AMERICAN INTERNATIONAL GROUP, INC. Glossary and Acronyms of Selected Insurance Terms and References
Throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), we use certain terms and abbreviations, which are summarized in the Glossary and Acronyms.American International Group, Inc. (AIG) has incorporated into this discussion a number of cross-references to additional information included throughout this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 (the 2019 Annual Report) to assist readers seeking additional information related to a particular subject. In this Quarterly Report on Form 10-Q, unless otherwise mentioned or unless the context indicates otherwise, we use the terms "AIG," the "Company," "we," "us" and "our" to refer toAmerican International Group, Inc. , aDelaware corporation, and its consolidated subsidiaries. We use the term "AIG Parent" to refer solely toAmerican International Group, Inc. , and not to any of its consolidated subsidiaries.
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q and other publicly available documents may include, and officers and representatives of AIG may from time to time make and discuss, projections, goals, assumptions and statements that may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These projections, goals, assumptions and statements are not historical facts but instead represent only a belief regarding future events, many of which, by their nature, are inherently uncertain and outside 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, the effect of catastrophes and macroeconomic events, such as COVID-19, anticipated dispositions, monetization and/or acquisitions of businesses or assets, or successful integration of acquired businesses, management succession and retention plans, exposure to risk, trends in operations and financial results.
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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:
?the adverse impact of COVID-19, ?concentrations in AIG's investment including with respect to AIG's portfolios; business, financial condition and ?changes to the valuation of AIG's results of operations;
investments;
?changes in market and industry ?actions by credit rating agencies;
conditions, including the significant ?changes in judgments concerning
global economic downturn, general market insurance underwriting and insurance
declines, prolonged economic recovery liabilities;
and disruptions to AIG's operations ?the effectiveness of strategies to
driven by COVID-19 and responses recruit and retain key personnel and to
thereto, including new or changed implement effective succession plans;
governmental policy and regulatory ?the requirements, which may change
actions; from time to time, of the global
?the occurrence of catastrophic events, regulatory framework to which AIG is
both natural and man-made, including subject;
COVID-19, pandemics, civil unrest and ?significant legal, regulatory or
the effects of climate change; governmental proceedings;
?AIG's ability to effectively execute on ?AIG's ability to successfully manage
AIG 200 operational programs designed to Legacy Portfolios;
achieve underwriting excellence, ?AIG's ability to successfully dispose
modernization of AIG's operating of, monetize and/or acquire businesses
infrastructure, enhanced user and or assets or successfully integrate
customer experiences and unification of acquired businesses;
AIG; ?changes in judgments concerning the
?the impact of potential information recognition of deferred tax assets and technology, cybersecurity or data the impairment of goodwill; and security breaches, including as a result ?such other factors discussed in: of cyber-attacks or security
-Part I, Item 2. MD&A and Part II, Item
vulnerabilities, the likelihood of which 1A. Risk Factors of this Quarterly may increase due to extended remote Report on Form 10-Q; business operations as a result of -Part I, Item 2. MD&A of the Quarterly COVID-19;
Report on Form 10-Q for the quarterly
?disruptions in the availability of period ended
II, Item 7. MD&A of the 2019 Annual
?the effectiveness of our risk Report.
management policies and procedures,
including with respect to our business
continuity and disaster recovery plans;
?changes in judgments concerning
potential cost-saving opportunities;
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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INDEX TO ITEM 2
Page
Use of Non-GAAP Measures 81
Critical Accounting Estimates 84
Executive Summary 87
Overview 87
Financial Performance Summary 89
AIG's Outlook - Industry and Economic Factors 94
Consolidated Results of Operations 98
Business Segment Operations 104
General Insurance 105
Life and Retirement 117
Other Operations 135
Legacy Portfolio 137
Investments 141
Overview 141
Investment Highlights in the Six Months Ended June 30, 2020 141
Investment Strategies 141
Credit Ratings 143
Credit Impairments 150
Insurance Reserves 153
Loss Reserves 153
Life and Annuity Reserves and DAC 158
Liquidity and Capital Resources 164
Overview 164
Analysis of Sources and Uses of Cash 166
Liquidity and Capital Resources of AIG Parent and Subsidiaries 167
Credit Facilities 169
Contractual Obligations 170
Off-Balance Sheet Arrangements and Commercial Commitments 171
Debt 172
Credit Ratings 174
Financial Strength Ratings 174
Regulation and Supervision 175
Dividends 175
Repurchases of AIG Common Stock 175
Dividend Restrictions 175
Enterprise Risk Management 176
Overview 176
Market Risk Management 176
Regulatory Environment 181
Overview 181
Glossary 183
Acronyms 186
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ITEM 2 | Use of Non-GAAP Measures
Use of Non-GAAP Measures
Throughout this MD&A, we present our financial condition and results of
operations in the way we believe will be most meaningful and representative of
our business results. Some of the measurements we use are "non-GAAP financial
measures" under Securities and Exchange Commission rules and regulations. GAAP
is the acronym for "generally accepted accounting principles" in the United
States . The non-GAAP financial measures we present may not be comparable to
similarly-named measures reported by other companies.
Book value per common share, excluding accumulated other comprehensive income
(AOCI) adjusted for the cumulative unrealized gains and losses related to
Fortitude Re's Funds Withheld Assets and Book value per common share, excluding
AOCI adjusted for the cumulative unrealized gains and losses related to
Fortitude Re's Funds Withheld Assets 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 after eliminating items that can fluctuate significantly
from period to period including changes in fair value of AIG's 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. In addition, we adjust for the cumulative
unrealized gains and losses related to Fortitude Re's Funds Withheld Assets
since these fair value movements are economically transferred to Fortitude Re.
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
adjusted for the cumulative unrealized gains and losses related to Fortitude
Re's Funds Withheld Assets, is derived by dividing total AIG common
shareholders' equity, excluding AOCI adjusted for the cumulative unrealized
gains and losses related to Fortitude Re's Funds Withheld Assets, by total
common shares outstanding. Adjusted book value per common share is derived by
dividing total AIG common shareholders' equity, excluding AOCI adjusted for the
cumulative unrealized gains and losses related to Fortitude Re's Funds Withheld
Assets and DTA (Adjusted Common Shareholders' Equity), by total common shares
outstanding. The reconciliation to book value per common share, the most
comparable GAAP measure, is presented in the Executive Summary section of this
MD&A.
Return on common equity - Adjusted after-tax income excluding AOCI adjusted for
the cumulative unrealized gains and losses related to Fortitude Re'sFunds
Withheld Assets 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. In addition, we adjust for the cumulative unrealized
gains and losses related to Fortitude Re's Funds Withheld Assets since these
fair value movements are economically transferred to Fortitude Re. We exclude
deferred tax assets representing U.S. tax attributes related to net operating
loss carryforwards and foreign tax credits as they have not yet been utilized.
Amounts for interim periods are estimates based on projections of full-year
attribute utilization. As net operating loss carryforwards and foreign tax
credits are utilized, the portion of the DTA utilized is included in Adjusted
return on common equity. Adjusted return on common equity is derived by dividing
actual or annualized adjusted after-tax income attributable to AIG common
shareholders by average Adjusted Common Shareholders' Equity. The reconciliation
to return on common equity, the most comparable GAAP measure, is presented in
the Executive Summary section of this MD&A.
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ITEM 2 | Use of Non-GAAP Measures
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 (the Tax Act);
and by excluding the net realized capital gains (losses) and other charges 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.
Adjusted pre-tax income is derived by excluding the items set forth below from income from continuing operations before income tax. This definition is consistent across our segments. These items generally fall into one or more of the following broad categories: legacy matters having no relevance to our current businesses or operating performance; adjustments to enhance transparency to the underlying economics of transactions; and measures that we believe to be common to the industry. APTI is a GAAP measure for our segments. Excluded items include the following:
?changes in fair value of securities ?income or loss from discontinued used to hedge guaranteed living operations; benefits;
?net loss reserve discount benefit
?changes in benefit reserves and (charge);
deferred policy acquisition costs (DAC), ?pension expense related to a one-time
value of business acquired (VOBA), and lump sum payment to former employees;
sales inducement assets (SIA) related to ?income and loss from divested
net realized capital gains and losses; businesses;
?changes in the fair value of equity ?non-operating litigation reserves and
securities; settlements;
?net investment income on Fortitude Re ?restructuring and other costs related funds withheld assets post
to initiatives designed to reduce
deconsolidation of Fortitude Re; operating expenses, improve efficiency
?following deconsolidation of Fortitude and simplify our organization;
Re, net realized capital gains and ?the portion of favorable or unfavorable
losses on Fortitude Re funds withheld prior year reserve development for which
assets held by AIG in support of we have ceded the risk under retroactive
Fortitude Re's reinsurance obligations reinsurance agreements and related
to AIG (Fortitude Re funds withheld changes in amortization of the deferred
assets); gain;
?loss (gain) on extinguishment of debt; ?integration and transaction costs
?all net realized capital gains and associated with acquired businesses;
losses except earned income (periodic ?losses from the impairment of goodwill;
settlements and changes in settlement and
accruals) on derivative instruments used ?non-recurring costs associated with the
for non-qualifying (economic) hedging or implementation of non-ordinary course
for asset replication. Earned income on legal or regulatory changes or changes
such economic hedges is reclassified to accounting principles.
from net realized capital gains and
losses to specific APTI line items based
on the economic risk being hedged (e.g.
net investment income and interest
credited to policyholder account
balances);
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ITEM 2 | Use of Non-GAAP Measures
?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. AIG | Second Quarter 2020 Form 10-Q 83
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ITEM 2 | Critical Accounting Estimates
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires the
application of accounting policies that often involve a significant degree of
judgment.
The accounting policies that we believe are most dependent on the application of
estimates and assumptions, which are critical accounting estimates, are related
to the determination of:
?loss reserves;
?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 impairments on other invested assets and goodwill
impairment;
?allowances for credit losses primarily on loans, available for sale fixed
maturity securities, reinsurance assets and premiums and other receivables;
?liability for legal contingencies;
?fair value measurements of certain financial assets and liabilities; and
?income tax assets and liabilities, including recoverability of our net deferred
tax asset and the predictability of future tax operating profitability of the
character necessary to realize the net deferred tax asset and estimates
associated with the Tax Act.
These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected.
The following accounting estimates have been updated from the descriptions in the 2019 Annual Report on account of the new accounting standard that changed how entities account for current expected credit losses (CECL) for most financial assets, premiums receivable, trade receivables, off-balance sheet exposures and reinsurance receivables (the Financial Instruments Credit Losses Standard) that we adopted onJanuary 1, 2020 .
Reinsurance RECOVERABLE
The estimation of reinsurance recoverable involves a significant amount of judgment, particularly for latent exposures, such as asbestos, due to their long-tail nature. Reinsurance assets include reinsurance recoverable on unpaid losses and loss adjustment expenses that are estimated as part of our loss reserving process and, consequently, are subject to similar judgments and uncertainties as the estimation of gross loss reserves. Similarly, Other assets include reinsurance recoverable for contracts which are accounted for as deposits.
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ITEM 2 | Critical Accounting Estimates
We assess the collectability of reinsurance recoverable balances, at minimum on
an annual basis, through either historical trends of disputes and credit events
or financial analysis of the credit quality of the reinsurer. We record
adjustments to reflect the results of these assessments through an allowance for
credit losses and disputes on uncollectable reinsurance that reduces the
carrying amount of reinsurance and other assets on the balance sheet
(collectively, the reinsurance recoverable balances). This estimate requires
significant judgment for which key considerations include:
?paid and unpaid amounts recoverable;
?whether the balance is in dispute or subject to legal collection;
?the relative financial health of the reinsurer as determined by the Obligor Risk Ratings (ORRs) we assign to each reinsurer based upon our financial reviews; insurers that are financially troubled (i.e., in run-off, have voluntarily or involuntarily been placed in receivership, are insolvent, are in the process of liquidation or otherwise subject to formal or informal regulatory restriction) are assigned ORRs that will generate significant allowance; and
?whether collateral and collateral arrangements exist.
An estimate of the reinsurance recoverable's lifetime expected credit losses is established utilizing a probability of default and loss given default method, which reflects the reinsurer's ORR rating. The allowance for credit losses excludes disputed amounts. An allowance for disputes is established for a reinsurance recoverable using the losses incurred model for contingencies.
At
Impairment Charges Impairments of Investments
Available for sale securities
If we intend to sell a fixed maturity security, or it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, an impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized capital losses. No allowance is established in these situations. When assessing our intent to sell a fixed maturity security, or whether it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis, management evaluates relevant facts and circumstances including, but not limited to, decisions to reposition our investment portfolio, sales of securities to meet cash flow needs and sales of securities to take advantage of favorable pricing. For fixed maturity securities for which a decline in the fair value below the amortized cost is due to credit related factors, an allowance is established for the difference between the estimated recoverable value and amortized cost with a corresponding charge to realized capital losses. The allowance for credit losses is limited to the difference between amortized cost and fair value. The estimated recoverable value is the present value of cash flows expected to be collected, as determined by management. The difference between fair value and amortized cost that is not associated with credit related factors is presented in unrealized appreciation (depreciation) of fixed maturity securities on which an allowance for credit losses were recognized (a separate component of accumulated other comprehensive income).
Commercial and residential mortgage loans
At the time of origination or purchase, an allowance for credit losses is
established for mortgage and other loan receivables and is updated each
reporting period. Changes in the allowance for credit losses are recorded in
realized capital losses. This allowance reflects the risk of loss, even when
that risk is remote, and reflects losses expected over the remaining contractual
life of the loan. The allowance for credit losses considers available relevant
information about the collectability of cash flows, including information about
past events, current conditions, and reasonable and supportable forecasts of
future economic conditions. We revert to historical information when we
determine that we can no longer reliably forecast future economic assumptions.
The allowances for the commercial mortgage loans and residential mortgage loans
are estimated utilizing a probability of default and loss given default model.
Loss rate factors are determined based on historical data and adjusted for
current and forecasted information. The loss rates are applied based on
individual loan attributes and considering such data points as loan-to-value
ratios, Fair Isaac Corporation (FICO) scores, and debt service coverage.
The estimate of credit losses also reflects management's assumptions on certain
macroeconomic factors that include, but are not limited to, gross domestic
product growth, employment, inflation, housing price index, interest rates and
credit spreads.
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ITEM 2 | Critical Accounting Estimates
Goodwill Impairment
Goodwill represents the future economic benefits arising from assets acquired in
a business combination that are not individually identified and separately
recognized. At both June 30, 2020 and December 31, 2019 , our goodwill balance
was $4.0 billion . The operating segments with goodwill are our General Insurance
business - North America and International operating segments, our Life and
Retirement business - Life Insurance operating segment, Legacy Portfolio and
Other Operations.
Goodwill is tested for impairment annually or more frequently if circumstances
indicate an impairment may have occurred. The date of our annual goodwill
Impairment testing is July 1 . In 2019, for substantially all of the reporting
units we performed quantitative assessments that supported a conclusion that the
fair value of all of the reporting units tested exceeded their book value. To
determine fair value, we primarily use a discounted expected future cash flow
analysis that estimates and discounts projected future distributable earnings.
Such analysis is principally based on our business projections that inherently
include judgments regarding business trends.
COVID-19 has caused significant market volatility impacting our actual and
projected results along with a decline in our stock price. During the
three-month period ended June 30, 2020 , we performed a qualitative assessment
that continues to support a conclusion that fair values of all of our reporting
units exceeded their book value. As this is an evolving crisis, we expect to
continue to monitor developments and perform updated analyses as necessary.
For a complete discussion of goodwill impairment see Part I, Item 1A. Risk
Factors - Estimates and Assumptions and Note 13 to the Consolidated Financial
Statements in the 2019 Annual Report and Part II, Item 1A. Risk Factors in the
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 .
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. Recent events, including the COVID-19 crisis, multiple reductions in target interest rates by theBoard of Governors of theFederal Reserve System , and significant market volatility, continued to impact actual and projected results of our business operations as well as our views on potential effectiveness of certain prudent and feasible tax planning strategies. In order to demonstrate the predictability and sufficiency of future taxable income necessary to support the realizability of the net operating losses and foreign tax credit carryforwards, we have considered forecasts of future income for each of our businesses, including assumptions about future macro-economic and AIG-specific conditions and events, and any impact these conditions and events may have on our prudent and feasible tax planning strategies. We also subjected the forecasts to a variety of stresses of key assumptions and evaluate the effect on tax attribute utilization. The carryforward periods of our foreign tax credit carryforwards range from tax years 2020 through 2023. Carryforward periods for our net operating losses extend from 2028 forward. However, utilization of a portion of our net operating losses is limited under separate return limitation year (SRLY) rules. Based on the events that transpired in the six-month period endedJune 30, 2020 and our analysis of their potential impact on utilization of our tax attributes, we concluded that valuation allowance should be established on a portion of our foreign tax credit carryforwards and net operating losses that are no longer more-likely-than-not to be realized, all of which was allocated to continuing operations.
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ITEM 2 | Critical Accounting Estimates
For the six-month period ended June 30, 2020 , recent changes in market
conditions, including the COVID-19 crisis and interest rate fluctuations,
impacted the unrealized tax gains and losses in the U.S. Life Insurance
Companies' available for sale securities portfolio, resulting in a deferred tax
liability related to net unrealized tax capital gains. As of June 30, 2020 ,
based on all available evidence, we concluded that no valuation allowance is
necessary in the U.S. Life Insurance Companies' available for sale securities
portfolio.
For the six-month period ended June 30, 2020 , recent changes in market
conditions, including interest rate fluctuations, impacted the unrealized tax
gains and losses in the U.S. non-life companies' available for sale securities
portfolio, resulting in a deferred tax liability related to net unrealized tax
capital gains. As of June 30, 2020 , based on all available evidence, we
concluded that no valuation allowance is necessary in the U.S. non-life
companies' available for sale securities portfolio. Accordingly, for the
three-month period ended June 30, 2020 , we released $115 million of valuation
allowance associated with the unrealized tax losses in the U.S. non-life
companies' available for sale securities portfolio which was recorded during the
three-month period ended March 31, 2020 . Amounts recorded in both periods were
allocated to other comprehensive income.
For a complete discussion of our critical accounting estimates, see Part II, Item 7. MD&A - Critical Accounting Estimates in the 2019 Annual Report.
Executive Summary
Overview
This overview of the MD&A highlights selected information and may not contain all of the information that is important to current or potential investors in our securities. You should read this Quarterly Report on Form 10-Q, together with the 2019 Annual Report, in their entirety for a more detailed description of events, trends, uncertainties, risks and critical accounting estimates affecting us. OnJune 2, 2020 , we completed the sale of a majority of the interests inFortitude Group Holdings, LLC (Fortitude Holdings ) toCarlyle FRL, L.P. (Carlyle FRL), an investment fund advised by an affiliate ofThe Carlyle Group Inc. (Carlyle), andT&D United Capital Co., Ltd. (T&D), a subsidiary of T&D Holdings, Inc., under the terms of a membership interest purchase agreement entered into onNovember 25, 2019 by and among AIG,Fortitude Holdings , Carlyle FRL, Carlyle,T&D and T&D Holdings, Inc. (the Majority Interest Fortitude Sale). AIG establishedFortitude Reinsurance Company Ltd. (Fortitude Re), a wholly owned subsidiary ofFortitude Holdings , in 2018 in a series of reinsurance transactions related to AIG's Legacy Portfolio. As ofJune 30, 2020 , approximately$30.5 billion of reserves from AIG's Legacy Life and Retirement Run-Off Lines and approximately$4.1 billion of reserves from AIG's Legacy General Insurance Run-Off Lines, related to business written by multiple wholly-owned AIG subsidiaries, had been ceded to Fortitude Re under these reinsurance transactions. As of closing of the Majority Interest Fortitude Sale, these reinsurance transactions are no longer considered affiliated transactions and Fortitude Re is the reinsurer of the majority of AIG's Legacy Portfolio. As these reinsurance transactions are structured as modified coinsurance and loss portfolio transfers with funds withheld, following the closing of the Majority Interest Fortitude Sale, AIG continues to reflect the invested assets, which consist mostly of available for sale securities, supporting Fortitude Re's obligations, in AIG's financial statements. AIG sold a 19.9 percent ownership interest inFortitude Holdings toTC Group Cayman Investments Holdings, L.P. (TCG), an affiliate of Carlyle, inNovember 2018 (the 2018 Fortitude Sale). As a result of completion of the Majority Interest Fortitude Sale, Carlyle FRL purchased from AIG a 51.6 percent ownership interest inFortitude Holdings and T&D purchased from AIG a 25 percent ownership interest inFortitude Holdings ; AIG retained a 3.5 percent ownership interest inFortitude Holdings and one seat on itsBoard of Managers . The$2.2 billion of proceeds received by AIG at closing include (i) the$1.8 billion under the Majority Interest Fortitude Sale, which is subject to a post-closing purchase price adjustment pursuant to which AIG will pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur on or prior toDecember 31, 2023 , up to a maximum payment of$500 million ; and (ii) a$383 million purchase price adjustment from Carlyle FRL and T&D, corresponding to their respective portions of a proposed$500 million non-pro rata distribution fromFortitude Holdings that was not received by AIG prior to the closing.
For further discussion on the sale of
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ITEM 2 | Executive Summary
AIG'S OPERATING STRUCTURE
Our Core businesses include General Insurance , Life and Retirement and Other
Operations. General Insurance consists of two operating segments - North America
and International. Life and Retirement consists of four operating segments -
Individual Retirement, Group Retirement, Life Insurance and Institutional
Markets. Blackboard U.S. Holdings, Inc. (Blackboard), AIG's technology-driven
subsidiary, is reported within Other Operations. At the end of March 2020 ,
Blackboard was placed into run-off. We also report a Legacy Portfolio consisting
of our run-off insurance lines and legacy investments that we consider non-core.
Effective February 2018 , our Bermuda -domiciled composite reinsurer, Fortitude Re
was included in our Legacy Portfolio. In November 2019 , we announced the
Majority Interest Fortitude Sale. On June 2, 2020 , we completed the Majority
Interest Fortitude Sale. Upon closing of the Majority Interest Fortitude Sale,
AIG has a 3.5 percent ownership interest in Fortitude Holdings .
Consistent with how we manage our business, our General Insurance North America
operating segment primarily includes insurance businesses in the United States ,
Canada and Bermuda . Our General Insurance International operating segment
includes regional insurance businesses in Japan , the UK , Europe , Asia Pacific ,
Latin America and Caribbean , Middle East and Africa , and China . General
Insurance results are presented before consideration of internal reinsurance
agreements.
For further discussion on our business segments see Note 3 to the Condensed Consolidated Financial Statements.
Business SegmentsGeneral Insurance Life and Retirement
provider of insurance products and that brings together a broad portfolio of
services for commercial and life insurance, retirement and
personal insurance customers. It institutional products offered through an
includes one of the world's most extensive, multichannel distribution
far-reaching property casualty network. It holds long-standing, leading
networks.
a broad range of products to serves in the
customers through a diversified, position, customer-focused service, breadth
multichannel distribution network. of product expertise and deep distribution
Customers value
strong capital position, extensive Life and Retirement is well positioned to
risk management and claims serve growing market needs.
experience and its ability to be a
market leader in critical lines of
the insurance business.
[[Image Removed: Picture [[Image Removed: Picture
1]][[Image Removed: Picture 2]] 3]][[Image Removed: Picture
4]][[Image Removed: Picture
5]][[Image Removed: Picture 6]]following major operating major operating companies: American
General
companies: National Union Fire
Pa. (
(Lexington);AIG General Insurance AIG Life Limited .Company, Ltd. (AIG Sonpo);AIG Asia Pacific Insurance, Pte, Ltd. ; AIGEurope S.A. ;American International Group UK Ltd. ;Validus Reinsurance, Ltd. (Validus );Talbot Holdings Ltd. (Talbot );Western World Insurance Group, Inc. andGlatfelter Insurance Group (Glatfelter). Other Operations Legacy Portfolio
Other Operations consists of Legacy Portfolio includes Legacy Life and
businesses and items not attributed Retirement Run-Off Lines, Legacy General
to our
and Retirement segments or our Investments. Effective
Legacy Portfolio. It includes AIG Fortitude Re, our
Parent; Blackboard; deferred tax composite reinsurer, was included in our
assets related to tax attributes; Legacy Portfolio. On
corporate expenses and intercompany announced an agreement to sell a
eliminations. At the end of March controlling financial interest in Fortitude
2020, Blackboard was placed into Holdings. OnJune 2, 2020 , we completed the run-off. sale of a controlling interest in Fortitude Holdings (reducing our interest inFortitude Holdings to 3.5 percent), and Fortitude Re is only in the Legacy Portfolio through such date.
88 AIG | Second Quarter 2020 Form 10-Q
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ITEM 2 | Executive Summary
Financial Performance Summary
Net Income (Loss) Attributable To AIG Common Shareholders Three Months EndedJune 30 , (in millions) 2020 and 2019 Quarterly Comparison [[Image Removed: Chart 3]] Net income (loss) attributable to AIG Common Shareholders decreased due to: ?loss on the closing of the Majority Interest Fortitude Sale; ?net realized capital losses in the three-month period endedJune 30, 2020 compared to net realized capital gains in the same period in the prior year; ?lower investment returns due to losses on our private equity funds compared to gains in the same period in the prior year, which included income from an initial public offering of a holding in the private equity portfolio; and ?higher catastrophe losses and adverse mortality primarily due to the impact of COVID-19. This decrease was partially offset by: ?lower net loss reserve discount charge; and ?lower variable annuity DAC/SIA amortization and reserves due to higher equity market performance. For further discussion see Consolidated Results of Operations. AIG | Second Quarter 2020 Form 10-Q 89
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ITEM 2 | Executive Summary
Net Income (Loss) Attributable To AIG Common Shareholders
Six Months Ended June 30 ,
(in millions)
2020 and 2019 Year-to-Date Comparison
[[Image Removed: Chart 4]] Net income (loss) attributable to AIG Common
Shareholders decreased due to:
?loss on the closing of the Majority Interest
Fortitude Sale;
?lower investment returns due to losses on our
alternative investments and fair value option
equity security holdings due to declines in
equity markets in the six-month period ended
June 30, 2020 , and lower income on our fixed
maturity securities for which the fair value
option was elected due to a widening of credit
spreads in the current period. This compares to
the same period in the prior year where we
experienced gains on our alternative
investments, which included income from an
initial public offering of a holding in the
private equity portfolio, and gains on fair
value option equity security holdings as a
result of robust returns in equity markets and
higher gains on our fixed maturity securities
for which the fair value option was elected due
to a decrease in rates and narrowing of credit
spreads;
?higher catastrophe losses and adverse mortality
primarily due to the impact of COVID-19; and
?asset impairment charges as a result of
Blackboard being placed into run-off.
This decrease was partially offset by:
?net realized capital gains in the six-month
period ended June 30, 2020 compared to net
realized capital losses in the same period in
the prior year;
?lower net loss reserve discount charge; and
?the impact of noncontrolling interest
attributed to Fortitude Re results as discussed
in Consolidated Results of Operations.
For further discussion see Consolidated Results
of Operations.
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ITEM 2 | Executive Summary
Adjusted Pre-Tax Income*
Three Months Ended June 30 ,
(in millions)
2020 and 2019 Quarterly Comparison
[[Image Removed: Chart 4]] Adjusted pre-tax income decreased primarily due
to:
?lower investment returns due to losses on our
private equity funds compared to gains in the
same period in the prior year, which included
income from an initial public offering of a
holding in the private equity portfolio; and
?higher catastrophe losses and adverse
mortality primarily due to the impact of
COVID-19.
This decrease was partially offset by:
?lower variable annuity DAC/SIA amortization
and reserves due to higher equity market
performance.
Adjusted Pre-Tax Income*
Six Months Ended June 30 ,
(in millions)
2020 and 2019 Year-to-Date Comparison
[[Image Removed: Chart 4]] Adjusted pre-tax income decreased primarily due
to:
?lower investment returns due to losses on our
alternative investments due to declines in
equity markets in the six-month period ended
June 30, 2020 , and lower income on our fixed
maturity securities for which the fair value
option was elected due to a widening of credit
spreads in the current period. This compares to
the same period in the prior year where we
experienced gains on our alternative
investments, which included income from an
initial public offering of a holding in the
private equity portfolio, as a result of robust
returns in equity markets and higher gains on
our fixed maturity securities for which the
fair value option was elected due to a decrease
in rates and narrowing of credit spreads; and
?higher catastrophe losses and adverse
mortality primarily due to the impact of
COVID-19 .
*Non-GAAP measure - for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
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ITEM 2 | Executive Summary
General Operating and Other Expenses
Three Months Ended June 30 ,
(in millions)
2020 and 2019 Quarterly Comparison
[[Image Removed: Chart 1]] General operating and other expenses
decreased primarily due lower
employee-related expenses. General
operating and other expenses in the
three-month periods ended June 30, 2020
and 2019 included approximately $134
million and $60 million of pre-tax
restructuring and other costs,
respectively, which were primarily
comprised of employee severance charges
and other exit costs related to
organizational simplification,
operational efficiency, and business
rationalization.
General Operating and Other Expenses
Six Months Ended June 30 ,
(in millions)
2020 and 2019 Year-to-Date Comparison
[[Image Removed: Chart 1]] General operating and other expenses
increased primarily due to restructuring
and related costs partially offset by
lower employee- related expenses.
General operating and other expenses in
the six-month periods ended June 30,
2020 and 2019 included approximately
$224 million and $107 million of pre-tax
restructuring and other costs,
respectively, 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 2 | Executive Summary
Return on Common Equity Return on Common Equity[[Image Removed: Chart 1]] [[Image Removed: Chart 3]] Adjusted Return on Common Equity* Adjusted Return on Common Equity* [[Image Removed: Chart 1]] [[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.
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AIG's Outlook - Industry and economic factors
Our business is affected by industry and economic factors such as interest rates, currency exchange rates, credit and equity market conditions, catastrophic claims events, regulation, tax policy, competition, and general economic, market and political conditions. We continued to operate under difficult market conditions in the first six months of 2020, characterized by factors such as the impact of COVID-19 and the related governmental and societal responses, historically low interest rates, global economic contraction, global trade tensions and theUK's 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 COVID-19
We are continually assessing the impact on our business, operations and investments of COVID-19 and the resulting ongoing and severe economic and societal disruption. Adverse impacts to the global economy resulting from the crisis, including a global economic contraction, disruptions in financial markets, increased market volatility and declines in equity and other asset prices have had and may continue to have negative effects on our investments, our access to liquidity, our ability to generate new sales and the costs associated with claims. In addition, in response to the crisis, new governmental, legislative and regulatory actions have been taken and continue to be developed that could result in additional restrictions and requirements, or court decisions rendered, relating to our policies that may have a negative impact on our business, operations and capital.General Insurance offers numerous products for which we are monitoring claims activity and assessing adverse impact on future new and renewal business in relation to the COVID-19 crisis.General Insurance had$674 million and$1.1 billion of pre-tax catastrophe losses, net of reinsurance, in the three- and six-month periods endedJune 30, 2020 , respectively. This included$458 million and$730 million of estimated COVID-19 losses related to travel, contingency, commercial property, trade credit, workers' compensation andValidus in the three- and six-month periods endedJune 30, 2020 , respectively. The remainder of the catastrophe losses were primarily weather-related. We are continually reassessing our exposures in light of unfolding developments in theU.S. and globally and evaluating coverage by our reinsurance arrangements. In our Life and Retirement business, the most significant impacts relating to COVID-19 have been the impact of interest rate and equity market levels on spread and fee income, deferred acquisition cost amortization and adverse mortality. We are actively monitoring our claims activity and the potential direct and indirect impacts that COVID-19 may have across our portfolio of Life and Retirement businesses. We have a diverse investment portfolio with material exposures to various forms of credit risk. Because of the far reaching economic impacts of COVID-19, it is likely that there will be continued impact on the value of the portfolio, however, at this point in time, uncertainty surrounding the duration and severity of the COVID-19 crisis makes the short-term or long-term financial impact difficult to quantify. For additional information please see Part II, Item 1A. Risk Factors - COVID-19 is adversely affecting, and is expected to continue to adversely affect, our global business, financial condition and results of operations, and its ultimate impact will depend on future developments that are uncertain and cannot be predicted, including the scope, severity and duration of the crisis, and the governmental, legislative and regulatory actions taken and court decisions rendered in response thereto.
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. In the first six months of 2020, interest rates declined further in response to COVID-19 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. The severe market impacts in the first six months of 2020 have, however, resulted in an increase in credit spreads that partially offset the decrease in benchmark rates. 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.
Additionally, sustained low interest rates may result in higher pension expense due to the impact on discounting of projected benefit cash flows.
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ITEM 2 | Executive Summary
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. Fixed annuities have
surrender charge periods, generally in the three-to-five year range, 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 closely monitor surrenders of fixed annuities as contracts
with lower minimum interest rates come out of the surrender charge period. 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, 67 percent were crediting at the contractual minimum guaranteed interest rate atJune 30, 2020 . The percentage of fixed account values of our annuity products that are currently crediting at rates above one percent was 61 percent at bothJune 30, 2020 andDecember 31, 2019 . 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, 66 percent of the account values were crediting at the contractual minimum guaranteed interest rate atJune 30, 2020 . AIG | Second Quarter 2020 Form 10-Q 95
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ITEM 2 | 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
June 30, 2020 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% $ 7,601 $ 1,813 $ 19,258 $ 28,672
> 1% - 2% 5,202 56 1,742 7,000
> 2% - 3% 11,576 6 50 11,632
> 3% - 4% 8,870 41 6 8,917
> 4% - 5% 511 - 4 515
> 5% - 5.5% 34 - 5 39
Total Individual Retirement $ 33,794 $ 1,916 $ 21,065 $ 56,775
Group Retirement*
1% $ 1,703 $ 2,793 $ 4,404 $ 8,900
> 1% - 2% 5,597 794 360 6,751
> 2% - 3% 14,707 6 - 14,713
> 3% - 4% 777 - - 777
> 4% - 5% 7,052 - - 7,052
> 5% - 5.5% 170 - - 170
Total Group Retirement $ 30,006 $ 3,593 $ 4,764 $ 38,363
Universal life insurance
1% $ - $ - $ - $ -
> 1% - 2% 97 25 368 490
> 2% - 3% 266 539 1,106 1,911
> 3% - 4% 1,505 388 - 1,893
> 4% - 5% 2,929 236 - 3,165
> 5% - 5.5% 250 - - 250
Total universal life insurance $ 5,047 $ 1,188 $ 1,474 $ 7,709
Total $ 68,847 $ 6,697 $ 27,303 $ 102,847
Percentage of total 67 % 6 % 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 currently expect limited impacts on our existing long-tail Casualty business as the duration of our assets is slightly longer than that of our liabilities. Sustained low interest rates would potentially impact new and renewal business for the long-tail Casualty line as we may not be able to adjust our future pricing consistent with our profitability objectives to fully offset the impact of investing at lower rates. However, we will continue to maintain pricing discipline and risk selection. 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 Regulatory Environment - Standard of Care Developments. Changes in standard of care requirements or new standards issued by governmental authorities, such as theDepartment of Labor , theSEC , theNational Association of Insurance Commissioners (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 2 | Executive Summary
SECURE Act
On December 20, 2019 the Setting Every Community Up for Retirement Enhancement
(SECURE) Act was signed into law as part of larger federal appropriations
legislation. The SECURE Act includes many provisions affecting qualified
contracts, some of which became effective upon enactment on January 1, 2020 or
later, and some of which were retroactively effective. Some of the SECURE Act
provisions that became effective on January 1, 2020 , include, without
limitation: an increase in the age at which required minimum distributions
(RMDs) generally must commence, to age 72, from the previous age of 70 ½; new
limitations on the period for beneficiary distributions following the death of
the plan participant or IRA owner; elimination of the age 70 ½ restriction on
IRA contributions (combined with an offset to the amount of eligible qualified
charitable distributions (QCDs) by the amount of post-70 ½ IRA contributions); a
new exception to the 10% additional tax on early distributions for the birth or
adoption of a child, which also became an allowable plan distribution event;
and, reduction of the earliest permissible age for in-service distributions from
pension plans and certain Section 457 plans to 59 ½. Some of the changes in law
made by the SECURE Act are complex and require further regulatory definition and
guidance. At this time, we cannot predict what, or the extent of, impact the
provisions of the SECURE Act will ultimately have on our Life and Retirement
businesses.
CARES Act
On March 27, 2020 , the U.S. enacted the Coronavirus Aid, Relief, and Economic
Security (CARES) Act to mitigate the economic impacts of the COVID-19 emergency.
This legislation contains multiple provisions, including some that provide
greater access to assets held in tax-qualified retirement plans and IRAs for
qualifying individuals, which have relevance to the products and services
offered by Individual Retirement and Group Retirement. The relief provided in
the CARES Act includes, among others, temporary liberalization of access to
distributions and loans, and loan repayment suspension, for eligible individuals
in many defined contribution retirement plans; a waiver of the 10% additional
tax on qualifying distributions which otherwise applies to early distributions
(generally, prior to age 59 ½) from retirement plans and IRAs; and a temporary
waiver of required minimum distributions due to be taken in 2020 from retirement
plans and IRAs. We have implemented an array of forms, processes and procedures
to assist in making these provisions available to plan sponsors, plan
participants and IRA owners.
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 inU.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 theUK's exit from the EU, and such fluctuations will affect net premiums written growth trends reported inU.S. dollars, as well as financial statement line item comparability.General Insurance businesses are transacted in most major foreign currencies. The following table presents the average of the quarterly weighted average exchange rates of the Major Currencies, which have the most significant impact on our businesses: Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage Rate for1 USD 2020 2019 Change 2020 2019 Change Currency: GBP 0.81 0.77 5 % 0.79 0.77 3 % EUR 0.91 0.89 2 % 0.91 0.88 3 % JPY 107.57 110.94 (3) % 108.51 110.72 (2) %
Unless otherwise noted, references to the effects of foreign exchange in the
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ITEM 2 | Executive Summary
Other Industry Developments
On September 7, 2017 , the UK Ministry of Justice announced a proposal to
increase the Ogden rate from negative 0.75 percent to between zero and one
percent. Following this announcement, on December 20, 2018 the UK Parliament
passed the Civil Liability Act 2018 which implements a new framework for
determining the Ogden rate and requires the UK Ministry of Justice to start a
review of the Ogden rate within 90 days of its commencement and review
periodically thereafter. The Ministry of Justice concluded a public call for
evidence on January 30, 2019 prior to beginning its first review. On July 15,
2019 , the UK Ministry of Justice announced a change in the Ogden rate from
negative 0.75 percent to negative 0.25 percent with an effective date of August
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- and six-month periods endedJune 30, 2020 and 2019. Factors that relate primarily to a specific business are discussed in more detail within the business segment operations section. For a discussion of the Critical Accounting Estimates that affect our results of operations see the Critical Accounting Estimates section of this MD&A and Part II, Item 7. MD&A - Critical Accounting Estimates in the 2019 Annual Report. The following table presents our consolidated results of operations and other key financial metrics: Three Months Ended Six Months Ended June 30, Percentage June 30, Percentage (in millions) 2020 2019 Change 2020 2019 Change Revenues: Premiums$ 7,407 $ 7,430 - %$ 14,850 $ 15,500 (4) % Policy fees 749 769 (3) 1,504 1,504 - Net investment income 3,366 3,745 (10) 5,874 7,624 (23) Net realized capital gains (losses) (2,332) 404 NM 1,187 (42) NM Other income 206 213 (3) 424 431 (2) Total revenues 9,396 12,561 (25) 23,839 25,017 (5) Benefits, losses and expenses: Policyholder benefits and losses incurred 6,521 5,802 12 12,846 12,481 3 Interest credited to policyholder account balances 918 967 (5) 1,875 1,907 (2) Amortization of deferred policy acquisition costs 754 1,439 (48) 2,616 2,728 (4) General operating and other expenses 2,087 2,140 (2) 4,240 4,193 1 Interest expense 365 360 1 720 709 2 Loss on extinguishment of debt - 15 NM 17 13 31 Net (gain) loss on sale or disposal of divested businesses 8,412 1 NM 8,628 (5) NM Total benefits, losses and expenses 19,057 10,724 78 30,942 22,026 40 Income (loss) from continuing operations before income tax expense (benefit) (9,661) 1,837 NM (7,103) 2,991 NM Income tax expense (benefit) (1,896) 446 NM (992) 663 NM Income (loss) from continuing operations (7,765) 1,391 NM (6,111) 2,328 NM Loss from discontinued operations, net of income taxes (1) (1) - (1) (1) - Net income (loss) (7,766) 1,390 NM (6,112) 2,327 NM Less: Net income attributable to noncontrolling interests 162 281 (42) 67 564 (88) Net income (loss) attributable to AIG (7,928) 1,109 NM (6,179) 1,763 NM Less: Dividends on preferred stock 8 7 14 15 7 114 Net income (loss) attributable to AIG common shareholders$ (7,936) $ 1,102 NM %$ (6,194) $ 1,756 NM %
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