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
ended December 31, 2021 (the 2021 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," "we," "us" and "our" to
refer to American International Group, Inc., a Delaware corporation, and its
consolidated subsidiaries. We use the term "AIG Parent" to refer solely to
American International Group, Inc., and not to any of its consolidated
subsidiaries.
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q and other publicly available documents may
include, and officers and representatives of AIG may from time to time make and
discuss, statements which, to the extent they are not statements of historical
or present fact, may constitute "forward-looking statements" within the meaning
of the U.S. Private Securities Litigation Reform Act of 1995. These
forward-looking statements are intended to provide management's current
expectations or plans for AIG's future operating and financial performance,
based on assumptions currently believed to be valid or accurate. Forward-looking
statements are often preceded by, followed by or include words such as "will,"
"believe," "anticipate," "expect," "expectations," "intend," "plan," "strategy,"
"prospects," "project," "anticipate," "should," "guidance," "outlook,"
"confident," "focused on achieving," "view," "target," "goal," "estimate" and
other words of similar meaning in connection with a discussion of future
operating or financial performance. These statements may include, among other
things, projections, goals and assumptions that relate to future actions,
prospective services or products, future performance or results of current and
anticipated services or products, sales efforts, expense reduction efforts, the
outcome of contingencies such as legal proceedings, anticipated organizational,
business or regulatory changes, such as the separation of the Life and
Retirement business from AIG, the effect of catastrophes, and macroeconomic
and/or geopolitical events, 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, and other statements that are not
historical facts.
61 AIG | First Quarter 2022 Form 10-Q
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All forward-looking statements involve risks, uncertainties and other factors
that may cause AIG's actual results and financial condition to differ, possibly
materially, from the results and financial condition expressed or implied in the
forward-looking statements. Factors that could cause AIG's actual results to
differ, possibly materially, from those in the specific projections, goals,
assumptions and statements include, without limitation:
?AIG's ability to continue to separate ?changes to the valuation of AIG's
the Life and Retirement business, investments;
including through an initial public ?actions by rating agencies with respect
offering, and the impact separation may to AIG's credit and financial strength
have on AIG, its businesses, employees, ratings as well as those of its
contracts and customers;
businesses and subsidiaries;
?the effects of economic conditions in ?the impact of COVID-19 and its variants
the markets in which AIG and its and responses thereto;
businesses operate in the U.S. and ?the effectiveness of AIG's enterprise
globally and any changes therein, risk management policies and procedures,
including from the effects of financial including with respect to business
market conditions, fluctuations in continuity and disaster recovery plans;
interest rates and foreign currency ?changes in judgments concerning
exchange rates and inflationary potential cost-saving opportunities;
pressures, each of which may also be ?changes in judgments concerning the
affected by geopolitical conflicts, recognition of deferred tax assets and
including the conflict between Russia the impairment of goodwill;
and Ukraine;
?AIG's ability to effectively execute on
?the occurrence of catastrophic events, environmental, social and governance
both natural and man-made, including targets and standards;
geopolitical conflicts, pandemics, civil ?the requirements, which may change from
unrest and the effects of climate time to time, of the global regulatory
change;
framework to which AIG is subject;
?the effects of sanctions related to the ?nonperformance or defaults by
conflict between Russia and Ukraine and counterparties, including Fortitude
failure to comply therewith;
Reinsurance Company Ltd. (Fortitude Re);
?the impact of potential information ?AIG's ability to successfully dispose
technology, cybersecurity or data of, monetize and/or acquire businesses
security breaches, including as a result or assets or successfully integrate
of supply chain disruptions,
acquired businesses;
cyber-attacks or security ?changes in judgments or assumptions
vulnerabilities, the likelihood of which concerning insurance underwriting and
may increase due to extended remote insurance liabilities;
business operations as a result of ?changes to our sources of or access to
COVID-19;
liquidity;
?AIG's ability to effectively execute on ?significant legal, regulatory or
the AIG 200 operational programs governmental proceedings; and
designed to modernize AIG's operating ?such other factors discussed in:
infrastructure and enhance user and -Part I, Item 2. MD&A of this Quarterly
customer experiences, and AIG's ability Report on Form 10-Q; and
to achieve anticipated cost savings from -Part I, Item 1A. Risk Factors and Part
AIG 200;
II, Item 7. MD&A of the 2021 Annual
?availability of reinsurance or access Report.
to reinsurance on acceptable terms;
?the effectiveness of strategies to
recruit and retain key personnel and to
implement effective succession plans;
?concentrations in AIG's investment
portfolios, including as a result of our
asset management relationships with
Blackstone Inc. (Blackstone) and
BlackRock, Inc. (BlackRock);
?disruptions in the availability of
AIG's electronic data systems or those
of third parties;
The forward-looking statements speak only as of the date of this report, or in
the case of any document incorporated by reference, the date of that document.
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. Additional information as to factors
that may cause actual results to differ materially from those expressed or
implied in the forward-looking statements is disclosed from time to time in our
other filings with the Securities and Exchange Commission (SEC).
AIG | First Quarter 2022 Form 10-Q 62
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INDEX TO ITEM 2
Page
Use of Non-GAAP Measures 64
Critical Accounting Estimates 66
Executive Summary 67
Overview 67
Operating Structure 68
Financial Performance Summary 69
AIG's Outlook - Industry and Economic Factors 71
Consolidated Results of Operations 74
Business Segment Operations 78
General Insurance 79
Life and Retirement 87
Other Operations 102
Investments 104
Overview 104
Investment Highlights in the First Quarter of 2022 104
Investment Strategies 104
Credit Ratings 106
Insurance Reserves 114
Loss Reserves 114
Life and Annuity Future Policy Benefits, Policyholder Contract
Deposits and DAC
118
Liquidity and Capital Resources 123
Overview 123
Analysis of Sources and Uses of Cash 124
Liquidity and Capital Resources of AIG Parent and Subsidiaries 125
Credit Facilities 127
Contractual Obligations 128
Off-Balance Sheet Arrangements and Commercial Commitments 128
Debt 128
Credit Ratings 130
Financial Strength Ratings 130
Rating Agency Actions Related to Corebridge Senior Note Offering
and Other Recent Actions
131
Regulation and Supervision 131
Dividends 131
Repurchases of AIG Common Stock 132
Dividend Restrictions 132
Enterprise Risk Management 132
Overview 132
Regulatory Environment 133
Overview 133
Glossary 134
Acronyms 137
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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 SEC 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.
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.
Book value per common share, excluding accumulated other comprehensive income
(loss) (AOCI) adjusted for the cumulative unrealized gains and losses related to
Fortitude Re funds withheld assets and deferred tax assets (DTA) (Adjusted book
value per common share) is 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. 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 funds withheld assets held by AIG in
support of Fortitude Re's reinsurance obligations to AIG post deconsolidation of
Fortitude Re (Fortitude Re 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. 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 funds
withheld assets, and DTA (Adjusted common shareholders' equity), by total common
shares outstanding.
Return on common equity - Adjusted after-tax income excluding AOCI adjusted for
the cumulative unrealized gains and losses related to Fortitude Re funds
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 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.
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, noncontrolling interest on net realized
gains (losses), other non-operating expenses 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).
Adjusted revenues exclude Net realized 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 segments.
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ITEM 2 | Use of Non-GAAP Measures
Adjusted pre-tax income is derived by excluding the items set forth below from
income from continuing operations before income tax. This definition is
consistent across our segments. These items generally fall into one or more of
the following broad categories: legacy matters having no relevance to our
current businesses or operating performance; adjustments to enhance transparency
to the underlying economics of transactions; and measures that we believe to be
common to the industry. APTI is a GAAP measure for our segments. Excluded items
include the following:
?changes in fair value of securities ?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 lump sum
value of business acquired (VOBA), and payments to former employees;
deferred sales inducements (DSI) related ?net gain or loss on divestitures;
to net realized gains and losses; ?non-operating litigation reserves and
?changes in the fair value of equity settlements;
securities;
?restructuring and other costs related
?net investment income on Fortitude Re to initiatives designed to reduce
funds withheld assets;
operating expenses, improve efficiency
?following deconsolidation of Fortitude and simplify our organization;
Re, net realized gains and losses on ?the portion of favorable or unfavorable
Fortitude Re funds withheld assets; prior year reserve development for which
?loss (gain) on extinguishment of debt; we have ceded the risk under retroactive
?all net realized gains and losses reinsurance agreements and related
except earned income (periodic
changes in amortization of the deferred
settlements and changes in settlement gain;
accruals) on derivative instruments used ?integration and transaction costs
for non-qualifying (economic) hedging or associated with acquiring or divesting
for asset replication. Earned income on businesses;
such economic hedges is reclassified ?losses from the impairment of goodwill;
from net realized gains and losses to and
specific APTI line items based on the ?non-recurring costs associated with the
economic risk being hedged (e.g. net implementation of non-ordinary course
investment income and interest credited legal or regulatory changes or changes
to policyholder account balances); to accounting principles.
?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 accident year combined ratios, as adjusted (Accident
year loss ratio, ex-CAT and Accident year combined ratio, ex-CAT): both the
accident year loss and accident year 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, in each case, having
a net impact on AIG in excess of $10 million 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. We believe the measure of premiums and deposits is
useful in understanding customer demand for our products, evolving product
trends and our sales performance period over period.
Results from discontinued operations are excluded from all of these measures.
65 AIG | First Quarter 2022 Form 10-Q
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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;
?future policy benefit reserves for life and accident and health insurance
contracts;
?liabilities for guaranteed benefit features of variable annuity, fixed annuity
and fixed index annuity products;
?embedded derivative liabilities for fixed index annuity and life products;
?estimated gross profits to value deferred acquisition costs and unearned
revenue for investment-oriented products;
?reinsurance assets, including the allowance for credit losses and disputes;
?goodwill impairment;
?allowance for credit losses on certain investments, primarily on loans and
available for sale fixed maturity securities;
?legal contingencies;
?fair value measurements of certain financial assets and financial liabilities;
and
?income taxes, in particular the recoverability of our deferred tax asset and
establishment of provisions for uncertain tax positions.
These accounting estimates require the use of assumptions about matters, some of
which are highly uncertain at the time of estimation. To the extent actual
experience differs from the assumptions used, our consolidated financial
condition, results of operations and cash flows could be materially affected.
For a complete discussion of our critical accounting estimates, see Part II,
Item 7. MD&A - Critical Accounting Estimates in the 2021 Annual Report.
AIG | First Quarter 2022 Form 10-Q 66
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ITEM 2 | Executive Summary
Executive Summary
Overview
This overview of the MD&A highlights selected information and may not contain
all of the information that is important to current or potential investors in
our securities. You should read this Quarterly Report on Form 10-Q, together
with the 2021 Annual Report, in their entirety for a more detailed description
of events, trends, uncertainties, risks and critical accounting estimates
affecting us.
Separation of Life and Retirement Business and Relationship with Blackstone
On October 26, 2020, AIG announced its intention to separate its Life and
Retirement business from AIG. On November 2, 2021, AIG and Blackstone completed
the acquisition by Blackstone of a 9.9 percent equity stake in Corebridge
Financial, Inc., formerly known as SAFG Retirement Services, Inc. (Corebridge),
which is the holding company for AIG's Life and Retirement business, for $2.2
billion in an all cash transaction, subject to adjustment if the final pro forma
adjusted book value is greater or lesser than the target pro forma adjusted book
value. This resulted in a $629 million decrease to AIG's shareholders' equity in
the fourth quarter of 2021. As part of the separation, most of AIG's investment
operations were transferred to Corebridge or its subsidiaries as of December 31,
2021, and AIG entered into a long-term asset management relationship with
Blackstone to manage an initial $50 billion of Life and Retirement's existing
investment portfolio beginning in the fourth quarter of 2021, with that amount
increasing by increments of $8.5 billion per year for five years beginning in
the fourth quarter of 2022, for an aggregate of $92.5 billion. In addition,
Blackstone designated one member of the Board of Directors of Corebridge, which
currently consists of 11 directors. Pursuant to the definitive agreement,
Blackstone will be required to hold its ownership interest in Corebridge
following the completion of the separation of the Life and Retirement business,
subject to exceptions permitting Blackstone to sell 25%, 67% and 75% of its
shares after the first, second and third anniversaries, respectively, of the
initial public offering of Corebridge (the IPO), with the transfer restrictions
terminating in full on the fifth anniversary of the IPO. In the event that the
IPO of Corebridge is not completed prior to November 2, 2023, Blackstone will
have the right to require AIG to undertake the IPO, and in the event that the
IPO has not been completed prior to November 2, 2024, Blackstone will have the
right to exchange all or a portion of its ownership interest in Corebridge for
shares of AIG's common stock on the terms set forth in the definitive agreement.
On November 1, 2021, Corebridge declared a dividend payable to AIG Parent in the
amount of $8.3 billion. In connection with such dividend, Corebridge issued a
promissory note to AIG Parent in the amount of $8.3 billion, which is required
to be paid to AIG Parent prior to the IPO of Corebridge. On April 5, 2022,
Corebridge issued senior unsecured notes in the aggregate principal amount of
$6.5 billion, the proceeds of which were used to repay a portion of the $8.3
billion promissory note previously issued by Corebridge to AIG. While we
currently believe the IPO is the next step in the separation of the Life and
Retirement business from AIG, no assurance can be given regarding the form that
future separation transactions may take or the specific terms or timing thereof,
or that a separation will in fact occur. Any separation transaction will be
subject to the satisfaction of various conditions and approvals, including
approval by the AIG Board of Directors, receipt of insurance and other required
regulatory approvals, and satisfaction of any applicable requirements of the
SEC.
On December 15, 2021, AIG and Blackstone Real Estate Income Trust (BREIT), a
long-term, perpetual capital vehicle affiliated with Blackstone, completed the
acquisition by BREIT of AIG's interests in a U.S. affordable housing portfolio
for $4.9 billion, in an all cash transaction, resulting in a pre-tax gain of
$3.0 billion. The historical results of the U.S. affordable housing portfolio
were reported in our Life and Retirement operating segments.
For additional information regarding the debt issuance of Corebridge, see Note
16 to the Condensed Consolidated Financial Statements.
Our Investment Management Agreements with BlackRock
On March 28, 2022, we announced entry into a binding letter of intent with
BlackRock pursuant to which certain of our insurance company subsidiaries would
enter into separate investment management agreements with BlackRock (the
BlackRock Arrangement). On April 28, 2022, certain of our insurance company
subsidiaries entered into such investment management agreements, with the
expectation that certain additional insurance company subsidiaries will enter
into such investment management agreements over the coming months. Overall, we
expect to transfer the management of up to $150 billion of our investment of
liquid fixed income and certain private placement assets, including $90 billion
of the Life and Retirement investment portfolio, over a period of 12 months in
connection with the BlackRock Arrangement. The investment management agreements
contain detailed investment guidelines and reporting requirements. These
agreements also contain reasonable and customary representations and warranties,
standard of care, expense reimbursement, liability, indemnity and other
provisions. The investment management agreements continue unless terminated by
either party on 45 days' notice or by us immediately for cause. We continue to
be responsible for our overall investment
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ITEM 2 | Executive Summary
portfolio, including decisions surrounding asset allocation, risk composition
and investment strategy. There can be no assurance that all of such investment
management agreements will be entered into as contemplated, or at all.
OPERATING STRUCTURE
AIG reports the results of its businesses through three segments - 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. Other Operations is primarily
comprised of corporate, our institutional asset management business and
consolidation and eliminations.
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, and our global reinsurance business, AIG Re. Our General
Insurance International operating segment includes regional insurance businesses
in Japan, the United Kingdom, Europe, Middle East and Africa (EMEA region), Asia
Pacific, Latin America and Caribbean, and China. International also includes the
results of Talbot Holdings, Ltd. as well as AIG's Global Specialty business.
For additional information on our business segments, see Note 3 to the Condensed
Consolidated Financial Statements, and for information regarding the separation
of Life and Retirement, see Note 1 to the Condensed Consolidated Financial
Statements.
Business Segments
General Insurance Life and Retirement
General Insurance is a leading Life and Retirement is a unique franchise
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. General Insurance offers market positions in many of the markets it
a broad range of products to serves in the U.S. With its strong capital
customers through a diversified, position, customer-focused service, breadth
multichannel distribution network. of product expertise and deep distribution
Customers value General Insurance's relationships across multiple channels,
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]]
General Insurance includes the Life and Retirement includes the following
following major operating major operating companies: American General
companies: National Union Fire Life Insurance Company (AGL); The Variable
Insurance Company of Pittsburgh, Annuity Life Insurance Company (VALIC); The
Pa. (National Union); American Home United States Life Insurance Company in the
Assurance Company (American Home); City of New York (U.S. Life); Laya
Lexington Insurance Company Healthcare Limited and AIG Life Limited.
(Lexington); AIG General Insurance
Company, Ltd. (AIG Sonpo); AIG Asia
Pacific Insurance, Pte, Ltd.; AIG
Europe S.A.; American International
Group UK Ltd.; Validus Reinsurance,
Ltd. (Validus Re); Talbot Holdings
Ltd. (Talbot); Western World
Insurance Group, Inc. and
Glatfelter Insurance Group
(Glatfelter).
Other Operations
Other Operations primarily consists of income from assets held by AIG Parent
and other corporate subsidiaries, deferred tax assets related to tax
attributes, corporate expenses and intercompany eliminations, our institutional
asset management business and results of our consolidated investment entities,
General Insurance portfolios in run-off as well as the historical results of
our legacy insurance lines ceded to Fortitude Re.
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ITEM 2 | Executive Summary
Financial Performance Summary
Net Income (Loss) Attributable to AIG Common Shareholders
Three Months Ended March 31,
(in millions)
2022 and 2021 Comparison
[[Image Removed: Chart 4]] Net income attributable to AIG common
shareholders increased $384 million due to the
following, on a pre-tax basis:
?an increase in Net realized gains on
Fortitude Re funds withheld embedded
derivative of $936 million driven by interest
rate movements, partially offset by losses on
Fortitude Re funds withheld assets of $140
million in 2022 compared to a gain of $173
million in 2021;
?an increase in Net realized gains excluding
Fortitude Re funds withheld assets and
embedded derivative of $546 million, driven by
a $1.0 billion increase in derivative and
hedge activity and gains on variable annuity
embedded derivatives, net of hedging partially
offset by losses on sales of securities of
$201 million and unfavorable movement in the
allowance for credit losses on fixed maturity
securities and loans of $164 million;
?higher underwriting income in General
Insurance ($373 million) from higher premiums
marked by changes in business mix along with
strong rate improvement, focused risk
selection and improved terms and conditions,
and significantly lower catastrophe losses;
and
?lower interest expense of $79 million
primarily driven by interest savings resulting
from redemptions and cash tender offers of
$3.6 billion of debt completed during 2021
($34 million) and interest savings from
consolidated investment entities ($40
million).
The increase in Net income attributable to AIG
common shareholders was partially offset by
the following:
?lower net investment income ($420 million)
primarily driven by lower returns on available
for sale fixed maturity securities as a result
of the higher interest rate environment (which
led to lower call income) of $213 million and
declines in fair value of fixed maturity
securities of $217 million, where we elected
the fair value option; and
?higher income attributable to noncontrolling
interest ($342 million) driven by the sale of
9.9 percent interest of Corebridge to
Blackstone in December 2021 ($354 million).
The $381 million increase in income tax
expense was primarily attributable to higher
income from continuing operations.
For further discussion see Consolidated
Results of Operations.
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ITEM 2 | Executive Summary
Adjusted Pre-Tax Income (Loss)*
Three Months Ended March 31,
(in millions)
2022 and 2021 Comparison
[[Image Removed: Chart 4]] Adjusted pre-tax income increased $258 million
primarily due to higher underwriting income in
General Insurance ($373 million) from higher
premiums marked by changes in business mix
along with strong rate improvement, focused
risk selection and improved terms and
conditions, significantly lower catastrophe
losses, and net favorable prior year reserve
development in 2022 compared to net adverse
prior year reserve development in 2021.
Partially offset by lower net investment
income ($193 million) primarily driven by
lower returns on available for sale fixed
maturity securities as a result of the higher
interest rate environment (which led to lower
call income) of $132 million and declines in
fair value of fixed maturity securities of $92
million, where we elected the fair value
option, partially offset by gains on other
invested assets, primarily private equity
funds, of $50 million and income on mortgage
and other loans of $39 million.
*Non-GAAP measure - for reconciliation of Non-GAAP to GAAP measures see
Consolidated Results of Operations.
General Operating and Other Expenses
Three Months Ended March 31,
(in millions)
2022 and 2021 Comparison
[[Image Removed: Chart 1]] General operating and other expenses increased
$93 million primarily due to increases in
professional fees inclusive of transaction
costs and other acquisition expenses.
General operating and other expenses in the
three-months ended March 31, 2022 and 2021
included approximately $93 million and $74
million, respectively, of pre-tax
restructuring and other costs which were
primarily comprised of employee severance
charges and other costs related to
organizational simplification, operational
efficiency, and business rationalization.
AIG | First Quarter 2022 Form 10-Q 70
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ITEM 2 | Executive Summary
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
challenging market conditions in the first quarter of 2022, characterized by
factors such as the impact of COVID-19 and the related governmental and societal
responses, interest rate volatility, inflationary pressures, an uneven global
economic recovery and global trade tensions. Responses by central banks and
monetary authorities with respect to inflation, growth concerns and other
macroeconomic factors have also affected global exchange rates and volatility.
Russia/Ukraine Conflict
The Russia/Ukraine conflict began in February 2022. The conflict has and may
continue to have a significant impact on the global macroeconomic and
geopolitical environments, including increased volatility in capital and
commodity markets, rapid changes to regulatory conditions around the globe
including the use of sanctions, operational challenges for multinational
corporations, inflationary pressures and an increased risk of cybersecurity
incidents.
The conflict is evolving and has the potential to adversely affect our business
and results of operations from an investment, underwriting and operational
perspective. While we believe we have taken appropriate actions to minimize
related risk, we continue to monitor potential exposure and operational impacts,
as well as any actual and potential claims activity. The ultimate impact will
depend on future developments that are uncertain and cannot be predicted,
including scope, severity and duration, the governmental, legislative and
regulatory actions taken (including the application of sanctions), and court
decisions, if any, rendered in response to those actions.
Impact of Changes in the Interest Rate Environment and Equity Markets
Key U.S. benchmark rates have continued to rise during the first quarter of 2022
as investors form opinions over elevated inflation measures, geopolitical risk,
and the Board of Governors of the Federal Reserve System raising short term
interest rates for the first time since 2018. As of March 31, 2022, increases in
key rates have improved yields on new investments which are now closer to the
runoff yield that we are experiencing on our existing portfolios. 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, but we may not be
able to fully mitigate our interest rate risk by matching exposure of our assets
relative to our liabilities.
Equity Markets
Our financial results are impacted by the performance of equity markets. The
impact of equity market returns, both increases and decreases, is reflected in
our results almost immediately due to the impact on the fair values of equity
exposed securities in our portfolio as well as separate account values in our
Life and Retirement business. The reduction in separate account asset values
impacts fee income as well as policyholder benefits and DAC on our variable
annuity portfolio within the Life and Retirement segment. For instance, variable
annuities earn fees based on the account value, which fluctuates with the equity
markets as a significant amount of our separate account assets are invested in
equity funds.
In Life and Retirement, hedging costs could also be significantly impacted by
volatility in the equity markets as rebalancing and option costs are tied to the
equity market volatility. These costs are mostly offset by rider fees that are
tied to the level of the Chicago Board Options Exchange Volatility Index. As
rebalancing and option costs increase or decrease, the rider fees will increase
or decrease partially offsetting the hedging costs incurred.
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 and customer facing rates, which may negatively affect sales of interest
rate sensitive products and reduce future profits on certain existing fixed rate
products. However, our disciplined pricing has helped to mitigate some of the
pressure on investment spreads and remain competitive. 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-seven year range. Fixed Index annuities have surrender charge periods,
generally in the five-to-ten year range, and within our Group Retirement
segment, certain of our fixed investment options are subject to other withdrawal
restrictions, 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 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. Changes in interest rates significantly impact the valuation of our
liabilities for annuities with guaranteed living benefit features and the value
of the related hedging portfolio.
71 AIG | First Quarter 2022 Form 10-Q
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ITEM 2 | Executive Summary
Reinvestment and Spread Management
We actively monitor fixed income markets, including the level of interest rates,
credit spreads and the shape of the yield curve. We also frequently review our
interest rate assumptions and actively manage the crediting rates used for new
and in-force business. Business strategies continue to evolve and attempt 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 our products has reduced spreads in a sustained low
interest rate environment and thus reduces future profitability.
For additional information on our investment and asset-liability management
strategies see Investments.
For investment-oriented products, including universal life insurance, and
variable, fixed and fixed index annuities, 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
expect to continue to adjust crediting rates on in-force business, as
appropriate, 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 or under certain conditions.
If and as interest rates rise, we may need to raise crediting rates on in-force
business for competitive and other reasons, potentially offsetting a portion of
the additional investment income resulting from investing in a higher interest
rate environment.
Of the aggregate fixed account values of our Individual Retirement and Group
Retirement annuity products, 69 percent were crediting at the contractual
minimum guaranteed interest rate as of March 31, 2022. The percentage of fixed
account values of our annuity products that are currently crediting at rates
above one percent were 57 percent and 58 percent as of March 31, 2022 and
December 31, 2021, respectively. In the universal life products in our Life
Insurance business, 67 percent of the account values were crediting at the
contractual minimum guaranteed interest rate as of both March 31, 2022 and
December 31, 2021. 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.
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, excluding balances ceded to Fortitude Re:
Current Crediting Rates
March 31, 2022 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% $ 10,456 $ 1,851 $ 18,812 $ 31,119
> 1% - 2% 4,428 27 1,678 6,133
> 2% - 3% 10,184 - 18 10,202
> 3% - 4% 8,045 40 6 8,091
> 4% - 5% 473 - 5 478
> 5% - 5.5% 34 - 4 38
Total Individual Retirement $ 33,620 $ 1,918 $ 20,523 $ 56,061
Group Retirement*
<=1% $ 3,850 $ 1,683 $ 4,591 $ 10,124
> 1% - 2% 6,316 411 7 6,734
> 2% - 3% 14,648 - - 14,648
> 3% - 4% 702 - - 702
> 4% - 5% 6,955 - - 6,955
> 5% - 5.5% 159 - - 159
Total Group Retirement $ 32,630 $ 2,094 $ 4,598 $ 39,322
AIG | First Quarter 2022 Form 10-Q 72
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TABLE OF CONTENTS
ITEM 2 | Executive Summary
Universal life insurance
<=1% $ - $ - $ - $ -
> 1% - 2% 104 24 355 483
> 2% - 3% 246 540 1,209 1,995
> 3% - 4% 1,388 207 186 1,781
> 4% - 5% 3,052 2 - 3,054
> 5% - 5.5% 228 - - 228
Total universal life insurance $ 5,018 $ 773 $ 1,750 $ 7,541
Total
$ 71,268 $ 4,785 $ 26,871 $ 102,924
Percentage of total 69 % 5 % 26 % 100 %
*Individual Retirement and Group Retirement amounts shown include fixed options
within variable annuity products.
General Insurance
Our net investment income is significantly impacted by market interest rates as
well as the deployment of asset allocation strategies to manage duration,
enhance yield and interest rate risk. As interest rates increase, so too does
our ability to reinvest future cash inflows from premiums, as well as sales and
maturities of existing investments, at more favorable rates. For additional
information on our investment and asset-liability management strategies see
Investments.
The impact of low interest rates on our General Insurance segment reduces the
benefit of investment income in our pricing. This leads to stronger requirements
for underwriting profitability in all of our portfolios, particularly those for
long-tail casualty business.
Although investing at lower interest rates puts pressure on our ability to
adjust pricing to achieve profitability objectives, market conditions have been
conducive to achieving our pricing targets. The pressure on pricing does not
necessarily ease as interest rates rise, as the changes in interest rates are a
lagging response to economic conditions of unemployment and inflation. We
monitor these trends closely, particularly loss cost trend uncertainty, to
ensure that not only our pricing, but also our loss reserving, assumptions are
proactive to, and considerate of, current and future economic conditions.
For our General Insurance segment loss reserves, sustained low interest rates
may unfavorably affect the statutory net loss reserve discount for workers'
compensation and its associated amortization.
Impact of Currency Volatility
Currency volatility remains acute. This volatility affected 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 central bank responses to inflation, concerns regarding future
economic growth and other macroeconomic factors, and such fluctuations will
affect net premiums written growth trends reported in U.S. dollars, as well as
financial statement line item comparability.
General Insurance businesses are transacted in most major foreign currencies.
The following table presents the average of the quarterly weighted average
exchange rates of the Major Currencies, which have the most significant impact
on our businesses:
Three Months Ended March 31, Percentage
Rate for 1 USD 2022 2021 Change
Currency:
GBP 0.74 0.73 1 %
EUR 0.88 0.82 7 %
JPY 114.62 104.29 10 %
Unless otherwise noted, references to the effects of foreign exchange in the
General Insurance discussion of results of operations are with respect to
movements in the Major Currencies included in the preceding table.
73 AIG | First Quarter 2022 Form 10-Q
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ITEM 2 | Consolidated Results of Operations
Consolidated Results of Operations
The following section provides a comparative discussion of our consolidated
results of operations on a reported basis for the three-month periods ended
March 31, 2022 and 2021. Factors that relate primarily to a specific business
are discussed in more detail within the business segment operations section.
For information regarding the Critical Accounting Estimates that affect our
results of operations see Critical Accounting Estimates in this MD&A and Part
II, Item 7. MD&A - Critical Accounting Estimates in the 2021 Annual Report.
The following table presents our consolidated results of operations and other
key financial metrics:
Three Months Ended March 31, Percentage
(in millions) 2022 2021 Change
Revenues:
Premiums $ 7,110 $ 6,507 9 %
Policy fees 764 784 (3)
Net investment income:
Net investment income - excluding Fortitude Re
funds withheld assets 2,946 3,171 (7)
Net investment income - Fortitude Re funds
withheld assets 291 486 (40)
Total net investment income 3,237 3,657 (11)
Net realized gains (losses):
Net realized gains - excluding Fortitude Re
funds withheld
assets and embedded derivative 1,241 695 79
Net realized gains (losses) on Fortitude Re
funds withheld assets (140) 173 NM
Net realized gains on Fortitude Re funds
withheld embedded derivative 3,318 2,382 39
Total net realized gains 4,419 3,250 36
Other income 278 256 9
Total revenues 15,808 14,454 9
Benefits, losses and expenses:
Policyholder benefits and losses incurred 5,255 5,139 2
Interest credited to policyholder account
balances 877 868 1
Amortization of deferred policy acquisition
costs 1,437 1,304 10
General operating and other expenses 2,181 2,088 4
Interest expense 263 342 (23)
Gain on extinguishment of debt - (8) NM
Net gain on divestitures (40) (7) (471)
Total benefits, losses and expenses 9,973 9,726 3
Income from continuing operations before income
tax expense 5,835 4,728 23
Income tax expense 1,179 798 48
Income from continuing operations 4,656 3,930 18
Income (loss) from discontinued operations, net
of income taxes - - NM
Net income 4,656 3,930 18
Less: Net income attributable to noncontrolling
interests 396 54 NM
Net income attributable to AIG 4,260 3,876 10
Less: Dividends on preferred stock 7 7 -
Net income attributable to AIG common
shareholders $ 4,253 $ 3,869 10 %
March 31, December 31,
(in millions, except per common share data) 2022 2021
Balance sheet data:
Total assets $ 573,513 $ 596,112
Long-term debt 23,572 23,741
Debt of consolidated investment entities 6,366 6,422
Total AIG shareholders' equity 55,944 65,956
Book value per common share 69.30 79.97
Adjusted book value per common share 70.72 68.83
AIG | First Quarter 2022 Form 10-Q 74
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TABLE OF CONTENTS
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