inform our selection
of best estimates of loss reserves by major product line of business. Our range
of reasonable estimates is not intended to cover all possibilities or extreme
values and is based on known data and facts at the time of estimation.
We consult with third-party environmental litigation and engineering
specialists, third-party toxic tort claims professionals, third-party clinical
and public health specialists, third-party workers' compensation claims
adjusters and third-party actuarial advisors to help inform our judgments, as
needed.
A critical component of our detailed valuation reviews is an internal peer
review of our reserving analyses and conclusions, where actuaries independent of
the initial review evaluate the reasonableness of assumptions used, methods
selected and weightings given to different methods. In addition, each detailed
valuation review is subjected to a review and challenge process by specialists
in our Enterprise Risk Management group.
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ITEM 7 | Critical Accounting Estimates
We consider key factors in performing detailed actuarial reviews, including:
?an assessment of economic conditions including inflation, employment rates or
unemployment duration;
?changes in the legal, regulatory, judicial and social environment including
changes in road safety, public health and cleanup standards;
?changes in medical cost trends (inflation, intensity and utilization of medical
services) and wage inflation trends;
?underlying policy pricing, terms and conditions including attachment points and
policy limits;
?changes in claims handling philosophy, operating model, processes and related
ongoing enhancements;
?third-party claims reviews that are periodically performed for key product
lines such as toxic tort, environmental and other complex casualty;
?third-party actuarial reviews that are periodically performed for key product
lines of business;
?input from underwriters on pricing, terms, and conditions and market trends;
and
?changes in our reinsurance program, pricing and commutations.
Actuarial and Other Methods for
Our actuaries determine the appropriate actuarial methods and segmentation. This determination is based on a variety of factors including the nature of the losses associated with the product line of business, such as the frequency or severity of the claims. In addition to determining the actuarial methods, the actuaries determine the appropriate loss reserve groupings of data. This determination is a judgmental, dynamic process and refinements to the groupings are made every year. The changes to groupings may be driven by and may change to reflect observed or emerging patterns within and across product lines, or to differentiate different risk characteristics (for example, size of deductibles and extent of third-party claims specialists used by our insureds). As an example of reserve segmentation, we write many unique subsets of professional liability, which cover different products, industry segments, and coverage structures. While for pricing or other purposes, it may be appropriate to evaluate the profitability of each subset individually, we believe it is appropriate to combine the subsets into larger groups for reserving purposes to produce a greater degree of credibility in the loss experience. This determination of data segmentation and related actuarial methods is assessed, reviewed and updated at least annually. The actuarial methods we use most commonly include paid and incurred loss development methods, expected loss ratio methods, including "Bornhuetter Ferguson" and "Cape Cod ", and frequency/severity models. Loss development methods utilize the actual loss development patterns from prior accident years updated through the current year to project the reported losses to an ultimate basis for all accident years. We also use this information to update our current accident year loss selections. Loss development methods are generally most appropriate for classes of business that exhibit a stable pattern of loss development from one accident year to the next, and for which the components of the product line have similar development characteristics. For example, property exposures would generally not be combined into the same product line as casualty exposures, and primary casualty exposures would generally not be combined into the same product line as excess casualty exposures. We continually refine our loss reserving techniques and adopt further segmentations based on our analysis of differing emerging loss patterns for certain product lines. We generally use expected loss ratio methods in cases where the reported loss data lacked sufficient credibility to utilize loss development methods, such as for new product lines of business or for long-tail product lines at early stages of loss development. Frequency/severity models may be used where sufficient frequency counts are available to apply such approaches. Expected loss ratio methods rely on the application of an expected loss ratio to the earned premium for the product line of business to determine the liability for loss reserves and loss adjustment expenses. For example, an expected loss ratio of 70 percent applied to an earned premium base of$10 million for a product line of business would generate an ultimate loss estimate of$7 million . Subtracting any paid losses and loss adjustment expenses would result in the indicated loss reserve for this product line. Under the Bornhuetter Ferguson methods, the expected loss ratio is applied only to the expected unreported portion of the losses. For example, for a long-tail product line of business for which only 10 percent of the losses are expected to be reported at the end of the accident year, the expected loss ratio would be used to represent the 90 percent of losses still unreported. The actual reported losses at the end of the accident year would be added to determine the total ultimate loss estimate for the accident year. Subtracting the reported paid losses and loss adjustment expenses would result in the indicated loss reserve. In the example above, the expected loss ratio of 70 percent would be multiplied by 90 percent. The result of 63 percent would be applied to the earned premium of$10 million resulting in an estimated unreported loss of$6.3 million . Actual reported losses would be added to arrive at the total ultimate losses. If the reported losses were$1 million , the ultimate loss estimate under the Bornhuetter Ferguson method would be$7.3 million versus the$7 million amount under the expected loss ratio method described above. Thus, the Bornhuetter Ferguson method gives partial credibility to the actual loss experience to date for the product line of business. Loss development methods generally give full credibility to the reported loss experience to date. In the example above, loss development methods would typically indicate an ultimate loss estimate of$10 million , as the reported losses of$1 million would be estimated to reflect only 10 percent of the ultimate losses. 48 AIG | 2019 Form 10-K
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ITEM 7 | Critical Accounting Estimates
A key advantage of loss development methods is that they respond more quickly to
any actual changes in loss costs for the product line of business. Therefore, if
loss experience is unexpectedly deteriorating or improving, the loss development
method gives full credibility to the changing experience. Expected loss ratio
methods would be slower to respond to the change, as they would continue to give
more weight to a prior expected loss ratio, until enough evidence emerged to
modify the expected loss ratio to reflect the changing loss experience. On the
other hand, loss development methods have the disadvantage of overreacting to
changes in reported losses if the loss experience is anomalous due to the
various key factors described above and the inherent volatility in some of the
classes. For example, the presence or absence of large losses at the early
stages of loss development could cause the loss development method to overreact
to the favorable or unfavorable experience by assuming it is a fundamental shift
in the development pattern. In these instances, expected loss ratio methods such
as Bornhuetter Ferguson have the advantage of recognizing large losses without
extrapolating unusual large loss activity onto the unreported portion of the
losses for the accident year.
The
Frequency/severity methods generally rely on the determination of an ultimate number of claims and an average severity for each claim for each accident year. Multiplying the estimated ultimate number of claims for each accident year by the expected average severity of each claim produces the estimated ultimate loss for the accident year. Frequency/severity methods generally require a sufficient volume of claims in order for the average severity to be predictable. Average severity for subsequent accident years is generally determined by applying an estimated annual loss cost trend to the estimated average claim severity from prior accident years. In certain cases, a structural approach may also be used to predict the ultimate loss cost. Frequency/severity methods have the advantage that ultimate claim counts can generally be estimated more quickly and accurately than can ultimate losses. Thus, if the average claim severity can be accurately estimated, these methods can more quickly respond to changes in loss experience than other methods. However, for average severity to be predictable, the product line of business must consist of homogenous types of claims for which loss severity trends from one year to the next are reasonably consistent and where there are limited changes to deductible levels or limits. Generally these methods work best for high frequency, low severity product lines of business such as personal auto. However, frequency and severity metrics are also used to test the reasonability of results for other product lines of business and provide indications of underlying trends in the data. In addition, ultimate claim counts can be used as an alternative exposure measure to earned premiums in theCape Cod method. Structural driver analytics seek to explain the underlying drivers of frequency/severity. A structural driver analysis of frequency/severity is particularly useful for understanding the key drivers of uncertainty in the ultimate loss cost. For example, for the excess workers' compensation product line of business, we have attempted to corroborate our judgment by considering the impact on severity of the future potential for deterioration of an injured worker's medical condition, the impact of price inflation on the various categories of medical expense and cost of living adjustments on indemnity benefits, the impact of injured worker mortality and claim specific settlement and loss mitigation strategies, etc., using the following:
?Claim by claim reviews, often facilitated by third-party specialists, to determine the stability and likelihood of settling an injured worker's indemnity and medical benefits;
?Analysis of the potential for future deterioration in medical condition unlikely to be picked up by a claim file review and associated with potentially costly medical procedures (i.e., increases in both utilization and intensity of medical care) over the course of the injured worker's lifetime; ?Analysis of the cost of medical price inflation for each category of medical spend (services and devices) and for cost of living adjustments in line with statutory requirements; ?Portfolio specific mortality level and mortality improvement assumptions based on a mortality study conducted for our primary and excess workers' compensation portfolios and our opinion of future longevity trends for the open reported cases; ?Ground-up consideration of the reinsurance recoveries expected for the product line of business for reported claims with extrapolation for unreported claims; and
?The effects of various run-off loss management strategies that have been developed by our run-off unit.
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ITEM 7 | Critical Accounting Estimates
In recent years, we have expanded our analysis of structural drivers to
additional product lines of business as a means of corroborating our judgments
using traditional actuarial techniques. For example, we have explicitly used
external estimates of future medical inflation and mortality in estimating the
loss development tail for excess of deductible primary workers' compensation
business. Using external forecasts for items such as these can improve the
accuracy and stability of our estimates.
The estimation of liability for loss reserves and loss adjustment expenses
relating to asbestos and environmental pollution losses on insurance policies
written many years ago is typically subject to greater uncertainty than other
types of losses. This is due to inconsistent court decisions, as well as
judicial interpretations and legislative actions that in some cases have tended
to broaden coverage beyond the original intent of such policies or have expanded
theories of liability. In addition, reinsurance recoverable balances relating to
asbestos and environmental loss reserves are subject to greater uncertainty due
to the underlying age of the claim, underlying legal issues surrounding the
nature of the coverage, and determination of proper policy period. For these
reasons, these balances tend to be subject to increased levels of disputes and
legal collection activity when actually billed. The insurance industry as a
whole is engaged in extensive litigation over these coverage and liability
issues and is thus confronted with a continuing uncertainty in its efforts to
quantify these exposures.
We continue to receive claims asserting injuries and damages from toxic waste,
hazardous substances, and other environmental pollutants and alleged claims to
cover the cleanup costs of hazardous waste dump sites, referred to collectively
as environmental claims, and indemnity claims asserting injuries from asbestos.
The vast majority of these asbestos and environmental losses emanate from
policies written in 1984 and prior years. Commencing in 1985, standard policies
contained absolute exclusions for pollution-related damage and asbestos. The
current environmental policies that we specifically price and underwrite for
environmental risks on a claims-made basis have been excluded from the analysis.
The majority of our exposures for asbestos and environmental losses are related
to excess casualty coverages, not primary coverages. The litigation costs are
treated in the same manner as indemnity amounts, with litigation expenses
included within the limits of the liability we incur. Individual significant
loss reserves, where future litigation costs are reasonably determinable, are
established on a case-by-case basis.
Discussion of Key Assumptions of our Actuarial Methods
Line of Key Assumptions Business or CategoryU.S. Workers' We generally use a combination of loss development and expected Compensation loss ratio methods forU.S. Workers' Compensation as this line of business is long-tail. The loss cost trend assumption is not believed to be material with respect to our guaranteed cost loss reserves. This is primarily because our actuaries are generally able to use loss development projections for all but the most recent accident year's reserves, so there is limited need to rely on loss cost trend assumptions for primary workers' compensation business. The tail factor is typically the most critical assumption, and small changes in the selected tail factor can have a material effect on our carried reserves. For example, the tail factors beyond twenty years for guaranteed cost business could vary by one and one-half percent below to two percent above those actually indicated in the 2019 loss reserve review. For excess of deductible business, in our judgment, it is
reasonably likely
that tail factors beyond twenty years could vary by four percent
below to six percent above those actually indicated in the 2019
loss reserve review.
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ITEM 7 | Critical Accounting Estimates
Line of Key Assumptions
Business or
Category
U.S. Excess We utilize various loss cost trend assumptions for different
Casualty segments of the portfolio. After evaluating the historical loss
cost trends from prior accident years since the early 1990s, in
our judgment, it is reasonably likely that actual loss cost
trends applicable to the year-end 2019 loss reserve review for
U.S. Excess Casualty may range five percent lower or higher than
this estimated loss trend. The loss cost trend assumption is
critical for the U.S. Excess Casualty class of business due to
the long-tail nature of the losses, and is applied across many
accident years. Thus, there is the potential for the loss
reserves with respect to a number of accident years (the
expected loss ratio years) to be significantly affected by
changes in loss cost trends that were initially relied upon in
setting the loss reserves. These changes in loss trends could be
attributable to changes in inflation or in the judicial
environment, or in other social or economic conditions affecting
losses.
U.S. Excess Casualty is a long-tail class of business and any
deviation in loss development factors might not be discernible
for an extended period of time subsequent to the recording of
the initial loss reserve estimates for any accident year. Mass
tort claims in particular may develop over a very extended
period and impact multiple accident years, so we usually select
a separate pattern for them. Thus, there is the potential for
the loss reserves with respect to a number of accident years to
be significantly affected by changes in loss development factors
that were initially relied upon in setting the reserves.
After evaluating the historical loss development factors from
prior accident years since the early 1990s, in our judgment, it
is reasonably likely that the actual loss development factors
could vary by an amount equivalent to a six month shift from
those actually utilized in the year-end 2019 reserve review.
This would impact projections both for accident years where the
selections were directly based on loss development methods as
well as the a priori loss ratio assumptions for accident years
with selections based on Bornhuetter-Ferguson or Cape Cod
methods. Similar to loss cost trends, these changes in loss
development factors could be attributable to changes in
inflation or in the judicial environment, or in other social or
economic conditions affecting losses.
U.S. Other The key uncertainties for other casualty lines are similar to
Casualty excess casualty, as the underlying business is long-tailed and
can be subject to variability in loss cost trends and changes in
loss development factors. These may differ significantly by line
of business as coverages such as general liability, medical
malpractice and environmental may be subject to different risk
drivers.
U.S. Financial The loss cost trends for U.S. Directors and Officers (D&O)
Lines liability business vary by year and subset, but for the most
recent accident years, it is assumed to have been generally
close to zero. After evaluating the historical loss cost levels
from prior accident years since the early 1990s, including the
potential effect of losses relating to the credit crisis, in our
judgment, it is reasonably likely that the actual variation in
loss cost levels for these subsets could vary by approximately
10 percent lower or higher on a year-over-year basis than the
assumptions actually utilized in the year-end 2019 reserve
review. Because U.S. D&O business has exhibited highly volatile
loss trends from one accident year to the next, there is the
possibility of an exceptionally high deviation. In our analysis,
the effects of loss cost trend assumptions affect the results
through the a priori loss ratio assumptions used for the
Bornhuetter-Ferguson and Cape Cod methods, which impact the
projections for the more recent accident years.
The selected loss development factors are also an important
assumption, but are less critical than for U.S. Excess Casualty.
Because these classes are written on a claims made basis, the
loss reporting and development tail is much shorter than for
U.S. Excess Casualty. However, the high severity nature of the
losses does create the potential for significant deviations in
loss development patterns from one year to the next. Similar to
U.S. Excess Casualty, after evaluating the historical loss
development factors from prior accident years since the early
1990s, in our judgment, it is reasonably likely that actual loss
development factors could change by an amount equivalent to a
shift by six months from those actually utilized in the year-end
2019 reserve review.
Europe Casualty Similar to U.S. business, European Casualty and Financial Lines
and Financial can be significantly impacted by loss cost trends and changes in
Lines loss development factors. The variation in such factors can
differ significantly by product and region.
U.S. Property For short-tail lines such as Property and Special Risks,
and Special variance in outcomes for individual large claims or events can
Risks, and have a significant impact on results. These outcomes generally
Europe Property relate to unique characteristics of events such as catastrophes
and Special or losses with significant business interruption claims.
Risks
U.S. Personal Personal Insurance is short-tailed in nature similar to Property
Insurance, and and Special Risks but less volatile. Variance in estimates can
Europe , and result from unique events such as catastrophes. In addition,
Japan Personal some subsets of this business, such as auto liability, can be
Insurance impacted by changes in loss development factors and loss cost
trends.
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ITEM 7 | Critical Accounting Estimates
Line of Key Assumptions
Business or
Category
U.S. Run-Off We historically have used a combination of loss development
Long Tail methods and expected loss ratio methods for excess workers'
Insurance lines compensation and other run-off segments. For environmental
claims, we have utilized a variety of methods including
traditional loss development approaches, claim department and
other expert evaluations of the ultimate costs for certain
claims and survival ratio metrics.
U.S. Run-Off Long Tail Insurance lines is an extremely long-tail
class of business, with a much greater than normal uncertainty
as to the appropriate loss development factors for the tail of
the loss development. Specifically for excess workers'
compensation, after evaluating the historical loss development
factors for prior accident years since the 1980s as well as the
development over the past several years of the ground up loss
projections utilized to help select the loss development factors
in the tail for this class of business, in our judgment, it is
reasonably likely that the tail factor beyond 30 years could
vary by 10 percent above or below that actually indicated in the
2019 loss reserve review.
Other Reserve Loss adjustment expenses (LAE) are separated into two broad
Items categories: allocated loss adjustment expenses (ALAE), also
referred to as legal defense and cost containment or "legal" and
unallocated loss adjustment expenses, which includes certain
claims adjuster fees and other internal claim management costs.
We determine reserves for legal expenses for each class of
business by one or more actuarial or structural driver methods.
For the majority of segments, legal costs are analyzed in
conjunction with losses. For segments where they are separately
analyzed the methods used generally include development methods
comparable to those described for loss development methods. The
development could be based on either the paid loss adjustment
expenses or the ratio of paid loss adjustment expenses to paid
losses, or both. Other methods include the utilization of
expected ultimate ratios of paid loss expense to paid losses,
based on actual experience from prior accident years or from
similar product lines of business.
The bulk of adjuster expenses are allocated and charged to
individual claim files. For these expenses, we generally
determine reserves based on calendar year ratios of adjuster
expenses paid to losses paid for the particular product line of
business. For other internal claim costs, which generally relate
to specific claim department expenses that are not allocated to
individual claim files such as technology costs and other broad
initiatives, we look at historic and expected expenditures for
these items and project these into the future.
The incidence of LAE is directly related to the frequency,
complexity and level of underlying claims. As a result, a key
driver of variability in LAE is the variability in the overall
claims, particularly for long tail lines.
The following sensitivity analysis table summarizes the effect on the loss reserve position of using certain alternative loss cost trend (for accident years where we use expected loss ratio methods) or loss development factor assumptions rather than the assumptions actually used in determining our estimates in the year-end loss reserve analyses in 2019:
December 31, 2019 Increase (Decrease) Increase (Decrease)
(in millions) to Loss Reserves to Loss Reserves
Loss cost trends: Loss development factors:
U.S. Excess Casualty: U.S. Excess Casualty:
5 percent increase $ 1,150 6-months slower $ 1,200
5 percent decrease (850) 6-months faster (950)
U.S. Financial Lines (D&O) U.S. Financial Lines (D&O)
10 percent increase 955 6-months slower 550
10 percent decrease (550) 6-months faster (500)
U.S. Run-Off P&C Lines (Excess
Workers' Compensation):
10% tail factor increase 460
10% tail factor decrease (460)
U.S. Workers' Compensation:
Tail factor increase(a) 1,100
Tail factor decrease(b) (800)
(a)Tail factor increase of 2 percent for guaranteed cost business and 6 percent for deductible business.
(b)Tail factor decrease of 1.5 percent for guaranteed cost business and 4 percent for deductible business.
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ITEM 7 | Critical Accounting Estimates
Future Policy Benefits for Life and Accident and Health Insurance Contracts
Long-duration traditional products include whole life insurance, term life insurance, accident and health insurance, long-term care insurance, and certain payout annuities for which the payment period is life-contingent, which include certain of our single premium immediate annuities and structured settlements. For long-duration traditional business, 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. The assumptions include mortality, morbidity, persistency, maintenance expenses, and investment returns. These assumptions are typically consistent with pricing inputs. The assumptions also include margins for adverse deviation, principally for key assumptions such as mortality and interest rates used to discount cash flows, to reflect uncertainty given that actual experience might deviate from these assumptions. Establishing margins at contract inception requires management judgment. The extent of the margin for adverse deviation may vary depending on the uncertainty of the cash flows, which is affected by the volatility of the business and the extent of our experience with the product. Loss recognition occurs if observed changes in actual experience or estimates result in projected future losses under loss recognition testing. To determine whether loss recognition exists, we determine whether a future loss is expected based on updated current assumptions. If loss recognition exists, we recognize the loss by first reducing DAC through amortization expense, and, if DAC is depleted, record additional liabilities through a charge to policyholder benefit expense. Because of the long-term nature of many of our liabilities subject to the "lock-in" principle, small changes in certain assumptions may cause large changes in the degree of reserve adequacy. In particular, changes in estimates of future invested asset returns have a large effect on the degree of reserve deficiency.
For additional information on loss recognition see Note 10 to the Consolidated Financial Statements.
Groupings for loss recognition testing are consistent with our manner of
acquiring, servicing, and measuring the profitability of the business and are
applied by product groupings, including traditional life, payout annuities and
long-term care insurance. Once loss recognition has been recorded for a block of
business, the old assumption set is replaced and the assumption set used for the
loss recognition would then be subject to the lock-in principle. Key judgments
made in loss recognition testing include the following:
?To determine investment returns used in loss recognition tests, we typically
match liabilities with assets of comparable duration, to the extent practicable,
and then project future cash flows on those assets. Assets supporting insurance
liabilities are primarily comprised of a diversified portfolio of high to medium
quality fixed maturity securities, and may also include, to a lesser extent,
alternative investments. Our projections include a reasonable allowance for
investment expenses and expected credit losses over the projection horizon. A
critical assumption in the projection of expected investment income is the
assumed net rate of investment return at which excess cash flows are to be
reinvested. For products in which asset and liability durations are matched
relatively well, this is less of a consideration since interest on excess cash
flows are not a significant component of future cash flows. For the reinvestment
rate assumption, anticipated future changes to the yield curves could have a
large effect. Given the interest rate environment applicable at the date of our
most recent loss recognition tests, we assumed a modest and gradual increase in
long-term interest rates over time.
?For mortality assumptions, key judgments include the extent of industry versus
own experience to base future assumptions as well as the extent of expected
mortality improvements in the future. The latter judgment is based on a
combination of historical mortality trends and advice from industry, public
health and demography specialists that were consulted by AIG's actuaries and
published industry information.
?For surrender rates, a key judgment involves the correlation between expected
increases/decreases in interest rates and increases/decreases in surrender
rates. To support this judgment, we compare crediting rates on our products to
expected rates on competing products under different interest rate scenarios.
?For in-force long-term care insurance, rate increases are allowed but must be
approved by state insurance regulators. Consequently, the extent of rate
increases that may be assumed requires judgment. In establishing our assumption
for rate increases for long-term care insurance, we consider historical
experience as to the frequency and level of rate increases approved by state
regulators.
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ITEM 7 | Critical Accounting Estimates
Significant unrealized appreciation on investments in a low interest rate
environment may cause DAC to be adjusted and additional future policy benefit
liabilities to be recorded through a charge directly to accumulated other
comprehensive income ("shadow loss recognition"). These charges are included,
net of tax, with the change in net unrealized appreciation of investments. In
applying shadow loss recognition, the Company overlays unrealized gains onto
loss recognition tests without revising the underlying test. Accordingly, there
is limited additional judgment in this process.
For additional information on shadow loss recognition see Note 10 to the Consolidated Financial Statements.
Guaranteed Benefit Features of Variable Annuity Products
Variable annuity products offered by ourIndividual Retirement and Group Retirement product lines offer guaranteed benefit features. These guaranteed features include guaranteed minimum death benefits (GMDB) that are payable in the event of death or other instances, and living benefits that are payable in the event of annuitization, or, in other instances, at specified dates during the accumulation period. Living benefits primarily include guaranteed minimum withdrawal benefits (GMWB).
For additional information on these features see Note 15 to the Consolidated Financial Statements.
The liability for GMDB, which is recorded in Future policyholder benefits, represents the expected value of benefits in excess of the projected account value, with the excess recognized ratably through Policyholder benefits and losses incurred over the accumulation period based on total expected fee assessments. The liabilities for GMWB, which are recorded in Policyholder contract deposits, are accounted for as embedded derivatives measured at fair value, with changes in the fair value of the liabilities recorded in Other realized capital gains (losses). Our exposure to the guaranteed amounts is equal to the amount by which the contract holder's account balance is below the amount provided by the guaranteed feature. A variable annuity contract may include more than one type of guaranteed benefit feature; for example, it may have both a GMDB and a GMWB. However, a policyholder can generally only receive payout from one guaranteed feature on a contract containing a death benefit and a living benefit, i.e., the features are generally mutually exclusive (except a surviving spouse who has a rider to potentially collect both a GMDB upon their spouse's death and a GMWB during his or her lifetime). A policyholder cannot purchase more than one living benefit on one contract. Declines in the equity markets, increased volatility and a sustained low interest rate environment increase our exposure to potential benefits under the guaranteed features, leading to an increase in the liabilities for those benefits. For sensitivity analysis which includes the sensitivity of reserves for guaranteed benefit features to changes in the assumptions for interest rates, equity market returns, volatility, and mortality see Estimated Gross Profits for Investment-Oriented Products below. 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, Index Annuity and Universal Life Risk Management and Hedging Programs.
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ITEM 7 | Critical Accounting Estimates
The reserving methodology and assumptions used to measure the liabilities of our two largest guaranteed benefit features are presented in the following table:
Guaranteed
Benefit Reserving Methodology &
Feature Assumptions and Accounting Judgments
GMDB We determine the GMDB liability at each balance sheet date by
estimating the expected value of death benefits in excess of the
projected account balance and recognizing the excess ratably over
the accumulation period based on total expected feeassessments. For
additional information on how we reserve for variable annuity
products with guaranteed benefit features see Note 15 to the
Consolidated Financial Statements.
Key assumptions include:
?Mortality rates, which are based upon actual experiencemodified to
allow for variations in policy form
?Lapse rates, which are based upon actual experience modified to
allow for variations in policy form
?Investment returns, using assumptions from a stochastic equity
model
In applying asset growth assumptions for the valuation of the GMDB
liability, we use a reversion to the mean methodology, similar to
that applied for DAC. For a description of this methodology see
Estimated Gross Profits for Investment-Oriented Products below.
GMWB GMWB living benefits are embedded derivatives that are required to
be bifurcated from the host contract and carried at fair value. For
additional information on how we reserve for variable annuity
products with guaranteed benefit features see Note 15 to the
Consolidated Financial Statements, and for information on fair value
measurement of these embedded derivatives, including how we
incorporate our own non-performance risk see Note 6 to the
Consolidated Financial Statements.
The fair value of the embedded derivatives is based onactuarial and
capital market assumptions related to projected cash flows over the
expected lives of the contracts. Key assumptions include:
?Interest rates
?Equity market returns
?Market volatility
?Credit spreads
?Equity / interest rate correlation
?Policyholder behavior, including mortality, lapses,withdrawals and
benefit utilization. Estimates of future policyholder behavior are
subjective and based primarily on our historical experience
?In applying asset growth assumptions for the valuation of GMWBs, we
use market-consistent assumptions calibrated to observable interest
rate and equity option prices
?Allocation of fees between the embedded derivative and host
contract
valuation of embedded derivatives for fixed index annuity and Life Products
Fixed index annuity and life products provide growth potential based in part on the performance of a market index. Certain fixed index annuity products offer optional guaranteed benefit features similar to those offered on variable annuity products. The index crediting feature of these products results in the recognition of an embedded derivative that is required to be bifurcated from the host contract and carried at fair value. Option pricing models are used to estimate fair value, taking into account assumptions for future equity index growth rates, volatility of the equity index, future interest rates, and our ability to adjust the participation rate and the cap on equity indexed credited rates in light of market conditions and policyholder behavior assumptions. 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, Index Annuity and Universal Life Risk Management and Hedging Programs.
Estimated Gross Profits for Investment-Oriented Products
Policy acquisition costs and policy issuance costs that are incremental and
directly related to the successful acquisition of new or renewal of existing
insurance contracts related to universal life and investment-type products
(collectively, investment-oriented products) are generally deferred and
amortized, with interest, in relation to the incidence of estimated gross
profits to be realized over the expected lives of the contracts, except in
instances where significant negative gross profits are expected in one or more
periods. Estimated gross profits include current and expected interest rates,
net investment income and spreads, net realized capital gains and losses, fees,
surrender rates, mortality experience and equity market returns and volatility.
In estimating future gross profits, lapse assumptions require judgment and can
have a material impact on DAC amortization. For fixed deferred annuity
contracts, the future spread between investment income and interest credited to
policyholders is a significant judgment, particularly in a low interest rate
environment.
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ITEM 7 | Critical Accounting Estimates
If the assumptions used for estimated gross profits change, DAC and related
reserves, including VOBA, SIA, guaranteed benefit reserves and unearned revenue
reserve (URR), are recalculated using the new assumptions, and any resulting
adjustment is included in income. Updating such assumptions may result in
acceleration of amortization in some products and deceleration of amortization
in other products.
In estimating future gross profits for variable annuity products as of December
31, 2019 , a long-term annual asset growth assumption of 7.0 percent (before
expenses that reduce the asset base from which future fees are projected) was
applied to estimate the future growth in assets and related asset-based fees. In
determining the asset growth rate, the effect of short-term fluctuations in the
equity markets is partially mitigated through the use of a reversion to the mean
methodology, whereby short-term asset growth above or below the long-term annual
rate assumption impacts the growth assumption applied to the five-year period
subsequent to the current balance sheet date. The reversion to the mean
methodology allows us to maintain our long-term growth assumptions, while also
giving consideration to the effect of actual investment performance. When actual
performance significantly deviates from the annual long-term growth assumption,
as evidenced by growth assumptions for the five-year reversion to the mean
period falling below a certain rate (floor) or above a certain rate (cap) for a
sustained period, judgment may be applied to revise or "unlock" the growth rate
assumptions to be used for both the five-year reversion to the mean period as
well as the long-term annual growth assumption applied to subsequent periods.
The use of a reversion to the mean assumption is common within the industry;
however, the parameters used in the methodology are subject to judgment and vary
within the industry.
For additional discussion see Insurance Reserves - Life and Annuity Reserves and DAC - DAC - Reversion to the Mean.
The following table summarizes the sensitivity of changes in certain assumptions for DAC and SIA, embedded derivatives and other reserves related to guaranteed benefits and URR, measured as the related hypothetical impact onDecember 31, 2019 balances and the resulting hypothetical impact on pre-tax income, before hedging. Increase (decrease) in Other Embedded Reserves Derivatives Related to Unearned Related to December 31, 2019 DAC/SIA Guaranteed Revenue Guaranteed Pre-Tax (in millions) Asset Benefits Reserve Benefits Income Assumptions: Net Investment Spread Effect of an increase by 10 basis points$ 124 $ (27) $ 20 $ (152) $ 283 Effect of a decrease by 10 basis points (155) 29 (27) 156 (313) Equity Return(a) Effect of an increase by 1% 91 (34) - (66) 191 Effect of a decrease by 1% (87) 43 - 67 (197) Volatility(b) Effect of an increase by 1% (2) 25 - (51) 24 Effect of a decrease by 1% 2 (24) - 49 (23) Interest Rate(c) Effect of an increase by 1% - - - (2,118) 2,118 Effect of a decrease by 1% - - - 2,786 (2,786) Mortality Effect of an increase by 1% (13) 50 (3) (39) (21) Effect of a decrease by 1% 12 (50) 1 39 22 Lapse Effect of an increase by 10% (121) (86) (22) (74) 61 Effect of an decrease by 10% 124 88 22 74 (60) (a)Represents the net impact of a one percent increase or decrease in long-term equity returns for GMDB reserves and net impact of a one percent increase or decrease in the S&P 500 index on the value of the GMWB embedded derivative.
(b)Represents the net impact of a one percentage point increase or decrease in equity volatility.
(c)Represents the net impact of one percent parallel shift in the yield curve on the value of the GMWB embedded derivative. Does not represent interest rate spread compression on investment-oriented products.
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ITEM 7 | Critical Accounting Estimates
The sensitivity ranges of 10 basis points, one percent and 10 percent are
included for illustrative purposes only and do not reflect the changes in net
investment spreads, equity return, volatility, interest rate, mortality or lapse
used by AIG in its fair value analyses or estimates of future gross profits to
value DAC and related reserves. Changes in excess of those illustrated may occur
in any period.
The analysis of DAC, embedded derivatives and other reserves related to
guaranteed benefits, and unearned revenue reserve is a dynamic process that
considers all relevant factors and assumptions described above. We estimate each
of the above factors individually, without the effect of any correlation among
the key assumptions. An assessment of sensitivity associated with changes in any
single assumption would not necessarily be an indicator of future results. The
effects on pre-tax income in the sensitivity analysis table above do not reflect
the related effects from our economic hedging program, which utilizes derivative
and other financial instruments and is designed so that changes in value of
those instruments move in the opposite direction of changes in the guaranteed
benefit embedded derivative liabilities.
For a further discussion on guaranteed benefit features of our variable
annuities and the related hedging program see Enterprise Risk Management -
Insurance Risks - Life and Retirement Companies' Key Risks - Variable Annuity,
Index Annuity and Universal Life Risk Management and Hedging Programs, Insurance
Reserves - Life and Annuity Reserves and DAC - Variable Annuity Guaranteed
Benefits and Hedging Results, and Notes 6 and 15 to the Consolidated Financial
Statements.
Reinsurance Assets
The estimation of reinsurance recoverable involves a significant amount of judgment, particularly for latent exposures, such as asbestos, due to their long-tail nature. Reinsurance assets include reinsurance recoverable on unpaid losses and loss adjustment expenses that are estimated as part of our loss reserving process and, consequently, are subject to similar judgments and uncertainties as the estimation of gross loss reserves.
We assess the collectability of reinsurance recoverable balances through either detailed reviews of the underlying nature of the reinsurance balance or comparisons with historical trends of disputes and credit events. We record adjustments to reflect the results of these assessments through an allowance for uncollectable reinsurance that reduces the carrying amount of reinsurance assets on the balance sheet. This estimate requires significant judgment for which key considerations include:
?paid and unpaid amounts recoverable;
?whether the balance is in dispute or subject to legal collection;
?whether the reinsurer is financially troubled (i.e., liquidated, insolvent, in receivership or otherwise subject to formal or informal regulatory restriction); and
?whether collateral and collateral arrangements exist.
At
Risk transfer
All insurance contracts, including reinsurance contracts, must meet risk transfer requirements in order to use insurance accounting, principally resulting in the recognition of cash flows under the contract as premiums and losses. If risk transfer requirements are not met, a contract is to be accounted for as a deposit, typically resulting in the recognition of cash flows under the contract through a deposit asset or liability and not as revenue or expense. To meet risk transfer requirements, all insurance and reinsurance contracts must include insurance risk, consisting of underwriting and timing risk; in addition, reinsurance contracts must also include a reasonable possibility of a significant loss for the assuming entity. We have entered into certain insurance and reinsurance contracts, primarily in ourGeneral Insurance companies, that do not contain sufficient insurance risk to be accounted for as insurance or reinsurance and are therefore subject to deposit accounting.
For additional information on reinsurance see Note 9 to the Consolidated Financial Statements.
Impairment Charges
Impairments of Investments
At each balance sheet date, we evaluate our available for sale securities
holdings with unrealized losses to determine if an other-than-temporary
impairment has occurred. We also evaluate our other invested assets for
impairment; these include equity method investments in private equity funds,
hedge funds and other entities as well as investments in real estate and life
settlements.
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ITEM 7 | Critical Accounting Estimates
An allowance is typically established for the difference between the impaired
value of a loan and its current carrying amount. Additional allowance amounts
are established for incurred but not specifically identified impairments, based
on statistical models primarily driven by past due status, debt service
coverage, loan-to-value ratio, property type and location, loan term, profile of
the borrower and of the major property tenants, and loan seasoning.
For additional information on the methodology and significant inputs, by investment type, that we use to determine the amount of impairment and allowances for loan losses see the discussion in Notes 7 and 8 to the Consolidated Financial Statements.
Goodwill Impairment
For a discussion of goodwill impairment see Part I, Item 1A. Risk Factors - Estimates and Assumptions and Note 13 to the Consolidated Financial Statements. In 2019, 2018 and 2017, for substantially all of the reporting units we elected to bypass the qualitative assessment of whether goodwill impairment may exist and, therefore, performed quantitative assessments that supported a conclusion that the fair value of all of the reporting units tested exceeded their book value. To determine fair value, we primarily use a discounted expected future cash flow analysis that estimates and discounts projected future distributable earnings. Such analysis is principally based on our business projections that inherently include judgments regarding business trends.
Liability for Legal Contingencies
We estimate and record a liability for potential losses that may arise from regulatory and government investigations and actions and litigation and other forms of dispute resolution to the extent such losses are probable and can be estimated. Determining a reasonable estimate of the amount of such losses requires significant management judgment. In many cases, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the matter is close to resolution. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases that are in the early stages of litigation or in which claimants seek substantial or indeterminate damages, we often cannot predict the outcome or estimate the eventual loss or range of reasonably possible losses related to such matters. Given the inherent unpredictability of such matters, the outcome of certain matters could, from time to time, have a material adverse effect on the company's consolidated financial condition, results of operations or cash flows.
For more information on legal, regulatory and litigation matters see Note 17 to the Consolidated Financial Statements.
Fair Value Measurements of Certain Financial Assets and Financial Liabilities
For additional information about the measurement of fair value of financial assets and financial liabilities and our accounting policy regarding the incorporation of credit risk in fair value measurements see Note 6 to the Consolidated Financial Statements.
The following table presents the fair value of fixed maturity and equity securities by source of value determination:
December 31, 2019 Fair Percent (in billions) Value of Total
Fair value based on external sources(a)
22.9 8.9
Total fixed maturity and equity securities(b)
(a)Includes
(b)Includes available for sale and other securities.
Level 3 Assets and Liabilities
Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are measured and classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs available in the marketplace used to measure the fair value.
For additional information see Note 6 to the Consolidated Financial Statements.
The following table presents the amount of assets and liabilities measured at fair value on a recurring basis and classified as Level 3:
December 31, Percentage December 31, Percentage
(in billions) 2019 of Total 2018 of Total
Assets $ 31.2 5.9 % $ 33.7 6.9 %
Liabilities 7.0 1.5 4.4 1.0
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ITEM 7 | Critical Accounting Estimates
Level 3 fair value measurements are based on valuation techniques that use at
least one significant input that is unobservable. We consider unobservable
inputs to be those for which market data is not available and that are developed
using the best information available about the assumptions that market
participants would use when valuing the asset or liability. Our assessment of
the significance of a particular input to the fair value measurement in its
entirety requires judgment.
We classify fair value measurements for certain assets and liabilities as Level
3 when they require significant unobservable inputs in their valuation,
including contractual terms, prices and rates, yield curves, credit curves,
measures of volatility, prepayment rates, default rates, mortality rates and
correlations of such inputs.
For a discussion of the valuation methodologies for assets and liabilities measured at fair value, as well as a discussion of transfers of Level 3 assets and liabilities see Note 6 to the Consolidated Financial Statements.
Income Taxes
Recoverability of Net Deferred Tax Asset
The evaluation of the recoverability of our deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed. We consider a number of factors to reliably estimate future taxable income so we can determine the extent of our ability to realize net operating losses, foreign tax credits, realized capital loss and other carryforwards. These factors include forecasts of future income for each of our businesses and actual and planned business and operational changes, both of which include assumptions about future macroeconomic and AIG specific conditions and events. We subject the forecasts to stresses of key assumptions and evaluate the effect on tax attribute utilization. We also apply stresses to our assumptions about the effectiveness of relevant prudent and feasible tax planning strategies. We have also considered the impact of the Tax Act on our forecasts of taxable income, made certain assumptions related to interpretation of relevant new rules, and incorporated guidance issued by theU.S. tax authority. Our analysis also reflects the effect of slower utilization of our tax credits due to a reduction in theU.S. statutory tax rate as a result of the Tax Act. Our income forecasts, coupled with our tax planning strategies, all resulted in sufficient taxable income to achieve realization of theU.S. tax attributes prior to their expiration. For the year endedDecember 31, 2019 , recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in theU.S. Non-Life Companies' available for sale securities portfolio, resulting in an increase to the deferred tax liability related to net unrealized tax capital gains. As ofDecember 31, 2019 , we continue to be in an overall unrealized tax gain position with respect to theU.S. Non-Life Companies' available for sale securities portfolio and thus concluded no valuation allowance is necessary in theU.S. Non-Life Companies' available for sale securities portfolio.
For the year ended
For a discussion of our framework for assessing the recoverability of our deferred tax asset see Note 23 to the Consolidated Financial Statements.
Uncertain Tax Positions
Our accounting for income taxes, including uncertain tax positions, represents
management's best estimate of various events and transactions, and requires
judgment. FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes" now incorporated into Accounting Standards Codification, 740, Income
Taxes prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of an income tax position taken
or expected to be taken in a tax return. The standard also provides guidance on
derecognition, classification, interest and penalties and additional
disclosures. We determine whether it is more likely than not that a tax position
will be sustained, based on technical merits, upon examination by the relevant
taxing authorities before any part of the benefit can be recognized in the
financial statements. A tax position is measured at the largest amount of
benefit that is greater than 50 percent likely to be realized upon settlement.
We classify interest expense and penalties recognized on income taxes as a
component of income taxes.
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ITEM 7 | Critical Accounting Estimates
TheU.S. federal income tax laws applicable to determining the amount of income taxes related to differences between the book carrying amounts and tax bases of subsidiaries are complex. Determining the amount also requires significant judgment and reliance on reasonable assumptions and estimates.
OnDecember 22, 2017 , theU.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 ofU.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG and the insurance industry. The Tax Act includes a provision for 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 BEAT under which taxes are imposed on certain base eroding payments to affiliated foreign companies. While theU.S. tax authorities issued formal guidance, including recently issued proposed and final regulations for BEAT and other provisions of the Tax Act, there are still certain aspects of the Tax Act that remain unclear and subject to substantial uncertainties. Additional guidance is expected in future periods. Such guidance may result in changes to the interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner.
For an additional discussion of the Tax Act see Note 23 to the Consolidated Financial Statements.
Executive Summary Overview This overview of the MD&A highlights selected information and may not contain all of the information that is important to current or potential investors in our securities. You should read this Annual Report in its entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us. OnNovember 13, 2018 , AIG completed the sale of a 19.9 percent ownership interest inFortitude Group Holdings, LLC (Fortitude Holdings ) toTC Group Cayman Investments Holdings, L.P. (TCG), an affiliate ofThe Carlyle Group L.P. (Carlyle) (2018 Fortitude Sale). Upon completion of the 2018 Fortitude Sale,Fortitude Holdings owned 100 percent of the outstanding common shares of Fortitude Re and AIG had an 80.1 percent ownership interest inFortitude Holdings . OnNovember 25, 2019 , AIG entered into a membership interest purchase agreement withFortitude Holdings , Carlyle, Carlyle FRL, an investment fund advised by an affiliate of Carlyle (Carlyle FRL),T&D United Capital Co., Ltd. (T&D) and T&D Holdings, Inc., pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, Carlyle FRL will purchase from AIG a 51.6 percent ownership interest inFortitude Holdings and T&D will purchase from AIG a 25 percent ownership interest inFortitude Holdings (2019 Fortitude Sale). Upon closing of the 2019 Fortitude Sale, AIG will have a 3.5 percent ownership interest inFortitude Holdings . There can be no guarantee that we will receive the required regulatory approvals or that closing conditions will be satisfied in order to consummate the 2019 Fortitude Sale.
For further discussion on these
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ITEM 7 | Executive Summary
Financial Performance Summary
Net Income (Loss) Attributable To AIG Common Shareholders
(in millions)
[[Image Removed: Chart 4]] 2019 and 2018 Comparison
Net income attributable to AIG Common
Shareholders increased due to:
•improvement in accident year losses in
General Insurance as a result of
underwriting discipline, increased use
of reinsurance and a change in business
mix as well as lower catastrophe losses
and favorable prior year loss reserve
development compared to unfavorable loss
reserve development in the prior year in
General Insurance ;
•higher investment returns in our
alternative investments portfolio due to
robust equity market returns in 2019,
income from an initial public offering
of a holding in the private equity
portfolio, and an increase in income
from fixed maturity securities for which
the fair value option was elected. This
compares to the prior year where returns
were lower as a result of an increase in
interest rates and widening credit
spreads that occurred, lower hedge fund
performance as well as negative
performance of our fair value option
equity securities portfolio;
•net realized capital gains in 2019
compared to net realized capital losses
in the prior year; and
•lower general and other operating
expenses as a result of ongoing
strategic initiatives to reduce costs.
These increases were partially offset
by:
•a net loss reserve discount charge in
2019 compared to a loss reserve discount
benefit in 2018; and
•the impact of noncontrolling interest
attributed to Fortitude Re results in
2019 as discussed in Consolidated
Results of Operations.
For further discussion see Consolidated
Results of Operations.
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ITEM 7 | Executive Summary
[[Image Removed: Chart 5]] 2018 and 2017 Comparison
Decrease in Net loss attributable to AIG
common shareholders in 2018 compared to
2017. Excluding the $6.7 billion tax
charge related to the enactment of the
Tax Act in 2017, we recorded a Net loss
attributable to AIG common shareholders
in 2018 compared to Net income
attributable to AIG common shareholders
in 2017 primarily due to:
•lower investment returns primarily
driven by lower hedge fund performance,
a decline in income from fixed maturity
securities for which the fair value
option was elected when compared to
higher returns on this portfolio in 2017
as a result of significant spread
tightening that occurred, 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 Life and Retirement
actuarial assumptions compared to a net
favorable adjustment in the prior year;
and
•higher general operating and other
expenses.
This decrease was partially offset by:
•lower losses incurred from General
Insurance operations driven by
significantly lower catastrophe losses
and lower unfavorable prior year loss
reserve development, partially offset by
higher severe losses; and
•lower net realized capital losses.
For further discussion see Consolidated
Results of Operations.
Adjusted Pre-Tax Income*
(in millions)
[[Image Removed: Chart 4]] 2019 and 2018 Comparison
Adjusted pre-tax income increased
primarily due to:
•higher investment returns in our
alternative investments portfolio due to
robust equity market returns in 2019,
income from an initial public offering
of a holding in the private equity
portfolio, and an increase in income
from fixed maturity securities for which
the fair value option was elected. In
the prior year returns were lower as a
result of an increase in interest rates
and widening credit spreads that
occurred and lower hedge fund
performance;
•lower catastrophe losses and lower
accident year losses as a result of
underwriting discipline, increased use
of reinsurance and a change in business
mix and favorable prior year loss
reserve development compared to
unfavorable loss reserve development in
the prior year; and
•lower general operating and other
expenses as a result of ongoing
strategic initiatives to reduce costs.
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ITEM 7 | Executive Summary
[[Image Removed: Chart 5]] 2018 and 2017 Comparison
Adjusted pre-tax income decreased
primarily due to:
•lower investment returns primarily
driven by lower hedge fund performance,
a decline in income from fixed maturity
securities for which the fair value
option was elected when compared to
higher returns on this portfolio in 2017
as a result of significant spread
tightening that occurred, 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 Life and Retirement
actuarial assumptions compared to a net
favorable adjustment in the prior year;
and
•higher general operating and other
expenses.
This decrease was partially offset by
lower losses incurred from General
Insurance operations driven by
significantly lower catastrophe losses
and lower unfavorable prior year loss
reserve development, partially offset by
higher severe losses.
For further discussion see Consolidated
Results of Operations.
*Non-GAAP measure - for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
General Operating and Other Expenses
(in millions)
[[Image Removed: Chart 1]] General operating and other expenses
declined in 2019 compared to 2018
primarily due to lower employee related
expenses and professional fee reductions
pertaining to expense reduction
initiatives. The declines were partially
offset by an increase in expenses caused
by the acquisitions of Validus and
Glatfelter in the third and fourth
quarters of 2018, respectively. General
operating and other expenses increased
in 2018 compared to 2017 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 2019, 2018 and 2017
included approximately $218 million ,
$395 million and $413 million ,
respectively, of pre-tax restructuring
and other costs which were primarily
comprised of employee severance charges
and other exit costs related to
organizational simplification,
operational efficiency, and business
rationalization.
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ITEM 7 | Executive Summary
Return on Common Equity Adjusted Return on Common Equity*
[[Image Removed: Chart 3]] [[Image Removed: Chart 1]]
*Non-GAAP measure - for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
Book Value Per Common Share Adjusted Book Value Per Common
Share*
[[Image Removed: Chart 1]] [[Image Removed: Chart 1]]
*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 2019, characterized by factors such as the impact of historically low interest rates, slowing global economic growth, global trade tensions and theUK's pending withdrawal from its membership in theEuropean Union (the EU) (commonly referred to as Brexit). Brexit has also affected theU.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 many benchmarkU.S. interest rates had risen to recent period highs in 2018, more recent concerns about global trade and potential weakness inU.S. economic expansion led to declining interest rates in 2019, with key benchmark rates in theU.S. and in many developed markets close to historic lows and, in some international jurisdictions, negative. The low interest rate environment negatively affects sales of interest rate sensitive products in our industry and negatively impacts the profitability of our existing business as we reinvest cash flows from investments, including increased calls and prepayments of fixed maturity securities and mortgage loans, at rates below the average yield of our existing portfolios. On the other hand, if rates rise, some of these impacts may abate while there may be different impacts, some of which are highlighted below. We actively manage our exposure to the interest rate environment through portfolio selection and asset-liability management, including spread management strategies for our investment-oriented products and economic hedging of interest rate risk from guarantee features in our variable and fixed index annuities.
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ITEM 7 | Executive Summary
Additionally, sustained low interest rates may result in higher pension expense due to the impact on discounting of projected benefit cash flows.
Annuity Sales and Surrenders
The 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, generally in the three-to-five year range, in pursuit of higher returns, which may help mitigate increased early surrenders in a rising rate environment. In addition, older contracts that have higher minimum interest rates and continue to be attractive to the contract holders have driven better than expected persistency in Fixed Annuities, 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.
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 ourIndividual Retirement and Group Retirement annuity products, 65 percent were crediting at the contractual minimum guaranteed interest rate atDecember 31, 2019 . The percentage of fixed account values of our annuity products that are currently crediting at rates above one percent was 61 percent and 66 percent atDecember 31, 2019 and 2018, 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, 63 percent of the account values were crediting at the contractual minimum guaranteed interest rate atDecember 31, 2019 . AIG | 2019 Form 10-K 65
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ITEM 7 | Executive Summary
The following table presents fixed annuity and universal life account values of
our Individual Retirement, Group Retirement and Life Insurance operating
segments by contractual minimum guaranteed interest rate and current crediting
rates:
Current Crediting Rates
December 31, 2019 1-50 Basis More than 50
Contractual Minimum Guaranteed At Contractual Points Above Basis Points
Interest Rate Minimum Minimum Above Minimum
(in millions) Guarantee Guarantee Guarantee Total
Individual Retirement*
<=1% $ 5,835 $ 2,756 $ 19,812 $ 28,403
> 1% - 2% 5,437 90 1,892 7,419
> 2% - 3% 11,668 237 69 11,974
> 3% - 4% 9,094 41 6 9,141
> 4% - 5% 517 - 4 521
> 5% - 5.5% 34 - 5 39
Total Individual Retirement $ 32,585 $ 3,124 $ 21,788 $ 57,497
Group Retirement*
1% $ 1,504 $ 2,514 $ 4,540 $ 8,558
> 1% - 2% 5,329 932 552 6,813
> 2% - 3% 14,703 4 - 14,707
> 3% - 4% 788 - - 788
> 4% - 5% 7,028 - - 7,028
> 5% - 5.5% 169 - - 169
Total Group Retirement $ 29,521 $ 3,450 $ 5,092 $ 38,063
Universal life insurance
1% $ - $ - $ - $ -
> 1% - 2% 94 24 373 491
> 2% - 3% 270 584 1,068 1,922
> 3% - 4% 1,460 483 68 2,011
> 4% - 5% 2,881 231 38 3,150
> 5% - 5.5% 200 - - 200
Total universal life insurance $ 4,905 $ 1,322 $ 1,547 $ 7,774
Total $ 67,011 $ 7,896 $ 28,427 $ 103,334
Percentage of total 65 % 8 % 27 % 100 %
*Individual Retirement and Group Retirement amounts shown include fixed options within variable annuity products.
The impact of low interest rates on ourGeneral 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 ourGeneral 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
In our Life and Retirement business, we and our distributors are subject to laws and regulations regarding the standard of care applicable to sales of our products and the provision of advice to our customers. In recent years, many of these laws and regulations have been revised or reexamined while others have been newly adopted. We continue to closely follow these legislative and regulatory activities. For additional information regarding these legislative and regulatory activities, see Item 1. Business - Regulation -U.S. Regulation - Standard of Care Developments. Changes in standard of care requirements or new standards issued by governmental authorities, such as the DOL, theSEC , the NAIC or state regulators and/or legislators, may affect our businesses, results of operations and financial condition. While we cannot predict the long-term impact of these legislative and regulatory developments on our Life and Retirement businesses, we believe our diverse product offerings and distribution relationships position us to compete effectively in this evolving marketplace.
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ITEM 7 | Executive Summary
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:
Years Ended December 31, Percentage Change
Rate for 1 USD 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Currency:
GBP 0.79 0.75 0.78 5 % (4) %
EUR 0.90 0.84 0.90 7 % (7) %
JPY 109.31 110.50 112.44 (1) % (2) %
Unless otherwise noted, references to the effects of foreign exchange in the
Other Industry Developments
OnSeptember 7, 2017 , theUK Ministry of Justice announced a proposal to increase theOgden rate from negative 0.75 percent to between zero and one percent. Following this announcement, onDecember 20, 2018 theUK Parliament passed the Civil Liability Act 2018 which implements a new framework for determining theOgden rate and requires theUK Ministry of Justice to start a review of theOgden rate within 90 days of its commencement and review periodically thereafter.The Ministry of Justice concluded a public call for evidence onJanuary 30, 2019 prior to beginning its first review. OnJuly 15, 2019 , theUK Ministry of Justice announced a change in theOgden rate from negative 0.75 percent to negative 0.25 percent with an effective date ofAugust 5, 2019 .
Consolidated Results of Operations
The following section provides a comparative discussion of our Consolidated
Results of Operations on a reported basis for the three-year period ended
For a discussion of the Critical Accounting Estimates that affect our results of operations see the Critical Accounting Estimates section of this MD&A.
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ITEM 7 | Consolidated Results of Operations
The following table presents our consolidated results of operations and other
key financial metrics:
Year Ended December 31, Percentage Change
(in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Revenues:
Premiums $ 30,561 $ 30,614 $ 31,374 - % (2) %
Policy fees 3,015 2,791 2,935 8 (5)
Net investment income 14,619 12,476 14,179 17 (12)Net realized capital gains (losses) 632 (130) (1,380)
NM 91
Other income 919 1,638 2,412 (44) (32)
Total revenues 49,746 47,389 49,520 5 (4)
Benefits, losses and expenses:
Policyholder benefits and losses
incurred 25,402 27,412 29,972 (7) (9)
Interest credited to policyholder
account balances 3,832 3,754 3,592 2 5
Amortization of deferred policy
acquisition costs 5,164 5,386 4,288 (4) 26
General operating and other expenses 8,537 9,302 9,107
(8) 2
Interest expense 1,417 1,309 1,168 8 12
(Gain) loss on extinguishment of debt 32 7 (5)
357 NM
Net (gain) loss on sale of divested
businesses 75 (38) (68) NM 44
Total benefits, losses and expenses 44,459 47,132 48,054
(6) (2)
Income from continuing operations
before
income tax expense 5,287 257 1,466 NM (82)
Current 545 336 636 62 (47)
Deferred 621 (182) 6,890 NM NM
Income tax expense 1,166 154 7,526 NM (98)
Income (loss) from continuing
operations 4,121 103 (6,060) NM NM
Income (loss) from discontinued
operations,
net of income taxes 48 (42) 4 NM NM
Net income (loss) 4,169 61 (6,056) NM NM
Less: Net income attributable to
noncontrolling interests 821 67 28 NM 139
Net income (loss) attributable to AIG 3,348 (6)
NM 100 % Less: Dividends on preferred stock 22 - - NM NM Net income (loss) attributable to AIG common shareholders$ 3,326 $ (6) $ (6,084) NM % 100 % Years Ended December 31, 2019 2018 2017 Return on common equity 5.3 % 0.0 % (8.4) % Adjusted return on common equity 8.3 2.1 4.1 December 31, December 31, (in millions, except per common share data) 2019 2018 Balance sheet data: Total assets$ 525,064 $ 491,984 Long-term debt and debt of consolidated investment entities 35,350 34,540 Total AIG shareholders' equity 65,675 56,361 Book value per common share 74.93 65.04 Book value per common share, excluding AOCI 69.20 66.67 Adjusted book value per common share 58.89 54.95 68 AIG | 2019 Form 10-K
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ITEM 7 | Consolidated Results of Operations
The following table presents a reconciliation of pre-tax income/net income (loss) attributable to AIG to adjusted pre-tax income/adjusted after-tax income attributable to AIG:
Year Ended December 31, 2019 2018 2017
Total Tax Non- Total Tax Non- Total Tax Non-
(Benefit) controlling After (Benefit) controlling After (Benefit) controlling After
(in millions, except per common
share data) Pre-tax Charge Interests(b) Tax Pre-tax Charge Interests Tax Pre-tax Charge
Interests Tax
Pre-tax income/net income (loss)
including noncontrolling interests $ 5,287 $ 1,166 $ - $ 4,169 $ 257 $ 154 $ - $ 61 $ 1,466 $ 7,526 $ - $ (6,056)
Noncontrolling interests (821) (821) (67) (67) (28) (28)
Pre-tax income/net income (loss)
attributable to AIG $ 5,287 $ 1,166 $ (821) $
3,348
$ (28) $ (6,084) Dividends on preferred stock 22 - - Net income (loss) attributable to AIG common shareholders$ 3,326 $ (6) $ (6,084) Changes in uncertain tax positions and other tax adjustments (30) - 30 (48) - 48 (488) - 488 Deferred income tax valuation allowance (releases) charges 43 - (43) (21) - 21 (43) - 43 Impact of Tax Act - - - - - - (6,687) - 6,687 Changes in fair value of securities used to hedge guaranteed living benefits (194) (40) - (154) 154 32 - 122 (146) (51) - (95) Changes in benefit reserves and DAC, VOBA and SIA related to net realized capital gains (losses) (56) (12) - (44) (6) (3) - (3) (303) (106) - (197) Changes in the fair value of equity securities (158) (33) - (125) - - - - - - - - Unfavorable (favorable) prior year development and related amortization changes ceded under retroactive reinsurance agreements (267) (56) - (211) 675 142 - 533 303 106 - 197 (Gain) loss on extinguishment of debt 32 7 - 25 7 1 - 6 (5) (2) - (3) Net realized capital (gains) losses(a) (448) (97) - (351) 193 41 - 152 1,380 506 - 874 (Income) loss from discontinued operations (48) 42 (4) (Income) loss from divested businesses 75 9 - 66 (38) (8) - (30) (68) (41) - (27) Non-operating litigation reserves and settlements (2) - - (2) 19 4 - 15 (129) (45) - (84) Net loss reserve discount (benefit) charge 955 201 - 754 (371) (79) - (292) 187 65 - 122 Pension expense related to a one-time lump sum payment to former employees - - - - - - - - 60 21 - 39 Integration and transaction costs associated with acquired businesses 24 5 - 19 124 26 - 98 - - - - Restructuring and other costs 218 46 - 172 395 83 - 312 413 145 - 268 Professional fees related to regulatory or accounting changes 12 2 - 10 - - - - - - - - Noncontrolling interests primarily related to net realized capital gains (losses) ofFortitude Holdings' standalone results(b) 660 660 46 46 7 7 Adjusted pre-tax income/Adjusted after-tax income attributable to AIG common shareholders$ 5,478 $ 1,211 $ (161) $
4,084
Weighted average diluted shares outstanding 889.5 910.1 930.6 Income (loss) per common share attributable to AIG common shareholders (diluted)$ 3.74 $ (0.01) $ (6.54) Adjusted after-tax income per common share attributable to AIG common shareholders (diluted)(c)$ 4.59 $ 1.17 $ 2.34
(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)Noncontrolling interests is primarily due to the 19.9 percent investment inFortitude Holdings by an affiliate of Carlyle, which occurred in the fourth quarter of 2018. Carlyle is allocated 19.9 percent ofFortitude Holdings' standalone financial results.Fortitude Holdings' results are mostly eliminated in AIG's consolidated income from continuing operations given that its results arise from intercompany transactions. Noncontrolling interests is calculated based on the standalone financial results ofFortitude Holdings . The most significant component ofFortitude Holdings' standalone results includes the change in fair value of the embedded derivatives, which moved materially in the year due to lower rates and tightening credit spreads, and which are recorded in net realized capital gains and losses ofFortitude Holdings . In accordance with AIG's adjusted after-tax income definition, realized capital gains and losses are excluded from noncontrolling interests. AIG | 2019 Form 10-K 69
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ITEM 7 | Consolidated Results of Operations
Fortitude Holdings' summarized financial information (standalone results) is
presented below:
Year Ended December 31, 2019 Fortitude AIG Noncontrolling
(in millions) Holdings Interest
Revenues $ 2,359 $ 470
Expenses 1,890 376
Adjusted pre-tax income 469 94
Taxes on adjusted pre-tax income 98 20
Adjusted after-tax income, excluding realized capital gains 371 74 Net realized capital gains 4,216 839 Taxes on realized capital gains 886
179
After-tax net realized capital gains 3,330 660 Net income $ 3,701 $ 734 (c)For 2017, because we reported a net loss from continuing operations attributable to AIG common shareholders, all common stock equivalents are anti-dilutive and are therefore excluded from the calculation of diluted shares and diluted per common share amounts. However, because we reported adjusted after-tax income attributable to AIG common shareholders, the calculation of adjusted after-tax income per diluted common share includes 22,412,682 dilutive shares.
pre-tax income Comparison for 2019 and 2018
Pre-tax income increased in 2019 compared to 2018 primarily due to:
?improvement in accident year losses inGeneral Insurance as a result of underwriting discipline, increased use of reinsurance and a change in business mix as well as lower catastrophe losses and favorable prior year loss reserve development compared to unfavorable loss reserve development in the prior year inGeneral Insurance ; ?higher investment returns in our alternative investments portfolio due to robust equity market returns in 2019, income from an initial public offering of a holding in the private equity portfolio, and an increase in income from fixed maturity securities for which the fair value option was elected. This compares to lower returns in the prior year as a result of an increase in interest rates and widening credit spreads that occurred, lower hedge fund performance, as well as negative performance of our fair value option equity securities portfolio; ?net realized capital gains in 2019 compared to net realized capital losses in the prior year due to gains on the sales of securities and foreign exchange compared to losses on sales of securities and foreign exchange in 2018, as well as lower impairments in 2019 and losses on private equity sales in 2018. Partially offsetting these gains were derivative losses in 2019 compared to gains in 2018; and
?lower general and other operating expenses as a result of ongoing strategic initiatives to reduce costs.
These increases were partially offset by:
?a net loss reserve discount charge in 2019 compared to a loss reserve discount benefit in the prior year.
pre-tax income (loss) Comparison for 2018 and 2017
Pre-tax income decreased in 2018 compared to 2017 primarily due to:
?lower investment returns primarily driven by lower hedge fund performance, a decline in income from fixed maturity securities for which the fair value option was elected compared to higher returns on this portfolio in 2017 as a result of significant spread tightening that occurred, 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 Life and Retirement actuarial assumptions compared to a net favorable adjustment in the prior year; and
?higher general operating and other expenses due to the acquisition of
Partially offset by:
?lower losses incurred from
?lower net realized capital losses due to:
-Life and Retirement guaranteed living benefits, net of hedges, which reflected net realized capital gains in 2018 compared to net realized capital losses in 2017, primarily due to changes in the movement in the non-performance or "own credit" risk adjustment (NPA), which is not hedged as part of our economic hedging program (see Insurance Reserves - Life and Annuity Reserves and DAC - Variable Annuity Guaranteed Benefits and Hedging Results);
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ITEM 7 | Consolidated Results of Operations
-Partially offset by losses on the sale of securities in 2018 due to a decline
in the credit and equity markets in the fourth quarter of 2018 compared to gains
in the prior year.
U.S. Tax Reform Overview
On December 22, 2017 , the U.S. enacted Public Law 115-97, known informally as
the Tax Act. The Tax Act reduced the statutory rate of U.S. federal corporate
income tax to 21 percent and enacted numerous other changes impacting AIG and
the insurance industry. Changes specific to the insurance industry include the
calculation of insurance tax reserves and related transition adjustments,
amortization of specified policy acquisition expenses, treatment of separate
account dividends received deductions and computation of pro-ration adjustments.
Provisions of the Tax Act with broader application include reductions or
elimination of deductions for certain items, e.g., reductions to corporate
dividends received deductions, disallowance of entertainment expenses and
limitations on the deduction of certain executive compensation costs. These
provisions, generally, result in an increase in AIG's taxable income.
The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI)
under which taxes are imposed on the excess of a deemed return on tangible
assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax
(BEAT) under which taxes are imposed on certain base eroding payments to
affiliated foreign companies. While the U.S. tax authorities issued formal
guidance, including recently issued proposed and final regulations for BEAT and
other provisions of the Tax Act, there are still certain aspects of the Tax Act
that remain unclear and subject to substantial uncertainties. Additional
guidance is expected in future periods. Such guidance may result in changes to
the interpretations and assumptions we made and actions we may take, which may
impact amounts recorded with respect to international provisions of the Tax Act,
possibly materially. Consistent with accounting guidance, we treat BEAT as a
period tax charge in the period the tax is incurred and have made an accounting
policy election to treat GILTI taxes in a similar manner.
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 fromU.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 2019, we consider our foreign earnings with respect to certain operations inCanada ,South Africa , the Far East,Latin America ,Bermuda as well as the European,Asia Pacific andMiddle 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.
INCOME TAX EXPENSE ANALYSIS
For the year ended
?tax charges of:
-
-
-$37 million of tax charges and related interest associated with increases in uncertain tax positions primarily related to open tax issues and audits in state and local jurisdictions
-
-
?partially offset by tax benefits of:
-$113 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities,
-
-
The effect of foreign operations is primarily related to income and losses in our foreign operations taxed at statutory tax rates different than 21 percent and foreign income subject toU.S. taxation. AIG | 2019 Form 10-K 71
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ITEM 7 | Consolidated Results of Operations
For the year ended
?tax charges of:
-
-
-
-
-
-
?partially offset by tax benefits of:
-$72 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities,
-
-
The effect of foreign operations is primarily related to income and losses in our foreign operations taxed at statutory tax rates different than 21 percent and foreign income subject toU.S. taxation.
For the year ended
?tax charges of:
-
-$660 million of tax charges and related interest associated with increases in uncertain tax positions primarily related to cross border financing transactions and other open tax issues,
-
-
?partially offset by tax benefits of:
-
-$184 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and
-
The effect of foreign operations is primarily related to losses incurred in our European operations taxed at a statutory tax rate lower than 35 percent and other foreign taxes.
For additional information see Note 23 to the Consolidated Financial Statements.
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ITEM 7 | Business Segment Operations
Business Segment Operations
Our business operations consist of
General Insurance consists of two operating segments:North America and International. Life and Retirement consists of four operating segments: Individual Retirement, Group Retirement, Life Insurance and Institutional Markets. Other Operations consists of businesses and items not allocated to our other businesses, which are primarily AIG Parent, Blackboard andFuji Life , which was sold onApril 30, 2017 . Our Legacy Portfolio consists of our Legacy Life and Retirement Run-Off Lines, Legacy General Insurance Run-Off Lines, and Legacy Investments. EffectiveFebruary 2018 , Fortitude Re is included in our Legacy Portfolio. The following table summarizes Adjusted pre-tax income (loss) from our business segment operations. See also Note 3 to the Consolidated Financial Statements. Years EndedDecember 31 , (in millions) 2019 2018 2017 Core business: General Insurance North America$ 2,709 $ (8) $ (232) International 824 (461) (581) General Insurance 3,533 (469) (813) Life and Retirement Individual Retirement 1,984 1,681 2,289 Group Retirement 937 933 1,004 Life Insurance 246 330 274 Institutional Markets 291 246 264 Life and Retirement 3,458 3,190 3,831 Other Operations (1,709) (1,584) (1,405)
Consolidations, eliminations and other adjustments (305) 59
75
Total Core 4,977 1,196 1,688
Legacy Portfolio 501 213 1,470
Adjusted pre-tax income $ 5,478 $ 1,409 $ 3,158
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ITEM 7 | Business Segment Operations | General Insurance
General Insurance PRODUCTS AND DISTRIBUTION
[[Image Removed: Picture 3]] [[Image Removed: Picture 4]]
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 D&O, mergers and acquisitions, fidelity,
employment practices, fiduciary liability, cyber risk, kidnap and ransom, and
errors and omissions insurance (E&O).
Property: Products include commercial and industrial property insurance products
and services that cover exposures to man-made and natural disasters, including
business interruption.
Special Risks: Products include aerospace, political risk, trade credit, portfolio
solutions, energy-related property insurance products, surety, marine and crop
insurance.
Personal Lines: Products include personal auto and property in selected markets
and insurance for high net worth individuals offered through AIG Private Client
Group 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 strive to optimize our reinsurance program to manage volatility and protect the balance sheet from tail events and unpredictable net losses in support of our profitable growth objectives. Underwriting Excellence: Empower and increase accountability of the underwriter and continue to integrate underwriting, claims and actuarial to enable better decision making. Focus on enhancing risk selection, driving consistent underwriting best practices and building robust monitoring standards to improve underwriting results. 74 AIG | 2019 Form 10-K
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ITEM 7 | Business Segment Operations | General Insurance
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 challenges to pricing and risk management;
?over capacity in certain lines of business that creates downward market pressure on pricing;
?tort environment volatility in certain jurisdictions and lines of business; and
?volatility in claims arising from natural and man-made catastrophes.
OUTLOOK-INDUSTRY AND ECONOMIC FACTORS
Below is a discussion of the industry and economic factors impacting our operating segments:
Commercial Lines over recent years has experienced challenging market conditions, with widespread excess capacity increasing competition and suppressing rates across multiple classes of business. However, in more recent periods we are seeing growing market support for rate increases in challenged segments where major carriers are reducing their risk appetite and market capacity is contracting as a result. We are seeing rate increases acrossU.S. Financial Lines and Liability segments (outside of workers' compensation), with a common driver being higher industry-wide claims severity trends, as well as within our Property and Specialty portfolios. We continue to achieve positive rate increases across a number of lines and classes of business as a result of our disciplined underwriting strategy and focus on risk selection. Further, we continue to achieve growth in several of our Commercial Lines high margin businesses, although these market segments remain highly competitive.Personal Insurance growth prospects are supported by the need for full life cycle products and coverage, increases in personal wealth accumulation, and awareness of insurance protection and risk management. We compete in the high net worth market, accident and health insurance, travel insurance, and warranty services and will continue to expand our innovative products and services to distribution partners and clients.
We believe our global presence providesCommercial 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, due to increased market capacity and ample availability of capital. Despite this, we continue to grow our most profitable segments and diversify our portfolio across all regions by expanding into new product lines (e.g., cyber), new client segments (e.g., middle market) and new distribution channels (e.g., digital and national brokers) while remaining a market leader in key developed and developing markets. Overall, Commercial lines are showing positive rate increases in selective products and markets where market events or withdrawal of capability have favorably impacted pricing. We are maintaining our underwriting discipline, reducing gross and net limits, increasing use of reinsurance to reduce volatility, as well as continuing our risk selection strategy to improve profitability.
AIG | 2019 Form 10-K 75
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ITEM 7 | Business Segment Operations | General Insurance
General insurance RESULTS
Years Ended December 31, Percentage Change
(in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Underwriting results:
Net premiums written $ 25,092 $ 26,407 $ 25,438 (5) % 4 %Decrease in unearned premiums(a) 1,346 1,098 588
23 87 Net premiums earned 26,438 27,505 26,026 (4) 6 Losses and loss adjustment expenses incurred(b) 17,246 20,824 21,642 (17) (4) Acquisition expenses: Amortization of deferred policy acquisition costs 4,482 4,596 3,765 (2) 22 Other acquisition expenses 1,292 1,385 1,388 (7) - Total acquisition expenses 5,774 5,981 5,153 (3) 16 General operating expenses 3,329 3,837 3,712 (13) 3 Underwriting income (loss) 89 (3,137) (4,481) NM 30 Net investment income 3,444 2,668 3,668 29 (27)
Adjusted pre-tax income (loss)
NM % 42 % Loss ratio(b) 65.2 75.7 83.2 (10.5) (7.5) Acquisition ratio 21.8 21.7 19.8 0.1 1.9
General operating expense ratio 12.6 14.0 14.3 (1.4)
(0.3)
Expense ratio 34.4 35.7 34.1 (1.3) 1.6
Combined ratio(b) 99.6 111.4 117.3 (11.8) (5.9)
Adjustments for accident year loss
ratio, as adjusted
and accident year combined ratio,
as adjusted:
Catastrophe losses and
reinstatement premiums (4.8) (10.5) (16.1) 5.7 5.6
Prior year development, net of (additional) return premium on loss sensitive business 1.1 (1.5) (4.0) 2.6
2.5
Adjustment for ceded premiums under reinsurance contracts related to prior accident years and other 0.1 0.3 (0.1) (0.2)
0.4
Accident year loss ratio, as adjusted 61.6 64.0 63.0 (2.4)
1.0
Accident year combined ratio, as adjusted 96.0 99.7 97.1 (3.7)
2.6
(a)In 2018, the underwriting loss included an additional
(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
Years Ended
December 31, Percentage Change in Percentage Change in
U.S. dollars Original Currency
(in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 2019 vs. 2018 2018 vs. 2017
North America(a)(b) $ 12,103 $ 11,383 $ 10,973 6 % 4 % 6 % 4 %
International(a)(c) 12,989 15,024 14,465 (14) 4 (11) 1
Total net premiums
written $ 25,092 $ 26,407 $ 25,438 (5) % 4 % (4) % 3 %
(a)Includes $2,350 million and $500 million of Validus Net premiums written for
North America in 2019 and 2018, respectively, and $810 million and $371 million
of Validus Net premiums written for International in 2019 and 2018,
respectively.
(b)Includes
(c)As a result of the merger ofAIU Insurance Company, Ltd. (AIUI Japan) andFuji Fire andMarine Insurance Company (Fuji), Fuji's fiscal reporting period was conformed to that of AIUI Japan (Japan Merger Impact). Therefore, 2018 included approximately$300 million for two additional months of Net premiums written. 76 AIG | 2019 Form 10-K
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ITEM 7 | Business Segment Operations | General Insurance The following tables present
Catastrophes(b)
# of North
(in millions) Events America International Total
Year Ended December 31, 2019
Flooding and rainstorms 3 $ 20 $ 13 $ 33
Windstorms and hailstorms 26 792 340 1,132
Wildfire 3 59 10 69
Civil Disorders 2 - 23 23
Reinstatement premiums - (8) 29 21
Total catastrophe-related charges 34 $ 863 $ 415 $ 1,278
Year Ended December 31, 2018
Flooding and rainstorms 3 $ 16 $ 154 $ 170
Windstorms and hailstorms 23 1,123 791 1,914
Wildfire 5 712 4 716
Earthquakes 3 19 82 101
Volcanic eruptions 1 16 2 18
Reinstatement premiums - (33) (1) (34)
Total catastrophe-related charges 35 $ 1,853 $ 1,032 $ 2,885
Year Ended December 31, 2017
Flooding and rainstorms - (c) $ 962 $ 158 $ 1,120
Windstorms and hailstorms 21 1,771 682 2,453
Wildfire 2 562 10 572
Earthquakes 1 - 41 41
Reinstatement premiums - (23) - (23)
Total catastrophe-related charges 24 $ 3,272 $ 891 $ 4,163
(a)Geography:North America primarily includes insurance businesses inthe United States ,Canada andBermuda . International includes regional insurance businesses inJapan , theUnited Kingdom ,Europe ,Asia Pacific ,Latin America andCaribbean ,Middle East andAfrica , andChina .General Insurance results are presented before consideration of internal reinsurance agreements. (b) Natural catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of$10 million each and man-made catastrophe losses, such as terrorism and civil disorders that exceed the$10 million threshold.
(c)Flooding events reported in 2017 are a subset of windstorm events.
AIG | 2019 Form 10-K 77
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ITEM 7 | Business Segment Operations | General Insurance
North America Results
Years Ended December 31, Percentage Change
(in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Underwriting results:
Net premiums written $ 12,103 $ 11,383 $ 10,973 6 % 4 %
(Increase) decrease in unearned
premiums(a) 750 931 482 (19) 93
Net premiums earned 12,853 12,314 11,455 4 7
Losses and loss adjustment expenses
incurred(b) 9,226 10,776 11,646 (14) (7)
Acquisition expenses:
Amortization of deferred policy
acquisition costs 2,008 1,859 1,305 8 42
Other acquisition expenses 488 515 485 (5) 6
Total acquisition expenses 2,496 2,374 1,790 5 33
General operating expenses 1,351 1,477 1,396 (9) 6
Underwriting loss(a) (220) (2,313) (3,377) 90 32
Net investment income 2,929 2,305 3,145 27 (27)
Adjusted pre-tax income (loss)
NM % 97 % Loss ratio(b) 71.8 87.5 101.7 (15.7) (14.2) Acquisition ratio 19.4 19.3 15.6 0.1 3.7
General operating expense ratio 10.5 12.0 12.2 (1.5)
(0.2)
Expense ratio 29.9 31.3 27.8 (1.4) 3.5
Combined ratio(b) 101.7 118.8 129.5 (17.1) (10.7)
Adjustments for accident year loss
ratio, as adjusted
and accident year combined ratio, as
adjusted:
Catastrophe losses and reinstatement
premiums (6.8) (15.1) (28.7) 8.3 13.6
Prior year development, net of (additional) return premium on loss sensitive business 1.8 (3.1) (3.6) 4.9
0.5
Adjustment for ceded premiums under reinsurance contracts related to prior accident years and other 0.3 0.8 (0.3) (0.5)
1.1
Accident year loss ratio, as adjusted 67.1 70.1 69.1 (3.0)
1.0
Accident year combined ratio, as adjusted 97.0 101.4 96.9 (4.4)
4.5
(a)In 2018, the underwriting loss included an additional
(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
We recorded adjusted pre-tax income in 2019 compared to an adjusted pre-tax loss in the prior year, primarily due to lower loss ratio, higher net investment income and lower general operating expenses as a result of ongoing efforts to reduce expenses. The loss ratio decreased due to lower catastrophe losses, favorable prior year loss reserve development compared to unfavorable loss reserve development in the prior year and lower current accident year loss ratio, as adjusted. Net premiums written increased in the year endedDecember 31, 2019 compared to the prior year due to the inclusion of theValidus and Glatfelter acquisitions as well as growth within theValidus business, partially offset by underwriting actions taken to reposition our portfolio and to maintain pricing discipline and higher ceded premiums due to the changes in 2019 reinsurance programs.
For a discussion of 2019 reinsurance programs see MD&A - Enterprise Risk Management.
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ITEM 7 | Business Segment Operations | General Insurance
North America Adjusted Pre-Tax Income (Loss)
(in millions)
[[Image Removed: Chart 3]] 2019 and 2018 Comparison
Adjusted pre-tax income in 2019 compared to adjusted
pre-tax loss in 2018 reflected:
?significantly lower catastrophe losses;
?increase in net investment income reflecting higher
returns on alternative investments, change in fair
value of equity securities in 2018 and improved
performance of fixed income securities;
?favorable prior year loss reserve development in
2019 compared to unfavorable prior year loss reserve
development in 2018;
?the lower accident year loss ratio, as adjusted
primarily driven by a change in business mix
including the Validus and Glatfelter acquisitions,
improved new business and renewal terms, reduced net
severity of loss events and changes in 2019
reinsurance programs which have reduced volatility;
and
?lower general operating expenses as a result of
ongoing expense reduction initiatives.
North America Adjusted Pre-Tax Income (Loss)
(in millions)
[[Image Removed: Chart 4]] 2018 and 2017 Comparison
Adjusted pre-tax loss decreased primarily due to:
?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 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 severe losses;
?higher acquisition ratio primarily driven by
changes in 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 and Glatfelter acquisition;
however general operating expense ratio decreased
slightly.
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ITEM 7 | Business Segment Operations | General Insurance
North America Net Premiums Written
(in millions)
[[Image Removed: Chart 1]] 2019 and 2018 Comparison
Net premiums written increased primarily due to
the inclusion of the Validus and Glatfelter
acquisitions as well as growth within the Validus
business.
This increase was partially offset by:
?lower production primarily due to underwriting
actions taken to strengthen our portfolio and to
maintain pricing discipline; and
?higher ceded premiums due to the changes in 2019
reinsurance programs.
North America Net Premiums Written
(in millions)
[[Image Removed: Chart 2]] 2018 and 2017 Comparison
Net premiums written increased primarily due to:
?growth in the Travel business within Personal
Insurance ;
?lower ceded premiums due to changes in the 2018
reinsurance programs; and
?the inclusion of the Validus and Glatfelter
acquisitions.
This increase was partially offset by:
?lower production primarily in Property, Programs
business, and D&O products within Financial Lines
mainly due to underwriting actions taken to
strengthen our portfolio and to maintain pricing
discipline; and
?exiting of certain businesses in Accident &
Health in 2017.
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ITEM 7 | Business Segment Operations | General Insurance
North America Combined Ratios
[[Image Removed: Chart 4]] 2019 and 2018 Comparison
The decrease in the combined ratio reflected a
decrease in both the loss ratio and the expense
ratio.
The decrease in the loss ratio reflected:
?lower accident year loss ratio, as adjusted,
primarily driven by a change in business mix
including the Validus and Glatfelter acquisitions,
improved new business and renewal terms, reduced net
severity of loss events and changes in 2019
reinsurance programs which have reduced volatility;
?significantly lower catastrophe losses; and
?favorable prior year loss reserve development
compared to unfavorable loss reserve development in
the prior year.
The decrease in the expense ratio reflected lower
general operating expense ratio driven by ongoing
expense reduction initiatives.
North America Combined Ratios
[[Image Removed: Chart 3]] 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.
These decreases in the loss ratio were partially
offset by a higher current accident year loss ratio,
as adjusted, driven primarily by higher severe
losses.
The increase in the expense ratio reflected a higher
acquisition ratio primarily due to changes in
portfolio mix, higher insurance taxes, licenses and
fees, and changes in the 2018 reinsurance programs.
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ITEM 7 | Business Segment Operations | General Insurance
International Results
Years Ended December 31, Percentage Change
(in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Underwriting results:
Net premiums written $ 12,989 $ 15,024 $ 14,465 (14) % 4 %
Decrease in unearned premiums 596 167 106 257 58
Net premiums earned 13,585 15,191 14,571 (11) 4
Losses and loss adjustment expenses
incurred 8,020 10,048 9,996 (20) 1
Acquisition expenses:
Amortization of deferred policy
acquisition costs 2,474 2,737 2,460 (10) 11
Other acquisition expenses 804 870 903 (8) (4)
Total acquisition expenses 3,278 3,607 3,363 (9) 7
General operating expenses 1,978 2,360 2,316 (16) 2
Underwriting income (loss)(a) 309 (824) (1,104) NM 25
Net investment income 515 363 523 42 (31)
Adjusted pre-tax income (loss) $ 824 $ (461) $ (581) NM % 21 %
Loss ratio 59.0 66.1 68.6 (7.1) (2.5)
Acquisition ratio 24.1 23.7 23.1 0.4 0.6General operating expense ratio 14.6 15.5 15.9 (0.9)
(0.4) Expense ratio 38.7 39.2 39.0 (0.5) 0.2 Combined ratio 97.7 105.3 107.6 (7.6) (2.3) Adjustments for accident year loss ratio, as adjusted and accident year combined ratio, as adjusted: Catastrophe losses and reinstatement premiums (2.9) (6.8) (6.1) 3.9
(0.7)
Prior year development, net of (additional) return premium on loss sensitive business 0.3 (0.2) (4.3) 0.5
4.1
Adjustment for ceded premiums under reinsurance contracts related to prior accident years - - - NM
NM
Accident year loss ratio, as adjusted 56.4 59.1 58.2 (2.7)
0.9
Accident year combined ratio, as adjusted 95.1 98.3 97.2 (3.2)
1.1
(a)As a result of the Japan Merger Impact, 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
TheInternational General Insurance business is focused on further improving underwriting margins and profits through underwriting excellence, improved efficiency, and growing in profitable segments and geographies supported by our targeted growth strategy. We recorded adjusted pre-tax income in 2019 compared to an adjusted pre-tax loss in the prior year primarily due to lower catastrophe losses, lower accident year loss ratio, as adjusted, lower general operating expenses, higher net investment income and inclusion of theValidus acquisition. Net premiums written, excluding the impact of foreign exchange, decreased in 2019 compared to the prior year due to lower Accident & Health business inAsia Pacific , underwriting actions to maintain pricing discipline, Japan Merger Impact in 2018 and higher ceded premiums due to changes in 2019 reinsurance programs, partially offset by inclusion of theValidus acquisition and profitable business growth across lines and geographies.
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ITEM 7 | Business Segment Operations | General Insurance
International Adjusted Pre-Tax Income (Loss)
(in millions)
[[Image Removed: Chart 1]] 2019 and 2018 Comparison
Adjusted pre-tax income in 2019 compared to adjusted
pre-tax loss in 2018 primarily reflected:
?lower catastrophe losses;
?lower general operating expense driven by the Japan
Merger Impact in 2018 and ongoing expense
optimization initiatives;
?lower accident year loss ratio, as adjusted
primarily driven by reduced net severity of loss
events;
?higher net investment income driven by prior year
weaker market performance of equity securities for
which the fair value option was elected as well as
higher income from fixed income securities;
?inclusion of the Validus acquisition; and
?favorable prior year loss reserve development in
2019 compared to unfavorable prior year loss reserve
development in 2018.
International Adjusted Pre-Tax Income (Loss)
(in millions)
[[Image Removed: Chart 3]] 2018 and 2017 Comparison
Adjusted pre-tax loss decreased primarily due to
significantly lower unfavorable prior year loss
reserve development.
This decrease was partially offset by:
?higher catastrophe losses;
?higher current accident year loss ratio, as
adjusted, driven primarily by higher severe losses;
and
?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.
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ITEM 7 | Business Segment Operations | General Insurance
International Net Premiums Written
(in millions)
[[Image Removed: Chart 1]] 2019 and 2018 Comparison
Net premiums written, excluding the impact of
foreign exchange, decreased due to:
•lower Accident & Health business in Asia
Pacific ;
•lower production primarily due to underwriting
actions taken to strengthen our portfolio and to
maintain pricing discipline, partially offset by
profitable business growth across lines and
geographies;
•the Japan Merger Impact in 2018; and
•higher ceded premiums due to changes in 2019
reinsurance program.
This decrease was partially offset by:
•inclusion of the Validus acquisition
International Net Premiums Written
(in millions)
[[Image Removed: Chart 4]] 2018 and 2017 Comparison
Net premiums written, excluding the impact of
foreign exchange, increased due to:
•growth in Accident & Health and Personal Lines
business in Asia Pacific and in the Financial
Lines business in Europe ;
•inclusion of the Validus acquisition; and
•the Japan Merger Impact.
This increase was partially offset by:
•sale of certain insurance operations and assets
to Fairfax;
•lower business production in Japan because of
delayed product introduction related to the Japan
Merger Impact and exit from unprofitable
distribution channels;
•higher ceded premiums due to changes in 2018
reinsurance programs; and
•lower production primarily driven by portfolio
remediation efforts.
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ITEM 7 | Business Segment Operations | General Insurance
International Combined Ratios
[[Image Removed: Chart 4]] 2019 and 2018 Comparison
The decrease in the combined ratio reflected a
decrease in both the loss ratio and expense ratio.
This decrease in the loss ratio was primarily driven
by:
•lower catastrophe losses; and
•lower accident year loss ratio, as adjusted
primarily driven by reduced net severity of loss
events.
This decrease in the expense ratio reflected a lower
general operating expense ratio driven by ongoing
expense optimization initiatives partially offset by
a higher acquisition ratio mainly due to changes in
business mix.
International Combined Ratios
[[Image Removed: Chart 5]] 2018 and 2017 Comparison
The decrease in the combined ratio reflected a lower
loss ratio partially 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:
•a higher current accident year loss ratio, as
adjusted, driven primarily by higher severe losses;
and
•higher catastrophe losses.
The slight increase in the expense ratio was
primarily driven by a higher acquisition ratio
mainly due to changes in business mix combined with
changes in 2018 reinsurance programs.
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ITEM 7 | Business Segment Operations | Life and Retirement
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 theperformance 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
[[Image Removed: Picture 2]] and independent insurance agents.
Fixed Annuities: Products include single premium fixed annuities,
immediate annuities and deferred income annuities. Certain fixed
deferred annuity products offer optionalincome protection features.
The Fixed Annuities product line maintains an industry-leading
position in the U.S. bank distribution channel by designing products
collaboratively with banks and offering an efficient and flexible
administration platform.
Retail Mutual Funds: Includes our mutual fund offerings and related
administration and servicing operations. Retail Mutual Funds are
distributed primarily through broker-dealers.
Group Retirement: Products and services consist of group mutual
funds, group annuities, individual annuity and investment products,
and financial planning and advisory services.
In March 2019 , the products and services marketed by The Variable
Annuity Life Insurance Company (VALIC), which include investment
offerings and plan administrative andcompliance services, were [[Image Removed: Picture 3]] rebranded under the AIG Retirement Services name to allow the
business to fully leverage the strength and scale of the AIG brand.
Legal entity names, however, remain unchanged: The Variable Annuity
Life Insurance Company and its subsidiaries,VALIC Financial Advisors, Inc. andVALIC Retirement Services Company . AIG Retirement Services career financial advisors and independent financial advisors provide retirement plan participants with enrollment support and comprehensive
financial planning services.
Life Insurance: In the U.S. , products primarily include term life
and universal life insurance distributed through independent
[[Image Removed: Picture 11]] marketing organizations, independent insurance agents, financial
advisors and direct marketing. International operations include the
distribution of life and health products in the UK and Ireland .
Institutional Markets: Products primarily include stable value wrap
products, structured settlement and pension risk transfer annuities,
[[Image Removed: Picture 12]] 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.
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ITEM 7 | Business Segment Operations | Life and Retirement
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 FHLBs in their respective districts at fixed or floating rates over
specified periods, which can be prepaid at our discretion. Proceeds are
generally invested in fixed income securities and other suitable investments to
generate spread income. These investment contracts do not have mortality or
morbidity risk and are similar to GICs.
BUSINESS STRATEGY
Deliver client-centric solutions through our unique franchise by bringing together a broad portfolio of life insurance, retirement and institutional products offered through an extensive, multichannel distribution network. Life and Retirement focuses on ease of doing business, offering valuable solutions, and expanding and deepening its distribution relationships across multiple channels.
Position market leading businesses to serve growing needs by continually enhancing product solutions, service delivery and digital capabilities while using data and analytics in an innovative manner to improve customer experience.
Individual Retirement will continue Group Retirement continues to
to capitalize on the opportunity to enhance its technology platform to
meet consumer demand for guaranteed improve the customer experience for
income by maintaining innovative plan sponsors and individual
variable and index annuity products, participants. AIG Retirement
while also managing risk from Services' (formerlyVALIC ) guarantee features through self-service tools paired with
its
risk-mitigating product design and career financial advisors provide a
well-developed economic hedging compelling service platform. Group
capabilities. Retirement's strategy also
involves
providing financial planning
Our fixed annuity products provide services for its clients and meeting
diversity in our annuity product their need for income in retirement.
suite by offering stable returns for retirement savings.
Life Insurance in the
continue to position itself for grow its assets under management
growth and changing market dynamics (AUM) across multiple product lines,
while continuing to execute including stable value wrap,
GICs
strategies to enhance returns. Our and pension risk transfer annuities.
focus is on materializing success Our growth strategy is opportunistic
from a multi-year effort of building and allows us to pursue select
state-of-the-art platforms and transactions that meet our
underwriting innovations, which are risk-adjusted return requirements.
expected to bring process improvements and cost efficiencies. In theUK ,AIG Life Insurance will continue to focus on growing the business organically and through potential acquisition opportunities. 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 efficiency, and diversification of risk, while optimizing capital allocation and efficiency within insurance entities to enhance return on common equity. AIG | 2019 Form 10-K 87
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ITEM 7 | Business Segment Operations | Life and Retirement
COMPETITION and challenges
Life and Retirement operates in the highly competitive insurance and financial services industry in theU.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 competitors with different profitability targets in the pension risk transfer space as well as other product lines;
?increasingly complex new and proposed regulatory requirements, which have affected industry growth and costs; 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 index and fixed deferred 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 variable, fixed index, and fixed deferred 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 AIG Retirement Services brand. AIG Retirement Services is a leading retirement plan provider in theU.S. for K-12 schools and school districts, higher education, healthcare, government and other not-for-profit institutions. The defined contribution market is a highly efficient and competitive market that requires support for both plan sponsors and individual participants. To meet this challenge, AIG Retirement Services is investing in a client-focused technology platform to support improved compliance and self-service functionality. AIG Retirement Services' model pairs self-service tools with its career financial advisors who provide individual plan participants with enrollment support and comprehensive financial planning services.
Changes in the interest rate environment can have a significant impact on investment returns, guaranteed income features, and spreads, and a moderate impact on sales and surrender rates.
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ITEM 7 | Business Segment Operations | Life and Retirement
Life Insurance
Consumers have a significant need for life insurance, whether it is used for
income replacement for their surviving family, estate planning or wealth
transfer. Additionally, consumers use life insurance to provide living benefits
in case of chronic, critical or terminal illnesses, and to supplement retirement
income.
In response to consumer needs and a sustained low interest rate environment, our
Life Insurance product portfolio will continue to promote products with lower
long-duration interest rate risk and mitigate exposure to products that have
long-duration interest rate risk through sales levels and hedging strategies.
As life insurance ownership remains at historical lows in the U.S. and the UK ,
efforts to expand the reach and increase the affordability of life insurance are
critical. The industry is investing in consumer-centric efforts to reduce
traditional barriers to securing life protection by simplifying the sales and
service experience. Digitally enabled processes and tools provide a fast,
friendly and simple path to life insurance protection.
Institutional Markets
Institutional Markets serves a variety of needs for corporate clients. Demand is driven by a number of factors including the macroeconomic and regulatory environment. We expect to see continued growth in the pension risk transfer market as corporate plan sponsors look to transfer asset or liability, longevity, administrative and operational risks associated with their defined benefit plans.
Changes in the interest rate environment can have a significant impact on investment returns and net investment spreads, as well as reduce the tax efficiency associated with institutional life insurance products, dampening organic growth opportunities.
For additional discussion of the impact of market interest rate movement on our Life and Retirement business see Executive Summary - AIG's Outlook - Industry and Economic Factors - Impact of Changes in the Interest Rate Environment. life and retirement RESULTS Years Ended December 31, Percentage Change (in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Revenues: Premiums$ 3,600 $ 2,592 $ 4,046 39 % (36) % Policy fees 2,893 2,669 2,798 8 (5) Net investment income 8,461 7,922 7,816 7 1 Advisory fee and other income 911 953 926 (4) 3 Total adjusted revenues 15,865 14,136 15,586 12 (9) Benefits, losses and expenses: Policyholder benefits and losses incurred 5,528 4,179 5,247 32 (20) Interest credited to policyholder account balances 3,599 3,513 3,360 2 5 Amortization of deferred policy acquisition costs 650 680 743 (4) (8) General operating and other expenses* 2,472 2,412 2,296 2 5 Interest expense 158 162 109 (2) 49 Total benefits, losses and expenses 12,407 10,946 11,755 13 (7) Adjusted pre-tax income$ 3,458 $ 3,190 $ 3,831 8 % (17) %
*Includes general operating expenses, non-deferrable commissions, other acquisition expenses, advisory fee expenses and other expenses.
For information on the impact of actuarial assumptions on our Life and Retirement results, see Insurance Reserves - Life and Annuity Reserves and DAC - Update of Actuarial Assumptions.
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.
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ITEM 7 | Business Segment Operations | Life and Retirement
Individual Retirement Results
Years Ended December 31, Percentage Change (in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Revenues: Premiums$ 104 $ 52 $ 91 100 % (43) % Policy fees 811 804 767 1 5 Net investment income 4,133 3,827 4,013 8 (5) Advisory fee and other income 606 655 643 (7) 2 Benefits and expenses: Policyholder benefits and losses incurred 409 261 161 57 62 Interest credited to policyholder account balances 1,730 1,679 1,616 3 4 Amortization of deferred policy acquisition costs 449 630 415 (29) 52 Non deferrable insurance commissions 318 324 308 (2) 5 Advisory fee expenses 219 238 241 (8) (1) General operating expenses 468 443 426 6 4 Interest expense 77 82 58 (6) 41 Adjusted pre-tax income$ 1,984 $ 1,681 $ 2,289 18 % (27) % Fixed Annuities base net investment spread: Base yield* 4.54 % 4.60 % 4.80 % (6) bps (20) bps Cost of funds 2.68 2.65 2.65 3 - Fixed Annuities base net investment spread 1.86 % 1.95 % 2.15 %
(9) bps (20) bps
*Includes returns from base portfolio including accretion and income (loss) from certain other invested assets.
Business and Financial Highlights
The market environment continues to reflect uncertainties in the annuity business resulting from a sustained low interest rate environment. Interest rates declined in 2019 and are near historical lows. Excluding prior year deposits from FHLB funding agreements, premiums and deposits increased in 2019 compared to the prior year. Net flows in 2019 remained negative but improved compared to the prior year primarily due to higher deposits driven by increased Fixed and Index Annuities sales, offset by lower sales for the Variable Annuities and Retail Mutual Funds. Premiums and deposits improved in 2018 compared to 2017. Premiums and deposits in 2018 included deposits from FHLB funding agreements. Net flows in 2018 deteriorated compared to 2017 and continued to be negative primarily due to higher surrenders and withdrawals, mainly in Retail Mutual Funds. Adjusted pre-tax income increased in 2019 compared to the prior year, primarily driven by decreases in Variable Annuity DAC amortization and reserves due to stronger equity market performances, growth in income from base portfolio due to higher invested assets, higher gains on securities for which the fair value option was elected, and prior year DAC and reserve model adjustments. Partially offsetting these increases were lower Variable Annuity policy and advisory fee income, net of expenses due toVariable Annuity and Retail Mutual Fund negative net flows. Adjusted pre-tax income decreased in 2018 compared to 2017 as a result of decreased Fixed Annuity base spread income primarily due to lower reinvestment yields and decreased gains on securities for which the fair value option was elected, and higher Variable Annuity DAC amortization and reserves due to lower equity market performance. Partially offsetting these decreases were higher policy and advisory fees, and increased base spread income for Index Annuities. 90 AIG | 2019 Form 10-K
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ITEM 7 | Business Segment Operations | Life and Retirement
Individual Retirement Adjusted Pre-Tax Income
(in millions)
[[Image Removed: Chart 6]] 2019 and 2018 Comparison
Adjusted pre-tax income increased primarily due
to:
?higher net investment returns including growth in
income from base net investment spread due to
higher invested assets, driven by increased sales,
higher gains on securities for which the fair
value option was elected, and income from an
initial public offering of a holding in the
private equity portfolio, partially offset by
lower affordable housing returns, and prior-year
non-recurring payments on structured securities;
and
?stronger equity market performance, which
contributed to decreases in Variable Annuity DAC
amortization and reserves, prior year DAC and
reserve model adjustment, and lower Fixed Annuity
DAC amortization due to lower surrenders,
partially offset by higher Index Annuity DAC
amortization and reserves driven by growth in
sales and DAC model adjustments.
Partially offsetting these increases were:
?lower policy and advisory fee income net of
expenses due to negative Variable Annuity and
Retail Mutual Fund net flows and a decrease in
Variable Annuity and Retail Mutual Fund average
AUM related to the equity market decline at the
end of 2018.
Individual Retirement Adjusted Pre-Tax Income
(in millions)
[[Image Removed: Chart 2]] 2018 and 2017 Comparison
Adjusted pre-tax income decreased primarily due
to:
?a net unfavorable adjustment from the review and
update of actuarial assumptions of $52 million in
2018, compared to a net favorable adjustment of
$242 million in the prior year;
?a decline in net investment income, primarily
from lower gains on fixed maturity securities for
which the fair value option was elected when
compared to 2017 where returns were higher as a
result of significant spread tightening that
occurred and lower bond call and tender income;
?a decline in Fixed Annuity base spread income
primarily driven by lower reinvestment yields and
volumes; and
?higher Variable Annuity DAC amortization and
reserves due to lower equity market performance.
Partially offsetting these decreases were:
?higher Index Annuity base portfolio income
reflecting growth in assets from increased sales;
and
?higher policy fees primarily driven by asset
growth in Index and Variable Annuities.
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ITEM 7 | Business Segment Operations | Life and Retirement
Individual Retirement GAAP Premiums, Premiums and Deposits, Surrenders and Net Flows
For Individual Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums increased in 2019 compared to the prior year. Premiums decreased in 2018 compared to 2017, primarily due to increased market rates competition.
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:
Years EndedDecember 31 , (in millions) 2019 2018 2017 Premiums$ 104 $ 52 $ 91 Deposits 14,804 15,577 11,819 Other (9) (8) (4) Premiums and deposits$ 14,899 $ 15,621 $ 11,906
The following table presents surrenders as a percentage of average reserves:
Years Ended December 31, 2019 2018 2017 Surrenders as a percentage of average reserves Fixed Annuities 7.3 % 8.2 % 6.7 % Variable and Index Annuities 6.4 6.5 6.0
The following table presents reserves for Fixed Annuities and Variable and Index Annuities by surrender charge category:
At December 31, 2019 2018
Variable Variable
Fixed and Index Fixed and Index
(in millions) Annuities Annuities Annuities Annuities
No surrender charge $ 27,804 $ 24,393 $ 30,036 $ 19,036
Greater than 0% - 2% 2,059 9,397 1,037 6,229
Greater than 2% - 4% 3,209 15,296 2,429 9,781
Greater than 4% 16,453 31,833 15,217 33,244
Non-surrenderable 1,664 525 1,608 474
Total reserves $ 51,189 $ 81,444 $ 50,327 $ 68,764
Individual Retirement annuities are typically subject to a four- to seven-year
surrender charge period, depending on the product. For Fixed Annuities, the
proportion of reserves subject to surrender charge at December 31, 2019 has
increased compared to December 31, 2018 due to improved net flows driven by
higher Fixed Annuity sales, combined with fewer policyholders reaching the end
of the surrender charge period in 2019 compared to 2018. The increase in
reserves with no surrender charge for Variable and Index Annuities at December
31, 2019 compared to December 31, 2018 is due to normal aging of business.
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ITEM 7 | Business Segment Operations | Life and Retirement
A discussion of the significant variances in premiums and deposits and net flows for each product line follows:
Individual Retirement Premiums and Deposits (P&D) and Net Flows
(in millions)
[[Image Removed: Chart 5]] 2019 and 2018 Comparison
?Fixed Annuities premiums and deposits
increased primarily due to higher
broker dealer and Independent Market
Organization (IMO) distribution sales
driven by increased sales of products
with living benefit features. Net flows
improved primarily due to higher
premiums and deposits, and lower
surrenders.
?Variable and Index Annuities premiums
and deposits increased primarily due to
higher index annuity sales driven by
growth in all key distribution channels
partially offset by a decline in
variable annuity premiums and deposits
driven by lower broker dealer and bank
distribution sales. Index annuity net
flows increased primarily due to higher
sales partially offset by higher
surrenders. Variable annuity net flows
remained negative and deteriorated
primarily due to a decline in sales.
?Funding Agreements premiums and
deposits in 2018 reflected deposits
from the FHLB funding agreements, which
were excluded from reported net flows.
?Retail Mutual Funds net flows remained
negative and deteriorated reflecting
lower deposits, offset by lower
surrenders and withdrawals due to
industry trends in the U.S. and the
impact of underperformance within our
largest fund.
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ITEM 7 | Business Segment Operations | Life and Retirement
Individual Retirement Premiums and Deposits and Net Flows
(in millions)
[[Image Removed: Chart 4]] 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 easing industry uncertainty
caused by the DOL Fiduciary Rule, which
was vacated in June 2018 . Index annuity
net flows increased primarily due to
higher sales but were partially offset
by increased surrenders. Variable
annuity net flows remained negative and
deteriorated primarily due to lower
sales and higher surrenders.
?Funding Agreements premiums and
deposits in 2018 reflected deposits
from FHLB funding agreements, 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.
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ITEM 7 | Business Segment Operations | Life and Retirement
Group Retirement Results
Years Ended December 31, Percentage Change
(in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Revenues:
Premiums $ 16 $ 34 $ 27 (53) % 26 %
Policy fees 429 446 427 (4) 4
Net investment income 2,240 2,172 2,164 3 -
Advisory fee and other income 262 239 230 10 4
Benefits and expenses:
Policyholder benefits and losses
incurred 65 85 74 (24) 15
Interest credited to policyholder
account balances 1,147 1,122 1,115 2 1
Amortization of deferred policy
acquisition costs 81 95 84 (15) 13
Non deferrable insurance
commissions 114 117 108 (3) 8
Advisory fee expenses 103 91 83 13 10
General operating expenses 456 406 348 12 17
Interest expense 44 42 32 5 31
Adjusted pre-tax income $ 937 $ 933 $ 1,004 - % (7) %
Base net investment spread:
Base yield* 4.53 % 4.50 % 4.53 % 3 bps (3) bps
Cost of funds 2.72 2.73 2.76 (1) (3)
Base net investment spread 1.81 % 1.77 % 1.77 % 4 bps - bps
*Includes returns from base portfolio including accretion and income (loss) from certain other invested assets.
Business and Financial Highlights
Group Retirement is focused on implementing initiatives to grow its business.
However, external factors, including increased competition and the consolidation
of healthcare providers and other employers in target markets, continue to
impact Group Retirement's customer retention. Excluding deposits from FHLB
funding agreement, premiums and deposits decreased in 2019 compared to the prior
year. Net flows remained negative but improved in 2019 compared to the prior
year primarily due to lower surrenders partially offset by decreased deposits.
Premiums and deposits increased in 2018 compared to 2017. Premiums and deposits
in 2018 included deposits from FHLB funding agreement. Net flows deteriorated in
2018 compared to 2017 and continued to be negative primarily due to higher
surrenders, partially offset by increased premiums and deposits in 2018.
Adjusted pre-tax income remained relatively flat in 2019 compared to the prior
year. The slight increase was primarily driven by an increase in base net
investment spread primarily due to higher average invested assets, lower
Variable Annuity DAC amortization and reserves due to stronger equity market
performance and higher investment returns in our alternative investment
portfolio due to gains from an initial public offering of a holding in the
private equity portfolio in the second quarter of 2019 and gains on securities
for which the fair value option was elected. Partially offsetting these
increases were higher general operating expenses, prior year receipt of
non-recurring payments on structured securities, and a net unfavorable
adjustment from the review and update of actuarial assumptions compared to a net
favorable adjustment in the prior year. Adjusted pre-tax income decreased in
2018 compared to 2017 due to increases in general operating expenses and higher
variable annuity DAC amortization and reserves due to lower equity market
performance partially offset by higher policy fees and net investment income.
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ITEM 7 | Business Segment Operations | Life and Retirement
Group Retirement Adjusted Pre-Tax Income
(in millions)
[[Image Removed: Chart 3]] 2019 and 2018 Comparison
Adjusted pre-tax income increased primarily due
to:
•an increase in base net investment spread
primarily due to higher average invested assets;
•lower variable annuity DAC amortization and
reserves due to stronger equity market
performance; and
•higher net investment returns in our alternative
investment portfolio, including income from an
initial public offering of a holding in the
private equity portfolio and higher gains on
securities for which the fair value option was
elected, partially offset by the prior year
receipt of non-recurring payments on structured
securities and lower returns on affordable
housing income.
Partially offsetting these increases were:
•a net unfavorable adjustment from the review and
update of actuarial assumptions compared to a net
favorable adjustment in the prior year; and
•higher general operating expenses primarily due
to continued investment in people and technology.
Group Retirement Adjusted Pre-Tax Income
(in millions)
[[Image Removed: Chart 4]] 2018 and 2017 Comparison
Adjusted pre-tax income decreased primarily due
to:
•higher general operating expenses, which
reflected continued investments in people and
technology, and higher legal expenses; and
•higher Variable Annuity DAC amortization and
reserves due to lower equity market performance.
Partially offsetting these decreases were:
•higher policy and advisory fees, net of
expenses, primarily driven by growth in assets;
and
•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 fixed maturity securities for
which the fair value option was elected when
compared to 2017 where returns were higher as a
result of significant spread tightening that
occurred.
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ITEM 7 | Business Segment Operations | Life and Retirement
Group Retirement GAAP Premiums, Premiums and Deposits, Surrenders and Net Flows
For Group Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums in 2019, which primarily represents immediate annuities, decreased compared to 2018 and 2017. Overall, premiums are not a significant driver of the Group Retirement results. Premiums and deposits is a non-GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts and mutual funds under administration. Premiums and deposits included FHLB funding agreement in 2018. Net flows for annuity products included in Group Retirement represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals. Deposits from FHLB funding agreement was excluded from net flows of Group Retirement in 2018, as net flows from this funding agreement is not considered part of the metric to measure Group Retirement's core recurring performance.
The following table presents a reconciliation of Group Retirement GAAP premiums to premiums and deposits:
Years Ended December 31, (in millions) 2019 2018 2017 Premiums $ 16 $ 34 $ 27 Deposits 8,330 8,605 7,523 Premiums and deposits $ 8,346 $ 8,639 $ 7,550
The following table presents Group Retirement surrenders as a percentage of average reserves and mutual funds under administration:
Years Ended December 31, 2019 2018
2017
Surrenders as a percentage of average reserves and mutual funds 10.7 % 11.3 % 8.6 %
The following table presents reserves for Group Retirement annuities by surrender charge category:
At December 31, (in millions) 2019 (a) 2018 (a) No surrender charge(b) $ 71,912 $ 65,500 Greater than 0% - 2% 1,140 650 Greater than 2% - 4% 672 1,115 Greater than 4% 6,038 5,868 Non-surrenderable 614 612 Total reserves $ 80,376 $ 73,745
(a)Excludes mutual fund assets under administration of $21.7 billion and $17.9 billion at December 31, 2019 and 2018, respectively.
(b)Group Retirement amounts in this category include General Account reserves of
approximately $6.2 billion and $6.3 billion at December 31, 2019 and 2018,
respectively, which are subject to 20 percent annual withdrawal limitations at
the participant level and General Account reserves of $5.4 billion and $4.7
billion at December 31, 2019 and 2018, respectively, which are subject to 20
percent annual withdrawal limitations at the plan level.
Group Retirement annuities are typically subject to a five- to seven-year
surrender charge period, depending on the product. At December 31, 2019, Group
Retirement annuity reserves increased compared to December 31, 2018 primarily
due to higher equity market performance. The surrender rate in 2019 decreased
due to fewer large plan surrenders compared to the prior year.
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ITEM 7 | Business Segment Operations | Life and Retirement
A discussion of the significant variances in premiums and deposits and net flows follows:
Group Retirement Premiums and Deposits and Net Flows
(in millions)
[[Image Removed: Chart 5]] 2019 and 2018 Comparison
Net flows remained negative but improved primarily
due to lower surrenders partially offset by
decreased deposits. There were approximately $1.3
billion of large plan surrenders for 2019 compared
to approximately $1.6 billion of large plan
surrenders for 2018. External factors including
consolidation of healthcare providers and other
employers in target markets continue to impact
Group Retirement customer retention. Premiums and
deposits in 2018 reflected deposits from FHLB
funding agreement, which were excluded from
reported net flows.
Group Retirement Premiums and Deposits and Net Flows
(in millions)
[[Image Removed: Chart 4]] 2018 and 2017 Comparison
Net flows deteriorated and
continued to be negative
primarily due to higher
surrenders, including
approximately $1.6 billion of
large plan surrenders,
partially offset by increased
deposits. External factors
including consolidation of
healthcare providers and
other employers in target
markets, continue to impact
Group Retirement customer
retention. Premiums and
deposits in 2018 reflected
deposits from FHLB funding
agreement, which were
excluded from reported net
flows.
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ITEM 7 | Business Segment Operations | Life and Retirement
Life Insurance Results
Years Ended December 31, Percentage Change
(in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Revenues:
Premiums $ 1,619 $ 1,554 $ 1,530 4 % 2 %
Policy fees 1,488 1,258 1,430 18 (12)
Net investment income 1,203 1,137 1,044 6 9
Other income 42 58 52 (28) 12
Benefits and expenses:
Policyholder benefits and losses
incurred 2,892 2,619 2,444 10 7
Interest credited to policyholder
account balances 369 374 376 (1) (1)
Amortization of deferred policy
acquisition costs 115 (50) 239 NM NM
Non deferrable insurance
commissions 93 89 109 4 (18)
General operating expenses 611 620 601 (1) 3
Interest expense 26 25 13 4 92
Adjusted pre-tax income $ 246 $ 330 $ 274 (25) % 20 %
Business and Financial Highlights
Life Insurance is focused on selling profitable new products through strategic channels to enhance future returns. Results for 2019 reflect growth in international life, health and group premiums primarily due to the acquisition of Ellipse in theUK . On December 31, 2018, AIG Life Ltd., aU.K. AIG Life and Retirement company, completed the acquisition of Ellipse, a specialist provider of group life risk protection in theU.K. Adjusted pre-tax income decreased in 2019 compared to the prior year primarily due to prior year favorable actuarial adjustments to universal life and prior year favorable ceded premium reinsurance adjustments, current period unfavorable reinsurance valuation allowance adjustment and less favorable mortality. Partially offsetting these decreases were higher gains on calls and higher net investment income including gains on alternative investments due to higher private equity income. Results for 2018 reflect growth in universal life deposits, and growth in term and international life and health premiums, offset by lower group benefits premiums. Adjusted pre-tax income increased in 2018 compared to 2017 primarily due to higher net investment income driven by growth in invested assets, favorable mortality, and actuarial reserve and reinsurance refinements, offset by higher general operating expenses. Life Insurance Adjusted Pre-Tax Income (in millions) [[Image Removed: Chart 3]] 2019 and 2018 Comparison Adjusted pre-tax income decreased primarily due to: ?prior year favorableU.S. reserve and reinsurance adjustments and an unfavorable reinsurance valuation allowance adjustment in 2019; and ?less favorable mortality experience in theU.S. Partially offsetting these decreases were: ?higher investment income primarily due to higher base portfolio income driven by growth in invested assets, higher returns in our alternative investment portfolio, including income from an initial public offering of a holding in the private equity portfolio, and higher gains on calls. AIG | 2019 Form 10-K 99
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ITEM 7 | Business Segment Operations | Life and Retirement
Life Insurance Adjusted Pre-Tax Income
(in millions)
[[Image Removed: Chart 4]] 2018 and 2017 Comparison
Adjusted pre-tax income increased primarily due
to:
•favorable reserve and reinsurance refinements;
•higher net investment income primarily due to
increases in base portfolio income driven by
growth in invested assets and higher alternative
returns; and
•favorable mortality.
Partially offsetting these increases were:
•a net unfavorable adjustment from the annual
review and update of actuarial assumptions of $63
million compared to a net favorable adjustment in
the prior year for $29 million; and
•higher general operating expenses primarily due
to growth in international life offset by a
reduction in group benefits expenses. In addition,
prior-year general operating expenses were reduced
by the impact of new business reinsurance.
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, increased in 2019 compared to 2018 and 2017. Premiums for 2018 included favorable ceded premium reinsurance refinements in domestic life business. Premiums and deposits for Life Insurance is a non-GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance.
The following table presents a reconciliation of Life Insurance GAAP premiums to premiums and deposits:
Years Ended December 31, (in millions) 2019 2018 2017 Premiums $ 1,619 $ 1,554 $ 1,530 Deposits 1,659 1,649 1,518 Other 808 711 707 Premiums and deposits $ 4,086 $ 3,914 $ 3,755
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ITEM 7 | Business Segment Operations | Life and Retirement
A discussion of the significant variances in premiums and deposits follows:
Life Insurance Premiums and Deposits
(in millions)
[[Image Removed: Chart 2]] Premiums and deposits, excluding the
effect of foreign exchange, increased
in 2019 compared to 2018 primarily due
to growth in domestic term life and
international life, including the
acquisition of Ellipse in the U.K.
These increases were partially offset
by lower U.S. group premiums as a
result of the strategic decision to
refocus the business at the end of
2016.
Premiums and deposits, excluding the
effect of foreign exchange, increased
in 2018 compared to 2017, 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.
Institutional markets Results
Years Ended December 31, Percentage Change
(in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Revenues:
Premiums $ 1,861 $ 952 $ 2,398 95 % (60) %
Policy fees 165 161 174 2 (7)
Net investment income 885 786 595 13 32
Other income 1 1 1 - -
Benefits and expenses:
Policyholder benefits and losses
incurred 2,162 1,214 2,568 78 (53)
Interest credited to policyholder
account balances 353 338 253 4 34
Amortization of deferred policy
acquisition costs 5 5 5 - -
Non deferrable insurance commissions 28 28 28 - -
General operating expenses 62 56 44 11 27
Interest expense 11 13 6 (15) 117
Adjusted pre-tax income $ 291 $ 246 $ 264 18 % (7) %
Business and Financial Highlights
Institutional Markets continued to opportunistically grow its portfolio, which
drove the increase in net investment income over recent years. Product
distribution continues to be strong and the business is focused on maintaining
pricing discipline to achieve attractive risk adjusted returns.
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ITEM 7 | Business Segment Operations | Life and Retirement
Institutional Markets Adjusted Pre-Tax Income
(in millions)
[[Image Removed: Chart 3]] 2019 and 2018 Comparison
Increase in premiums and policyholder benefits were
primarily due to pension risk transfer business
written during 2018 and 2019. Growth in reserves and
AUM drove the increase in net investment income with
similar impact to policyholder benefits and interest
credited.
Adjusted pre-tax income increased primarily due to:
?higher net investment income due to higher invested
assets resulting from growth in pension risk transfer
and GICs.
Institutional Markets Adjusted Pre-Tax Income
(in millions)
[[Image Removed: Chart 4]] 2018 and 2017 Comparison
Decreases in premiums and policyholder benefits were
primarily due to pension risk transfer business
written in 2017. Growth in reserves and assets under
management drove the increase in net investment
income with similar impact to policyholder benefits
and interest credited.
Adjusted pre-tax income decreased primarily due to:
?a decrease in policy fees due to lower stable value
wrap notional amounts; and
?higher general operating expenses due to investment
in business growth.
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ITEM 7 | Business Segment Operations | Life and Retirement
Institutional markets GAAP Premiums and Premiums and Deposits
Premiums for Institutional Markets primarily represent amounts received on pension risk transfer or structured settlement annuities with life contingencies. Premiums increased in 2019 compared to the prior year primarily driven by the pension risk transfer business written in 2019. Premiums decreased in 2018 compared to 2017 primarily driven by the pension risk transfer business written in 2017. Premiums and deposits for Institutional Markets is a non-GAAP financial measure that includes direct premiums as well as deposits received on investment-type annuity contracts, including GICs. Deposits also include FHLB funding agreements.
The following table presents a reconciliation of Institutional Markets GAAP premiums to premiums and deposits:
Years Ended December 31, (in millions) 2019 2018 2017 Premiums $ 1,861 $ 952 $ 2,398 Deposits 867 2,015 1,821 Other 30 65 28 Premiums and deposits $ 2,758 $ 3,032 $ 4,247
A discussion of the significant variances in premiums and deposits follows:
Institutional Markets Premiums and Deposits
(in millions)
[[Image Removed: Chart 2]] Premiums and deposits decreased in 2019
compared to the prior year due to lower
deposits offset by higher pension risk
transfer sales. Deposits in 2018
include $1.4 billion of FHLB
agreements. The shift in premium and
deposit mix is consistent with
Institutional Markets' strategy to
opportunistically grow and diversify
its portfolio.
Premiums and deposits decreased in 2018
compared to 2017 due to lower sales in
pension risk transfer and structured
settlements, partially offset by $1.4
billion in FHLB funding agreements.
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ITEM 7 | Business Segment Operations | Other Operations
Other Operations
Other Operations consists of income from assets held by AIG Parent and other
corporate subsidiaries, general operating expenses not attributable to AIG
reporting segments, certain compensation expenses attributable to Other
Operations and reporting segments, amortization of value of distribution network
acquired related to the Validus and Glatfelter acquisitions, and interest
expense attributable to AIG long-term debt as well as debt associated with
consolidated investment entities. Other Operations also includes Blackboard - a
subsidiary focused on delivering commercial insurance solutions using digital
technology, data analytics and automation. The results of Fuji Life , which
consisted of term insurance, life insurance, endowment policies and annuities,
are included in our results through April 30, 2017, the date on which it was
sold.
Other Operations Results
Years Ended December 31, Percentage Change
(in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Revenues:
Premiums $ 50 $ 39 $ 726 28 % (95) %
Net investment income(a)(b) 370 45 53 NM (15)
Other income(b) 425 552 634 (23) (13)
Total adjusted revenues 845 636 1,413 33 (55)
Benefits, losses and expenses:
Policyholder benefits and losses
incurred 37 39 603 (5) (94)
Acquisition expenses:
Amortization of deferred policy
acquisition costs 16 10 (9) 60 NM
Other acquisition expenses 2 1 19 100 (95)
Total acquisition expenses 18 11 10 64 10
General operating expenses 1,253 1,104 1,237 13 (11)
Interest expense:
Interest - corporate 1,043 1,013 967 3 5
Interest - other(c) 203 53 1 283 NM
Total interest expense 1,246 1,066 968 17 10Total benefits, losses and expenses 2,554 2,220 2,818
15 (21)
Adjusted pre-tax income (loss)
before consolidation and
eliminations (1,709) (1,584) (1,405) (8) (13)
Consolidation, eliminations and
other adjustments (305) 59 75 NM (21)
Adjusted pre-tax loss $ (2,014) $ (1,525) $ (1,330) (32) % (15) %
(a)Beginning in the first quarter of 2019, on a prospective basis, changes in
the fair value of equity securities are excluded from adjusted pre-tax loss. For
2018 and 2017, this amount was immaterial.
(b)Beginning in the first quarter of 2019, on a prospective basis, within Other
Operations, investment income from our non-insurance subsidiaries is reported in
Net investment income instead of Other income to align reporting with General
Insurance and Life and Retirement reporting segments. The impact of this
reclassification for the twelve-months ended December 31, 2019 was $262 million.
For the twelve-months ended December 31, 2018, the amount included in Other
income was $165 million.
(c)Interest expense-other primarily represents interest expense on consolidated
investment entities of $158 million, $11 million and $0 in 2019, 2018 and 2017,
respectively, and costs of derivatives used to economically hedge foreign
denominated debt of $37 million, $34 million and $0 in 2019, 2018 and 2017,
respectively.
2019 and 2018 Comparison
Adjusted pre-tax loss increased primarily due to:
?higher corporate general operating expenses due to higher compensation and technology costs; and
?higher interest expenses driven by corporate debt issuances in the first quarter of 2019 and 2018, and debt associated with consolidated investment entities.
The increase in adjusted pre-tax loss was partially offset by:
?higher net investment income associated with consolidated investment entities.
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ITEM 7 | Business Segment Operations | Other Operations
2018 and 2017 Comparison
Blackboard began operations in 2018 and
?higher interest expense due to corporate debt issuances totaling $2.5 billion at the end of the first quarter of 2018; and
?lower other income as a result of income on securities for which we elected the fair value option and available for sale investments.
The increase in adjusted pre-tax loss was partially offset by:
?lower general operating expenses related to one-time payments to executive
leadership in 2017.
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ITEM 7 | Business Segment Operations | Legacy Portfolio
Legacy Portfolio
Legacy Portfolio represents exited or discontinued product lines, policy forms
or distribution channels. Effective February 2018, our
?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.
•Enhanced 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 FORTITUDE HOLDINGS
Fortitude Re was established during the first quarter of 2018 in connection with a series of affiliated reinsurance transactions related to our Legacy Portfolio. Those reinsurance transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines into a single legal entity. As of December 31, 2019, the affiliated transactions included the cession of approximately $30.2 billion of reserves from our Legacy Life and Retirement Run-Off Lines and approximately $3.9 billion of reserves from our Legacy General Insurance Run-Off Lines related to business written by multiple wholly-owned AIG subsidiaries. Fortitude Re has approximately $2.5 billion of total assets after elimination of intercompany balances, primarily managed by AIG, and is AIG's main run-off reinsurer with its own dedicated management team. In the second quarter of 2018, we formed Fortitude Holdings to act as a holding company for Fortitude Re. On November 13, 2018, AIG completed the sale of a 19.9 percent ownership interest in Fortitude Holdings to TCG, an affiliate of Carlyle. Upon completion of the 2018 Fortitude Sale, Fortitude Holdings owned 100 percent of the outstanding common shares of Fortitude Re and AIG had an 80.1 percent ownership interest in Fortitude Holdings. AIG received $381 million in cash and will receive up to $95 million of deferred compensation which is subject to certain purchase price adjustments. To the extent AIG does not receive all or a portion of the planned distributions within 18 months of the 2018 Fortitude Sale, TCG will pay us up to an additional $100 million. In connection with the 2018 Fortitude Sale, we agreed to certain investment commitment targets into various Carlyle strategies and to certain minimum investment management fee payments within thirty-six months following the closing. AIG also will be required to pay a proportionate amount of an agreed make-whole fee to the extent we fail to satisfy such investment commitment targets. On November 25, 2019, AIG entered into a membership interest purchase agreement with Fortitude Holdings, Carlyle, Carlyle FRL, T&D and T&D Holdings, Inc., pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, Carlyle FRL will purchase from AIG a 51.6 percent ownership interest in Fortitude Holdings and T&D will purchase from AIG a 25 percent ownership interest in Fortitude Holdings. Upon closing of the 2019 Fortitude Sale, AIG will have a 3.5 percent ownership interest in Fortitude Holdings. In connection with the 2019 Fortitude Sale agreement, AIG, Fortitude Holdings and an affiliate of Carlyle FRL have agreed that, effective as of the closing of the 2019 Fortitude Sale, (i) AIG's aforementioned investment commitment targets will be assumed by Fortitude Holdings and AIG will be released therefrom, and (ii) Carlyle will remain obligated to pay AIG $95 million of deferred compensation and up to an additional $100 million to the extent AIG does not receive all or a portion of the planned 106 AIG | 2019 Form 10-K
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ITEM 7 | Business Segment Operations | Legacy Portfolio
distributions within 18 months of the closing of the 2018 Fortitude Sale. We
expect to contribute approximately $1.45 billion of the proceeds of the 2019
Fortitude Sale to certain of our insurance company subsidiaries for a period of
time following the closing of the transaction. There can be no guarantee that we
will receive the required regulatory approvals or that closing conditions will
be satisfied in order to consummate the 2019 Fortitude Sale.
The affiliated reinsurance transactions executed in the first quarter of 2018
with Fortitude Re resulted in prepaid insurance assets on the ceding
subsidiaries' balance sheets of approximately $2.5 billion (after-tax) and
related deferred acquisition costs of $0.5 billion (after-tax) at inception of
the contract. The prepaid insurance assets have been eliminated in AIG's
consolidated financial statements since the counterparties were wholly owned.
Upon closing of the 2019 Fortitude Sale, AIG will recognize a loss for the
portion of the unamortized balance of these assets that are not recoverable, if
any, when we are no longer a controlling shareholder in Fortitude Holdings. As
of December 31, 2019, the unamortized balances of the aforementioned prepaid
insurance assets and related deferred acquisition costs were $2.3 billion
(after-tax) and $0.4 billion (after-tax), respectively. This combined loss of
$2.7 billion would be incremental to any gain or loss recognized on the 2019
Fortitude Sale. The incremental gain or loss we will recognize on the 2019
Fortitude Sale would be impacted, perhaps significantly, by market conditions
existing at the time the 2019 Fortitude Sale closes.
LEGACY PORTFOLIO RESULTS
Years Ended December 31, Percentage Change
(in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Revenues:
Premiums $ 481 $ 480 $ 590 - % (19) %
Policy fees 122 120 137 2 (12)
Net investment income(a) (b) 2,480 2,325 2,776 7 (16)
Other income (loss) (b) (67) 114 888 NM (87)
Total adjusted revenues 3,016 3,039 4,391 (1) (31)
Benefits, losses and expenses:
Policyholder benefits and losses and
loss adjustment
expenses incurred 1,909 2,057 1,998 (7) 3
Interest credited to policyholder
account balances 213 236 241 (10) (2)
Amortization of deferred policy
acquisition costs 68 105 76 (35) 38
General operating and other expenses 306 398 484 (23) (18)
Interest expense 19 30 122 (37) (75)
Total benefits, losses and expenses 2,515 2,826 2,921 (11) (3)
Adjusted pre-tax income $ 501 $ 213 $ 1,470 135 % (86) %
Adjusted pre-tax income by type:
General Insurance Run-Off Lines $ 77 $ 76 $ 221 1 % (66) %
Life and Retirement Run-Off Lines 244 17 406 NM (96)
Legacy Investments 180 120 843 50 (86)
Adjusted pre-tax income $ 501 $ 213 $ 1,470 135 % (86) %
December 31, December 31,
(in millions) 2019 2018
Selected Balance Sheet Data
Legacy Investments, net of related
debt $ 2,002 $ 2,529
Legacy General Insurance run-off
reserves 5,409 5,498
Legacy Life and Retirement run-off
reserves 38,728 36,614
(a)Beginning in the first quarter of 2019, on a prospective basis, changes in
the fair value of equity securities are excluded from adjusted pre-tax loss. For
2018 and 2017, this amount was immaterial.
(b) Beginning in the first quarter of 2019, on a prospective basis, within
Legacy Portfolio, investment income from our non-insurance subsidiaries is
reported in Net investment income and Net realized gain (loss) instead of Other
income to align reporting with General Insurance and Life and Retirement
reporting segments. The impact of this reclassification for the twelve-months
ended December 31, 2019 was $124 million. For the twelve-months ended December
31, 2018, the amount included in other income was $152 million.
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ITEM 7 | Business Segment Operations | Legacy Portfolio
Business and Financial Highlights
Legacy insurance lines, including those ceded to Fortitude Re, continue to
run-off as anticipated for Legacy General Insurance and Legacy Life and
Retirement Run-Off Lines. Legacy investments have been reduced significantly
over the last several years declining from $6.7 billion at December 31, 2016 to
$2.0 billion at December 31, 2019. The remaining Legacy investments primarily
include structured credit junior notes for which we have elected the fair value
option and real estate investments.
Legacy Portfolio Adjusted Pre-Tax Income
(in millions)
[[Image Removed: Chart 2]] 2019 and 2018 Comparison
Adjusted pre-tax income increased due to:
?Higher Legacy Life and Retirement earnings due to
an increase in net investment income and a decrease
in policyholder benefits and losses incurred due to
non-recurring loss recognition incurred on accident
and health business (other than long-term care) in
2018.
?Higher Legacy Investment earnings due to an
increase in gains on fair value option portfolios
Legacy General Insurance earnings in 2019 were
consistent compared to 2018.
Legacy Portfolio Adjusted Pre-Tax Income
(in millions)
[[Image Removed: Chart 3]] 2018 and 2017 Comparison
Adjusted pre-tax income decreased due to:
?lower Legacy Life and Retirement earnings compared
to 2017 due to lower net investment income and loss
recognition from the update to actuarial assumptions
in 2018 of $105 million mainly attributable to
higher claims costs on the cancer products
portfolio;
?lower Legacy General Insurance earnings compared to
2017 due to lower net investment income, Japanese
catastrophe losses in 2018 and a change in premium
earning patterns on certain environmental business
in 2018; and
?Legacy Investment earnings compared to 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 2018.
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ITEM 7 | Investments
Investments
Overview
Our investment strategies are tailored to the specific business needs of each
operating unit by targeting an asset allocation mix that provides
diversification from an asset class, sector, issuer, and geographic perspective.
The primary objectives are generation of investment income, preservation of
capital, liquidity management and growth of surplus. The majority of assets
backing our insurance liabilities consist of fixed maturity securities.
Investment Highlights in 2019
?A drop in interest rates and narrowing credit spreads resulted in a net
unrealized gain in our investment portfolio. Net unrealized gains in our
available for sale portfolio increased to approximately $17.9 billion as of
December 31, 2019 from approximately $3.6 billion as of December 31, 2018.
?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.
?We experienced higher investment returns in our alternative investments
portfolio due to robust equity market returns in 2019, income from an initial
public offering of a holding in the private equity portfolio, and an increase in
income from fixed maturity securities for which the fair value option was
elected. This compares to the prior year where returns were lower as a result of
an increase in interest rates and widening credit spreads that occurred, lower
hedge fund performance, as well as negative performance of our fair value option
equity securities portfolio.
?During the first quarter of 2019, we sold our remaining investment in People's
Insurance Company (Group) of China Limited and PICC Property & Casualty Company
Limited (collectively, our PICC Investment).
?Blended investment yields on new investments were lower than blended rates on
investments that were sold, matured or called.
Investment Strategies
Investment strategies are assessed at the business segment level and involve considerations that include local and general market conditions, duration and cash flow management, risk appetite and volatility constraints, rating agency and regulatory capital considerations, tax and legal investment limitations.
Some of our key investment strategies are as follows:
?Our fundamental strategy across the portfolios is to seek investments with similar characteristics to the associated insurance liabilities to the extent practicable. AIG embeds Environmental, Social and Governance (ESG) considerations in its fundamental investment analysis of the companies or projects we invest in to ensure that they have sustainable earnings over the full term of our investment. AIG considers internal and external factors and evaluates changes in consumer behavior, industry trends related to ESG factors as well as the ability of the management of companies to respond appropriately to these changes in order to maintain their competitive advantage. ?We seek to originate investments that offer enhanced yield through liquidity premiums, such as private placements and commercial mortgage loans, which also add portfolio diversification. These assets typically afford credit protections through covenants, ability to customize structures that meet our insurance liability needs, and deeper due diligence given information access. ?Given our global presence, we have access to assets that provide diversification from local markets. To the extent we purchase these investments, we generally hedge the currency risk using derivatives, which could provide opportunities to earn higher risk adjusted returns compared to risk assets in the functional currency. ?AIG 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.
?Within the
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-Insurance reserves are backed by mainly investment grade fixed maturity
securities that meet our current risk-return, tax, liquidity, credit quality and
diversification objectives. We assess fixed maturity asset classes based on
their fundamental risk, including credit (public and private), commercial
mortgages and residential mortgages regardless of whether such investments are
bonds, loans, or structured products.
-Surplus accounts seek to enhance portfolio returns through a mix of fixed
maturity (investment grade and high yield) and various alternative asset
classes, including private equity, real estate equity, and hedge funds. Over the
past few years, hedge fund investments have been reduced with more emphasis
given to private equity, real estate and leveraged capital (for example, we are
currently focused on purchasing directly originated, middle market loans with
strong covenant packages).
?Outside of the
Asset Liability Management
The investment strategy within the General Insurance companies focuses on growth of surplus, maintenance of sufficient liquidity for unanticipated insurance claims, and preservation of capital. Assets with varying degrees of liquidity and volatility are allocated based on whether backing reserves, required surplus or excess surplus, subject to capital, liquidity, and regulatory constraints. General Insurance invests primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans. Fixed maturity securities of the General Insurance companies' domestic operations have an average duration of 3.5 years. Fixed maturity securities of the General Insurance companies' foreign operations have an average duration of 3.6 years. While invested assets backing reserves of the General Insurance companies are primarily invested in conventional liquid fixed maturity securities, we have continued to allocate to asset classes that offer higher yields through structural and liquidity premiums, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments to manage our exposure to potential changes in interest rates and inflation. We seek to diversify the portfolio across asset classes, sectors, and issuers to mitigate idiosyncratic portfolio risks.
In addition, a portion of the surplus of General Insurance is invested in a diversified portfolio of alternative investments which seek to balance liquidity, volatility and growth. There is a higher allocation to equity-oriented investments in General Insurance relative to other AIG portfolios given the underlying inflation risks inherent in that business. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader portfolio.
The investment strategy of the Life and Retirement companies is to provide net investment income to back liabilities that result in stable distributable earnings and enhance portfolio value for surplus accounts, subject to asset liability management, capital, and regulatory constraints.
The Life and Retirement companies use asset-liability management as a primary tool to monitor and manage risk in their businesses. The Life and Retirement companies maintain a diversified, high to medium quality portfolio of fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans that, to the extent practicable, match the duration characteristics of the liabilities. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, duration varies between distinct portfolios. The interest rate environment has a direct impact on the asset liability management profile of the businesses, and an extended low interest rate environment may result in a lengthening of liability durations from initial estimates, primarily due to lower lapses, which may require us to further extend the duration of the investment portfolio. A further lengthening of the portfolio will be assessed in the context of available market opportunities as longer duration markets may not provide similar diversification benefits as shorter duration markets.
Fixed maturity securities of the Life and Retirement companies' domestic operations have an average duration of 8.0 years. We seek to diversify the portfolio across asset class, sectors, and issuers to mitigate idiosyncratic portfolio risks.
In addition, the Life and Retirement companies seek to enhance surplus portfolio returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields.
NAIC Designations of Fixed Maturity Securities
The Securities Valuation Office (SVO) of theNational Association of Insurance Commissioners (NAIC) evaluates the investments ofU.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,
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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 AIG subsidiaries fixed maturity security portfolio by NAIC
Designation, and the distribution by composite AIG credit rating, which is
generally based on ratings of the three major rating agencies.
For a full description of the composite AIG credit ratings see Credit Ratings.
The following table presents the fixed maturity security portfolio categorized by NAIC Designation, at fair value:
December 31, 2019
(in millions)
Total
Total Below
Investment Investment
NAIC Designation 1 2 Grade 3 4 5 6 Grade Total
Other fixed maturity
securities $ 94,855 $ 74,024 $ 168,879 $ 7,759 $ 6,937 $ 1,184 $ 198 $ 16,078 $ 184,957
Mortgage-backed,
asset-backed and
collateralized 62,600 3,523 66,123 394 159 59 3,573 4,185 70,308
Total* $ 157,455 $ 77,547 $ 235,002 $ 8,153 $ 7,096 $ 1,243 $ 3,771 $ 20,263 $ 255,265
* Excludes $2.5 billion of fixed maturity securities for which no NAIC Designation is available.
The following table presents the fixed maturity security portfolio categorized by composite AIG credit rating, at fair value:
December 31, 2019
(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 $ 94,094 $ 75,174 $ 169,268 $ 7,526 $ 7,026 $ 1,137 $ 15,689 $ 184,957
Mortgage-backed,
asset-backed and
collateralized 51,809 4,252 56,061 721 406 13,120 14,247 70,308
Total* $ 145,903 $ 79,426 $ 225,329 $ 8,247 $ 7,432 $ 14,257 $ 29,936 $ 255,265
*Excludes $2.5 billion of fixed maturity securities for which no NAIC Designation is available.
Credit Ratings At December 31, 2019, approximately 89 percent of our fixed maturity securities were held by our domestic entities. Approximately 16 percent of these securities were ratedAAA by one or more of the principal rating agencies, and approximately 13 percent were rated below investment grade or not rated. Our investment decision process relies primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services' ratings and opinions provide one source of independent perspective for consideration in the internal analysis.Moody's Investors Service Inc. (Moody's),Standard & Poor's Financial Services LLC , a subsidiary of S&P Global Inc. (S&P), or similar foreign rating services rate a significant portion of our foreign entities' fixed maturity securities portfolio. Rating services are not available for some foreign-issued securities. Our Credit Risk Management department closely reviews the credit quality of the foreign portfolio's non-rated fixed maturity securities. At December 31, 2019, approximately 24 percent of such investments were either ratedAAA or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities ratedAAA , and approximately 6 percent were below investment grade or not rated. Approximately 29 percent of the foreign entities' fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance. AIG | 2019 Form 10-K 111
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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 (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
December 31, December 31, December 31, December 31, December 31, December 31,
(in millions) 2019 2018 2019 2018 2019 2018
Rating:
Other fixed
maturity
securities
AAA $ 11,821 $ 11,170 $ 2,121 $ 2,619 $ 13,942 $ 13,789
AA 31,141 27,766 - 106 31,141 27,872
A 49,437 40,142 11 1,356 49,448 41,498
BBB 75,598 69,564 - 300 75,598 69,864
Below investment
grade 15,905 14,511 7 - 15,912 14,511
Non-rated 1,301 1,333 - - 1,301 1,333
Total $ 185,203 $ 164,486 $ 2,139 $ 4,381 $ 187,342 $ 168,867
Mortgage-backed,
asset-
backed and
collateralized
AAA $ 29,419 $ 28,859 $ 365 $ 481 $ 29,784 $ 29,340
AA 14,816 12,019 201 911 15,017 12,930
A 6,861 6,964 165 290 7,026 7,254
BBB 4,154 4,058 98 152 4,252 4,210
Below investment
grade 10,575 12,923 3,630 5,096 14,205 18,019
Non-rated 58 82 84 104 142 186
Total $ 65,883 $ 64,905 $ 4,543 $ 7,034 $ 70,426 $ 71,939
Total
AAA $ 41,240 $ 40,029 $ 2,486 $ 3,100 $ 43,726 $ 43,129
AA 45,957 39,785 201 1,017 46,158 40,802
A 56,298 47,106 176 1,646 56,474 48,752
BBB 79,752 73,622 98 452 79,850 74,074
Below investment
grade 26,480 27,434 3,637 5,096 30,117 32,530
Non-rated 1,359 1,415 84 104 1,443 1,519
Total $ 251,086 $ 229,391 $ 6,682 $ 11,415 $ 257,768 $ 240,806
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Available-for-Sale Investments
The following table presents the fair value of our available-for-sale
securities:
Fair Value at Fair Value at
December 31, December 31,
(in millions) 2019 2018
Bonds available for sale:
U.S. government and government sponsored
entities $ 5,380 $ 3,260
Obligations of states, municipalities
and political subdivisions 15,318 16,001
Non-U.S. governments 14,869 14,525
Corporate debt 149,636 130,700
Mortgage-backed, asset-backed and
collateralized:
RMBS 32,805 34,377
CMBS 14,430 12,701
CDO/ABS 18,648 17,827
Total mortgage-backed, asset-backed and
collateralized 65,883 64,905
Total bonds available for sale* $ 251,086 $ 229,391
*At December 31, 2019 and 2018, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $27.8 billion and $28.8 billion, respectively.
The following table presents the fair value of our aggregate credit exposures to
non-
December 31, December 31,
(in millions) 2019 2018
Japan $ 1,651 $ 1,645
France 1,013 905
Canada 989 1,038
United Kingdom 638 794
Germany 593 783
Indonesia 589 453
United Arab Emirates 494 454
Norway 410 380
Israel 399 316
Chile 353 304
Other 7,740 7,498
Total $ 14,869 $ 14,570
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The following table presents the fair value of our aggregate European credit exposures by major sector for our fixed maturity securities:
December 31, 2019
Non- December 31,
Financial Financial Structured 2018
(in millions) Sovereign Institution Corporates Products Total Total
Euro-Zone countries:
France $ 1,013 $ 1,788 $ 1,503 $ - $ 4,304 $ 4,442
Germany 593 155 2,581 - 3,329 3,246
Netherlands 317 1,105 1,100 104 2,626 2,571
Ireland 62 123 435 1,512 2,132 1,494
Belgium 179 122 953 - 1,254 1,175
Spain 40 286 796 - 1,122 1,068
Italy 2 93 387 - 482 507
Luxembourg - 27 354 - 381 377
Finland 101 51 40 - 192 228
Austria 160 3 - 1 164 156
Other - EuroZone 510 78 238 - 826 929
Total Euro-Zone $ 2,977 $ 3,831 $ 8,387 $ 1,617 $ 16,812 $ 16,193
Remainder of Europe :
United Kingdom $ 638 $ 4,059 $ 8,622 $ 2,479 $ 15,798 $ 16,139
Switzerland 30 1,169 680 - 1,879 2,010
Sweden 137 320 125 - 582 639
Norway 410 45 94 - 549 566
Russian Federation 190 39 196 - 425 240
Other - Remainder of Europe 92 38 132 - 262 271
Total - Remainder of Europe $ 1,497 $ 5,670 $ 9,849 $ 2,479 $ 19,495 $ 19,865
Total $ 4,474 $ 9,501 $ 18,236 $ 4,096 $ 36,307 $ 36,058
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Investments in Municipal Bonds
At December 31, 2019, theU.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-exempt bonds with 91 percent of the portfolio rated A or higher.
The following table presents the fair values of our available for sale
December 31, 2019
State Local Total December 31,
General General Fair 2018
(in millions) Obligation Obligation Revenue Value Total Fair Value
State:
New York $ 7 $ 396 $ 2,656 $ 3,059 $ 3,134
California 712 389 1,827 2,928 2,813
Texas 105 524 883 1,512 1,692
Illinois 75 145 852 1,072 979
Massachusetts 426 - 319 745 811
Virginia 9 - 484 493 541
Ohio 47 1 434 482 485
Georgia 105 71 283 459 445
Washington 166 - 239 405 473
Pennsylvania 125 1 269 395 353
Florida 10 - 345 355 542
Washington, D.C. 11 - 305 316 340
New Jersey - 2 276 278 224
All other states(a) 453 277 2,089 2,819 3,169
Total(b)(c) $ 2,251 $ 1,806 $ 11,261 $ 15,318 $ 16,001
(a)We did not have material credit exposure to the government of
(b)Excludes certain university and not-for-profit entities that issue their bonds in the corporate debt market. Includes industrial revenue bonds.
(c)Includes $496 million of pre-refunded municipal bonds.
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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 December 31, December 31,
(in millions) 2019 2018
Financial institutions:
Money Center/Global Bank Groups $ 10,701 $ 9,602
Regional banks - other 659 630
Life insurance 3,166 3,201
Securities firms and other finance companies 334 389
Insurance non-life 5,492
4,648
Regional banks - North America 6,825 6,263 Other financial institutions 13,608 9,966 Utilities 19,424 17,542 Communications 9,939 9,249 Consumer noncyclical 19,997 16,410 Capital goods 8,006 7,237 Energy 13,379 12,350 Consumer cyclical 10,989 9,498 Basic 5,617 5,271 Other 21,500 18,444 Total* $ 149,636 $ 130,700
*At both December 31, 2019 and December 31, 2018, approximately 89 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 5.3 percent and 5.4 percent at December 31, 2019 and December 31, 2018, respectively. While the energy investments are primarily investment grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value.
Investments in RMBS
The following table presents AIG's RMBS available for sale securities:
Fair Value at Fair Value at
December 31, December 31,
(in millions) 2019 2018
Agency RMBS $ 15,721 $ 14,695
Alt-A RMBS 8,484 9,780
Subprime RMBS 2,654 2,982
Prime non-agency 4,451 6,211
Other housing related 1,495 709
Total RMBS(a)(b) $ 32,805 $ 34,377
(a)Includes approximately $8.7 billion and $10.3 billion at December 31, 2019 and December 31, 2018, 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 7 to the Consolidated Financial Statements.
(b)The weighted average expected life was six years at December 31, 2019 and seven years at December 31 2018.
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. 116 AIG | 2019 Form 10-K
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Investments in CMBS
The following table presents our CMBS available for sale securities:
Fair Value at Fair Value at
December 31, December 31,
(in millions) 2019 2018
CMBS (traditional) $ 11,250 $ 9,975
Agency 2,051 2,047
Other 1,129 679
Total $ 14,430 $ 12,701
The fair value of CMBS holdings remained stable throughout 2019. 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
December 31, December 31,
(in millions) 2019 2018
Collateral Type:
Bank loans (CLO) $ 9,330 $ 8,164
Other 44 56
Total $ 9,374 $ 8,220
Commercial Mortgage Loans
At December 31, 2019, we had direct commercial mortgage loan exposure of $36.2
billion. All commercial mortgage loans were current or performing according to
their restructured terms.
The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized cost:
Number Percent
of Class of
(dollars in
millions) Loans Apartments Offices Retail Industrial Hotel Others Total Total
December 31,
2019
State:
New York 99 $ 2,377 $ 4,913 $ 457 $ 376 $ 98 $ - $ 8,221 23 %
California 74 736 1,341 249 572 817 41 3,756 10
New Jersey 48 1,635 44 370 81 27 33 2,190 6
Texas 52 501 1,163 174 141 145 - 2,124 6
Florida 74 393 234 544 218 217 10 1,616 3
Massachusetts 13 540 245 549 25 - - 1,359 4
Illinois 19 505 441 10 18 - 22 996 3
Washington,
D.C. 13 447 302 - - 18 - 767 2
Pennsylvania 23 81 20 528 46 25 - 700 2
Ohio 25 174 10 188 269 - 5 646 2
Other states 215 2,073 740 1,276 740 401 44 5,274 15
Foreign 85 4,237 1,189 987 1,177 564 367 8,521 24
Total* 740 $ 13,699 $ 10,642 $ 5,332 $ 3,663 $ 2,312 $ 522 $ 36,170 100 %
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December 31, 2018
State:
New York 98 $ 2,009 $ 4,082 $ 512 $ 393 $ 100 $ - $ 7,096 22 %
California 78 490 1,308 283 535 831 48 3,495 11
Texas 53 344 1,256 185 102 125 5 2,017 6
New Jersey 45 1,049 45 422 41 28 33 1,618 5
Florida 87 358 159 589 224 218 35 1,583 5
Massachusetts 14 635 243 549 26 - - 1,453 4
Illinois 18 456 444 11 19 - 22 952 3
Pennsylvania 25 80 21 567 47 25 - 740 2
Washington, D.C. 12 401 311 - - 19 - 731 2
Ohio 27 179 10 199 235 - 5 628 2
Other states 228 1,869 790 1,326 773 460 73 5,291 16
Foreign 79 3,320 1,201 1,002 679 717 359 7,278 22
Total* 764 $ 11,190 $ 9,870 $ 5,645 $ 3,074 $ 2,523 $ 580 $ 32,882 100 %
*Does not reflect allowance for credit losses.
For additional discussion on commercial mortgage loans see Note 8 to the Consolidated Financial Statements.
Impairments
The following table presents impairments by investment type:
Years Ended December 31, (in millions) 2019 2018
2017
Other-than-temporary Impairments: Fixed maturity securities, available for sale $ 174 $ 251 $
216
Equity securities, available for sale(a) - -
11
Private equity funds and hedge funds - -
33
Subtotal 174 251
260
Other impairments: Investments in life settlements(b) - - 360 Other investments 12 - 20 Real estate 34 79 61 Total $ 220 $ 330 $ 701
(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 $360 million related to investments in our life settlements portfolio that were sold in 2017.
Our investments in life settlements are monitored for impairment on a contract-by-contract basis quarterly. An investment in life settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds would not be sufficient to recover our estimated future carrying amount. This amount is defined as the current carrying amount for the investment in life settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life settlements are written down to their estimated fair value. This is determined on a discounted cash flow basis, incorporating current market mortality assumptions and market yields or by repricing to the anticipated sale price as appropriate. Impairments on life settlements in 2017 were mainly attributable to write-downs of the policies to the purchase price as agreed in the sale of the life settlements portfolio. We sold the remaining portion of our life settlements portfolio in 2017. 118 AIG | 2019 Form 10-K
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Other-Than-Temporary Impairments
To determine other-than-temporary impairments, we use fundamental credit analyses of individual securities without regard to rating agency ratings. Based on this analysis, we expect to receive cash flows sufficient to cover the amortized cost of all below investment grade securities for which credit impairments were not recognized.
The following tables present other-than-temporary impairment charges recorded in
earnings on fixed maturity securities, equity securities, private equity funds
and hedge funds.
Other-than-temporary impairment charges by investment type and impairment type:
Other Fixed Equities/Other
(in millions) RMBS CDO/ABS CMBS Maturity Invested Assets* Total
Year Ended December 31, 2019
Impairment Type:
Change in intent $ - $ - $ - $ 3 - $ 3
Foreign currency declines - - - 18 - 18
Issuer-specific credit events 24 1 16 106 - 147
Adverse projected cash flows 6 - - - - 6
Total $ 30 $ 1 $ 16 $ 127 $ - $ 174
Year Ended December 31, 2018
Impairment Type:
Change in intent $ - $ - $ - $ 87 - $ 87
Foreign currency declines - - - 15 - 15
Issuer-specific credit events 62 9 20 56 - 147
Adverse projected cash flows 2 - - - - 2
Total $ 64 $ 9 $ 20 $ 158 $ - $ 251
Year Ended December 31, 2017
Impairment Type:
Severity $ - $ - $ - $ - $ 2 $ 2
Change in intent - - - 9 - 9
Foreign currency declines - - - 11 - 11
Issuer-specific credit events 24 41 32 95 42 234
Adverse projected cash flows 4 - - - - 4
Total $ 28 $ 41 $ 32 $ 115 $ 44 $ 260
*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.
We recorded other-than-temporary impairment charges in the years ended December 31, 2019, 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 $440 million in 2019, $530 million in 2018 and $669 million in 2017.
For a discussion of our other-than-temporary impairment accounting policy see Note 7 to the Consolidated Financial Statements.
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The following table shows the aging of the unrealized losses of fixed maturity
securities, the extent to which the fair value is less than amortized cost or
cost, and the number of respective items in each category:
December 31, 2019 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 $ 17,462 $ 234 2,491 $ 13 $ 5 1 $ 3 $ 3 1 $ 17,478 $ 242 2,493
7-11 months 1,633 40 319 1 - 1 1 - 1 1,635 40 321
12 months or more 6,392 160 877 62 16 8 16 12 5 6,470 188 890
Total $ 25,487 $ 434 3,687 $ 76 $ 21 10 $ 20 $ 15 7 $ 25,583 $ 470 3,704
Below investment
grade bonds
0-6 months $ 5,026 $ 90 1,347 $ 21 $ 6 12 $ 1 $ 1 3 $ 5,048 $ 97 1,362
7-11 months 380 15 245 280 97 16 3 2 4 663 114 265
12 months or more 1,017 46 324 173 72 26 24 16 14 1,214 134 364
Total $ 6,423 $ 151 1,916 $ 474 $ 175 54 $ 28 $ 19 21 $ 6,925 $ 345 1,991
Total bonds
0-6 months $ 22,488 $ 324 3,838 $ 34 $ 11 13 $ 4 $ 4 4 $ 22,526 $ 339 3,855
7-11 months 2,013 55 564 281 97 17 4 2 5 2,298 154 586
12 months or more 7,409 206 1,201 235 88 34 40 28 19 7,684 322 1,254
Total(e) $ 31,910 $ 585 5,603 $ 550 $ 196 64 $ 48 $ 34 28 $ 32,508 $ 815 5,695
(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 December 31, 2019.
(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 2019 was primarily attributable to increases in the fair value of fixed maturity securities. For 2019, net unrealized gains related to fixed maturity securities increased by $14.2 billion due primarily to a decrease in rates and a narrowing of credit spreads. The change in net unrealized gains and losses on investments in 2018 was primarily attributable to decreases in the fair value of fixed maturity securities. For 2018, net unrealized losses related to fixed maturity securities decreased by $9.9 billion due primarily to an increase in rates and a widening of credit spreads.
For further discussion of our investment portfolio see also Note 7 to the Consolidated Financial Statements.
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ITEM 7 | Investments
Net Realized Capital Gains and Losses
The following table presents the components of Net realized capital gains (losses): Years Ended December 31, (in millions) 2019 2018 2017 Sales of fixed maturity securities $ 320 $ (145) $ 425 Sales of equity securities(a) - 16 88 Other-than-temporary impairments: Severity - - (2) Change in intent (3) (87) (9) Foreign currency declines (18) (15) (11) Issuer-specific credit events (147) (147) (234) Adverse projected cash flows (6) (2) (4) Provision for loan losses (46) (92) (50) Foreign exchange transactions 227 (182) 489 Variable annuity embedded derivatives, net of related hedges (294) 304 (1,374) All other derivatives and hedge accounting (22) 338 (368) Impairments on investments in life settlements - - (360) Loss on sale of private equity funds - (321) - Other(b) 621 203 30 Net realized capital gains (losses) $ 632 $
(130) $ (1,380)
(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. (b)In 2019, includes $200 million from the sale and concurrent leaseback of our corporate headquarters and $300 million as a result of sales in investment real estate properties. In 2018, primarily includes $96 million and $49 million of realized gains on the sale of shares of OneMain Holdings, Inc. and an investment in Castle Holdings LLC's aircraft assets, respectively. Net realized capital gains in 2019 compared to net realized capital losses in the prior year due to gains on the sales of securities and foreign exchange compared to losses on sales of securities and foreign exchange in 2018, as well as lower impairments in 2019 and losses on private equity sales in 2018. Partially offsetting these gains were derivative losses in 2019 compared to gains in the prior year. Net realized capital losses in 2018 decreased compared to 2017 due primarily to derivative gains in 2018 compared to derivative losses in 2017. Net realized capital losses in 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 2017 consisted primarily of losses on variable annuity embedded derivatives, net of related hedges, and impairments, which were partially offset by gains on the sales of securities and foreign exchange gains. Variable annuity embedded derivatives, net of related hedges, reflected losses in 2019 compared to gains 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 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 Enterprise Risk Management - Insurance Risks - Life and Retirement Companies' Key Risks - Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs. 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 7 to the Consolidated Financial Statements.
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ITEM 7 | Insurance Reserves
Insurance Reserves
Liability for unpaid losses and loss adjustment expenses (Loss Reserves)
The following table presents the components of our gross and net loss reserves by segment and major lines of business*:
At December 31, 2019 2018
Net Net
liability liability
for Reinsurance Gross liability for Reinsurance Gross liability
unpaid unpaid
losses recoverable on for unpaid losses recoverable on for unpaid
and loss unpaid losses and losses and and loss unpaid losses and losses and
adjustment loss adjustment loss adjustment adjustment loss adjustment loss adjustment
(in millions) expenses expenses expenses expenses expenses expenses
General Insurance:
U.S. Workers'
Compensation
(net of discount) $ 4,330 $ 5,494 $ 9,824 $ 4,772 $ 5,318 $ 10,090
U.S. Excess Casualty 4,285 5,073 9,358 4,715 4,576 9,291
U.S. Other Casualty 4,064 4,695 8,759 4,288 4,661 8,949
U.S. Financial Lines 5,154 2,221 7,375 5,315 1,960 7,275
U.S. Property and
Special risks 4,950 2,807 7,757 6,534 2,748 9,282
U.S. Personal Insurance 1,287 988 2,275 1,706 1,001 2,707
UK /Europe Casualty and
Financial Lines 6,234 1,268 7,502 7,022 1,789 8,811
UK /Europe Property and
Special risks 2,573 1,191 3,764 2,988 1,251 4,239
UK/Europe and Japan
Personal Insurance 1,962 519 2,481 2,264 553 2,817
Other product lines 6,238 2,053 8,291 6,105 2,522 8,627
Unallocated loss
adjustment expenses 1,824 882 2,706 1,834 1,307 3,141
Total General Insurance 42,901 27,191 70,092 47,543 27,686 75,229
Legacy Portfolio -
Run-Off Lines:
U.S. Run-Off Long Tail
Insurance Lines
(net of discount) 3,769 3,587 7,356 3,862 3,689 7,551
Other run-off product
lines 164 66 230 104 66 170
Unallocated loss
adjustment expenses 377 115 492 397 115 512
Total Legacy Portfolio -
Run-Off Lines 4,310 3,768 8,078 4,363 3,870 8,233
Other Operations
(Blackboard) 48 110 158 43 134 177
Total $ 47,259 $ 31,069 $ 78,328 $ 51,949 $ 31,690 $ 83,639
* Includes net loss reserve discount of $1.5 billion and $2.0 billion for the
years ended December 31, 2019, and 2018, respectively. For discussion of loss
reserve discount see Note 14 to the Consolidated Financial Statements.
Prior Year Development
The following table summarizes incurred (favorable) unfavorable prior year development net of reinsurance by segment:
Years Ended December 31, (in millions) 2019 2018 2017 General Insurance: North America* $ (247) $ 328 $ 371 International (47) 38 628 Total General Insurance $ (294) $ 366 $ 999 Legacy Portfolio - Run-Off Lines - (4) (21)
Total prior year (favorable) unfavorable development $ (294) $ 362 $ 978
*Includes the amortization attributed to the deferred gain at inception from the NICO adverse development reinsurance agreement of $232 million, $233 million and $228 million in the year ended December 31, 2019 and 2018 and 2017, respectively. Consistent with our definition of APTI, prior year development excludes the portion of (favorable) unfavorable prior year reserve development for which we have ceded the risk under the NICO reinsurance agreements of $(278) million, $834 million and $359 million for the year ended December 31, 2019, 2018 and 2017, respectively, and related changes in amortization of the deferred gain of $(13) million, $162 million and $56 million over those same periods.
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ITEM 7 | Insurance Reserves
Net Loss Development - 2019
During 2019, we recognized favorable prior year loss reserve development of $294 million. The development was primarily driven by:
?Favorable development on 2017 Hurricanes and 2017 California Wildfires subrogation recoverables in Commercial Property and Personal Lines;
?Favorable development from amortization of the deferred gain on the adverse development reinsurance agreement with NICO for accident years 2015 and prior;
?Favorable development onU.S. Workers' Compensation business, both guaranteed cost business and large deductible and Defense Base Act business (covering government contractors serving at military bases overseas) where we reacted to favorable loss trends in recent accident years; ?Unfavorable development inU.S. Financial Lines, notably Directors and Officers (D&O), Employment Practices Liability (EPLI) and Non-Medical Professional Errors & Omissions business where we reacted to increasing frequency and severity in recent accident years; and
?Unfavorable development in Primary General Liability where we reacted to adverse frequency and severity trends especially in Construction.
International
?Favorable development on Europe Property and Special Risks,
?Unfavorable development on European Casualty & Financial Lines, notably Commercial Auto, Employers Liability, Directors & Officers, and Financial Institutions business.
Our analyses and conclusions about prior year reserves also help inform our judgments about the current accident year loss and loss adjustment expense ratios we selected.
For further details of prior year development by line of business, see Note 14 to the Consolidated Financial Statements. For a discussion of actuarial methods employed for major classes of business, see also Critical Accounting Estimates.
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:
Year Ended December 31, 2019 (in millions) Total 2018 2017 & Prior General Insurance North America: U.S. Workers' Compensation $ (442) $ 15 $ (457) U.S. Excess casualty 26 (1) 27 U.S. Other casualty 160 53 107 U.S. Financial lines 290 139 151 U.S. Property and special risks (187) 47 (234) U.S. Personal insurance (104) 13 (117) Other product lines 10 36 (26) Total General Insurance North America $ (247) $ 302 $
(549)
General Insurance International: UK/Europe casualty and financial lines $ 161 $ 46 $
115
UK/Europe property and special risks (108) 5
(113)
UK/Europe and Japan Personal insurance (119) (85)
(34)
Other product lines 19 (8)
27
Total General Insurance International $ (47) $ (42) $
(5)
Legacy Portfolio - Run-Off Lines - 48
(48)
Total prior year (favorable) unfavorable development $ (294) $ 308 $
(602)
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ITEM 7 | Insurance Reserves
Net Loss Development - 2018
During 2018, we recognized adverse prior year net loss reserve development of $362 million. This unfavorable development was primarily a result of the following:
?Unfavorable development inU.S. Excess Casualty, driven by the combination of construction Defect and construction wrap claims from accident year 2015 and prior where we reacted to significant increases in severity and longer claim reporting patterns, as well as higher than expected loss severity in accident years 2016 and 2017, which led to an increase in estimates for these accident years; ?Unfavorable development inU.S. Financial Lines, primarily from D&O and Employment Practices Liability (EPLI) policies covering Corporate and National Insureds as well as Private and Not-for-Profit insureds. This development was predominantly in accident years 2014-2017 and resulted largely from increases in severity as the frequency of class action lawsuits increased in those years. ?Favorable development inU.S. Commercial Property and Specialty Lines due to reductions in our estimates for 2017 Catastrophes and favorable development from the attritional losses in Commercial Property and Specialty.
?Unfavorable development in
?Adverse development in Financial Lines in
Net Loss Development - 2017
During 2017, we recognized unfavorable prior year loss reserve development of $978 million. This unfavorable development was primarily a result of the following:
?Unfavorable development inU.S. Excess Casualty andU.S. Other Casualty, driven primarily by increases in underlying severity and greater than expected emerging loss experience in accident year 2016 as well as increased development from claims related to construction defects and construction wrap business (largely from accident years 2006 and prior). ?Unfavorable development inU.S. Financial Lines, primarily from D&O policies covering privately owned and not-for-profit insureds. This development was predominantly in accident year 2016 and resulted largely from increases in bankruptcy-related claims and fiduciary liability claims for large educational institutions. ?Higher than expected losses for Europe Casualty and Financial Lines, including a significant increase in large claims activity in ourEurope long-tail business, with a large proportion emanating from accident year 2016. In addition, we increased our loss reserves as a result of the decision made by theUK Ministry of Justice to reduce the discount rate applied to lump-sum bodily injury payouts, known as theOgden rate.
?In addition, we also observed higher than expected losses in our Europe Property and Special Risks business driven by unexpected development on various large claims across the property, aviation, marine, and trade credit segments.
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.
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 ourU.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 underU.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 has provided a parental guarantee to secure NICO's obligations under the agreement.
For a description of AIG's catastrophe reinsurance protection for 2019, see Enterprise Risk Management - Insurance Risks -Natural Catastrophe Risk.
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ITEM 7 | Insurance Reserves
The table below shows the calculation of the deferred gain on the adverse development reinsurance agreement as of December 31, 2019 and 2018, showing the effect of discounting of loss reserves and amortization of the deferred gain.
December 31, December 31, December 31,
(in millions) 2019 2018 2017
Gross Covered Losses
Covered reserves before discount $ 19,064 $ 23,033 $ 26,654
Inception to date losses paid 22,954 19,331 14,788
Attachment point (25,000) (25,000) (25,000) Covered losses above attachment point $ 17,018 $ 17,364 $ 16,442
Deferred Gain Development Covered losses above attachment ceded to NICO (80%) $ 13,614 $ 13,891 $ 13,153 Consideration paid including interest (10,188) (10,188) (10,188) Pre-tax deferred gain before discount and amortization 3,426 3,703 2,965 Discount on ceded losses(a) (1,251) (1,719) (1,539) Pre-tax deferred gain before amortization 2,175 1,984 1,426 Inception to date amortization of deferred gain at inception (693) (461) (228) Inception to date amortization attributed to changes in deferred gain(b) (101) (141) (31) Deferred gain liability reflected in AIG's balance sheet $ 1,381 $
1,382 $ 1,167
(a)For the period from inception to December 31, 2019, 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:
Years Ended December 31, (in millions) 2019 2018
2017
Balance at beginning of year, net of discount $ 1,382 $ 1,167 $
-
Gain at inception - -
1,116
(Favorable) unfavorable prior year reserve development ceded to NICO(a) (277) 738
310
Amortization attributed to deferred gain at inception(b) (232) (233)
(228)
Amortization attributed to changes in deferred gain(c) 39 (110)
(31)
Changes in discount on ceded loss reserves 469 (180)
-
Balance at end of year, net of discount $ 1,381 $ 1,382 $
1,167
(a)Prior year reserve development ceded to NICO under the retroactive
reinsurance agreement is deferred under
(b)Represents amortization of the deferred gain recognized in APTI.
(c)Excluded from APTI and included in
The majority of the lines of business which experienced adverse prior year development have been subject to the adverse development reinsurance agreement. This agreement has resulted in lower capital charges for reserve risks at ourU.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 Enterprise Risk Management - Insurance Risks - Reinsurance Activities - Reinsurance Recoverable.
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 actuarial assumptions at least annually, generally in the third quarter. Assumption setting standards vary between investment-oriented products and traditional long-duration products.
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ITEM 7 | Insurance Reserves
Investment-oriented products
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 and other
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 updated assumptions, and any
resulting adjustment is included in income. Updating such assumptions may result
in acceleration of amortization in some products and deceleration of
amortization in other products.
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, 2019:
•We increased our reversion to the mean rates of return (gross of fees) to 3.62 percent from 2.92 percent for the Variable Annuity product line in Individual Retirement and to 3.29 percent from 1.90 percent for the Variable Annuity product line in Group Retirement primarily due to the recent strong returns in equity markets. Our separate account long-term asset growth rate assumption related to equity market performance remained unchanged at 7.0 percent; and •Our ultimate projected yields on invested assets changed on most annuity deposits with some increased by up to 9 basis points and others decreased by up to 34 basis points and lowered by up to 40 basis points on some 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 deferred annuity products and five years for life insurance products due to deferred annuities having a shorter duration than life products.
Traditional long-duration products
For long-duration traditional products discussed below, 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 2019, 2018 and 2017 are shown in the following tables.
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:
Years Ended December 31, (in millions) 2019 2018 2017 Life and Retirement: Individual Retirement Fixed Annuities $ 82 $ 40 $ 130 Variable and Indexed Annuities (145) (92) 112 Total Individual Retirement (63) (52) 242 Group Retirement (17) 17 13 Life Insurance (63) (63) 29 Institutional Markets - - - Total Life and Retirement (143) (98) 284 Legacy Life and Retirement Run-Off (30) (110)
(14)
Total increase (decrease) in adjusted pre-tax income from update of assumptions $ (173) $ (208) $ 270 126 AIG | 2019 Form 10-K
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ITEM 7 | Insurance Reserves
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:
Years Ended December 31, (in millions) 2019 2018 2017 Policy fees $ (32) $ (237) $ (2) Interest credited to policyholder account balances 19 - 49 Amortization of deferred policy acquisition costs 203 273 184 Policyholder benefits and losses incurred (363) (244) 39 Increase (decrease) in adjusted pre-tax income (173) (208) 270 Change in DAC related to net realized capital gains (losses) (17) 35 44 Net realized capital gains (losses) 180 (55) (246) Increase (decrease) in pre-tax income $ (10) $
(228) $ 68
In 2019, adjusted pre-tax income included a net unfavorable adjustment of $173 million, primarily in Index Annuities driven by an update to lapse assumptions, and in Life Insurance primarily due to methodology enhancements related to projected premium, certain riders and death benefit features, and reinsurance reserving. The unfavorable adjustments were partially offset by favorable updates to full surrender assumptions in Individual Retirement Fixed Annuities. In 2018, adjusted pre-tax income included a net unfavorable adjustment of $208 million, primarily in Variable Annuities driven by reductions to the GMWB full surrender assumption, in Life Insurance primarily due to strengthening of reserves for certain riders and interest crediting model refinements, and in Legacy Accident & Health Insurance loss recognition. 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 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 and Retirement Run-Off Lines.
The adjustments related to the update of actuarial assumptions in each period are discussed by segment below.
Update of Actuarial Assumptions by Segment
Individual Retirement
The update of actuarial assumptions resulted in net favorable (unfavorable) adjustments to adjusted pre-tax income of Individual Retirement of $(63) million, $(52) million and $242 million in 2019, 2018 and 2017, respectively.
In Fixed Annuities, the update of estimated gross profit assumptions resulted in
a net favorable adjustment of $82 million, $40 million and $130 million in 2019,
2018 and 2017, respectively, which reflected lower lapse assumptions including
the economic impact to competitor rate on the interest sensitive lapse
component, partially offset by lower interest spread assumptions.
In Variable and Index Annuities, the update of estimated gross profit
assumptions resulted in a net unfavorable adjustment of $145 million in 2019,
primarily due to lapse updates in Index Annuities and updated general account
earned rates on Variable Annuities. The unfavorable adjustments were partially
offset by updated lapse assumptions in Variable Annuities. In 2018, a net
unfavorable adjustment of $92 million primarily due to refinements to the
guaranteed benefit 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 guaranteed benefit lapse
assumptions in Variable Annuities. In 2017, a net favorable adjustment of $112
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 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.
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ITEM 7 | Insurance Reserves
Group Retirement
In Group Retirement, the update of estimated gross profit assumptions resulted
in an unfavorable adjustment of $17 million in 2019, primarily due to lapse
updates in Index Annuities and Variable Annuities. In 2018, a favorable
adjustment of $17 million was primarily due to improved premium persistency
assumptions. In 2017, a net favorable adjustment of $13 million was primarily
due to an increase in the reversion to the mean rate used for projecting future
estimated gross profit for variable annuity products and changes in maintenance
expense assumptions. The net 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 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 2019, primarily due to methodology
enhancements related to projected premium, certain riders and death benefit
features, and reinsurance reserving. The unfavorable adjustments were partially
offset by favorable adjustments driven by updates to mortality assumptions. In
2018, a net unfavorable adjustment of $63 million 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 2017, a net favorable adjustment of $29 million was primarily due
to improved mortality assumptions, partially offset by lower spread assumptions.
Legacy Portfolio
In the Legacy Portfolio, the update of actuarial assumptions resulted in a net unfavorable adjustment of $30 million in 2019, reflecting updates to loss recognition reserves and methodology enhancements for universal life insurance. In 2018, a net unfavorable adjustment of $110 million in 2018, primarily due to $105 million of loss recognition expense on accident and health business (other than long-term care) in the Legacy Life and Retirement Run-Off Lines resulting from assumption and model refinements. In 2017, a net unfavorable adjustment of $14 million was primarily due to $13 million of loss recognition expense on long-term care business in the Legacy Life and Retirement 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, Index Annuity and Universal Life Risk Management and Hedging Programs.
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 theU.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; theU.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
•The economic hedge target excludes the non-performance or "own credit" risk adjustment used in theU.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. 128 AIG | 2019 Form 10-K
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ITEM 7 | Insurance Reserves
Because the discount rate includes the NPA spread and other explicit risk
margins, the
For more information on our valuation methodology for embedded derivatives within policyholder contract deposits see Note 6 to the 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
December 31, December 31,
(in millions) 2019 2018
Reconciliation of embedded derivatives and economic hedge target: Embedded derivative liability $ 2,474 $ 1,943 Exclude non-performance risk adjustment (2,504)
(2,615)
Embedded derivative liability, excluding NPA 4,978
4,558
Adjustments for risk margins and differences in valuation (2,394)
(2,377)
Economic hedge target liability $ 2,584
$ 2,181
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, theU.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. AIG | 2019 Form 10-K 129
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ITEM 7 | Insurance Reserves
The following table presents the net increase (decrease) to consolidated pre-tax
income (loss) from changes in the fair value of the GMWB embedded derivatives
and related hedges, excluding related DAC amortization:
Years Ended December 31,
(in millions) 2019 2018 2017
Change in fair value of embedded derivatives, excluding update of actuarial assumptions and NPA $ (156) $ (244) $
1,423
Change in fair value of variable annuity hedging portfolio: Fixed maturity securities* 194 (154)
146
Interest rate derivative contracts 1,029 (470)
(70)
Equity derivative contracts (1,274) 312
(1,347)
Change in fair value of variable annuity hedging portfolio (51) (312)
(1,271)
Change in fair value of embedded derivatives excluding update of actuarial assumptions and NPA, net of hedging portfolio (207) (556)
152
Change in fair value of embedded derivatives due to NPA spread
(314) 388 (840)
Change in fair value of embedded derivatives due to change in NPA volume
202 280 (352)
Change in fair value of embedded derivatives due to update of actuarial assumptions
219 38 (188)
Total change due to update of actuarial assumptions and NPA
107 706 (1,380)
Net impact on pre-tax income (loss) $ (100) $ 150 $
(1,228)
By Consolidated Income Statement line Net investment income $ 194 $ (154) $
146
Net realized capital gains (losses) (294) 304
(1,374)
Net impact on pre-tax income (loss) $ (100) $ 150 $
(1,228)
* Beginning in July 2019, the fixed maturity securities portfolio used in the hedging program was rebalanced to reposition the portfolio from a duration, sector, and issuer perspective. As part of this rebalancing fixed maturity securities where we elected the fair value option were sold. Later in the quarter, as new fixed maturity securities were purchased they were classified as available for sale. The change in fair value of available-for-sale fixed maturity securities recognized as a component of other comprehensive income was $57 million for 2019. The net impact on pre-tax income from the GMWB embedded derivatives and related hedges in 2019 (excluding related DAC amortization) was driven by tightening of credits spreads on the NPA spread, and impact of lower interest rates on the change in the fair value of embedded derivatives excluding NPA, net of the hedging portfolio, offset by impact of lower interest rates that resulted in NPA volume gains from higher expected GMWB payments, and gains from the review and update of actuarial assumptions. In 2018, the net impact on pre-tax income was primarily driven by gains from the impact of widening credit spreads on the NPA spread, and higher interest rates, partially offset by losses from the impact of the change in credit spreads and the move from an economic to aU.S. GAAP discount basis. In 2017, the net impact on pre-tax income 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 2019 reflected losses from decreases in interest rates and tightening crediting spreads, offset by gains from higher equity markets. The change in the fair value of the GMWB embedded derivatives, excluding NPA and update of actuarial assumptions, in 2018 reflected losses from lower equity markets and the impact of moving from an economic to a GAAP discount basis, offset by increases in interest rates and widening credit spreads. In 2018, the hedge losses were driven by losses from higher interest rates and widening credit spreads, offset by gains from lower equity markets. In 2017, the change in the fair value of embedded derivatives, excluding update of actuarial assumptions and NPA, 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 aU.S. GAAP basis, due to the NPA and other risk margins used forU.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 increase in the economic hedge target liability in 2019 was primarily due to lower interest rates, offset by higher equity markets and gains from the review and update of actuarial assumptions. The decrease in the economic hedge target liability in 2018 was primarily due to higher interest rates and widening of credit spreads, offset by lower equity markets.
130 AIG | 2019 Form 10-K
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ITEM 7 | Insurance Reserves
Change in Fair Value of the Hedging Portfolio
The changes in the fair value of the economic hedge target and, to a lesser
extent, the embedded derivative valuation under
?Changes in the fair value of fixed maturity securities, primarily corporate bonds, are used as a capital-efficient way to economically hedge interest rate and credit spread-related risk. Beginning in July 2019, the change in the fair value of available-for-sale hedging bonds is reported as a component of comprehensive income in the Condensed Consolidated Statements of Comprehensive Income (Loss). Prior to July 2019, the change in the fair value of the hedging bonds, which was excluded from the adjusted pre-tax income of the Individual Retirement and Group Retirement segments, was reported in net investment income on the Consolidated Statements of Income (Loss). The change in the fair value of the corporate bond hedging program in 2019 reflected gains due to decreases in interest rates, and tightening credit spreads. The net losses in 2018 reflected the impact of increases in interest rates, and widening of credit spreads. The net gains in 2017 were primarily due to tightening of credit spreads. ?Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions and futures, resulted in gains driven by lower interest rates in 2019 compared to losses in the prior year, which was driven by higher interest rates. The small net loss in 2017 reflected increases in rates in the latter half of 2017, partially offset by the impact of interest rate declines in the first half of 2017. ?The change in the fair value of equity derivative contracts, which included futures and options, reflected losses in 2019, gains in 2018 and losses in 2017, 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: Years Ended December 31, (in millions) 2019 2018 2017 Balance, beginning of year $ 9,046 $ 7,585 $ 7,551 Acquisition costs deferred 1,180 1,129 938
Amortization expense: Update of assumptions included in adjusted pre-tax income
203 307 194
Related to realized capital gains and losses 51 5
293
All other operating amortization (853) (987)
(937)
Increase (decrease) in DAC due to foreign exchange 18 (22)
26
Change related to unrealized depreciation (appreciation) of investments (1,744) 1,029 (480) Balance, end of year* $ 7,901 $ 9,046 $ 7,585
*DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $10.0 billion, $9.3 billion and $8.9 billion at December 31, 2019, 2018 and 2017, respectively.
The net adjustments to DAC amortization from the update of actuarial assumptions
for estimated gross profits, including those reported within change in DAC
related to net realized capital gains (losses), represented two percent, four
percent and two percent of the DAC balance excluding the amount related to
unrealized depreciation (appreciation) of investments as of December 31, 2019,
2018 and 2017, respectively.
Reversion to the Mean
The reversion to the mean rate is updated quarterly based on market returns and
can change dramatically in periods where market returns move significantly. The
five-year reversion to the mean period did not meet the criteria for adjustment
in 2019 which would have otherwise required a reset of the start date used in
the calculation of the average gross long-term return rate. The long-term growth
assumption used in our reversion to the mean methodology remained unchanged at
7.0 percent in 2019 and 2018.
In 2017, we updated the long-term annual growth assumption applied to subsequent
periods used in our reversion to the mean methodology for estimating future
estimated gross profits for variable annuity products, from 7.5 percent to 7.0
percent (before expenses that reduce the asset base from which future fees are
projected). The five-year reversion to the mean period met the criteria for
adjustment in 2017. As a result, the average gross long-term return measurement
start date was reset to December 31, 2011 for Individual Retirement and June 30,
2013 for Group Retirement; the reversion to the mean rates (gross of fees) were
increased to 3.74 percent in Individual Retirement and 3.78 percent in Group
Retirement. Sustained favorable equity market performance in excess of long-term
assumptions could result in additional unlocking in the Individual Retirement or
Group Retirement variable annuity product lines in the future, with a positive
effect on pre-tax income in the period of the unlocking.
AIG | 2019 Form 10-K 131
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ITEM 7 | Insurance Reserves
For additional discussion of assumptions related to our reversion to the mean methodology see Critical Accounting Estimates - Estimated Gross Profits for Investment-Oriented Products.
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 decreased in 2019, which drove a $12.6 billion increase in the unrealized appreciation of fixed maturity securities held to support businesses in the Life and Retirement companies at December 31, 2019 compared to December 31, 2018. At December 31, 2019, the shadow Investment-Oriented Adjustments reflected decreases in DAC and unearned revenues and an increase in future policy benefit liabilities compared to December 31, 2018, while the shadow Loss Adjustments reflected an increase in future policy benefit liabilities.
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: Years Ended December 31, (in millions) 2019 2018 2017 Individual Retirement Balance at beginning of year, gross $ 132,729 $ 138,571 $ 129,321 Premiums and deposits 14,899 15,621 11,906 Surrenders and withdrawals (13,161) (14,081) (10,943) Death and other contract benefits (3,204) (3,316)
(3,089)
Subtotal (1,466) (1,776)
(2,126)
Change in fair value of underlying assets and reserve accretion, net of policy fees 11,491 (5,302) 10,098 Cost of funds* 1,666 1,540 1,528 Other reserve changes 508 (304) (250) Balance at end of year 144,928 132,729 138,571 Reinsurance ceded (308) (318) (322)
Total Individual Retirement insurance reserves and mutual fund assets
$ 144,620 $ 132,411 $ 138,249
Group Retirement
Balance at beginning of year, gross $ 91,685 $ 97,306 $ 88,622
Premiums and deposits 8,346 8,639 7,550
Surrenders and withdrawals (10,317) (10,652) (8,019)
Death and other contract benefits (675) (606) (562)
Subtotal (2,646) (2,619)
(1,031)
Change in fair value of underlying assets and reserve accretion, net of policy fees 11,939 (4,106) 8,617 Cost of funds* 1,128 1,106 1,098 Other reserve changes (57) (2) - Balance at end of year 102,049 91,685 97,306 Total Group Retirement insurance reserves and mutual fund assets $ 102,049 $ 91,685 $ 97,306 132 AIG | 2019 Form 10-K
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ITEM 7 | Insurance Reserves
Life Insurance
Balance at beginning of year, gross $ 19,719 $ 19,424 $ 18,397
Premiums and deposits 3,737 3,559 3,484
Surrenders and withdrawals (575) (943) (569)
Death and other contract benefits (524) (465) (575)
Subtotal 2,638 2,151
2,340
Change in fair value of underlying assets and reserve accretion, net of policy fees (1,138) (1,124) (889) Cost of funds* 370 374 376 Other reserve changes 507 (1,106) (800) Balance at end of year 22,096 19,719 19,424 Reinsurance ceded (1,150) (1,216) (1,055) Total Life Insurance reserves $ 20,946 $ 18,503 $ 18,369 Institutional Markets Balance at beginning of year, gross $ 19,839 $ 18,580 $ 15,385 Premiums and deposits 2,758 3,032 4,247 Surrenders and withdrawals (913) (1,745) (1,291) Death and other contract benefits (1,102) (655)
(343)
Subtotal 743 632
2,613
Change in fair value of underlying assets and reserve accretion, net of policy fees 605 179 245 Cost of funds* 353 338 253 Other reserve changes 48 110 84 Balance at end of year 21,588 19,839 18,580 Reinsurance ceded (43) (43) (3) Total Institutional Markets reserves $ 21,545 $ 19,796 $ 18,577 Total insurance reserves and mutual fund assets Balance at beginning of year, gross $ 263,972 $ 273,881 $ 251,725 Premiums and deposits 29,740 30,851 27,187 Surrenders and withdrawals (24,966) (27,421) (20,822) Death and other contract benefits (5,505) (5,042)
(4,569)
Subtotal (731) (1,612)
1,796
Change in fair value of underlying assets and reserve accretion, net of policy fees 22,897 (10,353) 18,071 Cost of funds* 3,517 3,358 3,255 Other reserve changes 1,006 (1,302) (966) Balance at end of year 290,661 263,972 273,881 Reinsurance ceded (1,501) (1,577) (1,380)
Total insurance reserves and mutual fund assets $ 289,160 $ 262,395 $ 272,501
*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:
December 31, December 31,
(in millions) 2019 2018
Future policy benefits $ 17,963 $ 14,739
Policyholder contract deposits 147,545 137,718
Other policy funds 271
295
Separate account liabilities 91,222 79,960 Total insurance reserves* 257,001 232,712 Mutual fund assets 33,660 31,260
Total insurance reserves and mutual fund assets $ 290,661 $ 263,972
*Excludes reserves related to the Legacy Portfolio.
AIG | 2019 Form 10-K 133
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ITEM 7 | Liquidity and Capital Resources
Liquidity and Capital Resources
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations. It is defined as cash and unencumbered assets that can be monetized in a short period of time at a reasonable cost. We endeavor to manage our liquidity prudently through various risk committees, policies and procedures, and a stress testing and liquidity risk framework established by ourTreasury 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 Enterprise Risk Management - Risk Appetite, Limits, Identification, and Measurement 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, issuing preferred stock, paying dividends to our shareholders and AIG Common Stock and/or warrant repurchases. 134 AIG | 2019 Form 10-K
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ITEM 7 | Liquidity and Capital Resources
LIQUIDITY AND CAPITAL RESOURCES HIGHLIGHTS
Sources
AIG Parent Funding from Subsidiaries
During 2019, AIG Parent received $3.8 billion in dividends from subsidiaries. Of
this amount, $2.2 billion consisted of dividends in the form of cash and fixed
maturity securities from our General Insurance companies and $1.6 billion
consisted of dividends and loan repayments in the form of cash from our Life and
Retirement companies.
AIG Parent also received a net amount of $1.2 billion in tax sharing payments in
the form of cash and fixed maturity securities from our insurance businesses in
2019, including $134 million of such payments in the fourth quarter of 2019. The
tax sharing payments may be subject to further adjustment in future periods.
Preferred Stock Issuance
In March 2019, we issued 20,000 shares of Series A Preferred Stock, with a par
value of $5.00 per share and a liquidation preference of $25,000 per share, for
net proceeds of approximately $485 million.
Debt Issuance
In March 2019, we issued $600 million aggregate principal amount of 4.250% Notes
Due 2029.
Uses
Debt Reduction*
We made repurchases of and repayments on debt instruments of approximately $3.3
billion during 2019, including the repayment of $1.0 billion aggregate principal
amount of our 2.300% Notes Due 2019. AIG Parent made interest payments on our
debt instruments totaling $941 million during 2019.
Dividend
We paid a cash dividend of $369.6875 per share, $365.625 per share and $365.625
per share on AIG's Series A Preferred Stock during the second, third and fourth
quarters of 2019, respectively, totaling $22 million.
We paid a cash dividend of $0.32 per share on AIG Common Stock during each
quarter of 2019 totaling $1.1 billion.
AIG Parent Funding to Subsidiaries
In February 2019, AIG Parent made a capital contribution of $300 million to our
General Insurance companies.
*On February 13, 2020, AIG announced that it will redeem all of its outstanding
4.35% Callable Notes Due 2045 (the Notes) on March 20, 2020, for a redemption
price of 100% of the principal amount plus accrued and unpaid interest. As of
February 13, 2020, $350 million aggregate principal amount of the Notes were
outstanding.
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ITEM 7 | Liquidity and Capital Resources
Analysis of Sources and Uses of Cash
The following table presents selected data from AIG's Consolidated Statements of Cash Flows: Years Ended December 31, (in millions) 2019 2018 2017 Sources: Net cash provided by operating activities $ - $ 61 $ - Net cash provided by other investing activities - 5,494
14,041
Changes in policyholder contract balances 4,751 6,179
2,123
Issuance of long-term debt and debt of consolidated investment entities 3,881 4,734
3,356
Issuance of preferred stock, net of issuance costs 485 -
-
Net cash provided by other financing activities 1,600 -
-
Total sources 10,717 16,468
19,520
Uses:
Net cash used in operating activities (928) -
(7,818)
Acquisition of businesses, net of cash and restricted cash acquired - (5,717)
-
Net cash used in other investing activities (5,475) -
-
Repayments of long-term debt and debt of consolidated investment entities (3,202) (3,672)
(3,698)
Purchase of common stock - (1,739)
(6,275)
Dividends paid on preferred stock (22) -
-
Dividends paid on common stock (1,114) (1,138)
(1,172)
Purchases of warrants - (11)
(3)
Net cash used in other financing activities - (3,559)
(28)
Total uses (10,741) (15,836)
(18,994)
Effect of exchange rate changes on cash and restricted cash 16 (11)
(29)
Increase (decrease) in cash and restricted cash $ (8) $ 621 $ 497
The following table presents a summary of AIG's Consolidated Statement of Cash Flows: Years Ended December 31, (in millions) 2019 2018 2017 Summary: Net cash provided by (used in) operating activities $ (928) $ 61 $ (7,818) Net cash provided by (used in) investing activities (5,475) (223)
14,041
Net cash provided by (used in) financing activities 6,379 794
(5,697)
Effect of exchange rate changes on cash and restricted cash 16 (11)
(29)
Net Increase (decrease) in cash and restricted cash (8) 621
497
Cash and restricted cash at beginning of year 3,358 2,737
2,107
Change in cash of businesses held for sale (63) -
133
Cash and restricted cash at end of year $ 3,287 $ 3,358
$ 2,737
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 $1.3 billion in 2019 compared to $1.3 billion in 2018 and $1.2 billion in 2017. Excluding interest payments, AIG had operating cash inflows of $399 million in 2019 compared to operating cash inflows of $1.4 billion in 2018 and operating cash outflows of $6.6 billion in 2017. The operating cash outflows in 2017 were primarily due to payment for the adverse development reinsurance agreement entered into with NICO.
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ITEM 7 | Liquidity and Capital Resources
Investing Cash Flow Activities
Net cash used in investing activities in 2019 was $5.5 billion compared to net cash used in investing activities of $0.2 billion in 2018 and net cash provided by investing activities of $14.0 billion in 2017. Net cash used in investing activities in 2018 included our acquisition ofValidus for approximately $5.5 billion in cash. Net cash provided by investing activities in 2017 primarily 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 2019 reflected:
•approximately $1.1 billion in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each quarter of 2019;
•approximately $22 million to pay a dividend of $369.6875 per share, $365.625 per share and $365.625 per share on AIG's Series A Preferred Stock in the second, third and fourth quarters of 2019, respectively;
•approximately $679 million in net inflows from the issuance and repayment of long-term debt and debt of consolidated investment entities; and
•approximately $485 million inflow from the issuance of preferred stock.
Net cash used in financing activities in 2018 reflected:
•approximately $1.1 billion in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each quarter of 2018;
•approximately $1.7 billion to repurchase approximately 36.5 million shares of AIG Common Stock; and
•approximately $1.1 billion in net inflows from the issuance and repayment of long-term debt and debt of consolidated investment entities.
Net cash used in financing activities in 2017 included:
•approximately $1.2 billion in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each quarter of 2017;
•approximately $6.3 billion to repurchase approximately 100 million shares of AIG Common Stock; and
•approximately $342 million in net outflows from the issuance and repayment of long-term debt and debt of consolidated investment entities.
Liquidity and Capital Resources of AIG Parent and Subsidiaries
AIG Parent
As of December 31, 2019, AIG Parent had approximately $12.1 billion in liquidity sources. AIG Parent's liquidity sources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities and also include a committed, revolving syndicated credit facility. Fixed maturity securities primarily includeU.S. government and government sponsored entity securities,U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities. AIG Parent actively manages its assets and liabilities in terms of products, counterparties and duration. Based upon an assessment of funding needs, the liquidity sources can be readily monetized through sales or repurchase agreements or contributed as admitted assets to regulated insurance companies. AIG Parent liquidity is monitored through the use of various internal liquidity risk measures. AIG Parent's primary sources of liquidity are dividends, distributions, loans and other payments from subsidiaries and credit facilities. AIG Parent's primary uses of liquidity are for debt service, capital and liability management, and operating expenses. We believe that we have sufficient liquidity and capital resources to satisfy our reasonably foreseeable future requirements and meet our obligations to our creditors, debt-holders and insurance company subsidiaries. We expect to access the debt and preferred equity markets from time to time to meet funding requirements as needed. We utilize our capital resources to support our businesses, with the majority of capital allocated to our insurance operations. Should we have or generate more capital than is needed to support our business strategies (including organic growth or acquisition opportunities) or mitigate risks inherent to our business, we may develop plans to distribute such capital to shareholders via dividends or AIG Common Stock repurchase authorizations or deploy such capital towards liability management. In the normal course, it is expected that a portion of the capital released by our insurance operations, by our other operations or through the utilization of AIG's deferred tax assets may be available to support our business strategies, for distribution to shareholders or for liability management. AIG | 2019 Form 10-K 137
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ITEM 7 | Liquidity and Capital Resources
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.
The following table presents AIG Parent's liquidity sources:
As of As of
December 31, December 31,
(in millions) 2019 2018
Cash and short-term investments(a) $ 2,804 $ 626
Unencumbered fixed maturity securities(b) 4,777
3,168
Total AIG Parent liquidity 7,581
3,794
Available capacity under committed, syndicated credit facility(c) 4,500
4,500
Total AIG Parent liquidity sources $ 12,081 $
8,294
(a)Cash and short-term investments include reverse repurchase agreements totaling $2.1 billion and $22 million as of December 31, 2019 and 2018, respectively.
(b)Unencumbered securities consist of publicly traded, investment grade rated
fixed maturity securities. Fixed maturity securities primarily include
(c)For additional information relating to this committed, syndicated credit facility see Credit Facilities below.
Insurance Companies
We expect that our insurance companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Our insurance companies' liquidity resources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities. Each of our material insurance companies' liquidity is monitored through various internal liquidity risk measures. The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income and maturities. The primary uses of liquidity are paid losses, reinsurance payments, benefit claims, surrenders, withdrawals, interest payments, dividends, expenses, investment purchases and collateral requirements. Our General Insurance companies may require additional funding to meet capital or liquidity needs under certain circumstances. Large catastrophes may require us to provide additional support to our affected operations. Downgrades in our credit ratings could put pressure on the insurer financial strength ratings of our subsidiaries, which could result in non-renewals or cancellations by policyholders and adversely affect a subsidiary's ability to meet its own obligations. Increases in market interest rates may adversely affect the financial strength ratings of our subsidiaries, as rating agency capital models may reduce the amount of available capital relative to required capital. 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 ourU.S. insurance companies are members of the FHLBs in their respective districts. Borrowings from FHLBs are used to supplement liquidity or for other uses deemed appropriate by management. OurU.S. General Insurance companies had no outstanding borrowings from FHLBs at December 31, 2019 and aggregate outstanding borrowings of approximately $115 million at December 31, 2018. OurU.S. Life and Retirement companies had $3.5 billion and $3.4 billion which were due to FHLBs in their respective districts at December 31, 2019 and 2018, respectively, under funding agreements issued through our Individual Retirement, Group Retirement and Institutional Markets operating segments, which were reported in Policyholder contract deposits. In addition, ourU.S. Life and Retirement companies had no outstanding borrowings in the form of cash advances from FHLBs at both December 31, 2019 and 2018.
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ITEM 7 | Liquidity and Capital Resources
Certain of our U.S. Life and Retirement companies have programs, which began in
2012, that lend securities from their investment portfolio to supplement
liquidity or for other uses as deemed appropriate by management. Under these
programs, these U.S. Life and Retirement companies lend securities to financial
institutions and receive cash as collateral equal to 102 percent of the fair
value of the loaned securities. Cash collateral received is invested in
short-term investments or partially used for short-term liquidity purposes.
Additionally, the aggregate amount of securities that a Life and Retirement
company is able to lend under its program at any time is limited to five percent
of its general account statutory-basis admitted assets. Our U.S. Life and
Retirement companies had $2.8 billion and $884 million of securities subject to
these agreements at December 31, 2019 and 2018, respectively, and $2.9 billion
and $904 million of liabilities to borrowers for collateral received at December
31, 2019 and 2018, respectively.
AIG generally manages capital between AIG Parent and our insurance companies
through internal, Board-approved policies and limits, as well as management
standards. In addition, AIG Parent has unconditional capital maintenance
agreements (CMAs) in place with certain subsidiaries. Nevertheless, regulatory
and other legal restrictions could limit our ability to transfer capital freely,
either to or from our subsidiaries.
In February 2018, AIG Parent entered into a CMA with Fortitude Re. Among other
things, the CMA provides that AIG Parent will maintain available statutory
capital and surplus in each of Fortitude Re's long term business fund and
general business account at or above a stress threshold percentage of its
projected enhanced capital requirement in respect of the applicable fund, as
defined under Bermuda law. As of December 31, 2019, the stress threshold
percentage under this CMA was 125 percent.
AIG Parent and/or certain subsidiaries are parties to several letter of credit
agreements with various financial institutions, which issue letters of credit
from time to time in support of our insurance companies. These letters of credit
are subject to reimbursement by AIG Parent and/or certain subsidiaries in the
event of a drawdown by our insurance companies. Letters of credit issued in
support of the General Insurance companies totaled approximately $3.9 billion at
December 31, 2019. Letters of credit issued in support of the Life and
Retirement companies totaled approximately $859 million at December 31, 2019.
Letters of credit issued in support of Fortitude Re totaled $550 million at
December 31, 2019.
In 2019, our General Insurance companies collectively paid a total of
approximately $2.2 billion in dividends in the form of cash and fixed maturity
securities to AIG Parent. The fixed maturity securities primarily included U.S.
agency mortgage-backed securities, municipal bonds and certain other highly
rated securities.
In 2019, our Life and Retirement companies collectively paid a total of approximately $1.6 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 payment(s) or prepayment(s), one or more of which could be made as early as the first quarter of 2020.
For additional information regarding this matter see Note 23 to the Consolidated Financial Statements.
Credit Facilities
We maintain a committed, revolving syndicated credit facility (the Facility) as
a potential source of liquidity for general corporate purposes. The Facility
provides for aggregate commitments by the bank syndicate to provide unsecured
revolving loans and/or standby letters of credit of up to $4.5 billion without
any limits on the type of borrowings and is scheduled to expire in June 2022.
As of December 31, 2019, 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.
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ITEM 7 | Liquidity and Capital Resources
Contractual Obligations
The following table summarizes contractual obligations in total, and by
remaining maturity:
December 31, 2019 Payments due by Period
Total 2021 - 2023 -
(in millions) Payments 2020 2022 2024 Thereafter
Insurance operations
Loss reserves(a) $ 81,128 $ 21,601 $ 22,194 $ 11,670 $ 25,663
Insurance and investment
contract liabilities 264,409 16,649 32,988 30,099 184,673
Borrowings 1,340 119 225 - 996
Interest payments on
borrowings 803 50 99 99 555
Operating leases 733 196 244 136 157
Other long-term obligations - - - - -
Total $ 348,413 $ 38,615 $ 55,750 $ 42,004 $ 212,044
Other
Borrowings $ 24,092 $ 1,380 $ 3,210 $ 2,868 $ 16,634
Interest payments on
borrowings 14,347 1,040 1,838 1,617 9,852
Operating leases 631 54 98 75 404
Other long-term obligations 439 132 185 97 25
Total $ 39,509 $ 2,606 $ 5,331 $ 4,657 $ 26,915
Consolidated
Loss reserves(a) $ 81,128 $ 21,601 $ 22,194 $ 11,670 $ 25,663
Insurance and investment
contract liabilities 264,409 16,649 32,988 30,099 184,673
Borrowings 25,432 1,499 3,435 2,868 17,630
Interest payments on
borrowings 15,150 1,090 1,937 1,716 10,407
Operating leases(b) 1,364 250 342 211 561
Other long-term
obligations(c) 439 132 185 97 25
Total(d) $ 387,922 $ 41,221 $ 61,081 $ 46,661 $ 238,959
(a)Represents loss reserves, undiscounted and gross of reinsurance.
(b)The company also procured additional office space via operating lease contracts for which lease commencement will occur in 2020. Future undiscounted obligations stemming from those contracts total $507 million, which excludes the effect of renewal options.
(c)Primarily includes contracts to purchase future services and other capital expenditures.
(d)Does not reflect unrecognized tax benefits of $4.8 billion. See Note 23 to the Consolidated Financial Statements for additional information.
Loss Reserves
Loss reserves relate to our General Insurance companies and represent estimates of future loss and loss adjustment expense payments based on historical loss development payment patterns. Due to the significance of the assumptions used, the payments by period presented above could be materially different from actual required payments. We believe that our General Insurance companies maintain adequate financial resources to meet the actual required payments under these obligations.
Insurance and Investment Contract Liabilities
Insurance and investment contract liabilities, including GIC liabilities, relate to our Life and Retirement companies. These liabilities include various investment-type products with contractually scheduled maturities, including periodic payments. These liabilities also include benefit and claim liabilities, of which a significant portion represents policies and contracts that do not have stated contractual maturity dates and may not result in any future payment obligations. For these policies and contracts (i) we are not currently making payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or (iii) payment may occur due to a surrender or other non-scheduled event beyond our control. We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits. These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts presented could be materially different from actual required payments. The amounts presented in this table are undiscounted and exceed the future policy benefits and policyholder contract deposits included in the Consolidated Balance Sheets. 140 AIG | 2019 Form 10-K
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ITEM 7 | Liquidity and Capital Resources
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.
Borrowings
Our borrowings exclude those incurred by consolidated investments and include hybrid financial instrument liabilities recorded at fair value. We expect to repay the long-term debt maturities and interest accrued on borrowings by AIG through maturing investments and dispositions of invested assets, future cash flows from operations, cash flows generated from invested assets, future debt or preferred stock issuance and other financing arrangements. Borrowings supported by assets of AIG include various notes and bonds payable as well as GIAs that are supported by cash and investments held by AIG Parent and certain non-insurance subsidiaries for the repayment of those obligations.
Off-Balance Sheet Arrangements and Commercial Commitments
The following table summarizes Off-Balance Sheet Arrangements and Commercial Commitments in total, and by remaining maturity:
December 31, 2019 Amount of Commitment Expiring
Total Amounts 2021 - 2023 -
(in millions) Committed 2020 2022 2024 Thereafter
Insurance operations
Guarantees:
Standby letters of credit $ 271 $ 252 $ 8 $ - $ 11
Guarantees of indebtedness 67 53 14 - -
All other guarantees(a) 28 9 19 - -
Commitments:
Investment commitments(b) 7,186 2,676 3,182 1,173 155
Commitments to extend credit 3,817 1,177 1,488 851 301
Letters of credit 3 3 - - -
Total(c) $ 11,372 $ 4,170 $ 4,711 $ 2,024 $ 467
Other
Guarantees:
Liquidity facilities(d) $ 74 $ - $ - $ - $ 74
Standby letters of credit 82 82 - - -
All other guarantees 407 407 - - -
Commitments:
Investment commitments(b) 175 49 71 29 26
Commitments to extend credit - - - - -
Letters of credit 11 11 - - -
Total(c)(e) $ 749 $ 549 $ 71 $ 29 $ 100
Consolidated
Guarantees:
Liquidity facilities(d) $ 74 $ - $ - $ - $ 74
Standby letters of credit 353 334 8 - 11
Guarantees of indebtedness 67 53 14 - -
All other guarantees(a) 435 416 19 - -
Commitments:
Investment commitments(b) 7,361 2,725 3,253 1,202 181
Commitments to extend credit 3,817 1,177 1,488 851 301
Letters of credit 14 14 - - -
Total(c)(e) $ 12,121 $ 4,719 $ 4,782 $ 2,053 $ 567
(a)Excludes potential amounts for indemnification obligations included in asset
sales agreements. For further information on indemnification obligations see
Note 17 to the Consolidated Financial Statements.
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ITEM 7 | Liquidity and Capital Resources
(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 annual pension contribution for 2020 is expected to be approximately $65 million for U.S. and non-U.S. plans.
Arrangements with Variable Interest Entities
We enter into various arrangements with variable interest entities (VIEs) in the normal course of business, and we consolidate a VIE when we are the primary beneficiary of the entity.
For a further discussion of our involvement with VIEs see Note 11 to the 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 17 to the Consolidated Financial Statements.
We have recorded liabilities for certain of these arrangements where it is possible to estimate them. These liabilities are not material in the aggregate. We are unable to develop a reasonable estimate of the maximum potential payout under some of these arrangements. Overall, we believe that it is unlikely we will have to make any material payments under these arrangements.
Debt
The following table provides the rollforward of AIG's total debt outstanding:
Balance at Maturities Effect of Balance at
Year Ended December 31, 2019 December 31, and Foreign Other December 31,
(in millions) 2018 Issuances Repayments Exchange Changes 2019
Debt issued or guaranteed by
AIG:
AIG general borrowings:
Notes and bonds payable $ 20,853 $ 595 $ (1,000) $ (14) $ 33 $ 20,467
Junior subordinated debt 1,548 - (6) (1) 1 1,542
AIG Japan Holdings Kabushiki
Kaisha 331 - - 13 - 344
AIGLH notes and bonds
payable 282 - - - - 282
AIGLH junior subordinated
debt 361 - - - - 361
Validus notes and bonds
payable 359 - - - (6) 353Total AIG general borrowings 23,734 595 (1,006)
(2) 28 23,349 AIG borrowings supported by assets:(a) Series AIGFP matched notes and bonds payable 21 - - - - 21 GIAs, at fair value 2,164 135 (467) - 171 (b) 2,003 Notes and bonds payable, at fair value 49 - (3) - 13 (b) 59 Total AIG borrowings supported by assets 2,234 135 (470) - 184 2,083 Total debt issued or guaranteed by AIG 25,968 730 (1,476) (2) 212 25,432 Other subsidiaries' notes, bonds, loans and mortgages payable - not guaranteed by AIG(c) 168 4 (126) - 1 47 Total long-term debt 26,136 734 (1,602) (2) 213 25,479 Debt of consolidated investment entities - not guaranteed by AIG(d) 8,404 3,147 (1,698) 12 6 (e) 9,871 Total debt $ 34,540 $ 3,881 $ (3,300) $ 10 $ 219 $ 35,350
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ITEM 7 | Liquidity and Capital Resources
(a)AIG Parent guarantees all such debt, except for Series AIGFP matched notes
and bonds payable, which are direct obligations of AIG Parent. Collateral posted
to third parties was $1.5 billion at both December 31, 2019 and December 31,
2018. 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 December 31, 2019, includes debt of consolidated investment entities related to real estate investments of $3.2 billion, affordable housing partnership investments of $2.1 billion and other securitization vehicles of $4.6 billion. At December 31, 2018, includes debt of consolidated investment entities related to real estate investments of $3.7 billion, affordable housing partnership investments of $1.8 billion and other securitization vehicles of $2.9 billion.
(e)Includes the effect of consolidating previously unconsolidated partnerships and the effect of deconsolidating previously consolidated partnerships.
TOTAL DEBT OUTSTANDING
(in millions)
[[Image Removed: Chart 1]]
Debt Maturities
The following table summarizes maturing debt at December 31, 2019 of AIG
(excluding $9.9 billion of borrowings of consolidated investment entities) for
the next four quarters:
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in millions) 2020 2020 2020 2020 Total
AIG general borrowings $ 119 $ - $ 638 $ 708 $ 1,465
AIG borrowings supported by assets 1 12 18 3 34
Other subsidiaries' notes, bonds, loans and
mortgages payable 36 - 1 - 37
Total $ 156 $ 12 $ 657 $ 711 $ 1,536
See Note 16 to the Consolidated Financial Statements for additional details on
debt outstanding.
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ITEM 7 | Liquidity and Capital Resources
Credit Ratings
Credit ratings estimate a company's ability to meet its obligations and may directly affect the cost and availability of financing to that company. The following table presents the credit ratings of AIG and certain of its subsidiaries as of the date of this filing. Figures in parentheses indicate the relative ranking of the ratings within the agency's rating categories; that ranking refers only to the major rating category and not to the modifiers assigned by the rating agencies.
Short-Term Debt Senior Long-Term Debt
Moody's S&P Moody's(a) S&P(b) Fitch(c)
American International A-2 (2nd Baa 1 (4th
Group, Inc. P-2 (2nd of 3) of 8) of 9) BBB+ (4th of 9) BBB+ (4th of 9)
Stable
Stable Outlook Outlook Stable Outlook Negative Outlook
AIG Financial Products
Corp.(d) P-2 A-2 Baa 1 BBB+ -
Stable
Stable Outlook Outlook Stable Outlook
(a)Moody's appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within the rating categories.
(b)S&P ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(c)Fitch ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(d)AIG guarantees all obligations of AIG Financial Products Corp.
These credit ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at our request.
We are party to some agreements that contain "ratings triggers." Depending on the ratings maintained by one or more rating agencies, these triggers could result in (i) the termination or limitation of credit availability or a requirement for accelerated repayment, (ii) the termination of business contracts or (iii) a requirement to post collateral for the benefit of counterparties.
In the event of a downgrade of AIG's long-term senior debt ratings, AIGFP and certain other AIG entities would be required to post additional collateral under some derivative and other transactions, or certain of the counterparties of AIGFP or of such other AIG entities would be permitted to terminate such transactions early. 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 12 to the Consolidated Financial Statements and Part I, Item 1A. Risk Factors - Liquidity, Capital and Credit.
FINANCIAL STRENGTH Ratings
Financial Strength ratings estimate an insurance company's ability to pay its
obligations under an insurance policy. The following table presents the ratings
of our significant insurance subsidiaries as of the date of this filing.
A.M. Best S&P Fitch Moody's
National Union Fire Insurance Company of Pittsburgh, Pa. A A+ A
A2
Lexington Insurance Company A A+ A
A2
American Home Assurance Company (U.S.) A A+ A A2 American General Life Insurance Company A A+ A+ A2 The Variable Annuity Life Insurance Company A A+ A+
A2
United States Life Insurance Company in the City of New York A A+ A+
A2
AIG Europe S.A. NR A+ NR
A2
American International Group UK Ltd. A A+ NR A2 AIG General Insurance Co. Ltd.
NR A+ NR NR
Validus Reinsurance, Ltd. A A NR 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 12 to the Consolidated Financial Statements and Part I, Item 1A. Risk
Factors - Liquidity, Capital and Credit.
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ITEM 7 | Liquidity and Capital Resources
Regulation and Supervision
For a discussion of our regulation and supervision by different regulatory authorities in the United States and abroad, including with respect to our liquidity and capital resources see Item 1. Business - Regulation and Item 1A. Risk Factors - Regulation.
Dividends On February 13, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 29, 2019 to shareholders of record on March 15, 2019. On May 6, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on June 28, 2019 to shareholders of record on June 14, 2019. On August 7, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on September 30, 2019 to shareholders of record on September 17, 2019. On October 31, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on December 26, 2019 to shareholders of record on December 12, 2019. On February 12, 2020, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 30, 2020 to shareholders of record on March 16, 2020. On May 21, 2019, our Board of Directors declared a cash dividend on AIG's Series A Preferred Stock of $369.6875 per share, payable on June 17, 2019 to holders of record on May 31, 2019. On August 7, 2019, our Board of Directors declared a cash dividend on AIG's Series A Preferred Stock of $365.625 per share, payable on September 16, 2019 to holders of record on August 30, 2019. On October 31, 2019, our Board of Directors declared a cash dividend on AIG's Series A Preferred Stock of $365.625 per share, payable on December 16, 2019 to holders of record on November 29, 2019. On February 12, 2020, our Board of Directors declared a cash dividend on AIG's Series A Preferred Stock of $365.625 per share, payable on March 16, 2020 to holders of record on February 28, 2020. 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 18 to the Consolidated Financial Statements.
Repurchases of AIG Common Stock
Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG Common Stock through a series of actions. On February 13, 2019, our Board of Directors authorized an additional increase to its previous repurchase authorization of AIG Common Stock of approximately $1.5 billion. As of February 12, 2020, $2.0 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, as discussed further in Note 18 to the Consolidated Financial Statements.
We did not repurchase any shares of AIG Common Stock during 2019.
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 20 to the Consolidated Financial Statements.
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ITEM 7 | Enterprise Risk Management
Enterprise Risk Management
Risk management includes the identification and measurement of various forms of
risk, the establishment of risk thresholds and the creation of processes
intended to maintain risks within these thresholds while optimizing returns. We
consider risk management an integral part of managing our core businesses and a
key element of our approach to corporate governance.
Overview
We have an integrated process for managing risks throughout our organization in accordance with our firm-wide risk appetite. Our Board of Directors has oversight responsibility for the management of risk. Our Enterprise Risk Management (ERM) Department supervises and integrates the risk management functions in each of our business units, providing senior management with a consolidated view of 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 by embedding risk management in our key day-to-day business processes and in identifying, assessing, quantifying, monitoring, reporting, and mitigating the risks taken by our businesses and AIG overall. Nevertheless, our risk management efforts may not always be successful and material adverse effects on our business, results of operations, cash flows, liquidity or financial condition may occur. AIG employs a Three Lines of Defense model. AIG's business leaders assume full accountability for the risks and controls in their operating units, and ERM performs a review, challenge and oversight function. The third line consists of our Internal Audit Group that provides independent assurance for AIG's Board.
Risk Governance Structure
Our risk governance structure fosters the development and maintenance of a risk and control management culture that encompasses all significant risk categories impacting our lines of business and functions. Accountability for the implementation of risk policies is aligned with individual corporate executives, with the risk committees receiving regular reports regarding compliance with each policy to support risk governance at our corporate level as well as in each business unit. We review our governance and committee structure on a regular basis and make changes as appropriate to continue to effectively manage and govern both our risks and risk-taking activities.
Our Board of Directors oversees the management of risk through its Risk and Capital Committee (RCC) and Audit Committee. These committees regularly interact with other committees of the Board of Directors which are further described below. Our Chief Risk Officer (CRO) reports to both the RCC and our Chief Executive Officer.
The Group Risk Committee (GRC): The GRC is the senior management group responsible for assessing all significant risk issues on a global basis to protect our financial strength and reputation. The GRC is chaired by our CRO and includes members of the Executive Leadership Team (ELT). Our CRO reports periodically on behalf of the GRC to both the RCC and the Audit Committee of the Board of Directors. Our CRO is also a member of the ELT providing ERM the opportunity to contribute to, review, monitor and consider the impact of changes in strategy. Management committees that support the GRC are described below. These committees are comprised of senior executives and experienced business representatives from a range of functions and business units throughout AIG and its subsidiaries. These committees are charged with identifying, analyzing and reviewing specific risk matters within their respective mandates. In addition, various working groups (e.g. reputational risk, control agenda) are in place in support of the GRC to manage and monitor the various risks across the organization. Financial Risk Group (FRG): The FRG is responsible for the oversight of financial risks taken by AIG and our subsidiaries. Its mandate includes overseeing our aggregate credit, market, interest rate, capital, liquidity and model risks, as well as asset-liability management, derivatives activity, and foreign exchange transactions. It provides the primary corporate-level review function for all proposed transactions and business practices that are significant in size, complex in scope, or that present heightened legal, reputational, accounting or regulatory risks. The FRG is chaired by our CRO. Membership of the FRG also includes our CFO, Chief Investment Officer and Treasurer. 146 AIG | 2019 Form 10-K
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ITEM 7 | Enterprise Risk Management
Business Unit Risk Committees: Each of our major insurance businesses has
established a risk committee that serves as the senior management committee
responsible for risk oversight at the individual business unit level. The risk
committees are responsible for the identification, assessment and monitoring of
all sources of risk within their respective portfolios. Specific
responsibilities include setting risk tolerances, reviewing the capital
allocation framework, insurance portfolio optimization, and providing oversight
of risk-adjusted metrics. In performing these responsibilities, the business
unit risk committees may leverage input provided by other business unit
committees and working groups.
[[Image Removed: Picture 1]]
Risk Appetite, Limits, Identification, and Measurement
Risk Appetite Framework
Our Risk Appetite Framework integrates stakeholder interests, strategic business
goals and available financial resources. We balance these by seeking to take
measured risks that are expected to generate repeatable, sustainable earnings
and create long-term value for our shareholders. The framework includes our risk
appetite statement approved by the Board of Directors and a set of supporting
tools, including risk tolerances, risk limits and policies, which we use to
manage our risk profile and financial resources.
We articulate our aggregate risk-taking by setting risk tolerances and
thresholds on capital and liquidity measures. These measures are set at the AIG
Parent level as well as the legal entity level and cover consolidated and
insurance company capital and liquidity ratios. We must comply with standards
for capital adequacy and maintain sufficient liquidity to meet all our
obligations as they come due in accordance with our capital management and
liquidity policies. Our risk tolerances take into consideration regulatory
requirements, rating agency expectations, and business needs. The GRC routinely
reviews the level of risk taken by the consolidated organization in relation to
the established risk tolerances. A consolidated risk report is also presented
periodically to the RCC by our CRO.
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ITEM 7 | Enterprise Risk Management
Risk Limits
A key component of our Risk Appetite Framework is having a process in place that
establishes and maintains appropriate limits on the material risks identified
for our core businesses and facilitates the monitoring and meeting of both
internal and external stakeholder expectations. Our objectives include:
?Establishing risk monitoring, providing early warning indicators, and ensuring timely oversight and enforceability of limits;
?Defining a consistent and transparent approach to limits governance; and
?Aligning our business activities with our risk appetite statement.
To support the monitoring and management of AIG's and its business units' material risks, ERM has an established limits framework that employs a three-tiered hierarchy:
?Board-level risk tolerances are AIG's aggregate consolidated capital and parent liquidity limits. They define the minimum level of capital and liquidity that we should maintain. These board-level risk tolerances require RCC and Board approval. ?AIG management level limits are risk type specific limits at the AIG consolidated level. These limits are defined and calibrated to constrain our concentration in specific risk types, to protect against taking risks that exceed the amount of overall capital AIG has available, and to protect against excess earnings volatility. These limits are approved by our CRO with consultation from the GRC. ?Business unit and legal entity level limits are set to address key risks identified for the business unit and legal entities, protect capital and liquidity at legal entities and/or meet legal entity specific requirements of regulators and rating agencies. These limits are defined by the business unit and legal entity Risk Officers.
All limits are reviewed by the GRC or relevant business unit risk committees on a periodic basis and revisions, if applicable, are approved by those committees.
The business units are responsible for measuring and monitoring their risk exposures. ERM is responsible for monitoring compliance with limits and providing regular, timely reporting to our senior management and risk committees. Limit breaches are required to be reported in a timely manner and are documented and escalated in accordance with their level of severity or materiality.
Risk Identification and Measurement
We conduct risk identification through a number of processes at the business unit and corporate level focused on capturing our material risks. A key initiative is our integrated bottom-up risk identification and assessment process which is conducted down to the product-line level. In addition, we perform an annual top-down risk assessment to identify top risks and assign owners to ensure these risks are appropriately addressed and managed. These processes are used as a critical input to enhance and develop our analytics for measuring and assessing risks across the organization. We employ various approaches to measure and monitor risk exposures, including the utilization of a variety of metrics and early warning indicators. We use a proprietary internal capital and stress testing framework to measure our quantifiable risks for both insurance and non-insurance operations. The internal capital framework quantifies our aggregate economic risk at a given confidence interval, after taking into account diversification benefits between risk factors and business lines. We leverage the internal capital framework to help inform our consolidated risk consumption and profile as well as risk and capital allocation for our businesses. The stress testing framework assesses our aggregate exposure to our most significant financial and insurance risks, including the risks in each of our key insurance company subsidiaries in relation to its capital needs under stress, risks inherent in our non-insurance company subsidiaries, and risks to AIG consolidated capital. The framework measures risk over multiple time horizons and under different levels of stress, and includes multi-factor stresses as well as single factor sensitivities that are designed to reflect AIG's risk characteristics. We use this information to support the assessment of resources needed at the AIG Parent level to support our subsidiaries and capital resources required to maintain consolidated company target capitalization levels.
We evaluate and manage risk in material topics as shown below. These topics are discussed in further detail in the following pages: ?Credit Risk Management ?Liquidity Risk Management ?Insurance Risks ?Market Risk Management ?Operational Risk ?Other Business Risks
Management
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ITEM 7 | Enterprise Risk Management
Credit Risk Management
Overview
Credit risk is defined as the risk that our customers or counterparties are
unable or unwilling to repay their contractual obligations when they become due.
Credit risk may also result from a downgrade of a counterparty's credit ratings
or a widening of its credit spreads.
We devote considerable resources to managing our direct and indirect credit
exposures. These exposures may arise from, but are not limited to, fixed income
investments, equity securities, deposits, commercial paper investments, reverse
repurchase agreements and repurchase agreements, corporate and consumer loans,
leases, reinsurance and retrocessional insurance 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.
Governance
Our credit risks are managed by teams of credit professionals, subject to ERM oversight and various control processes. Their primary role is to ensure appropriate credit risk management in accordance with our credit policies and procedures relative to our credit risk parameters. Our Chief Credit Officer (CCO) and credit executives are primarily responsible for the development, implementation and maintenance of a risk management framework, which includes the following elements related to our credit risks:
?developing and implementing our company-wide credit policies and procedures;
?approving delegated credit authorities to our credit executives and qualified credit professionals;
?developing methodologies for quantification and assessment of credit risks, including the establishment and maintenance of our internal risk rating process;
?managing a system of credit and program limits, as well as the approval process for credit transactions, above limit exposures, and concentrations of risk that may exist or be incurred;
?evaluating, monitoring, reviewing and reporting of credit risks and concentrations regularly with senior management; and
?approving appropriate credit reserves, credit-related other-than-temporary impairments and corresponding methodologies for all credit portfolios.
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 closely monitor the quality of any trust collateral accounts.
For further information on our credit concentrations and credit exposures see Investments - Available-for-Sale Investments.
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Our credit risk management framework incorporates the following elements:
Risk Identification including the ongoing capture and monitoring of all
existing, contingent, potential and emerging credit risk
exposures, whether funded or unfunded
Risk Measurement comprising risk ratings, default probabilities, loss given
default and expected loss parameters, exposure calculations,
stress testing and other risk analytics
Risk Limits including, but not limited to, a system of single obligor or
risk group-based AIG-wide house limits and sub-limits for
corporates, financial institutions, sovereigns and
sub-sovereigns when appropriate and a defined process for
identifying, evaluating, documenting and approving, if
appropriate, breaches of and exceptions to such limits
Risk Delegations a comprehensive credit risk delegation framework from the
CCO to authorized credit professionals throughout the
company
Risk Evaluation, including the ongoing analysis and assessment of credit
Monitoring and risks, trending of those risks and reporting of other key
Reporting 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,(ii) CECL reserves and (iii)other-than-temporary
impairments for securities portfolios
Market Risk Management
Overview
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 respective 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 the liability sides of our balance sheet
through on- and off-balance sheet exposures. Within each business, the Risk
Officer is responsible for creating a framework for proper identification of
market risks, and ensuring that the risks are appropriately measured, monitored
and managed, and are in accordance with the risk governance framework
established by the Chief Market Risk Officer (CMRO).
The scope and magnitude of our market risk exposures is managed under a robust
framework that contains 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 the above mentioned market risk drivers.
Many of our market risk exposures, including exposures to changes in levels of
interest rates and equity prices, are associated with the asset and liability
exposures of our Life and Retirement companies. These exposures are generally
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.
Governance
Market risk is overseen at the corporate level within ERM through the CMRO. The CMRO is supported by a dedicated team of professionals within ERM. Market Risk is managed by our finance, treasury and investment management corporate functions, collectively, and in partnership with ERM. The CMRO is primarily responsible for the development and maintenance of a risk management framework that includes the following key components:
?written policies that define the rules for our market risk-taking activities and provide clear guidance regarding their execution and management;
?a limit framework that aligns with our Board-approved risk appetite statement;
?independent measurement, monitoring and reporting for line of business, business unit and enterprise-wide market risks; and
?clearly defined authorities for all individuals and committee roles and responsibilities related to market risk management.
These components facilitate the CMRO's identification, measurement, monitoring, reporting and management of our market risks.
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Risk Identification
Market risk focuses on quantifying the financial repercussions of changes in
broad, external, predominantly market-observable variables. Financial
repercussions can include an adverse impact on results of operations, financial
condition, liquidity and capital of AIG.
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, mutual funds, exchange-traded funds,
alternative risk premia investment strategies, 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 Our investment portfolios are exposed to the risk of changing
commercial real values in a variety of residential and commercial real estate
estate values 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 an
asymmetric GAAP accounting effect where the existing securities
lose market value, which is largely reported through Other
comprehensive income, and the offsetting decrease in the value of
certain 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. Additionally, for Variable
Annuity, Index Annuity, and Equity Indexed Universal Life
products, deviations in actual versus expected policyholder
behavior can be driven by fluctuations in various market
variables, including interest rates. Policies with guaranteed
living benefit options or riders are also subject to the risk of
actual benefit utilization being different than expected.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, asset backed securities, mortgage-backed securities,
AIG-issued debt obligations, credit derivatives, derivative
credit valuation adjustments and economic valuation of insurance
liabilities. Much like higher interest rates, wider credit
spreads paired with unchanged expectations about default losses
imply higher 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
through 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 We are a globally diversified enterprise with income, assets and
exchange (FX) liabilities denominated in, and capital deployed in, a variety of
rates 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 Changes in commodity prices (the value of commodities) can affect
prices the valuation of publicly-traded commodities, commodity indices,
derivatives on commodities and commodity indices, and other
commodity-linked investments and insurance contracts. 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.
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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. The framework measures our overall
exposure to change in each of the systemic market risk factors on an economic
basis.
In addition, we monitor risks through multiple lenses that include economic, GAAP and statutory reporting frameworks at various levels of business consolidation. This process aims to establish a comprehensive coverage of potential implications from adverse market risk developments.
We use a number of approaches to measure our market risk exposure, including:
Examples include:
Sensitivity measures the impact from a •a one basis point increase in yield on
analysis unit change in a market fixed maturity securities,
risk input •a one basis point increase in credit
spreads of fixed maturity securities,
and
•a one percent increase in prices of
equity securities.
Scenario uses historical, •a 100 basis point parallel shift in the
analysis hypothetical, or yield curve, or
forward-looking •a 20 percent immediate and simultaneous
macroeconomic scenarios to decrease in world-wide equity markets.
assess and report exposures Scenarios may also utilize a stochastic
framework to arrive at a probability
distribution of losses.
Stress a special form of scenario •the stock market crash of October 1987
testing analysis in which the or the widening of yields or spreads of
scenarios are designed to RMBS or CMBS during 2008.
lead to a material adverse
outcome
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ITEM 7 | Enterprise Risk Management
Market Risk Sensitivities
The following table provides estimates of sensitivity to changes in yield
curves, equity prices and foreign currency exchange rates on our financial
instruments and excludes approximately $169.4 billion and $168.9 billion as of
December 31, 2019 and December 31, 2018, respectively, of insurance liabilities.
AIG believes that the interest rate sensitivities of these insurance and other
liabilities serve as an offset to the net interest rate risk of the financial
assets presented in the table below.
Balance Sheet Exposure Economic Effect
December 31, December 31, December 31, December 31,
(dollars in millions) 2019 2018 2019 2018
100 bps parallel increase in all yield
Sensitivity factor curves
Interest rate sensitive
assets:
Fixed maturity securities $ 255,743 $ 237,460 $ (16,644) $ (13,831)
Mortgage and other loans
receivable(a) 43,441 39,656 (2,385) (1,993)
Derivatives:
Interest rate contracts 451 867 (1,530) (1,196)
Equity contracts 630 383 (360) 21
Other contracts (64) 80 28 26
Total interest rate
sensitive assets $ 300,201 (b) $ 278,446 (b) $ (20,891) $ (16,973)
Interest rate sensitive
liabilities:
Policyholder contract
deposits:
Investment-type contracts(a) $ (126,137) $ (120,602) $ 8,553 $ 6,217
Variable annuity and other
embedded
derivatives (6,909) (4,116) 2,118 1,537
Long-term debt(a) (c) (24,092) (24,635) 2,127 1,807
Total interest rate
sensitive liabilities $ (157,138) $ (149,353) $ 12,798 $ 9,561
Sensitivity factor 20% decline in stock prices and
alternative investments
Derivatives:
Equity contracts(d) $ 630 $ 383 $ 426 $ 862
Equity and alternative
investments:
Real estate investments 8,491 8,935 (1,698) (1,787)
Private equity 5,531 4,787 (1,106) (957)
Hedge funds 3,314 4,179 (663) (836)
Common equity 827 792 (165) (158)
PICC Investment - 448 - (90)
Other investments 913 903 (183) (181)
Total derivatives, equity
and alternative
investments $ 19,706 $ 20,427 $ (3,389) $ (3,147)
Policyholder contract
deposits:
Variable annuity and other
embedded derivatives(d) $ (6,909) $ (4,116) $ (215) $ (655)
Total liability $ (6,909) $ (4,116) $ (215) $ (655)
10% depreciation of all foreign
Sensitivity factor currency
exchange rates against the U.S.
dollar
Foreign currency-denominated
net
asset position:
Great Britain pound $ 1,812 $ 1,861 $ (181) $ (186)
Euro 253 1,330 (25) (133)
Hong Kong dollar 35 585 (4) (58)
All other foreign currencies 1,829 1,587 (183) (159)
Total foreign
currency-denominated net
asset position(e) $ 3,929 $ 5,363 $ (393) $ (536)
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ITEM 7 | Enterprise Risk Management
(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 $43,783 million, $133,246 million and $26,427 million at December 31, 2019,
respectively. The estimated fair values for Mortgage and other loans receivable,
Policyholder contract deposits (Investment-type contracts) and Long-term debt
were $40,152 million, $121,374 million and $23,929 million at December 31, 2018,
respectively.
(b)At December 31, 2019, the analysis covered $300.2 billion of $306.3 billion
interest-rate sensitive assets. Excluded were $3.5 billion of loans. In
addition, $2.6 billion of assets across various asset categories were excluded
due to modeling limitations. At December 31, 2018, the analysis covered $278.4
billion of $285.8 billion interest-rate sensitive assets. Excluded were $3.5
billion of loans. In addition, $3.9 billion of assets across various asset
categories were excluded due to modeling limitations.
(c)At December 31, 2019, the analysis excluded $643 million of AIGLH borrowings,
$353 million of Validus borrowings, $47 million of borrowings from Glatfelter
and $344 million of AIG Japan Holdings loans. At December 31, 2018, the analysis
excluded $643 million of AIGLH borrowings, $359 million of Validus borrowings,
$168 million of borrowings from FHLB and $331 million of AIG Japan Holdings
loans.
(d)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.
(e)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 actual financial impacts in any particular period will not exceed the amounts indicated above.
Interest rate sensitivity is defined as change in value with respect to a 100 basis point parallel shift up in the interest rate environment, calculated as: scenario value minus base value, where base value is the value 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 considering effects of correlation of changes in levels of interest rate with other key market risks or other assumptions used for calculating the values of our financial assets and liabilities. This scenario does not measure changes in values resulting from non-parallel shifts in the yield curves, which could produce different results. We evaluate our equity price risk without considering effects of correlation of changes in equity prices with other key market risks or other assumptions used for calculating the values of our financial assets and liabilities. The stress 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 aggregated non-U.S. dollar assets less our aggregated 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 surplus at the regulated insurance entity level. At the AIG consolidated level, we monitor our foreign currency exposures against single currency and aggregate currency portfolio limits.
Our three largest foreign currency-denominated net asset positions at December 31, 2019 are Great Britain pound ($1.8 billion), South Korean won ($331 million), and Australian dollar ($276 million).
Our foreign currency-denominated net asset position at December 31, 2019, decreased by $1.4 billion compared to December 31, 2018. The decrease was primarily due to a $1.1 billion decrease in our Euro position. The reduction in our Euro position is principally due to currency conversions associated with internal reinsurance agreements and the rebalancing of net assets across European operations due to Brexit. Our Hong Kong dollar position also decreased $550 million, primarily due to the sale of our PICC investment. Offsetting these decreases was a $299 million increase in our Canadian dollar position, primarily due to hedging actions designed to protect statutory surplus at the regulated insurance entity level. For illustrative purposes, we modeled our sensitivities based on a 100 basis point parallel increase in yield curves, a 20 percent decline in equity prices and prices of 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.
The sensitivity factors utilized for 2019 and presented above were selected based on historical data from 1999 to 2019, as follows (see the table below):
?a 100 basis point parallel shift in the yield curve is consistent with a one standard deviation movement of the benchmark ten-year treasury yield;
?a 20 percent drop for equity and alternative investments is broadly consistent with a one standard deviation movement in the S&P 500; and
?a 10 percent depreciation of foreign currency exchange rates is consistent with a one standard deviation movement in the U.S. dollar (USD)/Japanese yen (JPY) exchange rate. 154 AIG | 2019 Form 10-K
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2019 2019 as a Original 2018
Scenario as 2019 Multiple Scenario (based
a Multiple on Standard
Standard Suggested of Change/ of Standard Deviation for
Standard 1998-2018
Period Deviation 2019 Scenario Deviation Return Deviation Period)
10-Year Treasury 1999-2019 0.01 0.01 1.18 (0.01) 0.95 0.01
S&P 500 1999-2019 0.18 0.20 1.14 0.29 1.64 0.20
USD/JPY 1999-2019 0.11 0.10 0.94 0.01 0.09 0.10
Risk Monitoring and Limits
The risk monitoring responsibilities, owned by the business units, include
ensuring compliance with market risk limits and escalation and remediation of
limit breaches. Such activities must be reported to the ERM Market Risk team by
the relevant business unit. This monitoring approach is aligned with our overall
risk limits framework.
To control our exposure to market risk, we rely on a three-tiered hierarchy of
limits that the CMRO closely monitors and reports to our CRO, senior management
and risk committees.
For further information on our three-tiered hierarchy of limits see Risk Appetite, Limits, Identification, and Measurement - Risk Limits.
Liquidity Risk Management
Overview
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 could breach these tolerances, we 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.
Governance
Liquidity risk is overseen at the corporate level within ERM. The CRO has responsibility for the oversight of the Liquidity Risk Management Framework and delegates the day-to-day implementation of this framework to the AIG Treasurer. Our corporate treasury function manages liquidity risk, subject to ERM oversight and various control processes.
The Liquidity Risk Management Framework is guided by the liquidity risk tolerance as set forth in the Board-approved risk appetite statement. The principal objective of this framework is to establish minimum liquidity requirements that protect our long-term viability and ability to fund our ongoing business, and to meet short-term financial obligations in a timely manner in both normal and stressed conditions.
Our Liquidity Risk Management Framework includes a number of liquidity and funding policies and monitoring tools to address AIG-specific, broader industry and market-related liquidity events.
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ITEM 7 | Enterprise Risk Management
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 Minimum Liquidity Limits specify the amount of assets required to
Liquidity be maintained in order to meet obligations as they arise over a
Limits specified time horizon under stressed liquidity conditions.
Coverage Coverage Ratios measure the adequacy of available liquidity
Ratios 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 Cash Flow Forecasts measure the liquidity needed for a specific Forecasts 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.
Operational Risk Management
Overview
Operational risk is defined as the risk of loss, or other adverse consequences, resulting from inadequate or failed internal processes, people, systems, or from external events. Operational risk includes legal, regulatory, technology, compliance, third-party and business continuity risks, but excludes business and strategy risks. Operational risk is inherent in each of our business units and functions and can have many impacts, including but not limited to: unexpected economic losses or gains, reputational harm due to negative publicity, regulatory action from supervisory agencies and operational and business disruptions, and/or damage to customer relationships. 156 AIG | 2019 Form 10-K
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ITEM 7 | Enterprise Risk Management
Governance
AIG and its consolidated subsidiaries establish and maintain operational risk
and controls governance forums that include representatives from the relevant
business units and functions to appropriately manage significant operational
risk exposures.
Operational risk is overseen at the corporate level within ERM through the Head
of Governance and Operational Controls. The Head of Governance and Operational
Controls is responsible for the development and maintenance of the operational
risk framework that includes policies, standards and deployment of systems.
Risk Identification, Measurement and Monitoring
The Operational Risk Management (ORM) function within ERM oversees adherence to the operational risk policy and risk and control framework, which includes risk identification, assessment, measurement, management and monitoring of operational risk exposures. ORM supports the Head of Governance and Operational Controls and has responsibility to provide an aggregate view of our operational risk profile. In line with the Three Lines of Defense Model, the ORM program includes, but is not limited to, several key components outlined below: ?Risk Event Capture - enables every employee to identify, document, and escalate operational risk events, with a view to enhancing processes, promoting lessons learned and embedding a culture of risk management. ?Risk Assessments - allows for the assessment, measurement and management of the key operational risks within our business units and helps inform on the efficacy of our control environment.
?Key Risk Indicators - enhances the ongoing monitoring and mitigation of operational risks and facilitate risk reporting.
?Issues Management - enables a consistent tracking of issues across the firm, including policy and process exceptions, control deficiencies and findings from risk and control assessment activities.
?Scenario Analyses - executed by first- and second-line professionals to identify potential risks that could result in financial losses to the firm and support the prioritization of operational risk treatment.
ORM, working together with other control and assurance functions (e.g.,
Compliance, Financial Controls Unit / Sarbanes Oxley, Global Business
Continuity, and Internal Audit) through the risk and control framework, provides
an independent view of operational risks for each business, and works with the
business unit and corporate function CRO and Owner of the Control Agenda, whose
responsibilities include coordinating identification, assessment, control and
mitigation of risks to the operating environment and promoting awareness, to
facilitate implementation of the above programs. This includes coverage of
operational risks related to core insurance activities, corporate functions,
investing, model risk, technology, third-party providers, as well as compliance
and regulatory matters. Based on the results of the risk identification and
assessment efforts above, business leaders are accountable for tracking and
remediating identified issues in line with our risk-monitoring procedures.
Governance committees support these efforts and promote transparency enabling
improved management decision making.
The risk and control framework facilitates the identification and mitigation of
operational risk issues and is designed to:
?ensure first line accountability and ownership of risks and controls;
?promote role clarity among the business and risk and control functions;
?enhance transparency, risk management governance and culture;
?foster greater consistency in identifying, measuring and ranking material
risks;
?proactively address potential risk issues and assign clear ownership and
accountability for risk treatment; and
?manage the development of technology solutions that support the objectives
above.
Cybersecurity Risk
Cybersecurity risk is an important, constant, and evolving focus for AIG and the
insurance and financial services industries in general. The goal of unauthorized
parties, using a variety of attack methods, is to gain access to AIG's data and
systems to obtain confidential information, destroy data, disrupt or degrade
service, sabotage systems or cause other damage. One such example, is the
increased sophistication and activities of unauthorized parties using phishing
in an attempt to access our systems, usually in an effort to obtain sensitive
information, which is an ever-present and increasing attack vector against AIG.
Cybersecurity risks may also derive from human error, fraud or malice on the
part of AIG employees or third parties who have authorized access to AIG's
systems or information.
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ITEM 7 | Enterprise Risk Management
ERM works closely with and supports the risk management practices of Information
Technology and the Information Security Office and the business units and
functions that form the first line of defense against the cybersecurity risks
that we face, including the risks that emerge as a result of the execution of
our business strategies and our corresponding exposure to new products, clients,
industry segments and regions, through initiatives such as investments in
technological infrastructure, education and training for employees and vendors,
and monitoring of industry developments. As part of our overarching
cybersecurity strategy, ERM monitors and assesses the programs designed to
remediate our exposures and enhance our systems and applications security.
AIG's Board of Directors and its Technology Committee are regularly briefed by
management on AIG's cybersecurity matters, including threats, policies,
practices and ongoing efforts to improve security. As part of our disclosure
controls and procedures, the Cyber Incident Management team, a cross functional
group, is responsible for ensuring that the members of management responsible
for disclosure controls are informed in a timely manner of known cybersecurity
risks and incidents that may materially impact our operations so that timely
notifications and public disclosures can be made as appropriate. There is no
guarantee that the measures AIG takes and the resources AIG devotes to protect
against cybersecurity risk will provide absolute security or recoverability of
AIG's systems given the complexity and frequency of the risk which AIG may not
always be able to anticipate or adequately address. For additional information
regarding the data protection and cybersecurity regulations to which we are
subject, see Item 1. Business - Regulation - U.S. Regulation - Privacy, Data
Protection and Cybersecurity and - International Regulation - Privacy, Data
Protection and Cybersecurity. For additional discussion of cybersecurity risks,
see Part I, Item 1A. Risk Factors - Business and Operations.
Insurance Risks
Overview
Insurance risk is defined as the risk of actual claims experience and/or policyholder behavior being materially different than initially expected at the inception of an insurance contract. Uncertainties related to insurance risk include the amount and timing of cash flows from premiums, commissions, expenses, claims and claim settlement expenses paid or received under a contract.
Except as described above, we manage our business risk oversight activities through our insurance operations. A primary goal in managing our insurance operations is to achieve an acceptable risk-adjusted return on equity. To achieve this goal, we must be disciplined in risk selection, premium adequacy, and appropriate terms and conditions to cover the risk accepted.
We operate our insurance businesses on a global basis, and we are exposed to a wide variety of risks with different time horizons. We manage these risks throughout the organization, both centrally and locally, through a number of processes and procedures:
?pre-launch approval of product design, development and distribution;
?underwriting approval processes and authorities;
?exposure limits with ongoing monitoring;
?pricing and risk selection models;
?price approval processes;
?modeling and reporting of aggregations and limit concentrations at multiple levels (policy, line of business, product group, country, individual/group, correlation and catastrophic risk events);
?risk transfer tools such as reinsurance, both internal and third-party;
?review and challenge of reserves to ensure comprehensive analysis with established escalation procedures to provide appropriate transparency in reserving decisions and judgments made in the establishment of reserves;
?business line actuarial briefings and actuarial financial judgment regular reviews with ERM and business management;
?management of relationship between assets and liabilities, including hedging;
?model risk management and validation processes;
?experience monitoring and assumption updates; and
?pricing model monitoring.
We closely manage insurance risk by monitoring and controlling the nature and geographic location of the risks in each line of business underwritten, concentrations in industries, the terms and conditions of the underwriting and the premiums we charge for taking on the risk. We analyze concentrations of risk using various modeling techniques, including both probability distributions (stochastic) and/or single-point estimates (deterministic) approaches.
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Governance
Insurance risks are monitored at the business unit level and overseen by the
business unit risk officer. As part of our established governance practices, key
decisions and considerations related to insurance risks can be raised and
deferred for discussion and consideration to business unit risk committees that
are chaired by the business unit's chief risk officer. In addition, in some
business units, pricing committees review insurance risk considerations
associated with pricing of new insurance products. The insurance risk oversight
framework includes the following key components:
?written policies that define the rules for our insurance risk-taking activities;
?a limit framework focused on key insurance risks that aligns with our Board-approved risk appetite statement; and
?clearly defined authorities for all individuals and committee roles and responsibilities related to insurance risk management.
Risk Identification
?General Insurance companies - risks covered include property, casualty, fidelity/surety, accident and health, aviation, and management liability. We manage risks in the General Insurance business through aggregations and limitations of concentrations at multiple levels: policy, line of business, geography, industry and legal entity.
?Life and Retirement companies - risks include mortality and morbidity in the individual life, individual health-care and group life insurance products, longevity risk in the individual retirement, group retirement and institutional markets products, and policyholder behavior across all product lines. We manage risks through product design, sound medical and non-medical underwriting. We purchase reinsurance for our insurance and reinsurance operations. Reinsurance facilitates insurance risk management (retention, volatility, concentrations) and capital planning. We may purchase reinsurance on a pooled basis. Pooling of our reinsurance risks enables us to purchase reinsurance more efficiently at a consolidated level, manage global counterparty risk and relationships and manage global catastrophe risks.
Risk Measurement, Monitoring and Limits
We use a number of approaches to measure our insurance risk exposure, including: Sensitivity analysis. Deterministic analyses are used to measure statistical variances from best estimate assumptions on important risk factors, as well as different distributions risk categories. Stochastic methods. Stochastic methods are used to measure and monitor risks including natural catastrophe, reserve and premium risk. We develop probabilistic estimates of risk based on our exposures, historical observed volatility or industry-recognized models in the case of catastrophe risk. Scenario analysis. Scenario or deterministic analysis is used to measure and monitor risks such as terrorism and pandemic or to estimate losses due to man-made catastrophic scenarios. Experience studies. Ongoing assessment of mortality, longevity, morbidity and policyholder behavior experience relative to that assumed in pricing and valuation and that experienced in the general market.
Additionally, there are risk specific assessment tools in place to better manage the variety of insurance risks to which we are exposed.
We monitor concentrations of exposure through insurance limits aggregated along dimensions such as geography, industry, or counterparty.
The risk monitoring responsibilities of the business units include ensuring compliance with insurance risk limits and escalation and remediation of limit breaches. Such activities are reported to management by the relevant business unit for informative decision-making on a regular basis. This monitoring approach is aligned with our overall risk limits framework. Risk limits have a consistent framework used across AIG, its business units, and legal entities. This includes escalation thresholds in cases where measurement is particularly challenging.
For further information on our three-tiered hierarchy of limits see Risk Appetite, Limits, Identification, and Measurement - Risk Limits.
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General Insurance Companies' Key Risks
We manage our risks through risk review and selection processes, exposure limitations, exclusions, deductibles, self-insured retentions, coverage limits, attachment points, and reinsurance. This management is supported by sound underwriting practices, pricing procedures and the use of actuarial analysis to help determine overall adequacy of provisions for insurance. Underwriting practices and pricing procedures incorporate historical experience, changes in underlying exposure, current regulation and judicial decisions as well as proposed or anticipated regulatory changes or societal trends.
For General Insurance companies, risks primarily include the following:
?Loss Reserves - The potential inadequacy of the liabilities we establish for unpaid losses and loss adjustment expenses is a key risk faced by the General Insurance companies. There is significant uncertainty in factors that may drive the ultimate development of losses compared to our estimates of losses and loss adjustment expenses. We manage this uncertainty through internal controls and oversight of the loss reserve setting process, as well as reviews by external experts. For further information see Critical Accounting Estimates - Insurance Liabilities - Loss Reserves. ?Underwriting - The potential inadequacy of premiums charged for future risk periods on risks underwritten in our portfolios can impact the General Insurance companies' ability to achieve an underwriting profit. We develop pricing based on our estimates of losses and expenses, but factors such as market pressures and the inherent uncertainty and complexity in estimating losses may result in premiums that are inadequate to generate underwriting profit. This may be driven by adverse economic conditions, unanticipated emergence of risks or increase in frequency of claims, or unexpected or increased costs or expenses. ?Catastrophe Exposure - Our business is exposed to various catastrophic events in which multiple losses can occur and affect multiple lines of business in any calendar year. Natural disasters, such as hurricanes, earthquakes and other catastrophes, have the potential to adversely affect our operating results. Other risks, such as man-made catastrophes or pandemic disease, could also adversely affect our business and operating results to the extent they are covered by our insurance products. Concentration of exposure in certain industries or geographies may cause us to suffer disproportionate losses. ?Single Risk Loss Exposure - Our business is exposed to loss events that have the potential to generate losses from a single insured client. Events such as fires or explosions can result in loss activity for our clients. The net risk to us is managed to acceptable limits established by the Chief Underwriting Officer through a combination of internal underwriting standards and external reinsurance. Furthermore, single risk loss exposure is managed and monitored on both a segregated and aggregated basis. ?Reinsurance - Since we use reinsurance to limit our losses, we are exposed to risks associated with reinsurance including the unrecoverability of expected payments from reinsurers due to either an inability or unwillingness to pay, contracts that do not respond properly to the event or actual reinsurance coverage that is different than anticipated. The inability or unwillingness to pay is considered credit risk and is monitored through our credit risk management framework.
Natural Catastrophe Risk
We manage catastrophe exposure with multiple approaches such as setting risk limits based on aggregate Probable Maximum Loss (PML) modeling, monitoring overall exposures and risk accumulations, modifying our gross underwriting standards, and purchasing catastrophe reinsurance through both the traditional reinsurance and capital markets in addition to other reinsurance protections. We use third-party catastrophe risk models and other tools to evaluate and simulate frequency and severity of catastrophic events and associated losses to our portfolios of exposures. We apply proprietary multi-model approaches, making adjustments to modeled losses to account for loss adjustment expenses, model biases, data quality and non-modeled risks. We perform post-catastrophe event studies to identify model inefficiencies, underwriting gaps, and improvement opportunities. Lessons learned from post-catastrophe event studies are incorporated into the modeling and underwriting processes of risk pricing and selection. The majority of policies exposed to catastrophic risks are one-year contracts that allow us to adjust our underwriting guidelines, pricing and exposure accumulation in a relatively short period. We recognize that climate change has implications for insurance industry exposure to natural catastrophe risk. With multiple levels of risk management processes in place, we actively analyze the latest climate science and policies to anticipate potential changes to our risk profile, pricing models and strategic planning. For example, we continually consider changes in climate and weather patterns as an integral part of the underwriting process. In addition, we provide insurance products and services to help our clients be proactive against the threat of climate change. Our internal product development, underwriting, and modeling, will continue to adapt to and evolve with the developing risk exposures attributed to climate change. Our natural catastrophe exposure to primary modeled perils is principally driven by the U.S. and secondarily Japan, though our overall exposure is diversified across multiple countries and perils. For example, we have exposures to additional perils such as European windstorms and wildfire exposures across multiple countries. Within the U.S., we have significant hurricane exposure in Florida, the 160 AIG | 2019 Form 10-K
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Gulf of Mexico, the Northeast U.S. and mid-Atlantic regions. Within the U.S., we
have significant earthquake exposure in California and the Pacific Northwest
regions. Earthquakes impacting the Pacific Northwest region may result in a
higher share of industry losses than other regions primarily due to our relative
share of exposure in these regions.
The table below details our modeled estimates of PML, net of reinsurance, on an
annual aggregate basis. The 1-in-100 and 1-in-250 PMLs are the annual aggregate
probable maximum losses with probability of 1 percent and 0.4 percent in a year,
respectively. Estimates as of December 31, 2019 reflect our in-force portfolio
for exposures as of October 1, 2019 and all inuring reinsurance covers as of
December 31, 2019, except for the catastrophe reinsurance programs, which are as
of January 1, 2020.
The following table presents an overview of annual aggregate modeled losses for
world-wide all perils and exposures arising from our largest primarily modeled
perils:
At December 31, 2019 Net of Net of Percent of Total
Reinsurance,
(in millions) Reinsurance After Tax(f) Shareholder Equity
Exposures:
World-wide all peril (1-in-250)(a) $ 5,119 $ 4,044 6.2 %
U.S. Hurricane (1-in-100)(b) 1,737 1,372 2.1
U.S. Earthquake (1-in-250)(c) 1,411 1,115
1.7
Japanese Typhoon (1-in-100)(d) 564 446
0.7
Japanese Earthquake (1-in-250)(e) 632 499
0.8
(a)The world-wide all peril loss estimate includes wildfire exposure.
(b)The U.S. hurricane loss estimate includes losses to Commercial and Personal Property from hurricane hazards of wind and storm surge.
(c)The U.S. earthquake loss estimates represent exposure to Commercial and Personal Property, Workers' Compensation (U.S.) and A&H business lines.
(d)Japan Typhoon loss estimate represents exposure to Commercial and Personal Property.
(e)Japan Earthquake loss estimate represents exposure to Commercial and Personal Property and A&H business lines.
(f)Taxed at the statutory tax rate of 21 percent for both the U.S. and Japanese modeled losses. The majority of Japan exposures are ceded to our U.S. Pool.
AIG, along with other property casualty insurance and reinsurance companies, uses industry-recognized catastrophe models and applies proprietary modeling processes and assumptions to arrive at loss estimates. The use of different methodologies and assumptions could materially change the projected losses. Since there is no industry standard for assumptions and preparation of insured data for use in these models, our modeled losses may not be comparable to estimates made by other companies. Also, the modeled results are based on the assumption that all reinsurers fulfill their obligations to us under the terms of the reinsurance arrangements. However, reinsurance recoverables may not be fully collectible. Therefore, these estimates are inherently uncertain and may not accurately reflect our net exposure, inclusive of credit risk, to these events. Our 2020 property catastrophe reinsurance program is a worldwide program providing both aggregate and per occurrence protection, with differing per occurrence and aggregate attachment points for North America, Japan, and Rest of World (with some additional regional/country variations). The program includes $2.5 billion of aggregate limit that is shared across the regional towers.
Our coverage for North America includes:
?$1.525 billion of per occurrence protection covering our U.S and Caribbean high net worth personal lines business, with varying attachment points in specific geographies ranging from $50 million to $150 million ?Per occurrence protection of up to $1 billion excess of $500 million, primarily covering commercial exposures but also personal lines exposures not covered by the above high net worth personal lines protection ?Aggregate protection utilizing the $2.5 billion of shared limit attaching excess $750 million with per occurrence deductibles of $25 million, $50 million or $75 million, depending on region/event, primarily covering commercial exposures but also covering our U.S. and Caribbean high net worth personal lines exposure to earthquakes
Our coverage for exposure outside North America includes:
?Japan per occurrence coverage of $550 million excess of $200 million and includes both personal and commercial exposure
?Rest of World per occurrence coverage of $300 million excess of $100 million, including both personal and commercial exposure
?Rest of World and Japan $2.5 billion of aggregate shared limit attaching excess
of $160 million and $250 million, respectively, with per occurrence deductibles
of $20 million
Although the shared limit coverage for North America, Japan and Rest of World
has varying retentions per region, the maximum aggregate retention globally is
$1.0 billion for 2020.
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We have also purchased property per risk covers that provide protection against
large losses globally, which include those emanating from non-critical
catastrophe events (all events except for named windstorm and earthquake)
globally as well as critical catastrophe events (named windstorm and earthquake)
outside North America.
For Validus Reinsurance Ltd., our catastrophe protection comes from a variety of
reinsurance protections but is largely providing $400 million of limit excess
$300 million of retention from world-wide exposure via an aggregate excess of
loss cover with an additional $450 million of limit excess $700 million via the
Tailwind Re Cat Bond for U.S., Puerto Rico and Canada named storm losses.
Actual results in any period are likely to vary, perhaps materially, from the
modeled scenarios. The occurrence of one or more severe events could have a
material adverse effect on our financial condition, results of operations and
liquidity.
For additional information see also Item 1A. Risk Factors - Reserves and Exposures.
Terrorism Risk
We actively monitor terrorism risk and manage exposures to losses from terrorist attacks. We have set risk limits based on modeled losses from certain terrorism attack scenarios. Terrorism risks are modeled using a third-party vendor model for various terrorism attack modes and scenarios. Adjustments are made to account for vendor model gaps and the nature of the General Insurance companies' exposures. Examples of modeled scenarios are conventional bombs of different sizes, anthrax attacks and nuclear attacks. Our largest terrorism concentrations are in New York City, and estimated losses are largely driven by the Property and Workers' Compensation lines of business. At our largest exposure location, modeled losses for a five-ton bomb attack net of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) and reinsurance recoveries are estimated to be $2.4 billion based on the exposures as of October 1, 2019. Our exposure to terrorism risk in the U.S. is mitigated by TRIPRA in addition to limited private reinsurance protections. TRIPRA covers terrorist attacks within the United States or U.S. missions and against certain U.S. carriers or vessels and excludes certain lines of business as specified by applicable law. In 2020, TRIPRA covers 80 percent of insured losses above a deductible. The current estimate of our deductible is approximately $2.0 billion for 2019. We offer terrorism coverage in many other countries through various insurance products and participate in country terrorism pools when applicable. International terrorism exposure is estimated using scenario-based modeling and exposure concentration is monitored routinely. Targeted reinsurance purchases are made for some lines of business to cover potential losses due to terrorist attacks. We also rely on the government-sponsored and government-arranged terrorism reinsurance programs, including pools, in force in applicable non-U.S. jurisdictions.
Life and Retirement Companies' Key Risks
We manage risk through product design, experience monitoring, pricing and underwriting discipline, risk limits, reinsurance and active monitoring and management of the relationships between assets and liabilities, including hedging.
For Life and Retirement companies, risks include the following:
?Longevity risk - represents the risk of an increase in value of an annuity policy or a payout benefit as a result of actual mortality experience being lower than the expected mortality experience. This risk could arise from medical advancement and longer-term societal health changes. This risk exists in a number of our product lines but is most significant for our annuity products.
?Morbidity risk - represents the risk arising from actual morbidity (e.g. illness, disability or disease) incidence rate being higher than expected or the length of the claims extending longer than expected resulting in a higher overall benefit payout. This risk could arise from longer-term medical advances in detection and treatment for various diseases and medical conditions. This risk exists in a number of our product lines such as accident and health and long -term care businesses which for the most part are in run-off, and ceded to Fortitude Re and U.S. group benefits which AIG has almost fully exited. ?Mortality risk - represents the risk of loss arising from actual mortality experience being higher than expected mortality experience. This risk could arise from pandemics or other events, including longer-term societal changes that cause higher-than-expected mortality. This risk exists in a number of our product lines, but is most significant for our life insurance products.
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?Policyholder behavior risk (including full and partial surrender/lapse risk) -
represents the risk that actual policyholder behavior differs from expected
behavior in a manner that has an adverse effect on our operating results. There
are many related assumptions made when products are sold, including how long the
contracts will persist and other assumptions which impact the expected
utilization of contract benefits, options and guarantees. Actual experience can
vary significantly from these assumptions. This risk is impacted by a number of
factors including changes in market conditions, especially changes in the levels
of interest rate and equity markets, tax law, regulations, competitive landscape
and policyholder preferences. This risk exists in many of our product lines, but
most notably within the annuity portfolio of business.
The emergence of significant adverse experience compared to the initial assumptions at policy issuance or revised expectations would require an adjustment to DAC and benefit reserves, which could have a material adverse effect on our consolidated results of operations for a particular period.
For additional discussion of the impact of actual and expected experience on DAC and benefit reserves see Critical Accounting Estimates - Future Policy Benefits for Life and Accident and Health Insurance Contracts and Critical Accounting Estimates - Guaranteed Benefit Features of Variable Annuity Products. For additional discussion of business risks see Item 1A. Risk Factors - Business and Operations.
Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs
Our Individual and Group Retirement businesses offer variable annuity products
with guaranteed living benefit (GLB) riders that guarantee a certain level of
lifetime benefits. GLBs are accounted for as embedded derivatives measured at
fair value, with changes in the fair value recorded in Other realized capital
gains (losses). GLB features subject the Life and Retirement companies to market
risk, including exposure to changes in levels of interest rates, equity prices,
credit spreads and market volatility.
Variable annuity product design is the first step in managing our exposure to
these market risks. Risk mitigation features of our variable annuity product
design include GLB rider fees indexed to an equity market volatility index,
which can provide additional fee assessments in periods of increased market
volatility, required minimum allocations to fixed accounts to reduce overall
equity exposure, and for some of the variable annuity products, the utilization
of volatility control funds, which have an ability to reduce equity exposures in
the funds in response to changes in market volatility, even under sudden or
extreme market movements.
After reflecting our product risk-mitigating features, we hedge our remaining
economic exposure to market risk within GLB features through our variable
annuity hedging program, which is designed to offset certain changes in the
economic value of these GLB embedded derivatives, within established thresholds.
The hedging program is designed to provide additional protection against large
and combined movements in levels of interest rates, equity prices, credit
spreads and market volatility under multiple scenarios.
Our hedging program utilizes an economic hedge target, which represents our
estimate of the underlying economic risks in our GLB riders, based on the
present value of the future expected benefit payments for the GLB, less the
present value of future GLB rider fees, over numerous stochastic scenarios. This
stochastic projection method uses best estimate assumptions for policyholder
behavior (including mortality, lapses, withdrawals and benefit utilization) in
conjunction with market scenarios calibrated to observable equity and interest
rate option prices. Policyholder behaviors are regularly evaluated to compare
current assumptions to actual experience and, if appropriate, changes are made
to the policyholder behavior assumptions. The risk of changes in policyholder
behavior is not explicitly hedged, and such differences between expected and
actual policyholder behaviors will result in hedge ineffectiveness.
Due to differences between the calculation of the value of the economic hedge
target and the U.S. GAAP valuation of the embedded derivative, which include
differences in the treatment of rider fees and exclusion of certain risk margins
and other differences in discount rates, we expect relative movements in the
value of the economic hedge target and the U.S. GAAP embedded derivative
valuation will vary over time with changes in levels of equity markets, interest
rates, credit spreads and volatility.
For information on the impact on our consolidated pre-tax income from the change
in fair value of the embedded derivatives and the hedging portfolio, as well as
additional discussion of differences between the economic hedge target and the
valuation of the embedded derivatives see Insurance Reserves - Life and Annuity
Reserves and DAC - Variable Annuity Guaranteed Benefits and Hedging Results.
In designing the hedging portfolio for our variable annuity hedging program, we
make assumptions and projections about the future performance of the underlying
contract mutual funds. To project future account value changes, we use these
assumptions about how each of the underlying mutual funds will perform. We map
the mutual funds to a set of publicly traded indices that we believe best
represent the liability to be hedged. Basis risk exists due to the variance
between fund returns projected under these assumptions and actual fund returns,
which may result in variances between changes in the value of the hedging
portfolio and changes in the economic value of the hedge target. Net hedge
results and the associated cost of hedging are also impacted by differences
between realized volatility and implied volatility.
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Our hedging programs associated with index annuity and index universal life
products, are designed to manage market risk associated with the index crediting
strategies offered on these product platforms. These hedging programs are
designed to offset economic risk arising in conjunction with index returns,
associated with the crediting strategies that will be occurring during the
current crediting rate reset period. These programs utilize derivative
instruments, including but not limited to equity index options and futures
contracts. Similarly, as with the variable annuities, there are differences
between the calculation of the value of the economic hedge target and the U.S.
GAAP valuation of the index annuity and index life embedded derivatives, which
can lead to variances in their relative movements.
To manage the capital market exposures embedded within the economic hedge
target, we identify and hedge market sensitivities to changes in equity markets,
interest rates, volatility and for variable annuities, credit spreads. Each
hedge program purchases derivative instruments or securities having
sensitivities that offset corresponding sensitivities in the associated economic
hedge targets, within internally defined threshold limits. Since the relative
movements of the hedging portfolio and the economic hedge target vary over time
or with market changes, the net exposure can be outside the threshold limits,
and adjustments to the hedging portfolio are made periodically to return the net
exposure to within the threshold limits.
Our hedging programs utilize various derivative instruments, including but not
limited to equity options, futures contracts, interest rate swaps and swaptions,
as well as other hedging instruments. In addition, within the variable annuities
hedging program, we purchase certain fixed income securities. The majority of
these securities are classified as available for sale, with a relatively small
portion for which we elect the fair value option. To minimize counterparty
credit risk the majority of the derivative instruments utilized within the
hedging programs are cleared through global exchanges. Over the counter
derivatives utilized within the hedging programs are highly collateralized.
The hedging programs are monitored on a daily basis to ensure that the economic
hedge targets and the associated derivative portfolios are within the threshold
limits, pursuant to the approved hedging strategies. Daily risk monitoring
verifies that the net risk exposures are within the approved net risk exposure
threshold limits. In addition, monthly stress tests are performed to determine
the program's effectiveness relative to the applicable limits, under an array of
combined severe market stresses in equity prices, interest rates, volatility and
credit spreads. Finally, hedging strategies are reviewed regularly to gauge
their effectiveness in managing our market exposures in the context of our
overall risk appetite.
Reinsurance Activities
Reinsurance is used primarily to manage overall capital adequacy and mitigate the insurance loss (Life and Non-Life) exposure related to certain events, such as natural and man-made catastrophes, death events, or single policy level events. Our subsidiaries operate worldwide primarily by underwriting and accepting risks for their direct account on a gross basis and reinsuring a portion of the exposure on either an individual risk or an aggregate basis to the extent those risks exceed the desired retention level. In addition, as a condition of certain direct underwriting transactions, we may be required by clients, agents or regulation to cede all or a portion of risks to specified reinsurance entities, such as captives, other insurers, local reinsurers and compulsory pools.
Reinsurance markets include:
?Traditional local and global reinsurance markets including those in the United States, Bermuda, London and Europe, accessed directly and through reinsurance intermediaries;
?Capital markets through insurance-linked securities and collateralized reinsurance transactions, such as catastrophe bonds, sidecars and similar vehicles; and
?Other insurers that engage in both direct and assumed reinsurance.
The form of reinsurance we may choose from time to time will generally depend on whether we are seeking:
?proportional reinsurance, whereby we cede a specified percentage of premiums and losses to reinsurers;
?non-proportional or excess of loss reinsurance, whereby we cede all or a specified portion of losses in excess of a specified amount on a per risk, per occurrence (including catastrophe reinsurance) or aggregate basis; or
?facultative contracts that reinsure individual policies.
We continually evaluate the relative attractiveness of different forms of reinsurance contracts and different markets that may be used to achieve our risk and profitability objectives.
Reinsurance contracts do not relieve our subsidiaries from their direct obligations to insureds. However, an effective reinsurance program substantially mitigates our exposure to potentially significant losses.
In certain markets, we are required to participate on a proportional basis in reinsurance pools based on our relative share of direct writings in those markets. Such mandatory reinsurance generally covers higher-risk consumer exposures such as assigned-risk automobile and earthquake, as well as certain commercial exposures such as workers' compensation.
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Reinsurance Recoverable
AIG's reinsurance recoverable assets are comprised of:
?Paid losses recoverable - balances due from reinsurers for losses and loss adjustment expenses paid by our subsidiaries and billed, but not yet collected.
?Ceded loss reserves - ultimate ceded reserves for losses and loss adjustment expenses, including reserves for claims reported but not yet paid and estimates for IBNR.
?Ceded reserves for unearned premiums.
?Life and Annuity reinsurance recoverables (ceded policy and claim reserves and policyholder contract deposits).
At December 31, 2019, total reinsurance recoverable assets were $38.0 billion. These assets include general reinsurance paid losses recoverable of $1.8 billion, ceded loss reserves of $31.4 billion including reserves for IBNR claims, and ceded reserves for unearned premiums of $3.2 billion, as well as life reinsurance recoverable of $1.5 billion. The methods used to estimate IBNR and to establish the resulting ultimate losses involve projecting the frequency and severity of losses over multiple years. These methods are continually reviewed and updated by management. Any adjustments are reflected in income. We believe that the amount recorded for ceded loss reserves at December 31, 2019 reflects a reasonable estimate of the ultimate losses recoverable. Actual losses may, however, differ from the reserves currently ceded. The Reinsurance Credit Department (RCD) conducts periodic detailed assessments of the financial strength and condition of current and potential reinsurers, both foreign and domestic. The RCD monitors both the financial condition of reinsurers as well as the total reinsurance recoverable ceded to reinsurers, and sets limits with regard to the amount and type of exposure we are willing to take with reinsurers. As part of these assessments, we attempt to identify whether a reinsurer is appropriately licensed, assess its financial capacity and liquidity, and evaluate the local economic and financial environment in which a foreign reinsurer operates. The RCD reviews the nature of the risks ceded and the need for measures, including collateral to mitigate credit risk. For example, in our treaty reinsurance contracts, we frequently include provisions that require a reinsurer to post collateral or use other measures to reduce exposure when a referenced event occurs. Furthermore, we limit our unsecured exposure to reinsurers through the use of credit triggers such as insurer financial strength rating downgrades, declines in regulatory capital, or relevant risk-based capital (RBC) ratios fall below certain levels. We also set maximum limits for reinsurance recoverable exposure, which in some cases is the recoverable amount plus an estimate of the maximum potential exposure from unexpected events for a reinsurer. In addition, credit executives within ERM review reinsurer exposures and credit limits and approve reinsurer credit limits above specified levels. Finally, even where we conclude that uncollateralized credit risk is acceptable, we require collateral from active reinsurance counterparties where it is necessary for our subsidiaries to recognize the reinsurance recoverable assets for statutory accounting purposes. At December 31, 2019, we held $23.1 billion of collateral, in the form of funds withheld, securities in reinsurance trust accounts and/or irrevocable letters of credit, in support of reinsurance recoverable assets from unaffiliated reinsurers.
The following table presents information for each reinsurer representing in excess of five percent of our total reinsurance recoverable assets:
At December 31, 2019 A.M. Gross Percent of Uncollateralized
S&P Best Reinsurance Reinsurance Collateral Reinsurance
(in millions) Rating(a) Rating(a) Assets Assets(b) Held(c) Assets
Reinsurer:
Berkshire Hathaway Group of
Companies AA+ A++ $ 14,561 (d) 38.3 % $ 14,403 $ 158
Swiss Reinsurance Group of
Companies AA- A+ $ 4,437 11.7 % $ 1,797 $ 2,640
(a)The financial strength ratings reflect the ratings of the various reinsurance subsidiaries of the companies listed as of January 28, 2020.
(b)Total reinsurance assets include both Property Casualty and Life and Retirement reinsurance recoverable.
(c)Excludes collateral held in excess of recoverable balances.
(d)Includes $13.9 billion recoverable under the 2011 retroactive asbestos reinsurance transaction and the 2017 adverse development reinsurance agreement.
At December 31, 2019, we had no significant reinsurance recoverable due from any individual reinsurer that was financially troubled. Reduced profitability associated with lower rates could potentially result in reduced capacity or rating downgrades for some reinsurers. The RCD, in conjunction with the credit executives within ERM, reviews these developments, monitors compliance with credit triggers that may require the reinsurer to post collateral, and seeks to use other appropriate means to mitigate any material risks arising from these developments.
For further discussion of reinsurance recoverable see Critical Accounting Estimates - Reinsurance Assets.
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Other BUSINESS RiskS
Derivative Transactions
We utilize derivatives principally to enable us to hedge exposure associated
with changes in levels of interest rates, currencies, credit, commodities,
equity prices and other risks. Credit risk associated with derivative
counterparties exists for a derivative contract when that contract has a
positive fair value to us. The maximum potential exposure will increase or
decrease during the life of the derivative commitments as a function of maturity
and market conditions. All derivative transactions must be transacted within
counterparty limits that have been approved by ERM.
We evaluate counterparty credit quality via an internal analysis that is
consistent with the AIG Credit Policy. We utilize various credit enhancements,
including letters of credit, guarantees, collateral, credit triggers, credit
derivatives, margin agreements and subordination to reduce the credit risk
related to outstanding financial derivative transactions. We require credit
enhancements in connection with specific transactions based on, among other
things, the creditworthiness of the counterparties, and transaction size and
maturity. Furthermore, we enter into certain agreements that have the benefit of
set-off and close-out netting provisions, such as ISDA Master Agreements. These
provisions provide that, in the case of an early termination of a transaction,
we can set off receivables from a counterparty against payables to the same
counterparty arising out of all covered transactions. As a result, where a
legally enforceable netting agreement exists, the fair value of the transaction
with the counterparty represents the net sum of estimated fair values.
The fair value of our interest rate, currency, credit, commodity and equity swaps, options, swaptions, and forward commitments, futures, and forward contracts reported as a component of Other assets, was approximately $0.8 billion at December 31, 2019 and $0.9 billion at December 31, 2018. Where applicable, these amounts have been determined in accordance with the respective master netting agreements.
The following table presents the fair value of our derivatives portfolios in asset positions by internal counterparty credit rating:
At December 31, (in millions) 2019 2018 Rating: AAA $ 45 $ 37 AA 19 4 A 145 81 BBB 553 619 Below investment grade* 31 174 Total $ 793 $ 915
*Below investment grade includes not rated.
For additional discussion related to derivative transactions see Note 12 to the Consolidated Financial Statements.
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Glossary
Glossary
Accident year The annual calendar accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.
Accident year combined ratio, as adjusted The combined ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting.
Accident year loss ratio, as adjusted The loss ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting.
Acquisition ratio Acquisition costs divided by net premiums earned. Acquisition costs are those costs incurred to acquire new and renewal insurance contracts and also include the amortization of VOBA and DAC. Acquisition costs vary with sales and include, but are not limited to, commissions, premium taxes, direct marketing costs and certain costs of personnel engaged in sales support activities such as underwriting.
Additional premium represents a premium on an insurance policy over and above the initial premium imposed at the beginning of the policy. An additional premium may be assessed if the insured's risk is found to have increased significantly.
Adjusted revenues exclude Net realized capital gains (losses), income from non-operating litigation settlements (included in Other income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net investment income for GAAP purposes). Adjusted revenues is a GAAP measure for our operating segments.
Assets under 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. Base yield includes returns from base portfolio including accretion and income (loss) from certain other invested assets. 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-common share basis. Book value per common share, excluding AOCI, is derived by dividing total AIG common shareholders' equity, excluding AOCI, by total common shares outstanding. Adjusted book value per common share is derived by dividing total AIG common shareholders' equity, excluding AOCI and DTA (Adjusted Common Shareholders' Equity), by total common shares outstanding. Casualty insurance Insurance that is primarily associated with the losses caused by injuries to third persons, i.e., not the insured, and the legal liability imposed on the insured as a result.
Combined ratio Sum of the loss ratio and the acquisition and general operating expense ratios.
CSA Credit Support Annex A legal document generally associated with an ISDA Master Agreement that provides for collateral postings which could vary depending on ratings and threshold levels.
CVA Credit Valuation Adjustment The CVA adjusts the valuation of derivatives to
account for nonperformance risk of our counterparty with respect to all net
derivative assets positions. Also, the CVA reflects the fair value movement in
AIGFP's asset portfolio that is attributable to credit movements only, without
the impact of other market factors such as interest rates and foreign exchange
rates. Finally, the CVA also accounts for our own credit risk in the fair value
measurement of all derivative net liability positions and liabilities where AIG
has elected the fair value option, when appropriate.
DAC Deferred Policy Acquisition Costs Deferred costs that are incremental and
directly related to the successful acquisition of new business or renewal of
existing business.
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Glossary
DAC Related to Unrealized Appreciation (Depreciation) of Investments An
adjustment to DAC and Reserves for investment-oriented products, equal to the
change in DAC and Unearned Revenue amortization that would have been recorded if
fixed maturity securities available for sale and also, prior to 2018, equity
securities at fair value had been sold at their stated aggregate fair value and
the proceeds reinvested at current yields. An adjustment to benefit reserves for
investment-oriented products is also recognized to reflect the application of
the benefit ratio to the accumulated assessments that would have been recorded
if fixed maturity securities available for sale and also, prior to 2018, equity
securities at fair value had been sold at their stated aggregate fair value and
the proceeds reinvested at current yields (collectively referred to as "shadow
Investment-Oriented Adjustments").
For long-duration traditional products, significant unrealized appreciation of
investments in a sustained low interest rate environment may cause additional
future policy benefit liabilities to be recorded (shadow loss reserves).
Deferred Gain on Retroactive Reinsurance Retroactive reinsurance is a
reinsurance contract in which an assuming entity agrees to reimburse a ceding
entity for liabilities incurred as a result of past insurable events. If the
amount of premium paid by the ceding reinsurer is less than the related ceded
loss reserves, the resulting gain is deferred and amortized over the settlement
period of the reserves. Any related development on the ceded loss reserves
recoverable under the contract would increase the deferred gain if unfavorable,
or decrease the deferred gain if favorable.
Expense ratio Sum of acquisition expenses and general operating expenses, divided by net premiums earned.
General operating expense ratio General operating expenses divided by net premiums earned. General operating expenses are those costs that are generally attributed to the support infrastructure of the organization and include but are not limited to personnel costs, projects and bad debt expenses. General operating expenses exclude losses and loss adjustment expenses incurred, acquisition expenses, and investment expenses.
GIC/GIA Guaranteed Investment Contract/Guaranteed Investment Agreement A contract whereby the seller provides a guaranteed repayment of principal and a fixed or floating interest rate for a predetermined period of time.
IBNR Incurred But Not Reported Estimates of claims that have been incurred but not reported to us.
ISDA Master Agreement An agreement between two counterparties, which may have multiple derivative transactions with each other governed by such agreement, that generally provides for the net settlement of all or a specified group of these derivative transactions, as well as pledged collateral, through a single payment, in a single currency, in the event of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions.
LAE Loss Adjustment Expenses The expenses directly attributed to settling and paying claims of insureds and include, but are not limited to, legal fees, adjuster's fees and the portion of general expenses allocated to claim settlement costs.
Loan-to-Value Ratio Principal amount of loan amount divided by appraised value of collateral securing the loan.
Loss Ratio Losses and loss adjustment expenses incurred divided by net premiums earned.
Loss reserve development The increase or decrease in incurred losses and loss adjustment expenses related to prior years as a result of the re-estimation of loss reserves at successive valuation dates for a given group of claims. Loss reserves Liability for unpaid losses and loss adjustment expenses. The estimated ultimate cost of settling claims relating to insured events that have occurred on or before the balance sheet date, whether or not reported to the insurer at that date.
Master netting agreement An agreement between two counterparties who have multiple derivative contracts with each other that provides for the net settlement of all contracts covered by such agreement, as well as pledged collateral, through a single payment, in a single currency, in the event of default on or upon termination of any one such contract.
Natural catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and man-made catastrophe losses, such as terrorism and civil disorders that exceed the $10 million threshold. Net premiums written represent the sales of an insurer, adjusted for reinsurance premiums assumed and ceded, during a given period. Net premiums earned are the revenue of an insurer for covering risk during a given period. Net premiums written are a measure of performance for a sales period, while Net premiums earned are a measure of performance for a coverage period.
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Glossary
Noncontrolling interests The portion of equity ownership in a consolidated subsidiary not attributable to the controlling parent company.
Policy fees An amount added to a policy premium, or deducted from a policy cash value or contract holder account, to reflect the cost of issuing a policy, establishing the required records, sending premium notices and other related expenses. Pool A reinsurance arrangement whereby all of the underwriting results of the pool members are combined and then shared by each member in accordance with its pool participation percentage. Premiums and deposits - Life and Retirement includes direct and assumed amounts received and earned on traditional life insurance policies, group benefit policies and life-contingent payout annuities, as well as deposits received on universal life, investment-type annuity contracts, FHLB funding agreements and mutual funds.
Prior year development See Loss reserve development.
RBC Risk-Based Capital A formula designed to measure the adequacy of an insurer's statutory surplus compared to the risks inherent in its business.
Reinstatement premiums Additional premiums payable to reinsurers or receivable from insurers to restore coverage limits that have been reduced or exhausted as a result of reinsured losses under certain excess of loss reinsurance 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 common equity - Adjusted after-tax income excluding AOCI and DTA (Adjusted return on common equity) is a non-GAAP measure and is used to show the rate of return on common shareholders' equity. Adjusted return on common equity is derived by dividing actual or annualized adjusted after-tax income attributable to AIG common shareholders by average Adjusted Common Shareholders' Equity.
Return premium represents amounts given back to the insured in the case of a cancellation, an adjustment to the rate or an overpayment of an advance premium.
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.
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Acronyms
Acronyms
A&H Accident and Health Insurance GMWB Guaranteed Minimum Withdrawal
Benefits
ABS Asset-Backed Securities ISDA International Swaps and
Derivatives Association, Inc.
AUM Assets Under Management Moody's Moody's Investors' Service Inc.CDO Collateralized Debt Obligations NAIC National Association of Insurance
Commissioners
CDS Credit Default Swap NM Not Meaningful
CMA Capital Maintenance Agreement OTC Over-the-Counter
CMBS Commercial Mortgage-Backed OTTI Other-Than-Temporary Impairment
Securities
EGPs Estimated gross profits RMBS Residential Mortgage-Backed
Securities
FASB Financial Accounting Standards S&P Standard & Poor's Financial Board
Services LLC
FRBNY Federal Reserve Bank of New York SEC Securities and Exchange Commission
GAAP Accounting principles generally URR Unearned revenue reserve
accepted in the United States of America
GMDB Guaranteed Minimum Death Benefits VIE Variable Interest Entity
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ITEM 7A | Quantitative and Qualitative Disclosures about Market Risk
ITEM 7A | Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is set forth in the Enterprise Risk Management section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.
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Part II
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