American International Group, Inc.
2018 Annual Report
Financial
Highlights1
American International Group, Inc.
(AIG) is a leading global insurance
organization. Building on 100 years
of experience, today AIG member
companies provide a wide range
of property casualty insurance, life
insurance, retirement solutions, and
other fi nancial services to customers
in more than 80 countries and
jurisdictions. These diverse offerings
include products and services that
help businesses and individuals
protect their assets, manage risks
and provide for retirement security.
AIG common stock is listed on the
New York Stock Exchange.
Throughout 2018 we executed on
our strategy to deliver long-term,
profi table growth by improving
underwriting capabilities, mitigating
risk and volatility by repositioning
reinsurance structures and risk limits,
adding world-class talent and
utilizing capital opportunistically
to re-invest in the business.
Looking ahead, we continue to
take decisive actions to enhance
AIG’s positioning for the future.
Years ended December 31,
(dollars in millions, except per share data)
2018
2017
2016
Operating results:
Total revenues
Net loss attributable to AIG
Adjusted after-tax income attributable to AIG2
Net loss per common share attributable
to AIG (diluted)
Adjusted after-tax income per common share
attributable to AIG (diluted)2
Balance sheet (year-end):
$
$
$
$
49,520
(6,084)
2,231
(6.54)
$
$
$
$
52,367
(849)
406
(0.78)
$ 47,389
(6)
1,064
(0.01)
$
$
$
$
1.17
$
2.34
$
0.36
Total assets
$ 491,984
$ 498,301
$ 498,264
Total AIG shareholders’ equity
$ 56,361
$
65,171
$
76,300
Key metrics:
Book value per common share
Adjusted book value per common share3
Return on equity (ROE)
Adjusted ROE3
Core Adjusted ROE4
General Insurance:
Net premiums written
Adjusted pre-tax loss5
Combined ratio6
Accident year combined ratio, as adjusted7
Life and Retirement:
Premiums and deposits8
Adjusted pre-tax income5
Adjusted ROE4
$
$
65.04
54.95
$
$
72.49
54.74
$
$
76.66
58.57
0.0 %
(8.4) %
(1.0) %
2.1 %
2.3 %
4.1 %
3.2 %
0.6 %
0.8 %
$ 26,407
$
(469)
$
$
111.4
99.7
25,438
(813)
117.3
97.1
$
$
28,393
(2,051)
118.9
96.0
$
$
31,206
3,190
$
$
27,458
3,831
$
$
29,304
3,428
12.6 %
12.4 %
10.8 %
1 The non-GAAP fi nancial measures presented herein may not be comparable to similarly-named measures reported by other companies. The reconciliations of such measures
to the most comparable GAAP measures in accordance with Regulation G are included within this Annual Report, AIG’s Annual Report on Form 10-K for the fi scal year ended
December 31, 2018 (included herein) or in the Fourth Quarter 2018 Financial Supplement available in the Investors section of AIG’s website, www.aig.com. 2 Adjusted after-tax
income attributable to AIG and Adjusted after-tax income per common share attributable to AIG (diluted) are reconciled on page 66 of the Annual Report on Form 10-K
(included herein). 3 Adjusted book value per common share and Return on equity — adjusted after-tax income excluding AOCI and DTA are reconciled on page 37 of the
Annual Report on Form 10-K (included herein). 4 Adjusted ROE for Core and Life and Retirement are defi ned and reconciled on pages 352 and 354 of this Annual Report.
5 Adjusted pre-tax income is a GAAP measure for General Insurance and Life and Retirement, and is defi ned on page 41 of the Annual Report on Form 10-K (included herein).
6 Consistent with our defi nition of adjusted pre-tax income, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which
we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain. 7Accident year combined ratio, as adjusted, is
reconciled on page 73 in the Annual Report on Form 10-K (included herein). 8 Premiums and deposits is defi ned and reconciled on pages 352 and 354 of this Annual Report.
Chairman Letter
to Shareholders
Dear AIG Shareholder,
2018 marked Brian Duperreault’s first full year
as President and Chief Executive Officer of AIG.
During his tenure, Brian and his leadership team
have worked quickly to implement a strategy
that is repositioning AIG to be an industry leader
delivering sustainable, profitable growth.
In January, we announced the election of
Thomas Motamed to the Board. Tom is an
insurance industry veteran who previously
served as Chairman and CEO of CNA
Financial Corporation and before that
spent 31 years with The Chubb Corporation.
To date, they have undertaken a number
of actions, including:
• Continuing to add world-class talent
across the organization
• Reducing risk and volatility in AIG’s portfolio
•Recommitting to underwriting excellence
• Leveraging the benefits of AIG’s diversified
global footprint
• Demonstrating a commitment to expense
discipline while prudently deploying capital
to invest in AIG’s businesses
We are also in the midst of a significant
refreshment of the Board of Directors,
adding substantial additional
insurance and investment expertise.
We are pleased to introduce three new
director candidates for election at this year’s
annual meeting:
• Peter Porrino, formerly Executive Vice President
and Chief Financial Officer of XL Group Ltd;
• Amy Schioldager, formerly Senior Managing
Director and Global Head of Beta Strategies
at BlackRock, Inc.; and
• Therese Vaughan, former CEO of the National
Association of Insurance Commissioners and
the Robb B. Kelley Visiting Distinguished Professor
and Former Dean of the College of Business
and Public Administration at Drake University.
Theresa Stone will be retiring as a Director
at this year’s Annual Meeting, as she has
reached our general retirement age under
Douglas M. Steenland
Independent Chairman of the Board
our corporate governance guidelines, and
Ronald Rittenmeyer has advised us that he will
not stand for election, given other professional
commitments. I want to thank them for their
service and many contributions.
The Board is also grateful for the continued
dedication of AIG’s employees around the
world who serve the needs of the company’s
clients, brokers and customers.
Thank you, our shareholders, for continuing
to entrust us with your capital. I want to assure
you that your Board is highly focused on
ensuring that AIG is best positioned to deliver
sustainable value for you over the long term.
Sincerely,
Douglas M. Steenland
Independent Chairman of the Board
1
AIG | 2018 Annual Report 2
AIG | 2018 Annual Report
CEO Letter
to Shareholders
Dear AIG Shareholder,
2018 was a year of significant foundational work as
we continued repositioning AIG to deliver long-term
and sustainable value for you, our shareholders.
When I joined AIG in mid-2017, the company
was emerging from more than a decade of
significant changes in leadership and shifting
strategies. Over the course of 2018, we
undertook a thorough review of our businesses
in order to return AIG to profitability by putting
the right people, structure and strategies in place.
During this process we uncovered many issues
and challenges that were deeper and more
pervasive than we anticipated, and we worked
aggressively across multiple fronts to address
what we found. We added world-class talent
in key senior roles, significantly reduced
volatility in our portfolio, fostered a culture of
accountability, instilled a focus on expense
discipline balanced with critical investments for
growth, and added strategic, complementary
capabilities to help us better serve our clients.
Having spent 45 years in the insurance industry
building and reshaping companies, I am
confident we have the right strategy in place
to return AIG to a position of industry leadership.
We are making intelligent decisions that will
allow us to continue to make progress, and
we are not taking shortcuts that could jeopardize
a strong long-term recovery.
Overview of 2018 Performance
Our focus in 2018 was on establishing
a foundation for sustainable profitability,
amidst significant volatility in the equity and
credit markets and another season of notable
catastrophe losses.
The numerous actions we took in 2018 are
not yet fully reflected in our General Insurance
financial results, but we have begun to show
incremental progress. Most notably, the business
began to demonstrate underlying profitability
in the fourth quarter, excluding catastrophes,
driven largely by an improvement in our loss
ratio along with expense reductions.
Life and Retirement delivered solid earnings
and returns for the year, despite a challenging
fourth quarter due to sharply declining equity
markets and widening credit spreads.
Looking ahead, we continue to expect to deliver
an underwriting profit for General Insurance
as we enter 2019. To be clear: this is only a
starting point. Our intention remains to continue
improving profitability and to reach double-digit
returns for consolidated AIG in three years.
General Insurance:
Repositioned for Profitability
In General Insurance, Peter Zaffino and his
leadership team made significant progress in
2018 transforming our business. They outlined
a new underwriting risk appetite, improved
underwriting capabilities, created business
units that positively distinguish themselves in the
market and built a world-class leadership team.
I am very pleased with what this new leadership
team has accomplished in a relatively short
period of time.
Brian Duperreault
President and Chief Executive Officer
3
AIG | 2018 Annual Report CEO Letter
to Shareholders
continued
Transforming our portfolio
Throughout 2018, Peter and his team rigorously
reviewed the entire General Insurance portfolio.
This revealed signifi cant exposures from AIG’s
strategy prior to 2017 of deploying large limits,
which made us an outlier in the industry. As a
result, we have substantially reduced gross and
net limits, particularly in Property and Casualty.
Peter and his team also enhanced our
organizational structure and control framework.
This included instituting revised underwriting
guidelines for all our underwriters worldwide
and implementing new assessment tools to
better measure underwriting performance.
The General Insurance team has also worked
to enhance the strategic positioning of each
business in the portfolio and empowered leaders
with end-to-end accountability for results.
Additionally, General Insurance completed the
acquisitions of Validus and Glatfelter during the
year. Each of these businesses further deepened
our talent bench while helping improve core
underwriting fundamentals and strengthening
our offerings in key areas.
Strategically utilizing reinsurance
Our notable progress on risk management and
underwriting was critical to the execution of a
revised reinsurance strategy. We recognized in
late 2017 that our legacy reinsurance strategy
had substantial shortcomings with respect to
managing volatility across return periods and
protecting against tail-risk events. In January
2018, we made initial decisions to reduce the net
risk in the portfolio, which provided meaningful
recoveries in the second half of last year. During
the January 2019 renewal season, we made
material enhancements to our reinsurance
program that have signifi cantly reduced the
risk and volatility across our portfolio. Looking
ahead, we will continue to evolve our use of
reinsurance to balance our portfolio, manage
volatility and protect against extreme risk events.
Developing world-class talent
While we will continue to see the results of
these changes into 2019, clients, brokers and
reinsurance partners are taking notice of the
team we have built and the work we are doing.
Peter has now fi lled critical positions, including
Chief Underwriting Offi cer, Head of International,
Head of Claims and CEO of Lexington, which
were part of more than a dozen new senior
additions. The caliber of those who have joined
AIG since I arrived is truly world-class, and
we continue to be energized as we add these
industry veterans to our existing talent base.
I want to thank colleagues across General
Insurance for their diligence and dedication
serving clients through another year of
high-impact catastrophe events — whether in
Japan, where many employees, regardless of
their role, fi elded claims while recovering from
Typhoons Jebi and Trami themselves, or in
response to Hurricanes Florence and Michael
and mudslides and wildfi res in California. We
have proven once again that we are there for
our clients at some of their most diffi cult moments.
Looking ahead, the signifi cant progress in
General Insurance throughout 2018 has
positioned us well for the future.
Life and Retirement: Stable
Earnings and Attractive Returns
Under the leadership of Kevin Hogan and his
highly experienced executive team, our Life
and Retirement 2018 results refl ected solid
growth from our ongoing strategy to leverage
our broad product portfolio and diversifi ed
distribution network to satisfy customer needs.
Continuing to deliver solid performance
Premiums and deposits increased 14 percent
year-over-year, including increases in
each key segment: Individual Retirement,
Group Retirement and Life Insurance.
Additionally, Institutional Markets closed a
number of pension risk transfer deals, refl ecting
the continued growth of this market. While
adjusted pre-tax income declined year-over-year,
this was primarily driven by changes to actuarial
assumptions and volatility in the performance of
credit and equity markets.
Overall, our Life and Retirement business
continued to deliver double-digit adjusted return
on equity in 2018, despite this volatility, and we
expect it to continue doing so in the coming year.
Positioning for industry leadership
Life and Retirement has made a number of
investments over the last several years to promote
a customer-centric culture by modernizing
operating platforms and enhancing digital
capabilities. These platforms have received
industry-leading awards year after year and
strengthened the effi ciency and quality of our
customer experience.
Life and Retirement also continues to enhance
our reach internationally. As an example, in
December 2018 AIG Life UK completed its
acquisition of Ellipse, expanding its individual
benefi t offering to include group protection.
Looking to the future, the need for protected
retirement income continues to increase, and
our ability to offer solutions in various product
structures remains a competitive advantage.
In addition, Life and Retirement is playing a
founding role in the Alliance for Lifetime Income.
This group has brought together professionals
from across the industry to advocate for new
policies that protect and secure the retirement
dreams of millions of Americans.
A key driver of our ongoing strength and unique
position is the incredible colleagues across our
Life and Retirement businesses. In the face of
changing economic environments and shifting
market demands, they remain focused every
day on helping people achieve fi nancial and
retirement security.
4
AIG | 2018 Annual Report
Thanks to their hard work and focus, Life and
Retirement enters 2019 with a sustainable
business model that is well-positioned to leverage
our product expertise and distribution footprint to
deploy capital to the most attractive opportunities.
Blackboard Insurance:
Reimagining the Middle Market
Under the leadership of Seraina Macia,
Blackboard Insurance continues to reimagine
the commercial insurance experience — from
underwriting to claims and finance to operations,
they are using data and technology to turn the
business inside out. By erasing inefficiencies and
old technologies, Blackboard is positioned to
help companies move faster, do more business
and reinvest for growth. 2018 was a pivotal
year as the team worked behind the scenes
to operationalize their business.
• Releasing capital tied up in lower return-on-
equity investments and product lines through
the management of our Legacy portfolio.
One example is the establishment of Fortitude
Re to hold most of our run-off portfolios.
In late 2018, we sold a minority stake
in Fortitude Re to The Carlyle Group
as we focus on standing up this business
independently while meeting commitments
to policyholders and regulators.
At the same time, we continued to
opportunistically repurchase AIG common
stock. Our share and warrant repurchases
for 2018 totaled $1.8 billion, and our Board
of Directors has approved an increase in our
share repurchase authorization to $2.0 billion,
including approximately $512 million that
remained under the previous authorization.
Capital: Prudent Management,
Strong Balance Sheet,
Future Investment
Our strong balance sheet and careful capital
management played a critical supporting
role throughout 2018 as we worked to build
AIG into a more valuable company.
As I have said many times before, I believe
AIG’s future is contingent on re-investing excess
capital in our businesses, so we can do better
for our clients, brokers, employees and investors.
I am proud of the choices we have made on
this front to date, which include:
• Investing in top industry talent who
have brought significant expertise
and experience to AIG;
• Focusing on high-quality acquisitions that
are complementary to our products, markets
and geographies, and investing in our potential
for sustainable, profitable growth; and
Leadership and Talent:
Leveraging Our Greatest Strength
Our talent remains our greatest resource, and
throughout 2018 we continued to work with
great success to position the right leaders in
the right roles. On my leadership team, 2018
brought the appointment of proven leaders,
including in Finance and Information Technology.
What I most appreciate about our new Chief
Information Officer, John Repko, is his track
record in balancing results-driven business unit
support with the ability to fortify corporate
systems for efficiency and security. Additionally,
our new Chief Financial Officer, Mark Lyons,
has already demonstrated his deep expertise
in insurance, building on his prior operating,
finance and actuarial experience.
I also want to express how thankful I am for
the signature determination of AIG employees
across the company — in both business units
and corporate functions. In the face of significant
change, they have continued to serve clients
and each other with focus and dedication.
Collectively we are making AIG a more
attractive and rewarding place for a more
diverse and inclusive workforce.
100 Years: Taking the Long View
On the back of all that took place in 2018,
we have now entered 2019, AIG’s Centennial
year. I am extremely proud of the pioneering
role AIG has played in this industry throughout
our history. Delivering deep specialist expertise
for our clients, an entrepreneurial spirit in how
we address evolving risks, and a commitment
to communities in which we operate have been
core to who we are since AIG’s roots were
planted in Shanghai in December 1919.
Importantly, I believe these qualities are key to
the history that lies ahead: our next 100 years.
In Conclusion
As we look to the future, our destination
remains clear. We will restore AIG as the
leading insurance company in the world.
Thank you for your continued support.
Sincerely,
Brian Duperreault
President and Chief Executive Officer
AIG | 2018 Annual Report
5
Making a
Better World
The best hope for building
a brighter tomorrow can be
found in our actions today.
Sustainability:
Taking a Strategic Approach
A commitment to sustainability is integral to AIG’s success as an insurer, investor, employer
and corporate citizen. As one of the fi rst U.S. insurance companies to recognize the importance
of climate change, we have employed our expertise in underwriting and investing to help
address its impact on our stakeholders.
Sustainability Task Force
This cross-functional, CEO-endorsed group
continues to develop a holistic, strategic
approach to sustainability at AIG. Current
initiatives are segmented into areas including:
Board-Level Governance
AIG’s Board of Directors has amended the
charter of the Nominating and Corporate
Governance Committee to actively oversee
matters relating to sustainability and citizenship.
• Products
• Operations
• Investments
• Resilience
• External Partners
Reporting
AIG has been engaged in The Climate-Related
Financial Disclosure Project (TCFD) throughout its
development, including in the consultation phase.
As part of the work of the Sustainability
Task Force, AIG has committed in 2019
to explore the issuance of a TCFD
disclosure and to undertake a review
of a climate change scenario analysis.
AIG has also joined a Sustainable Finance
Working Group at the Institute for International
Finance (IIF) focused on assisting members
across the fi nancial services sector by sharing
insights and fostering a consistent approach
towards TCFD disclosure.
Additionally, we continue to report our climate
change activities through the CDP Climate
Change questionnaire.
Strategic Partnerships
AIG remains engaged in strategic partnerships
that support our commitment to sustainability.
Examples include:
• Working with Enactus, AIG employees
mentor student entrepreneurs and innovators
focused on creating resilient communities
around the world.
• As part of the founding consortium of Blue
Marble Microinsurance, we support insurance
solutions for low-income populations.
Supporting Sustainable Investing
AIG has been a leading investor in renewable
energy projects for over 30 years, with
$2.9 billion invested as of December 31, 2018
in private placement wind, solar, geothermal
and hydroelectric projects worldwide.
As of December 31, 2018, AIG held
approximately $16 billion in municipal bonds
that help improve infrastructure and extend
vital services in communities across the U.S.
We proudly include the AIG Environmental
Social and Governance (ESG) Dividend
Fund in our product offering to seek capital
appreciation and income with a positive social
impact for customers.
For more information on AIG’s sustainability and
citizenship initiatives, visit www.aig.com/citizenship.
6
AIG | 2018 Annual Report
Community:
Operating as a Good Corporate Citizen
At AIG, both our client service and philanthropic activities help others prepare for the future
and overcome the most difficult challenges. As a steadfast advocate for our employees,
we primarily support our communities by advancing causes important to AIG colleagues
in two ways: providing two days of Volunteer Time Off per employee and through the
AIG Matching Grants Program. We are also proud to support partner organizations that
reflect the diversity of our people.
In 2018:
62,000+ hours volunteered
by AIG colleagues
451,000+ meals packed
at team-building events to feed the world’s
most vulnerable with Rise Against Hunger
$6.5 million in total matching funds
to amplify employee donations through the
AIG Matching Grants Program
18,200+ students mentored
in financial literacy across 12 countries
with Junior Achievement
17 artistic, cultural and educational
institutions in 6 countries
supported by AIG’s Museum
Membership Program
3,000+ colleagues
from 33 countries donated 13,000+ hours
of community service time during
Global Volunteer Month in April
Culture:
Promoting Diversity,
Development and
Well-Being
AIG’s employees are known for their
resilience and unwavering commitment to
achieving what seems impossible — again
and again. We aim to foster a culture of
inclusion that attracts, develops and retains
the best talent with diverse points of view
to help us better understand our clients,
increase innovation and manage risk.
Making Changes
Our 127 Employee Resource Groups (ERGs)
represent 13 dimensions of diversity and provide
a forum to share, support career development
and incite positive change in the workplace
and in the communities we serve.
• Membership grew by 21% in 2018.
• Employees formed 29 new groups
in 2018, a 30% increase from 2017.
Accelerating Diversity
AIG entered DiversityInc’s 2018 Top 50 Companies
for Diversity list, after four consecutive years
of recognition as a Noteworthy Company,
thanks to our management of talent pipeline
and development, leadership accountability
and supplier diversity.
Evolving Benefits
We introduced enhanced adoption and new
surrogacy reimbursement programs for U.S.
employees to further support a greater variety
of families as we seek to offer benefits that
matter to our ever-diversifying workforce.
Building Industry Talent
We are an active supporter of the Insurance
Careers Movement, which helps to promote
the benefits of working in the industry and
attract talent — from early-career to leadership
levels — to AIG.
7
AIG | 2018 Annual Report Celebrating
100 Years
A History of Innovation
At the heart of AIG’s success has been its vision, ingenuity
and willingness to seek out new markets and develop new
ways to help our clients manage their risk.
1919
American Asiatic
Underwriters opened
for business by
Cornelius Vander
Starr in Shanghai,
China — one of the
fi rst Western insurers
to sell directly to local
Chinese clients
1937
Operations established
in Havana, Cuba —
later to become
regional headquarters
during World War II
1946
First foreign
insurance company
to enter Japan after
World War II
9
1
9
1
1925
National Life and
Accident Insurance
Company, later
to become part of
AIG, recognized the
marketing potential
of radio and in an
unorthodox move,
launched radio station
WSM along with
what has become
the longest-running
radio program in U.S.
history, “The Grand
Ole Opry”
1926
First U.S. offi ce
opened in New York
1948
American International
Reinsurance
Company formed in
Bermuda, leading to
the development of
captive insurance for
a broader market
AIG traces its roots from a humble,
two-room insurance agency in
Shanghai, China, to the leading
global insurance organization
it is today. Time and time again,
the deep expertise of AIG’s people
has allowed the company to pioneer
new markets, products and services
to help clients address their most
challenging risks.
Looking ahead, the most important
part of AIG’s history is yet to be
written. We remain committed to
the principles that have guided us:
excellence at understanding risk,
commitment to keeping our promises
and dedication to exemplary
corporate citizenship.
8
AIG | 2018 Annual Report
1984
Listed on the
New York Stock
Exchange
1964
VALIC, later to join
AIG and become AIG
Retirement Services,
enrolls the fi rst public
school district in a
403(b) retirement
program — an
American fi rst
1999
Acquired SunAmerica,
Inc., a leading
retirement and
fi nancial services
company
2001
Acquired American
General Corporation,
a leading life insurer
1999
Provided one of the
fi rst cyber security
insurance protection
programs
2001
Led the insurance effort
to protect the aviation
industry following the
9/11 terror attacks
2017
Debuted fi xed
annuity product with
a guaranteed living
benefi t nationwide,
including the fi rst-ever
of its kind in the state of
New York: the Assured
Edge Income Builder®
2018
Blackboard Insurance
began its technology-
and analytics-driven
business serving
commercial customers
in the middle market
1967
American
International Group,
Inc. incorporated
in Delaware
1992
First foreign insurer
licensed to operate in
the People’s Republic
of China
2006
Acquired Travel Guard®,
a provider of travel
insurance programs
and emergency travel
assistance
2015
Participated in the
formation of the
consortium Blue Marble
Microinsurance
2018
Acquired Validus
Holdings, Ltd., a
leading provider of
reinsurance, primary
insurance and asset
management services
1969
Celebrated 50th
anniversary and stock
began publicly trading
1993
SunAmerica, later to
become part of AIG,
introduced Polaris® —
one of the nation’s
fi rst multi-managed
variable annuities
The official Centennial website —
100.aig — tells more of AIG’s story,
celebrating the value we deliver
to our clients, to our stakeholders
and to the world.
AIG | 2018 Annual Report
9
Executive
Leadership Team
Brian Duperreault
President and Chief Executive Offi cer
Doug Dachille
Executive Vice President
Chief Investment Offi cer
Lucy Fato
Executive Vice President
General Counsel
Interim Head of Human Resources
Kevin Hogan
Executive Vice President
Chief Executive Offi cer,
Life and Retirement
Tom Leonardi
Executive Vice President
Government Affairs,
Public Policy and Communications
Mark Lyons
Executive Vice President
Chief Financial Offi cer
Seraina Macia
Executive Vice President
Chief Executive Offi cer,
Blackboard Insurance
Naohiro Mouri
Executive Vice President
Chief Auditor
Alessa Quane
Executive Vice President
Chief Risk Offi cer
John Repko
Executive Vice President
Chief Information Offi cer
Peter Zaffi no
Executive Vice President
Global Chief Operating Offi cer, AIG
Chief Executive Offi cer,
General Insurance
10
AIG | 2018 Annual Report
Board
of Directors
W. Don Cornwell
Former Chairman of the Board
and Chief Executive Officer
Granite Broadcasting Corporation
Brian Duperreault
President and Chief Executive Officer
American International Group, Inc.
John H. Fitzpatrick
Former Secretary General
The Geneva Association
Former Chief Financial Officer,
Head of the Life and Health Reinsurance
Business Group and
Head of Financial Services
Swiss Re
William G. Jurgensen
Former Chief Executive Officer
Nationwide Insurance
Christopher S. Lynch
Independent Consultant
and Former National Partner
in Charge of Financial Services
KPMG LLP
Henry S. Miller
Chairman
Marblegate Asset Management, LLC
Douglas M. Steenland
Independent Chairman of the Board
American International Group, Inc.
Former Chairman and Managing Director
Miller Buckfire & Co., LLC
Former President and
Chief Executive Officer
Northwest Airlines Corporation
Theresa M. Stone
Former Executive Vice President
and Treasurer
Massachusetts Institute of Technology
Former Executive Vice President
and Chief Financial Officer
Jefferson-Pilot Corporation
Former President
Chubb Life Insurance Company
Linda A. Mills
Former Corporate Vice President
of Operations
Northrop Grumman Corporation
Thomas F. Motamed
Former Chairman and
Chief Executive Officer
CNA Financial Corporation
Suzanne Nora Johnson
Former Vice Chairman
The Goldman Sachs Group, Inc.
Ronald A. Rittenmeyer
Executive Chairman and
Chief Executive Officer
Tenet Healthcare Corporation
Former Chairman,
Chief Executive Officer and President
Electronic Data Systems Corporation
11
AIG | 2018 Annual Report Intentionally left blank
American International Group, Inc.
Form 10-K
AIG | 2018 Annual Report
13
Intentionally left blank
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8787
For the fiscal year ended December 31, 2018
American International Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
175 Water Street, New York, New York
(Address of principal executive offices)
13-2592361
(I.R.S. Employer
Identification No.)
10038
(Zip Code)
Registrant’s telephone number, including area code (212) 770-7000
______________________________
Securities registered pursuant to Section 12(b) of the Act: See Exhibit 99.02
Securities registered pursuant to Section 12(g) of the Act: None
______________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the registrant (based on the closing price of
the registrant’s most recently completed second fiscal quarter) was approximately $47,252,000,000.
As of February 6, 2019, there were outstanding 869,486,334 shares of Common Stock, $2.50 par value per share, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Document of the Registrant
Portions of the registrant’s definitive proxy statement for the 2019
Annual Meeting of Shareholders
Form 10-K Reference Locations
Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14
AMERICAN INTERNATIONAL GROUP, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
Form 10-K
Ite m Nu mbe r
Des c ri p ti o n
Part I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
Part II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
Part III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
Part IV
ITEM 15.
ITEM 16.
Signatures
Business
• Our Global Business Overview
• AIG's Operating Structure
• Diversified Mix of Businesses
• Our Employees
• Regulation
• Available Information about AIG
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
• Cautionary Statement Regarding Forward-Looking Information
• Use of Non-GAAP Measures
• Critical Accounting Estimates
• Executive Summary
• Consolidated Results of Operations
• Business Segment Operations
•
•
• Liquidity and Capital Resources
• Enterprise Risk Management
• Glossary
• Acronyms
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Reference to Financial Statements and Schedules
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Investments
Insurance Reserves
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
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Part I
ITEM 1 | Business
Maximizing Industry
Leadership and
Global Footprint
Creating Value
through
Profitable Growth
American International Group, Inc. (AIG)
is a leading global insurance organization. Building on 100 years of experience, today we
provide a wide range of property casualty insurance, life insurance, retirement products, and
other financial services to customers in more than 80 countries and jurisdictions. These
diverse offerings include products and services that help businesses and individuals protect
their assets, manage risks and provide for retirement security. AIG common stock is listed on
the New York Stock Exchange.
Throughout 2018 we executed on our strategy to deliver long-term, profitable growth by
improving underwriting capabilities, mitigating risk and volatility by repositioning reinsurance
structures and risk limits, adding world-class talent and utilizing capital opportunistically to re-
invest in the business. Looking ahead, we continue to take decisive actions to enhance AIG’s
positioning for the future.
In this Annual Report, unless otherwise mentioned or unless the context indicates otherwise, we use the terms “AIG,” the “Company,”
“we,” “us” and “our” to refer to American International Group, Inc., a Delaware corporation, and its consolidated subsidiaries. We use
the term “AIG Parent” to refer solely to American International Group, Inc., and not to any of its consolidated subsidiaries.
AIG | 2018 Form 10-K 3
ITEM 1 | Business | AIG
Maximizing Industry Leadership and Global Footprint
About AIG
World Class
Insurance Franchises
that are among the leaders in their
categories, providing differentiated service
and expertise.
Balance Sheet
Quality and Strength
as demonstrated by over $56 billion in
shareholders’ equity and AIG Parent
liquidity sources of $8.3 billion as of
December 31, 2018.
Effective
Capital Management
of one of the largest insurance
companies in the world by shareholders’
equity(a).
Breadth of Customers
which include over 87 percent of companies in the Fortune Global
500(b) and 81 percent of the Forbes 2000(b).
A Diverse Mix of Businesses
supported through a presence in most international markets.
(a) At September 30, 2018, the latest date for which information was available for certain foreign insurance companies.
(b) At November 1, 2018.
Creating Value Through Profitable Growth
2019 Priorities
Balance and Diversification of Products – Shifting our
Technology – Improving operations that help employees
business mix to grow the best-performing lines of business
and optimizing our global footprint
evaluate business and serve customers while strengthening
essential corporate system security and efficiency
Leadership, Culture and Talent – Continuing to structure
and cultivate teams to deliver world-class performance
Capital and Growth – Managing capital efficiently and
making selective investments in complementary growth
opportunities that advance profitability improvement efforts
Underwriting Excellence – Using newly implemented
framework and guidelines – while further integrating
underwriting, claims and actuarial – to enhance the portfolio
Reinsurance Optimization – Partnering strategically with
reinsurers on portfolio positioning and programs designed to
reduce exposures and severity from individual risk losses
2018 Highlights
Underwriting Approach
Leadership Changes
Growth & Balance
Addressed volatility and severity by
reducing gross and net limits in
property and casualty, and by
repositioning reinsurance structures
Provided underwriters across the
globe with a supportive underwriting
framework, and reissued underwriting
authorities aligned with revised risk
appetite
Recruited some of the industry’s
leading talent for senior roles.
Appointed 3 members of the AIG
Executive Leadership Team and more
than 12 General Insurance senior
leaders in 2018
Complemented product and service
offerings with strategic acquisitions
including:
Validus: reinsurance platform,
insurance-linked securities, Lloyd’s
syndicate, excess & surplus
specialty, crop risk
Glatfelter Insurance: specialty
programs
Ellipse: group life, critical illness
and income protection
4 AIG | 2018 Form 10-K
ITEM 1 | Business | AIG
AIG’S OPERATING STRUCTURE
Our Core businesses include General Insurance, Life and Retirement and Other Operations. General Insurance consists of two
operating segments – North America and International. Life and Retirement consists of four operating segments – Individual
Retirement, Group Retirement, Life Insurance and Institutional Markets. Blackboard U.S. Holdings, Inc. (Blackboard), AIG’s
technology-driven subsidiary, is reported within Other Operations. We also report a Legacy Portfolio consisting of our run-off
insurance lines and legacy investments that we consider non-core. Effective February 2018, our Bermuda-domiciled composite
reinsurer, Fortitude Reinsurance Company Ltd (Fortitude Re.) is included in our Legacy Portfolio.
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 insurance
businesses in Japan, the United Kingdom, Europe, the Asia Pacific region, Latin America, Puerto Rico, Australia, the Middle East and
Africa. General Insurance results are presented before consideration of internal reinsurance agreements.
For further discussion on our business segments see Item 7. MD&A and Note 3 to the Consolidated Financial Statements.
Business Segments
General Insurance
General Insurance is a leading provider of insurance
products and services for commercial and personal insurance
customers. It includes one of the world’s most far-reaching
property casualty networks. General Insurance offers a broad
range of products to customers through a diversified,
multichannel distribution network. Customers value General
Insurance’s strong capital position, extensive risk
management and claims experience and its ability to be a
market leader in critical lines of the insurance business.
Life and Retirement
Life and Retirement is a unique franchise that brings together a broad
portfolio of life insurance, retirement and institutional products offered
through an extensive, multichannel distribution network. It holds long-
standing, leading market positions in many of the markets it serves in
the U.S. With its strong capital position, customer-focused service,
breadth of product expertise and deep distribution relationships across
multiple channels, Life and Retirement is well positioned to serve
growing market needs.
North
America
International
Individual
Retirement
Group
Retirement
Life
Insurance
Institutional
Markets
General Insurance includes the following major operating
companies: National Union Fire Insurance Company of
Pittsburgh, Pa. (National Union); American Home Assurance
Company (American Home); Lexington Insurance Company
(Lexington); AIG General Insurance Company, Ltd. (AIG
Sonpo); AIG Asia Pacific Insurance, Pte, Ltd.; AIG Europe
S.A.; American International Group UK Ltd.; Validus
Reinsurance, Ltd.; Talbot Holdings Ltd.; Western World
Insurance Group, Inc. and Glatfelter Insurance Group.
Life and Retirement includes the following major operating companies:
American General Life Insurance Company (American General Life);
The Variable Annuity Life Insurance Company (VALIC); The United
States Life Insurance Company in the City of New York (U.S. Life);
Laya Healthcare Limited and AIG Life Limited.
Other Operations
Legacy Portfolio
Other Operations consists of businesses and items not
attributed to our General Insurance and Life and Retirement
segments or our Legacy Portfolio. It includes AIG Parent;
Blackboard; deferred tax assets related to tax attributes;
corporate expenses and intercompany eliminations.
Legacy Portfolio includes Legacy Life and Retirement Run-Off Lines,
Legacy General Insurance Run-Off Lines, and Legacy Investments.
Effective February 2018, Fortitude Re, our Bermuda-domiciled
composite reinsurer, is included in our Legacy Portfolio.
AIG | 2018 Form 10-K 5
ITEM 1 | Business | AIG
Diversified Mix of Businesses
(dollars in millions)
67%
General Insurance
North America
33%
International
34%
2%
Other Operations
$14,619
$15,554
2018
Adjusted
Revenues*
$5,338
6
3
6
$
0
0
1,9
$
$2,891
$4,007
31%
Life and Retirement
12%
Individual Retirement
9%
6%
4%
Life Insurance
Group Retirement
Institutional Markets
* Our Total revenues were $47.4 billion in 2018. The graph above represents Adjusted revenues excluding revenues from our Legacy Portfolio operations of $3.0 billion.
For reconciliation of Adjusted revenues to Total revenues see Note 3 to the Consolidated Financial Statements.
Geographic Concentration
In 2018, 5.7 percent of our property casualty direct premiums were written in the state of California, and 16.4 percent and 7.1 percent
were written in Japan and the United Kingdom, respectively. No other state or foreign jurisdiction accounted for more than five percent
of our property casualty direct premiums.
For further information on our business segments see Note 3 to the Consolidated Financial Statements.
6 AIG | 2018 Form 10-K
ITEM 1 | Business | AIG
How We Generate Revenues and Profitability
We earn revenues primarily from insurance premiums, policy fees and income from investments.
Our expenses consist of policyholder benefits and losses incurred, interest credited to policyholders, commissions and other costs of
selling and servicing our products, interest expense and general operating expenses.
Our profitability is dependent on our ability to properly price and manage risk on insurance and annuity products, to manage our
portfolio of investments effectively and to control costs through expense discipline.
Investment Activities of Our Insurance Operations
Our insurance companies generally receive premiums and deposits well in advance of paying covered claims or benefits. In the
intervening periods, we invest these premiums and deposits to generate net investment income that, along with the invested funds, is
available to pay claims or benefits. As a result, we generate significant revenues from insurance investment activities.
The practice for managing the investments of the insurance companies places primary emphasis in corporate bonds, government or
government-related bonds and mortgage backed securities and loans. Our fundamental strategy across all of our investment
portfolios is to optimize the duration characteristics of the assets within a target range based on comparable liability characteristics, to
the extent practicable.
For additional discussion of investment strategies see Item 7. MD&A — Investments.
Loss Reserve Development Process
The liability for unpaid losses and loss adjustment expenses (loss reserves) represents the accumulation of estimates for unpaid
claims, including estimates for claims incurred but not reported (IBNR) for our General Insurance companies, including the related
expenses of settling those losses.
The process of establishing loss reserves is complex and imprecise because it must take into consideration many variables that are
subject to the outcome of future events. As a result, informed subjective estimates and judgments about our ultimate exposure to
losses are an integral component of our loss reserving process. Because reserve estimates are subject to the outcome of future
events, changes in prior year estimates are unavoidable in the insurance industry. These changes are sometimes referred to as “prior
year loss development” or “reserve development.”
For further discussion on loss reserves and of prior year loss development see Item 7. MD&A — Critical Accounting Estimates —
Insurance Liabilities — Loss Reserves, Item 7. MD&A — Insurance Reserves — Loss Reserves, and Note 13 to the Consolidated
Financial Statements.
Our Employees
At AIG, we believe that a major strength of ours is the quality and dedication of our people. At December 31, 2018 and 2017, we had
approximately 49,600 and 49,800 employees, respectively. We believe that our relations with our employees are satisfactory.
AIG | 2018 Form 10-K 7
ITEM 1 | Business
Regulation
OVERVIEW
Our operations around the world are subject to regulation by many different types of regulatory authorities, including insurance,
securities, derivatives, investment advisory and thrift regulators in the United States and abroad. The insurance and financial services
industries generally have been subject to heightened regulatory scrutiny and supervision since the financial crisis.
Our insurance and reinsurance subsidiaries are subject to regulation and supervision by the states and other jurisdictions in which
they do business. We expect that the domestic and international regulations applicable to us and our regulated entities will continue to
evolve for the foreseeable future.
U.S. REGULATION
Dodd-Frank
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which brought about the most
extensive changes to financial regulation in the United States in many years, was signed into law. On July 8, 2013, the Financial
Stability Oversight Council (Council) made a determination that material financial distress at AIG could pose a threat to U.S. financial
stability. On September 29, 2017, the Council rescinded its determination that material financial distress at AIG could pose a threat to
U.S. financial stability and as a result, AIG is no longer designated as a nonbank systemically important financial institution (nonbank
SIFI). With the rescission of its designation as a nonbank SIFI, AIG is no longer subject to the consolidated supervision of the Board
of Governors of the Federal Reserve System (FRB) or subject to the enhanced prudential standards set forth in Dodd-Frank and its
implementing regulations. Although the Council has rescinded its designation of AIG as a nonbank SIFI, certain provisions of Dodd-
Frank remain relevant to insurance groups generally.
• The Council has authority to determine, subject to certain statutory and regulatory standards, that any nonbank financial company
be designated as a nonbank SIFI subject to supervision by the FRB and enhanced prudential standards. The Council may also
recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or
practices that nonbank financial services companies, including insurers, engage in.
• Title II of Dodd-Frank (Orderly Liquidation Authority) provides that a financial company whose largest United States subsidiary is
an insurer may be subject to a special orderly liquidation process outside the Bankruptcy Code. That process is to be administered
by the FDIC upon a determination that the company is: (i) in default or in danger of default, (ii) would have serious adverse effects
on U.S. financial stability were it to fail and be resolved, (iii) is not likely to attract private sector alternatives to default and (iv) is not
suitable for resolution under the Bankruptcy Code. Dodd-Frank authorizes possible assessments to cover the costs of any special
resolution of a financial company conducted under Title II. U.S. insurance subsidiaries of any such financial company, however,
would be subject to rehabilitation and liquidation proceedings under state insurance law.
• Title VII of Dodd-Frank provides for significantly increased regulation of and restrictions on derivatives markets and transactions
that have affected and, as additional regulations come into effect, could affect various activities of insurance and other financial
services companies, including (i) regulatory reporting for swaps and security-based swaps, (ii) mandated clearing through central
counterparties and execution through regulated swap execution facilities for certain swaps and security-based swaps and (iii)
margin and collateral requirements. Although the Commodities Futures Trading Commission (CFTC), which oversees and
regulates the U.S. swap, commodities and futures markets, has finalized most of its requirements, the SEC has yet to finalize the
majority of rules comprising its security-based swap regulatory regime. Increased regulation of and restrictions on derivatives
markets and transactions could increase the cost of our trading and hedging activities, reduce liquidity and reduce the availability
of customized hedging solutions and derivatives.
• Dodd-Frank mandated a study to determine whether stable value contracts should be included in the definition of "swap." If that
study concludes that stable value contracts are swaps, Dodd-Frank authorizes certain federal regulators to determine whether an
exemption from the definition of a swap for stable value contracts is appropriate and in the public interest. Certain of our affiliates
participate in the stable value contract business. We cannot predict what regulations might emanate from the aforementioned
study or be promulgated applicable to this business in the future.
• Title V of Dodd-Frank authorizes the United States to enter into covered agreements with foreign governments or regulatory
entities regarding the business of insurance and reinsurance. On September 22, 2017, the U.S. and the European Union (EU)
entered into such an agreement, and on December 18, 2018, the U.S. signed a covered agreement with the United Kingdom (UK)
8 AIG | 2018 Form 10-K
ITEM 1 | Business
in anticipation of the UK’s withdrawal of its membership in the EU, commonly referred to as Brexit. For additional information, see
— International Regulation.
• Dodd-Frank established the Bureau of Consumer Financial Protection (BCFP), an independent agency within the FRB, to regulate
certain non-insurance consumer financial products and services offered primarily for personal, family or household purposes.
Insurance products and services are not within the BCFP's general jurisdiction. Broker-dealers and investment advisers are not
subject to the BCFP's jurisdiction when acting in their registered capacity.
• Dodd-Frank established the Federal Insurance Office (FIO) to serve as the central insurance authority in the federal government.
While not serving a regulatory function, FIO performs certain duties related to the business of insurance. FIO serves as a non-
voting member of the Council, has authority to collect information on the insurance industry and recommend prudential standards,
monitors market access issues, represents the United States in international insurance forums, has authority to determine, after
consulting with the relevant State and the United States Trade Representative, if certain regulations are preempted by covered
agreements, and assists the Secretary of the Treasury in administering the Terrorism Risk Insurance Program under the Terrorism
Risk Insurance Act of 2002.
On February 3, 2017, the President of the United States signed an Executive Order that directed the Secretary of the Treasury, in
consultation with federal financial regulators, to assess all laws, rules and policies that regulate the U.S. financial system, including
requirements put into place under Dodd-Frank since 2010, and to recommend necessary changes to make sure they conform to
certain core principles. Treasury divided its review into four parts and published four reports: Banks and Credit Unions (June 12,
2017), Capital Markets (October 6, 2017), Asset Management and Insurance (October 26, 2017) and Nonbank Financials, Fintech
and Innovation (July 31, 2018). In its report on insurance regulation, Treasury identified several areas for improvement at the federal
and state levels and defined the role it intends for federal agencies. Among the points made in the report:
• Treasury expressed support for an activities-based approach to regulating systemic risk in the insurance industry rather than
designating individual entities;
• Treasury recommended continued U.S. engagement in international standard-setting forums and charged FIO with coordinating
the efforts of the federal government, state regulators, the National Association of Insurance Commissioners (NAIC), and other
stakeholders on the issues within its scope, such as covered agreements, matters related to the Terrorism Risk Insurance
Program, and standard-setting at the International Association of Insurance Supervisors (IAIS), including discussions regarding
capital and liquidity requirements;
• Treasury expressed support for robust liquidity risk management programs for insurers and encouraged regulators to continue
work on addressing potential liquidity risk in the insurance sector; and
• Treasury supported the Department of Labor (the DOL) in delaying full implementation of the final fiduciary rule issued by the DOL
in April 2016 (the DOL Fiduciary Rule) until relevant issues are further evaluated and addressed by the DOL, SEC, and state
insurance regulators working together. The DOL Fiduciary Rule was subsequently vacated by the U.S. Court of Appeals for the
Fifth Circuit. For additional information regarding legislative and regulatory developments surrounding a standard of care for the
sale of investment products and services, see – U.S. Regulation – ERISA and Standard of Care Developments below and Item 7.
MD&A – Executive Summary – AIG’s Outlook – Industry and Economic Factors – Standard of Care Developments.
In addition, on April 21, 2017 the President of the United States directed the Secretary of the Treasury to evaluate and provide
recommendations regarding the Council’s processes for designating nonbank SIFIs. The Treasury published a report pursuant to this
directive on November 17, 2017, recommending that the Council prioritize an activities-based approach to regulating systemic risk
rather than designating individual entities, and recommending that the Council increase the analytical rigor of its designation
analyses, enhance engagement with relevant regulators and transparency to the public, and provide a clear off-ramp to designated
nonbank SIFIs. The Council has begun discussions regarding potential amendments to its guidance on nonbank financial company
designations related to an activities-based approach to monitoring and addressing potential systemic risk. We will monitor
developments resulting from these recommendations and discussions closely.
Insurance Regulation
Certain states and other jurisdictions require registration and periodic reporting by (re)insurance companies that are licensed in such
jurisdictions and are controlled by other entities. Applicable legislation typically requires periodic disclosure concerning the entity that
controls the registered insurer and the other companies in the holding company system and prior approval of intercompany
transactions and transfers of assets, including in some instances payment of dividends by the (re)insurance subsidiary, within the
holding company system. This legislation also requires any person or entity desiring to purchase more than a specified percentage
(commonly 10 percent) of our outstanding voting securities to obtain regulatory approval prior to such purchase. Our subsidiaries are
registered under such legislation in those jurisdictions that have such requirements.
Our U.S. (re)insurance subsidiaries are subject to regulation and supervision by the states and other jurisdictions in which they do
business. The method of such regulation varies but generally has its source in statutes that delegate regulatory and supervisory
AIG | 2018 Form 10-K 9
ITEM 1 | Business
powers to a state insurance official. The regulation and supervision relate primarily to the financial condition of the insurers and their
corporate conduct and market conduct activities. This includes approval of policy forms and rates, the standards of solvency that must
be met and maintained, including with respect to risk-based capital, the standards on transactions between (re)insurance company
subsidiaries and their affiliates, including restrictions and limitations on the amount of dividends or other distributions payable by
(re)insurance company subsidiaries to their parent companies, the licensing of insurers and their agents, restrictions on the size of
risks that may be insured under a single policy, deposits of securities for the benefit of policyholders, requirements for acceptability of
reinsurers, periodic examinations of the affairs of (re)insurance companies, the form and content of reports of financial condition
required to be filed, reserves for unearned premiums, losses and other purposes and enterprise risk management and corporate
governance requirements. Our (re)insurance subsidiaries are also subject to requirements on investments, which prescribe the kind,
quality and concentration of investments they can make. In general, such regulation is for the protection of policyholders rather than
the creditors or equity owners of these companies.
U.S. states have state insurance guaranty associations in which insurers doing business in the state are required by law to be
members. Member insurers may be assessed by the associations for certain obligations of insolvent insurance companies to
policyholders and claimants. Typically, states assess member insurers in amounts related to the member’s proportionate share of the
relevant type of business written by all members in the state. The protection afforded by a state’s guaranty association to
policyholders of insolvent insurers varies from state to state.
In the U.S., the NAIC is a standard-setting and regulatory support organization created and governed by the chief insurance
regulators from the 50 states, the District of Columbia and five U.S. territories. The NAIC itself is not a regulator, but, with assistance
from the NAIC, state insurance regulators establish standards and best practices, conduct peer review and coordinate regulatory
oversight. Every state has adopted, in substantial part, the Risk-Based Capital (RBC) Model Law promulgated by the NAIC or a
substantially similar law, which allows states to act upon the results of RBC calculations, and provides four incremental levels of
regulatory action regarding insurers whose RBC calculations fall below specific thresholds. Those levels of action range from the
requirement to submit a plan describing how an insurer would regain a specified RBC ratio to a mandatory regulatory takeover of the
company. The RBC formula is designed to measure the adequacy of an insurer’s statutory surplus in relation to the risks inherent in
its business and computes a risk-adjusted surplus level by applying discrete factors to various asset, premium, reserve and other
financial statement items. These factors are developed to be risk-sensitive so that higher factors are applied to items exposed to
greater risk. The statutory surplus of each of our U.S. based (re)insurance companies exceeded RBC minimum required levels as of
December 31, 2018.
If any of our (re)insurance entities fell below prescribed levels of statutory surplus, it would be our intention to provide appropriate
capital or other types of support to that entity. For additional information, see Item 7. MD&A – Liquidity and Capital Resources –
Liquidity and Capital Resources of AIG Parent and Subsidiaries – Insurance Companies.
The NAIC’s Model Regulation “Valuation of Life Insurance Policies” (Regulation XXX) requires insurers to establish additional
statutory reserves for term life insurance policies with long-term premium guarantees and universal life policies with secondary
guarantees (ULSGs). NAIC Actuarial Guideline 38 (Guideline AXXX) clarifies the application of Regulation XXX as to these
guarantees, including certain ULSGs. See Item 1A. Risk Factors and Note 18 to the Consolidated Financial Statements for risks and
additional information related to these statutory reserving requirements. In December 2012, the NAIC approved a new valuation
manual containing a principle-based approach to life insurance company reserves. Principle-based reserving (PBR) is designed to
tailor the reserving process to specific products in an effort to create a principle-based modeling approach to reserving rather than the
factor-based approach historically employed. PBR became effective on January 1, 2017, after the NAIC’s model Standard Valuation
Law was enacted by the requisite number of states representing the required premium volume, replacing Regulation XXX and
Guideline AXXX with respect to new life insurance business issued after that date. Two of our domiciliary states (Missouri and Texas)
have adopted the regulations necessary to implement PBR. On December 10, 2018, a third domiciliary state (New York) adopted an
emergency regulation to begin the implementation of PBR for regulated life insurers. We have up to three years after January 1, 2017
to implement PBR, and have currently elected to defer implementation.
The NAIC’s Insurance Holding Company System Regulatory Act (the Model Holding Company Act) and the Insurance Holding
Company System Model Regulation include (i) provisions authorizing NAIC commissioners to act as global group-wide supervisors for
internationally active insurance groups and participate in international supervisory colleges, and (ii) the requirement that the ultimate
controlling person of a U.S. insurer file an annual enterprise risk report with its lead state regulator identifying risks likely to have a
material adverse effect upon the financial condition or liquidity of its licensed insurers or the insurance holding company system as a
whole. All of the states where AIG has domestic insurers have enacted a version of the revised Model Holding Company Act, including
the enterprise risk reporting requirement.
The NAIC’s Risk Management and Own Risk and Solvency Assessment Model Act (ORSA) requires that insurers maintain a risk
management framework and conduct an internal own risk and solvency assessment of the insurer’s material risks in normal and
stressed environments. All of the states where AIG has domestic insurers have enacted a version of ORSA.
10 AIG | 2018 Form 10-K
ITEM 1 | Business
ERISA and Standard of Care Developments
We provide products and services that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), or
the Internal Revenue Code of 1986, as amended (the Internal Revenue Code). Plans subject to ERISA include certain pension and
profit sharing plans and welfare plans, including health, life and disability plans. As a result, our activities are subject to the
restrictions imposed by ERISA and the Internal Revenue Code, including the requirement under ERISA that fiduciaries must perform
their duties solely in the interests of ERISA plan participants and beneficiaries, and that fiduciaries may not cause a covered plan to
engage in certain prohibited transactions.
Certain of our retirement products and services were also subject to the DOL Fiduciary Rule before the final rule was formally vacated
by the U.S. Court of Appeals for the Fifth Circuit (the Fifth Circuit) on March 15, 2018 with the Fifth Circuit ruling that the DOL
exceeded its authority in promulgating the DOL Fiduciary Rule, specifically in its broadening of the scope of fiduciary “investment
advice” under ERISA and in the terms of the best interest contract exemption. As the Fifth Circuit’s final judgment was not further
appealed, the ruling has the effect of invalidating the DOL Fiduciary Rule in its entirety. While the DOL has indicated that it plans to
issue in September 2019 a revised final fiduciary rule package to replace the DOL Fiduciary Rule vacated by the Fifth Circuit, we
cannot predict at this time the scope or substance of the new regulation that may be ultimately promulgated by the DOL or the impact
such regulation may have on our businesses and operations.
In addition to the DOL, the SEC, federal and state lawmakers and state insurance regulators continue their efforts to evaluate what is
an appropriate regulatory framework around a standard of care for the sale of investment products and services. On April 18, 2018,
the SEC proposed a package of proposed rules and interpretations designed to address standard of care issues and the
transparency of retail investors’ relationships with investment advisors and broker-dealers. On July 18, 2018, the New York State
Department of Financial Services (NYDFS) adopted a best interest standard of care regulation applicable to annuity and life
transactions through issuance of the First Amendment to Insurance Regulation 187 – Suitability and Best Interests in Life Insurance
and Annuity Transactions (Regulation 187).
For additional information regarding these developments, see Item 7. MD&A – Executive Summary – AIG’s Outlook – Industry and
Economic Factors –Standard of Care Developments.
Investment Adviser, Broker-Dealer and Investment Company Regulation
Our investment products and services are subject to federal and state securities, fiduciary, including ERISA, and other laws and
regulations. The SEC, Financial Industry Regulatory Authority (FINRA), CFTC, state securities commissions, state insurance
departments and the DOL are the principal U.S. regulators of these operations.
The subsidiaries that manage the operations of our investment products and services are registered as investment advisers with the
SEC under the Investment Advisers Act of 1940 (the Investment Advisers Act) and are required to supervise the activities of their
personnel. Our affiliates that offer interests in insurance company separate accounts, mutual funds and other pooled investment
products, and that provide other financial services to customers, are registered as broker-dealers and/or investment advisors with the
SEC under the Exchange Act or the Investment Advisors Act, with certain states, and/or are also members of FINRA, as
applicable. Our broker-dealer subsidiaries and their personnel are subject to examination by the SEC, FINRA, and the states for
compliance with law, and certain personnel of these broker-dealers are also required to pass qualification examinations. The
investment products that are offered by our affiliates may be registered under the Securities Act, which regulates disclosure regarding
the products, and/or the Investment Company of 1940, which imposes substantive regulation on the structure and governance of the
products, as well as being subject to insurance regulation in the case of separate accounts. Some products may also be qualified for
sale in various states, the District of Columbia and Puerto Rico.
Our subsidiary, AlphaCat Managers Ltd., is a licensed insurance manager and is registered as an investment adviser with the SEC
under the Investment Advisers Act. AlphaCat Managers Ltd. is also registered as a “commodity pool operator” with the CFTC and is a
member of the National Futures Association.
For additional information regarding legislative and regulatory developments surrounding a standard of care for the sale of investment
products and services, see Item 7. MD&A – Executive Summary – AIG’s Outlook – Industry and Economic Factors – Standard of
Care Developments.
Privacy, Data Protection and Cybersecurity
We are subject to U.S. laws and regulations that require financial institutions and other businesses to protect the security and
confidentiality of personal and other sensitive information and provide notice of their practices relating to the collection and disclosure
of personal information. We also are subject to laws and regulations requiring notification to affected individuals and regulators of
security breaches.
AIG | 2018 Form 10-K 11
ITEM 1 | Business
In October 2017, the NAIC adopted the Insurance Data Security Model Law (NAIC Model Law), which would require insurers,
insurance producers and other entities required to be licensed under state insurance laws to develop and maintain a written
information security program, conduct risk assessments, oversee the data security practices of third-party service providers and other
related requirements. Legislation based on the NAIC Model Law has been enacted in South Carolina, Ohio and Michigan, and may
be enacted in other states.
Effective March 1, 2017, the NYDFS promulgated a cybersecurity regulation requiring covered financial services institutions to
implement a cybersecurity program designed to protect information systems. The regulation imposes specific technical safeguards as
well as governance, risk assessment, monitoring and testing, third party service provider incident response and reporting and other
requirements. The regulation sets forth transitional periods for compliance with different sections of the regulation through early 2019.
AIG companies covered by the regulation periodically file certifications of compliance with the requirements in force at the time of
each such filing. Requirements under the NYDFS’ cybersecurity regulation are similar to those under the NAIC Model Law, with some
differences.
In 2018, California enacted the California Consumer Privacy Act of 2018 (CCPA), which will go into effect in 2020. The CCPA contains
a number of new requirements regarding the personal information of California consumers as defined by the statute, including new
individual rights and mandatory disclosures regarding consumers’ personal information. The statute also establishes a private right of
action in some cases if consumers’ personal information is subject to a data breach as a result of a business’ failure to implement and
maintain reasonable security practices.
For information on privacy, data protection and cybersecurity regulation in the EU and other international jurisdictions, see
International Regulation – Privacy, Data Protection and Cybersecurity.
Thrift Regulator
AIG Federal Savings Bank, our trust-only federal thrift subsidiary, is supervised and regulated by the Office of the Comptroller of the
Currency.
INTERNATIONAL REGULATION
Insurance Regulation
A substantial portion of our business is conducted in foreign countries. The degree of regulation and supervision in foreign
jurisdictions varies. Generally, our subsidiaries operating in foreign jurisdictions must satisfy local regulatory requirements; licenses
issued by foreign authorities to our subsidiaries are subject to modification or revocation by such authorities, and therefore these
subsidiaries could be prevented from conducting business in certain of the jurisdictions where they currently operate.
Certain jurisdictions require registration and periodic reporting by (re)insurance companies that are licensed in such jurisdictions and
are controlled by other entities. Applicable legislation typically requires periodic disclosure concerning the entity that controls the
registered insurer and the other companies in the holding company system and prior approval of intercompany transactions and
transfers of assets, including in some instances payment of dividends by the (re)insurance subsidiary within the holding company
system. Our subsidiaries are registered under such legislation in those jurisdictions that have such requirements.
In addition to these licensing and other requirements, our foreign operations are also regulated in various jurisdictions with respect to
currency, policy language and terms, advertising, amount and type of security deposits, amount and type of reserves, amount and
type of capital to be held, amount and type of local investment and the share of profits to be returned to policyholders on participating
policies. Our foreign operations are subject to local tax laws and regulations as well. Some foreign countries regulate rates on various
types of policies. Certain countries have established reinsurance institutions, wholly or partially owned by the local government, to
which admitted insurers are obligated to cede a portion of their business on terms that may not always allow foreign insurers,
including our subsidiaries, full compensation. In some countries, regulations governing constitution of technical reserves and
remittance balances may hinder remittance of profits and repatriation of assets.
Legislation in the EU could also affect our international (re)insurance operations. The EU issues Directives and Regulations on a wide
range of topics that impact financial services. Insurance companies operating in the EU are subject to the Solvency II framework. The
Prudential Regulation Authority, the United Kingdom’s (UK’s) prudential regulator, is the lead prudential supervisor for our new UK
entity, AIG UK. The UK’s Financial Conduct Authority has oversight of AIG UK for consumer protection and competition matters. The
Luxembourg insurance regulator, the Commissariat aux Assurances (the CAA) is the insurance regulator for AIG Europe SA, which
serves our European Economic Area (EEA) and Swiss policyholders. For information on the UK’s pending withdrawal of its
membership in the EU, see —Brexit. In addition, financial companies that operate in the EU are subject to a range of regulations
enforced by the national regulators in each member state in which that firm operates. The EU has also established a set of regulatory
requirements under the European Market Infrastructure Regulation (EMIR) that include, among other things, risk mitigation, risk
12 AIG | 2018 Form 10-K
ITEM 1 | Business
management, regulatory reporting and clearing requirements. Solvency II governs the insurance industry’s solvency framework,
including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards. In
accordance with Solvency II, the European Commission is required to make a determination as to whether a supervisory regime
outside of the EU is “equivalent.”
On September 22, 2017, the U.S. Treasury Department and the Office of the U.S. Trade Representative, on behalf of the U.S., and
the EU signed the bilateral Covered Agreement, which is intended to address issues regarding the application of Solvency II
requirements to U.S.-based insurance groups as well as other (re)insurance regulatory issues. Certain aspects of the agreement
remain subject to an implementation timetable in the U.S. and the EU, which may delay or even prevent the agreement from being
fully implemented. In particular, the U.S. states have been given a period of five years to comply with the agreement’s reinsurance
collateral provisions. After 42 months, FIO must begin evaluating a potential preemption determination with respect to any state law
not in compliance with the aim of assuring full compliance within the five-year timeframe. The agreement may be terminated (following
mandatory consultation) by notice from one party to the other effective in 180 days, or at such time as the parties may agree.
Under the agreement, AIG will be supervised at the worldwide group level only by its relevant U.S. insurance supervisors, and will not
have to satisfy EU Solvency II group capital, reporting and governance requirements for its worldwide group. The agreement,
however, would permit the imposition of EU Solvency II group capital requirements if, after five years from the signing of the
agreement, a U.S. insurer is not subject to a group capital assessment by its applicable state regulator. The NAIC is in the process of
developing a group capital calculation that, once adopted by the states, is expected to satisfy this condition. The agreement further
provides that if the summary risk reports submitted to the supervisory authority of a host jurisdiction expose any serious threat to
policyholder protection or financial stability in such host state, the host supervisor may request further information from the insurance
group and/or impose preventive or corrective measures with respect to the (re)insurer in its jurisdiction. The agreement also seeks to
impose equal treatment of U.S. and EU-based reinsurers that meet certain qualifications. In the U.S., once fully implemented, the
agreement requires U.S. states to lift reinsurance collateral requirements on qualifying EU-based reinsurers and provide them equal
treatment with U.S. reinsurers or be subject to federal preemption. While this provision does not preclude AIG from continuing to
request collateral from an EU reinsurer that is party to a bilateral reinsurance transaction, it is unclear how much collateral AIG will be
able to obtain from EU reinsurers going forward.
On December 18, 2018, the U.S. Treasury Department and the Office of the U.S. Trade Representative signed the Bilateral
Agreement between the U.S. and the UK on Prudential Measures Regarding Insurance and Reinsurance (the U.S.-UK Covered
Agreement). The terms of the agreement are substantially similar to the U.S.-EU Covered Agreement. The agreement has been
entered into in order to maintain regulatory certainty and market continuity as the UK prepares to leave the EU. The agreement is still
subject to U.S. and UK internal requirements and procedures, including a 90 day Congressional notification period in the U.S. In
addition, the agreement notes with respect to the date of entry into force that the UK must take into account its obligations arising in
respect of any agreement between the EU and the UK pursuant to Article 50 of the Treaty on European Union, which sets out the
process under which an EU member state may withdraw from the EU.
The Bermuda Monetary Authority (the BMA) regulates AIG’s operating (re)insurance subsidiaries in Bermuda. The Insurance Act 1978
and its related regulations (as amended, the Insurance Act), as enforced by the BMA, impose a variety of requirements and
restrictions on our Bermuda operating (re)insurance subsidiaries including: the filing of annual statutory financial returns; the filing of
annual GAAP financial statements; compliance with minimum enhanced capital requirements; compliance with the BMA’s Insurance
Code of Conduct; compliance with minimum solvency margins and liquidity ratios; limitations on dividends and distributions;
preparation of an annual Financial Condition Report providing details of measures governing the business operations, corporate
governance framework, solvency and financial performance; and restrictions on certain changes in control of regulated (re)insurers.
Privacy, Data Protection and Cybersecurity
The EU General Data Protection Regulation (GDPR) took effect in May 2018. The GDPR aims to introduce consistent data protection
rules across the EU, and its scope extends to entities established within the EEA (i.e., EU member states plus Iceland, Liechtenstein
and Norway) and also extends to certain entities not established in the EEA (in certain instances, if they process personal data of or
offer goods or services to EEA data subjects, or monitor the behavior of EEA data subjects (e.g., in an online context)).
We are addressing the new requirements regarding the processing of personal data about individuals, including mandatory security
breach reporting, new and strengthened individual rights, evidenced data controller accountability for compliance with the GDPR
principles (including fairness and transparency), maintenance of data processing activity records and the implementation of “privacy
by design”, including through the completion of mandatory Data Protection Impact Assessments in connection with higher risk data
processing activities. Sanctions for non-compliance with the GDPR are more onerous than the previous regulatory regime with the
potential for fines of up to 4 percent of global revenue for the most serious infringements.
We also are subject to other international laws and regulations that require financial institutions and other businesses to protect the
security and confidentiality of personal and other sensitive information and provide notice of their practices relating to the collection
AIG | 2018 Form 10-K 13
ITEM 1 | Business
and disclosure of personal information, and to international laws and regulations requiring notification to affected individuals and
regulators of security breaches. In addition, we must comply with laws and regulations regarding the cross-border transfer of
information.
For additional information on U.S. privacy, data protection and cybersecurity regulation, see U.S. Regulation – Privacy, Data
Protection and Cybersecurity.
FSB and IAIS
The Financial Stability Board (FSB) consists of representatives of national financial authorities of the G20 countries. The FSB itself is
not a regulator but is focused primarily on promoting international financial stability. It does so by coordinating the work of national
financial authorities and international standard-setting bodies as well as developing and promoting the implementation of regulatory,
supervisory and other financial policies. The FSB has issued a series of frameworks and recommendations intended to produce
significant changes in how financial companies, particularly global systemically important financial institutions, should be regulated.
These frameworks and recommendations address such issues as systemic financial risk, financial group supervision, capital and
solvency standards, corporate governance including compensation, and a number of related issues associated with responses to the
financial crisis.
The IAIS represents insurance regulators and supervisors of more than 200 jurisdictions (including regions and states) in nearly 140
countries and seeks to promote globally consistent insurance industry supervision. The IAIS itself is not a regulator, but one of its
activities is to develop insurance regulatory standards for use by local authorities across the globe. The FSB has charged the IAIS
with developing a framework for measuring systemic risks posed by insurance groups and has directed the IAIS to create standards
relative to many of the areas of focus of the FSB, which go beyond the IAIS’ basic Insurance Core Principles. The IAIS is developing
ComFrame, a Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs). ComFrame sets out
qualitative and quantitative standards in order to assist supervisors in collectively addressing an IAIG’s activities and risks, identifying
and avoiding regulatory gaps and coordinating supervisory activities. ComFrame is expected to include standards for group
supervision, governance and internal controls, enterprise risk management, and recovery and resolution planning. Also in connection
with ComFrame, the IAIS is in the process of developing a risk-based global insurance capital standard (ICS) applicable to IAIGs. We
currently meet the parameters set forth to define an IAIG. ComFrame standards are expected to be finalized in 2019. Following
completion of field testing in 2019, the IAIS will put forward ICS version 2.0 for implementation in 2020. Implementation of ICS version
2.0 will consist of two phases: (1) a five year monitoring phase in which ICS version 2.0 will be used for confidential reporting to
group-wide supervisors and discussion in supervisory colleges; and (2) an implementation phase whereby the ICS will be applied as a
group-wide prescribed capital requirement at which point results will be used as the basis for supervisory action. Confidential
reporting of ICS version 2.0 will include reporting by IAIGs of a standard formula based on market adjusted valuation and the option,
at the discretion of the group-wide supervisor, of additional ICS reporting based on GAAP with adjustments and/or an internal model
based-calculation. In recognition of U.S. Federal Reserve and NAIC plans to develop an “aggregation method” for group capital, the
IAIS has agreed to aid in the development of - and collect data from jurisdictions that are party to - the aggregation method. Although
the aggregation method will not be part of ICS version 2.0, the IAIS aims to be in a position at the end of the monitoring phase to
determine whether the aggregated approach provides substantially the same outcome as the ICS, in which case it could be
incorporated into the ICS as an outcome-equivalent approach.
In February 2017, the IAIS announced the adoption of a three-year systemic risk assessment and policy workplan due to be finalized
by year-end 2019. This initiative is comprised of a new macroprudential activities-based approach (ABA) to regulating systemic risk
which will be developed in conjunction with the IAIS’ previously announced work in finalizing ComFrame, including the ICS, as well as
any improvements to the methodology for identifying global systemically important insurers (G-SIIs). Based on the IAIS’ G-SII
assessment methodology, since July 2013 the FSB has published an annual list of G-SIIs, which has included us. However, on
November 30, 2017 the FSB announced that it would not be proceeding with the publication of a G-SII list for 2017 in light of the IAIS’
development of the ABA and its implications for the assessment of systemic risk in insurance and, by extension, the identification of
G-SIIs and related policy measures for G-SIIs. On November 14, 2018, the FSB announced that, in light of IAIS progress in
developing a proposed holistic framework for the assessment and mitigation of potential systemic risk in the insurance sector,
inclusive of the ABA as a key component of the framework, it has decided not to engage in an identification of G-SIIs in 2018. In its
public consultation on the holistic framework, issued on November 14, 2018, the IAIS noted that, in its view, the implementation of the
holistic framework would obviate the need for the FSB’s annual G-SII identification process. The FSB stated that it will (i) assess the
IAIS’s recommendation to suspend G-SII identification from 2020, once the holistic framework is finalized in November 2019; and
(ii) in November 2022, based on the initial years of implementation of the holistic framework, review the need to either discontinue or
re-establish an annual identification of G-SIIs.
The standards issued by the FSB and/or the IAIS are not binding on the United States or other jurisdictions around the world unless
and until the appropriate local governmental bodies or regulators adopt laws and regulations implementing such standards. At this
14 AIG | 2018 Form 10-K
ITEM 1 | Business
time, it is not known how the IAIS’ frameworks and/or standards might be implemented in the United States and other jurisdictions
around the world, or how they might apply to us.
Brexit
On June 23, 2016, the UK held a referendum in which a majority voted for the UK to withdraw its membership in the EU, commonly
referred to as Brexit. The terms of withdrawal remain uncertain, with the draft withdrawal agreement having to date been rejected by
the UK Parliament. There can be no assurance that a withdrawal agreement will be reached prior to Brexit.
AIG has significant operations and employees in the UK and other EU member states. Prior to December 1, 2018, our General
Insurance business operated through AIG Europe Limited (AEL), a UK-incorporated insurer with branches across the EEA. These
branches operated through the EU concept of Freedom of Establishment, which allows an insurer in any member state to establish
branch operations in any other member state but with a single capital pool and a single prudential regulator (which in this case was
the UK’s Prudential Regulation Authority as AEL was UK-authorized). In addition, the various establishments of AEL were able to sell
insurance products across borders into other member states under the EU principle of Freedom of Services. In the event that the UK
leaves the EU without a withdrawal agreement in place, or in the event that a withdrawal agreement does not preserve access to
these EU freedoms for UK insurers, AEL would be severely constrained in its ability to utilize and benefit from such freedoms. UK
government policy has not been to pursue continued UK membership of the EU single market and so even if the UK and EU are able
to settle on a withdrawal agreement, it is unlikely that AEL’s structure would have remained efficient beyond any proposed temporary
transitional period.
As a result, in order to adapt to and be prepared ahead of Brexit, on December 1, 2018, we completed a reorganization of our
operations and legal entity structure in the UK and the EU through the establishment of a new European subsidiary in Luxembourg,
AIG Europe S.A. (AESA), which has branches across the EEA and Switzerland, and a new UK subsidiary, American International
Group UK Limited (AIG UK). Business written by AEL’s branches in the remaining EEA countries was transferred to AESA, along with
business previously written on a Freedom of Services basis from AEL’s UK operations. The remaining business written by AEL’s UK
operations was transferred to AIG UK and AEL was merged into AESA, allowing AIG to operate in both the EEA and UK on a
standalone basis
This reorganization addresses the uncertainty for UK insurers generated by Brexit because it ensures that even in the event that no
agreement is reached between the UK and EU in this sector, AIG will be able to continue to service and pay claims on existing
policies, and write new and renewal business where the insured risk is located in the remaining EEA countries. AIG continues to
monitor, adapt to and prepare for other risks relating to a “no deal” Brexit that could impact its business including, for example, the
effect on the wider UK and EU economies and on investments, legislative changes, updates to policy wording that may become
necessary and other specific areas such as the issuance of additional documentation to motorists it insures who travel cross border.
Derivatives
Regulation of and restrictions on derivatives markets and transactions have been proposed or adopted outside the United States. For
instance, the EU has also established a set of new regulatory requirements for EU derivatives activities under EMIR. These
requirements include, among other things, various risk mitigation, risk management, margin posting, regulatory reporting and, for
certain categories of derivatives, clearing requirements. Aside from certain margin obligations, these requirements are now in force.
There remains the possibility of increased administrative costs with respect to our EU derivatives activities and overlapping or
inconsistent regulation depending on the ultimate application of cross-border regulatory requirements between and among U.S. and
non-U.S. jurisdictions.
Markets in Financial Instruments Directive (MiFID) II
The Markets in Financial Instruments Directive (MiFID II) and Markets in Financial Instruments Regulation took effect in Europe on
January 3, 2018. MiFID II and the related regulations are intended to create transparency in market trading by, for example, imposing
trade and transaction reporting and other requirements. AIG Asset Management (Europe) Limited (AAMEL) has and continues to
implement new policies, procedures and reporting protocols required to ensure compliance with this legislation and its related rules.
AIG | 2018 Form 10-K 15
ITEM 1 | Business
Available Information about AIG
Our corporate website is www.aig.com. We make available free of charge, through the Investor Information section of our corporate
website, the following reports (and related amendments as filed with the SEC) as soon as reasonably practicable after such materials
are electronically filed with, or furnished to, the SEC:
• Annual Reports on Form 10-K
• Quarterly Reports on Form 10-Q
• Current Reports on Form 8-K
• Proxy Statements on Schedule 14A, as well as other filings with the SEC
Also available on our corporate website:
• Charters for Board Committees: Audit, Nominating and Corporate Governance, Compensation and Management Resources, Risk
and Capital, and Technology Committees
• Corporate Governance Guidelines (which include Director Independence Standards)
• Director, Executive Officer and Senior Financial Officer Code of Business Conduct and Ethics (we will post on our website any
amendment or waiver to this Code within the time period required by the SEC)
• Employee Code of Conduct
• Related-Party Transactions Approval Policy
Except for the documents specifically incorporated by reference into this Annual Report on Form 10-K, information contained on our
website or that can be accessed through our website is not incorporated by reference into this Annual Report on Form 10-K.
Reference to our website is made as an inactive textual reference.
16 AIG | 2018 Form 10-K
ITEM 1A | Risk Factors
ITEM 1A | Risk Factors
Investing in AIG involves risk. In deciding whether to invest in AIG, you should carefully consider the following risk factors. Any of
these risk factors could have a significant or material adverse effect on our businesses, results of operations, financial condition or
liquidity. They could also cause significant fluctuations and volatility in the trading price of our securities. Readers should not consider
any descriptions of these factors to be a complete set of all potential risks that could affect AIG. These factors should be considered
carefully together with the other information contained in this report and the other reports and materials filed by us with the Securities
and Exchange Commission (SEC). Further, many of these risks are interrelated and could occur under similar business and economic
conditions, and the occurrence of certain of them may in turn cause the emergence or exacerbate the effect of others. Such a
combination could materially increase the severity of the impact of these risks on our businesses, results of operations, financial
condition and liquidity.
MARKET CONDITIONS
Deterioration of economic conditions, geopolitical tensions or weakening in global capital markets may materially affect our
businesses, results of operations, financial condition and liquidity. Our businesses are highly dependent on global economic
and market conditions. Weaknesses in economic conditions and the capital markets and market volatility have in the past led, and
may in the future lead, to a poor operating environment, erosion of consumer and investor confidence, reduced business volumes,
deteriorating liquidity and declines in asset valuations. Adverse economic conditions may result from global economic and political
developments, including plateauing business activity and inflationary pressures in developed economies, uncertainty surrounding
China’s ability to successfully maintain growth, the effects of Brexit (as defined below) on business investment, hiring, migration and
labor supply and intensifying trade protectionism. These and other market, economic, and political factors could have a material
adverse effect on our businesses, results of operations, financial condition and liquidity in many ways, including (i) lower levels of
consumer and commercial business activities that could decrease revenues and profitability and decrease value in goodwill, deferred
tax assets and other long-term assets, (ii) increases in credit spreads and defaults that could reduce investment asset valuations,
increase credit losses across numerous asset classes, and increase statutory capital requirements and (iii) increased market volatility
and uncertainty that could decrease liquidity and increase borrowing costs. Other ways in which we could be negatively affected by
economic conditions include, but are not limited to: increases in policy surrenders and cancellations; write-offs of deferred policy
acquisition costs; increases in liability for future policy benefits due to loss recognition on certain long-duration insurance and
reinsurance contracts; and increases in expenses associated with third-party reinsurance, or decreased ability to obtain reinsurance
at acceptable terms.
Sustained low interest rates, or rapidly increasing interest rates, may materially and adversely affect our profitability.
Although interest rates have been rising recently, particularly in the United States, rates remain low relative to historical
levels. Sustained low interest rates can negatively affect the performance of our investment securities and reduce the level of
investment income earned on our investment portfolios. If a low interest rate environment persists, we may experience lower
investment income. Due to practical and capital markets limitations, we may not be able to fully mitigate our interest rate risk by
matching exposure of our assets relative to our liabilities. Continued low interest rates could also impair our ability to earn the returns
assumed in the pricing and the reserving for our products at the time they were sold and issued. Changes in interest rates may be
correlated with inflation trends, which would impact our loss trends.
On the other hand, in periods of rapidly increasing interest rates, we may not be able to replace, in a timely manner, the investments
in our general account with higher yielding investments needed to fund the higher crediting rates necessary to keep interest rate
sensitive products competitive. Therefore, we may have to accept a lower investment spread and, thus, lower profitability or face a
decline in sales and greater loss of existing contracts and related assets. In addition, policy loans, surrenders and withdrawals tend to
increase as policyholders seek investments with higher perceived returns as interest rates rise. This process may result in cash
outflows requiring that we sell investments at a time when the prices of those investments are adversely affected by the increase in
interest rates. This may result in realized investment losses. An increase in interest rates could also have a material adverse effect on
the value of our investment portfolio, for example, by decreasing the estimated fair values of the fixed income securities that comprise
a substantial portion of our investment portfolio. This in turn could adversely affect our ability to realize our deferred tax assets.
RESERVES AND EXPOSURES
Insurance and reinsurance liabilities are difficult to predict and may exceed the related reserves for losses and loss
expenses. We regularly review the adequacy of the established loss reserves and conduct extensive analyses of our reserves during
the year. Our loss reserves, however, may develop adversely and materially impact our businesses, results of operations, financial
condition and liquidity.
AIG | 2018 Form 10-K 17
ITEM 1A | Risk Factors
For General Insurance, estimation of ultimate net losses, loss expenses and loss reserves is a complex process, particularly for long-
tail liability lines of business. These lines include, but are not limited to, general liability, commercial automobile liability, environmental,
workers' compensation, excess casualty and crisis management coverages, insurance and risk management programs for large
corporate customers and other customized structured insurance products, as well as excess and umbrella liability, errors and
omissions, products liability, programs and specialty. There is also greater uncertainty in establishing reserves with respect to new
business, particularly new business that is generated with respect to more recently introduced product lines. In these cases, there is
less historical experience or knowledge and less data upon which the actuaries can rely. Estimating reserves is further complicated by
unexpected claims or unintended coverages that emerge due to changing conditions. These emerging issues may increase the size
or number of claims beyond our underwriting intent and may not become apparent for many years after a policy is issued.
While we use a number of analytical reserve development techniques to project future loss development, reserves have been and
may be significantly affected by changes in loss cost trends or loss development factors that were relied upon in setting the reserves.
For example, in 2018, 2017 and 2016, we recorded pre-tax net charges of $1.4 billion, $1.6 billion and $5.8 billion, respectively, to
strengthen our General Insurance loss reserves, reflecting adverse development in classes of business with long reporting tails,
primarily in Casualty and Financial Lines. These changes in loss cost trends or loss development factors could be due to changes in
actual versus expected claims and losses, difficulties in predicting changes, such as changes in inflation, unemployment duration, or
other social or economic factors affecting claims, including judicial and legislative approaches. Any deviation in loss cost trends or in
loss development factors might not be identified for an extended period of time after we record the initial loss reserve estimates for
any accident year or number of years.
For Life and Retirement, experience may develop adversely such that additional reserves must be established. Adverse experience
could arise out of a severe short term event such as a pandemic, or due to misestimation of long-term assumptions such as mortality
improvement and interest rate assumptions. While mortality experience is relatively stable due to the large amount of historical data
available, assumptions in respect of other variables, such as policyholder behavior can be more difficult to estimate and may have a
significant impact on reserves. Life and Retirement reserves and assumptions are reviewed regularly and loss recognition testing and
cash flow testing is carried out annually.
For a further discussion of our loss reserves see Item 7. MD&A — Critical Accounting Estimates — Insurance Liabilities — Loss
Reserves and Insurance Reserves — Loss Reserves and Note 13 to the Consolidated Financial Statements.
Our consolidated results of operations, liquidity, financial condition and ratings are subject to the effects of natural and
man-made catastrophic events. Events such as hurricanes, windstorms, flooding, earthquakes, wildfires, solar storms, war or other
military action, acts of terrorism, explosions and fires, cyber-crimes, product defects, pandemic and other highly contagious diseases,
mass torts and other catastrophes have adversely affected our business in the past and could do so in the future. For example, we
had pre-tax catastrophe losses of $2.9 billion in 2018, which included losses from Hurricanes Florence and Michael, typhoons and
earthquakes in Japan and mudslides and wildfires in California.
In addition, we recognize the scientific consensus that climate change is a reality of increasing concern, indicated by higher
concentrations of greenhouse gases, a warming atmosphere and ocean, diminished snow and ice, and sea level rise. We understand
that climate change potentially poses a serious financial threat to society as a whole, with implications for the insurance industry in
areas such as catastrophe risk perception, pricing and modeling assumptions, particularly if the frequency and severity of natural
catastrophic events continue to increase. Because there is significant variability associated with the impacts of climate change, we
cannot predict how physical, legal, regulatory and social responses may impact our business.
Catastrophic events, and any relevant regulations, could expose us to:
• widespread claim costs associated with property, workers’ compensation, A&H, business interruption and mortality and morbidity
claims;
loss resulting from a decline in the value of our invested assets;
limitations on our ability to recover deferred tax assets;
loss resulting from actual policy experience that is adverse compared to the assumptions made in product pricing;
•
•
•
• declines in value and/or losses with respect to companies and other entities whose securities we hold and counterparties we
transact business with and have credit exposure to, including reinsurers, and declines in the value of investments; and
• significant disruptions to our physical infrastructure, systems and operations.
Natural and man-made catastrophic events are generally unpredictable. Our exposure to catastrophic-related loss depends on
various factors, including the frequency and severity of the catastrophes, the rate of inflation and the value and geographic or other
concentrations of insured companies and individuals. Vendor models and proprietary assumptions and processes that we use to
manage catastrophe exposure may prove to be ineffective due to incorrect assumptions or estimates.
18 AIG | 2018 Form 10-K
ITEM 1A | Risk Factors
In addition, legislative and regulatory initiatives and court decisions following major catastrophes could require us to pay the insured
beyond the provisions of the original insurance policy and may prohibit the application of a deductible, resulting in inflated catastrophe
claims.
For further details on potential catastrophic events, including a sensitivity analysis of our exposure to certain catastrophes, see Item 7.
MD&A — Enterprise Risk Management — Insurance Risks.
Reinsurance may not be available or affordable and may not be adequate to protect us against losses. Our subsidiaries are
major purchasers of third-party reinsurance and we use reinsurance as part of our overall risk management strategy. Our reinsurance
business also purchases retrocessional reinsurance, which allows a reinsurer to cede to another company all or part of the
reinsurance obligations originally assumed by the reinsurer. While reinsurance does not discharge our subsidiaries from their
obligation to pay claims for losses insured or reinsured under our policies, it does make the reinsurer liable to the subsidiaries for the
reinsured portion of the risk. For this reason, reinsurance is an important tool to manage transaction and insurance line risk retention
and to mitigate losses from catastrophes. Market conditions beyond our control may impact the availability and cost of reinsurance or
retrocessional reinsurance and could have a material adverse effect on our business, results of operations and financial condition. For
example, reinsurance may be more difficult or costly to obtain after a year with a large number of major catastrophes. We may, at
certain times, be forced to incur additional costs for reinsurance or may be unable to obtain sufficient reinsurance on acceptable
terms. In the latter case, we would have to accept an increase in exposure to risk, reduce the amount of business written by our
subsidiaries or seek alternatives in line with our risk limits.
Additionally, we are exposed to credit risk with respect to our subsidiaries’ reinsurers to the extent the reinsurance receivable is not
secured by collateral or does not benefit from other credit enhancements. We also bear the risk that a reinsurer may be unwilling to
pay amounts we have recorded as reinsurance recoverables for any reason, including that (i) the terms of the reinsurance contract do
not reflect the intent of the parties to the contract or there is a disagreement between the parties as to their intent, (ii) the terms of the
contract cannot be legally enforced, (iii) the terms of the contract are interpreted by a court or arbitration panel differently than
expected, (iv) the reinsurance transaction performs differently than we anticipated due to a flawed design of the reinsurance structure,
terms or conditions, or (v) a change in laws and regulations, or in the interpretation of the laws and regulations, materially impacts a
reinsurance transaction. The insolvency of one or more of our reinsurers, or inability or unwillingness to make timely payments under
the terms of our contracts, could have a material adverse effect on our results of operations and liquidity.
Additionally, the use of reinsurance placed in the capital markets may not provide the same levels of protection as traditional
reinsurance transactions. Any disruption, volatility and uncertainty in these markets, such as following a major catastrophic event, may
limit our ability to access such markets on terms favorable to us or at all. Also, to the extent that we intend to use structures based on
an industry loss index or other non-indemnity trigger rather than on actual losses incurred by us, we could be subject to residual risk.
We currently have limited reinsurance coverage for terrorist attacks. Further, the availability of private sector reinsurance for terrorism
is limited. We rely heavily on the Terrorism Risk Insurance Program (TRIP), which provides U.S. government risk assistance to the
insurance industry to manage the exposure to terrorism incidents in the U.S. TRIP was reauthorized in January 2015 and is
scheduled to expire on December 31, 2020. Under TRIP, once our losses for certain acts of terrorism exceed a deductible equal to 20
percent of our commercial property and casualty insurance premiums for covered lines for the prior calendar year, the federal
government will reimburse us for losses in excess of our deductible, starting at 85 percent of losses in 2015 (81 percent in 2019), and
reducing by one percentage point each year, ending at 80 percent in 2020, up to a total industry program limit of $100 billion. TRIP
does not cover losses in certain lines of business such as personal property and personal casualty. We also rely on the government
sponsored and government arranged terrorism reinsurance programs, including pools, in force in applicable non-U.S. jurisdictions.
There can be no assurance that TRIP will be reauthorized and extended past December 31, 2020.
For additional information on our reinsurance recoverable, see Item 7. MD&A — Enterprise Risk Management — Insurance Risks —
Reinsurance Activities — Reinsurance Recoverable.
Concentration of our insurance, reinsurance and other risk exposures may have adverse effects. We may be exposed to risks
as a result of concentrations in our insurance and reinsurance policies, derivatives and other obligations that we undertake for
customers and counterparties. We manage these concentration risks by monitoring the accumulation of our exposures to factors such
as exposure type and size, industry, geographic region, counterparty and other factors. We also seek to use third-party reinsurance,
hedging and other arrangements to limit or offset exposures that exceed the limits we wish to retain. In certain circumstances,
however, these risk management arrangements may not be available on acceptable terms or may prove to be ineffective for certain
exposures. Also, our exposure for certain single risk coverages and other coverages may be so large that adverse experience
compared to our expectations may have a material adverse effect on our consolidated results of operations or result in additional
statutory capital requirements for our subsidiaries.
Also see Item 7. MD&A – Business Segment Operations – General Insurance – Business Strategy and – Outlook – Industry and
Economic Factors.
AIG | 2018 Form 10-K 19
ITEM 1A | Risk Factors
Interest rate fluctuations, increased lapses and surrenders, declining investment returns and other events may require our
subsidiaries to accelerate the amortization of deferred policy acquisition costs (DAC) and record additional liabilities for
future policy benefits. We incur significant costs in connection with acquiring new and renewal insurance business. DAC represents
deferred costs that are incremental and directly related to the successful acquisition of new business or renewal of existing business.
The recovery of these costs is generally dependent upon the future profitability of the related business, but DAC amortization varies
based on the type of contract. For long-duration traditional business, DAC is generally amortized in proportion to premium revenue
and varies with lapse experience. Actual lapses in excess of expectations can result in an acceleration of DAC amortization.
DAC for investment-oriented products is generally amortized in proportion to estimated gross profits. Estimated gross profits are
affected by a number of assumptions, including current and expected interest rates, net investment income and spreads, net realized
capital gains and losses, fees, surrender rates, mortality experience and equity market returns and volatility. If actual and/or future
estimated gross profits are less than originally expected, then the amortization of these costs would be accelerated in the period the
actual experience is known and would result in a charge to income. For example, if interest rates rise rapidly and significantly,
customers with policies that have interest crediting rates below the current market may seek competing products with higher returns
and we may experience an increase in surrenders and withdrawals of life and annuity contracts, resulting in a decrease in future
profitability and an acceleration of the amortization of DAC.
We also periodically review products for potential loss recognition events, principally insurance-oriented products. This review
involves estimating the future profitability of in-force business and requires significant management judgment about assumptions
including mortality, morbidity, persistency, maintenance expenses, and investment returns, including net realized capital gains
(losses). If actual experience or revised future expectations result in projected future losses, we may be required to amortize any
remaining DAC and record additional liabilities through a charge to policyholder benefit expense, which could negatively affect our
results of operations.
For further discussion of DAC and future policy benefits, see Item 7. MD&A — Critical Accounting Estimates and Notes 9 and 13 to
the Consolidated Financial Statements.
Losses due to nonperformance or defaults by counterparties can materially and adversely affect the value of our
investments, our profitability and sources of liquidity. We incur credit risk with regard to counterparties related to investments,
derivatives, premiums receivable, certain General Insurance businesses and reinsurance recoverables. These counterparties include
issuers of fixed maturity and equity securities we hold, borrowers of loans we hold, customers, trading counterparties, counterparties
under swaps and other derivative contracts, reinsurers, corporate and governmental entities whose payments or performance we
insure, clearing agents, exchanges, clearing houses and other financial intermediaries and guarantors. These counterparties may
default on their obligations to us due to bankruptcy, insolvency, receivership, lack of liquidity, adverse economic conditions,
operational failure, fraud, government intervention and other reasons. In addition, for exchange-traded derivatives, such as futures,
options and "cleared" over-the-counter derivatives, we are generally exposed to the credit risk of the relevant central counterparty
clearing house. Defaults by these counterparties on their obligations to us could have a material adverse effect on the value of our
investments, business, financial condition, results of operations and liquidity. Additionally, if the underlying assets supporting the
structured securities we invest in default on their payment obligations, our securities may incur losses.
INVESTMENT PORTFOLIO AND CONCENTRATION OF INVESTMENTS
The performance and value of our investment portfolio are subject to a number of risks and uncertainties, including
changes in interest rates. Our investment securities are subject to market risks and uncertainties. In particular, interest rates are
highly sensitive to many factors, including monetary and fiscal policy, domestic and international economic and political issues and
other factors beyond our control. Changes in monetary policy or other factors may cause interest rate volatility, which could adversely
affect the value of the fixed income securities that we hold and could adversely affect our ability to sell these securities. In addition,
the evaluation of available-for-sale securities for other-than-temporary impairments, which may occur if interest rates rise, is a
quantitative and qualitative process that is subject to significant management judgment.
For a sensitivity analysis of our exposure to certain market risk factors see Item 7. MD&A – Enterprise Risk Management – Market
Risk Management.
For a discussion regarding changes to LIBOR rates, see “Changes in the method for determining LIBOR and the potential
replacement of LIBOR may affect our cost of capital and net investment income” below.
Furthermore, our alternative investment portfolio includes investments for which changes in fair value are reported through operating
income and are therefore subject to significant volatility. In an economic downturn or declining market, the reduction in our investment
income due to decreases in the fair value of alternative investments could have a material adverse effect on operating income.
20 AIG | 2018 Form 10-K
ITEM 1A | Risk Factors
Our investment portfolio is concentrated in certain segments of the economy. Our results of operations and financial condition
have in the past been, and may in the future be, adversely affected by the degree of concentration in our investment portfolio. We
have significant exposure in real estate and real estate-related securities, including residential mortgage-backed, commercial
mortgage-backed and other asset-backed securities and commercial mortgage loans. We also have significant exposures to financial
institutions and, in particular, to money center and global banks; certain industries, such as energy and utilities; U.S. state and local
government issuers and authorities; and Euro-Zone financial institutions, governments and corporations. Events or developments that
have a negative effect on any particular industry, asset class, group of related industries or geographic region may adversely affect
our investments to the extent they are concentrated in such segments. Our ability to sell assets concentrated in such segments may
be limited.
Our valuation of investment securities may include methodologies, estimations and assumptions that are subject to
differing interpretations and could result in changes to investment valuations that may materially adversely affect our
results of operations, financial condition and liquidity. During periods of market disruption, it may be difficult to value certain of
our investment securities if trading becomes less frequent and/or market data becomes less observable. There may be cases where
certain assets in normally active markets with significant observable data become inactive with insufficient observable data due to the
financial environment or market conditions in effect at that time. As a result, valuations may include inputs and assumptions that are
less observable or require greater estimation and judgment as well as valuation methods that are more complex. These values may
not be realized in a market transaction, may not reflect the value of the asset and may change very rapidly as market conditions
change and valuation assumptions are modified. Decreases in value and/or an inability to realize that value in a market transaction or
secured lending transaction may have a material adverse effect on our results of operations, financial condition and liquidity.
LIQUIDITY, CAPITAL AND CREDIT
AIG Parent’s ability to access funds from our subsidiaries is limited. As a holding company, AIG Parent depends on dividends,
distributions and other payments from its subsidiaries to fund dividends on AIG Common Stock, to fund repurchases of AIG Common
Stock, warrants and debt obligations and to make payments due on its obligations, including its outstanding debt. The majority of our
investments are held by our regulated subsidiaries. Our subsidiaries may be limited in their ability to make dividend payments or other
distributions to AIG Parent in the future because of the need to support their own capital levels or because of regulatory limits or rating
agency requirements. The inability of our subsidiaries to make payments, dividends or other distributions in an amount sufficient to
enable AIG Parent to meet its cash requirements could have an adverse effect on our operations, and on our ability to pay dividends,
repurchase AIG Common Stock, warrants and debt obligations or to meet our debt service obligations.
Our internal sources of liquidity may be insufficient to meet our needs, including providing capital that may be required by
our subsidiaries. We need liquidity to pay our operating expenses, interest on our debt, maturing debt obligations and to meet
capital needs of our subsidiaries. If our liquidity is insufficient to meet our needs, we may at the time need to have recourse to third-
party financing, external capital markets or other sources of liquidity, which may not be available or could be prohibitively expensive.
The availability and cost of any additional financing at any given time depends on a variety of factors, including general market
conditions, the volume of trading activities, the overall availability of credit, regulatory actions and our credit ratings and credit
capacity. It is also possible that, as a result of such recourse to external financing, customers, lenders or investors could develop a
negative perception of our long- or short-term financial prospects. Disruptions, volatility and uncertainty in the financial markets, and
downgrades in our credit ratings, may limit our ability to access external capital markets at times and on terms favorable to us to meet
our capital and liquidity needs or prevent our accessing the external capital markets or other financing sources.
For a further discussion of our liquidity, see Item 7. MD&A — Liquidity and Capital Resources.
AIG Parent’s ability to support our subsidiaries is limited. AIG Parent has in the past and expects to continue to provide capital to
our subsidiaries as necessary to maintain regulatory capital ratios, comply with rating agency requirements and meet unexpected
cash flow obligations. If AIG Parent is unable to satisfy a capital need of a subsidiary, the credit rating agencies could downgrade the
subsidiary’s financial strength ratings or the subsidiary could become insolvent or, in certain cases, could be seized by its regulator.
For further discussion of rating agency requirements, see “A downgrade in the Insurer Financial Strength ratings of our insurance or
reinsurance companies could limit their ability to write or prevent them from writing new business and retaining customers and
business” below.
Our subsidiaries may not be able to generate cash to meet their needs due to the illiquidity of some of their investments.
Our subsidiaries have investments in certain securities that may be illiquid, including certain fixed income securities and certain
structured securities, private company securities, investments in private equity funds and hedge funds, mortgage loans, finance
receivables and real estate. Collectively, investments in these assets had a fair value of $62 billion at December 31, 2018. Adverse
real estate and capital markets, and wider credit spreads, have in the past, and may in the future, materially adversely affect the
liquidity of our other securities portfolios, including our residential and commercial mortgage-related securities portfolios. In the event
AIG | 2018 Form 10-K 21
ITEM 1A | Risk Factors
additional liquidity is required by one or more of our subsidiaries and AIG Parent is unable to provide it, it may be difficult for these
subsidiaries to generate additional liquidity by selling, pledging or otherwise monetizing these less liquid investments.
A downgrade in the Insurer Financial Strength ratings of our insurance or reinsurance companies could limit their ability to
write or prevent them from writing new business and retaining customers and business. Insurer Financial Strength (IFS)
ratings are an important factor in establishing the competitive position of insurance or reinsurance companies. IFS ratings measure an
insurance or reinsurance company’s ability to meet its obligations to contract holders and policyholders. High ratings help maintain
public confidence in a company’s products, facilitate marketing of products and enhance its competitive position. Downgrades of the
IFS ratings of our insurance or reinsurance companies could prevent these companies from selling, or make it more difficult for them
to succeed in selling, products and services, or result in increased policy cancellations, lapses and surrenders, termination of
assumed reinsurance contracts, or return of premiums. Under credit rating agency policies concerning the relationship between
parent and subsidiary ratings, a downgrade in AIG Parent’s credit ratings could result in a downgrade of the IFS ratings of our
insurance or reinsurance subsidiaries. Certain rating agencies negatively revised the outlook for our IFS ratings in early 2017,
primarily as a result of our reserve strengthening in the fourth quarter of 2016 and related concerns regarding our profitability outlook.
These same rating agencies maintained negative outlooks on our ratings throughout 2018 and 2019 to date. We cannot predict what
actions rating agencies may take, or what actions we may take in response to the actions of rating agencies, which could adversely
affect our business.
A downgrade in our credit ratings could adversely affect our business, our results of operations or our liquidity. Credit
ratings estimate a company’s ability to meet its obligations. A downgrade of our long-term debt ratings by the major rating agencies
could potentially increase our financing costs and limit the availability of financing. A downgrade would also require us to post
additional collateral payments related to derivative transactions to which we are a party, and could permit the termination of these
derivative transactions. This could adversely affect our business, our consolidated results of operations in a reporting period and/or
our liquidity. Certain rating agencies negatively revised our credit ratings and ratings outlooks in early 2017, primarily as a result of our
reserve strengthening in the fourth quarter of 2016 and related concerns regarding our profitability outlook. These same rating
agencies maintained negative outlooks on our ratings throughout 2018 and 2019 to date. We cannot predict what actions rating
agencies may take, or what actions we may take in response to the actions of rating agencies, which could adversely affect our
business.
We may be required to post additional collateral because of changes in our reinsurance liabilities to regulated insurance
companies, or because of regulatory changes that affect our businesses. If our reinsurance liabilities increase, we may be
required to post additional collateral for insurance company clients that we reinsure. In addition, regulatory changes could sometimes
require us to post additional collateral. The need to post this additional collateral, if significant enough, may require us to sell
investments at a loss in order to provide securities of suitable credit quality or otherwise secure adequate capital at an unattractive
cost. This could adversely impact our consolidated results of operations, liquidity and financial condition.
Changes in the method for determining LIBOR and the potential replacement of LIBOR may affect our cost of capital and net
investment income. As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association
(BBA) member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged
manipulation of LIBOR. Actions by the BBA, regulators or law enforcement agencies as a result of these or future events may result in
changes to the manner in which LIBOR is determined.
For example, on July 27, 2017, the UK Financial Conduct Authority announced that it intends to stop persuading or compelling banks
to submit LIBOR rates after 2021, which is expected to result in these widely used reference rates no longer being available. Potential
changes to LIBOR, as well as uncertainty related to such potential changes and the establishment of any alternative reference rates,
may adversely affect the market for LIBOR-based securities and could adversely impact the substantial amount of derivatives
contracts used to hedge our insurance liabilities. In addition, the discontinuance of LIBOR or changes or reforms to the determination
or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse
impact on the market for LIBOR-based securities or the value of our investment portfolio and the derivatives contracts used to hedge
our insurance liabilities.
BUSINESS AND OPERATIONS
Our restructuring initiatives may not yield our expected reductions in expenses and improvements in operational and
organizational efficiency. We may not be able to fully realize the anticipated expense reductions and operational and organizational
efficiency improvements we expect to result from our restructuring initiatives, including the reorganization of AIG into General
Insurance and Life and Retirement segments. Actual costs to implement these initiatives may exceed our estimates or we may be
unable to fully implement and execute these initiatives as planned. The implementation of these initiatives may harm our relationships
with customers or employees or our competitive position. Our businesses and results of operations may be negatively impacted if we
are unable to realize these anticipated expense reductions and efficiency improvements or if implementing these initiatives harms our
22 AIG | 2018 Form 10-K
ITEM 1A | Risk Factors
relationships with customers or employees or our competitive position. The successful implementation of these initiatives may
continue to require us to effect workforce reductions, business rationalizations, systems enhancements, business process
outsourcing, business and asset dispositions and acquisitions and other actions, which depend on a number of factors, some of which
are beyond our control.
Pricing for our products is subject to our ability to adequately assess risks and estimate losses. We seek to price our
insurance and reinsurance products such that premiums, policy fees and charges, and future net investment income earned on
revenues received will result in an acceptable profit in excess of expenses and the cost of paying claims. Our business is dependent
on our ability to price our products effectively and charge appropriate premiums. Pricing adequacy depends on a number of factors
and assumptions, including proper evaluation of insurance risks, our expense levels, net investment income realized, our response to
rate actions taken by competitors, legal and regulatory developments and the ability to obtain regulatory approval for rate changes.
Some life insurance business has the ability to adjust certain nonguaranteed charges or benefits if necessary; however, this right is
limited and may be subject to guaranteed minimums and/or maximums and may result in reputational and/or litigation risk. Inadequate
pricing could have a material adverse effect on our results of operations and financial condition.
Guarantees within certain of our products may increase the volatility of our results. Certain of our annuity and life insurance
products include features that guarantee a certain level of benefits, including guaranteed minimum death benefits (GMDB),
guaranteed living benefits (GLB), and products with guaranteed interest crediting rates tied to an index.
For a discussion of market risk management related to these product features see Item 7. MD&A – Enterprise Risk Management –
Insurance Risks – Life and Retirement Companies Key Risks – Variable Annuity Risk Management and Hedging Programs.
Differences between the change in fair value of the embedded derivatives associated with some of these guarantees and the related
hedging portfolio can be caused by extreme and unanticipated movements in the equity markets, interest rates and market volatility,
policyholder behavior that differs from our assumptions and our inability to purchase hedging instruments at prices consistent with the
desired risk and return trade-off. The occurrence of one or more of these events could result in an increase in the liabilities
associated with the guaranteed benefits, reducing our net income and shareholders’ equity. While we believe that our actions have
reduced the risks related to guaranteed benefits and guaranteed interest crediting, our exposure may not be fully or correctly hedged.
For more information regarding these products see Notes 5 and 14 to the Consolidated Financial Statements, Item 1. Business –
Regulation, and Item 7. MD&A – Critical Accounting Estimates – Insurance Liabilities – Guaranteed Benefit Features of Variable
Annuity Products.
Our foreign operations expose us to risks that may affect our operations. We provide insurance, reinsurance, investment and
other financial products and services to both businesses and individuals in more than 80 countries and jurisdictions. A substantial
portion of our business is conducted outside the U.S., and we intend to continue to grow business in strategic markets. Operations
outside the U.S. may be affected by regional economic downturns, changes in foreign currency exchange rates, political events or
upheaval, nationalization and other restrictive government actions, which could also affect our other operations.
The degree of regulation and supervision in foreign jurisdictions varies. AIG subsidiaries operating in foreign jurisdictions must satisfy
local regulatory requirements and it is possible that local licenses may require AIG Parent to meet certain conditions. Licenses issued
by foreign authorities to our subsidiaries are subject to modification and revocation. Consequently, our insurance subsidiaries could
be prevented from conducting future business in some of the jurisdictions where they currently operate. Adverse actions from any
single country could adversely affect our results of operations, depending on the magnitude of the event and our financial exposure at
that time in that country.
On June 23, 2016, the United Kingdom (UK) held a referendum in which a majority voted for the UK to withdraw its membership in the
European Union (EU), commonly referred to as Brexit. The terms of withdrawal remain uncertain, with the draft withdrawal agreement
having to date been rejected by the UK Parliament. There can be no assurance that a withdrawal agreement will be reached prior to
Brexit. We have significant operations and employees in the UK and other EU member states, and, as a result of Brexit, we have
completed a reorganization of our operations and legal entity structure in the UK and the EU through the establishment of a new
European subsidiary in Luxembourg with branches across the EEA and Switzerland, and a new UK subsidiary. For additional
information regarding the reorganization of our European operations in light of Brexit, see Item 1. Business – Regulation –
International Regulation – Brexit. However, there remains uncertainty around the post-Brexit regulatory environment. Brexit has also
affected the U.S. dollar/British pound exchange rate, increased the volatility of exchange rates among the euro, British pound and the
Japanese yen, and created volatility in the financial markets. It is possible that the uncertainty around the outcome of the negotiations
between the UK and the EU will lead to further turbulence in the financial markets, which may affect the value of our investments.
We may experience difficulty in marketing and distributing products through our current and future distribution channels.
Although we distribute our products through a wide variety of distribution channels, we maintain relationships with certain key
distributors. Distributors have in the past, and may in the future, elect to renegotiate the terms of existing relationships, or reduce or
AIG | 2018 Form 10-K 23
ITEM 1A | Risk Factors
terminate their distribution relationships with us, including for such reasons as industry consolidation of distributors or other industry
changes that increase the competition for access to distributors, developments in legislation or regulation that affect our business,
adverse developments in our business, adverse rating agency actions or concerns about market-related risks. An interruption in
certain key relationships could materially affect our ability to market our products and could have a material adverse effect on our
businesses, operating results and financial condition.
In addition, when our products are distributed through unaffiliated firms, we may not be able to monitor or control the manner of their
distribution, despite our training and compliance programs. If our products are distributed to customers for whom they are unsuitable
or distributed in any other inappropriate manner, we may suffer reputational and other harm to our business.
We are exposed to certain risks if we are unable to maintain the availability of our electronic data systems and safeguard the
security of our data, which could compromise our ability to conduct business and adversely affect our consolidated
financial condition or results of operations. We use computer systems to store, retrieve, evaluate and use customer, employee,
and company data and information. Some of these systems, in turn, rely upon third-party systems. Additionally, some of our systems
are older, legacy-type systems that are less efficient and require an ongoing commitment of significant resources to maintain or
upgrade. Our business is highly dependent on our ability to access these systems to perform necessary business functions. These
functions include providing insurance or reinsurance quotes, processing premium payments, making changes to existing policies,
filing and paying claims, administering life and annuity products and mutual funds, providing customer support, executing transactions
and managing our investment portfolios. Systems failures or outages could compromise our ability to perform these functions in a
timely manner, which could harm our ability to conduct business, hurt our relationships with our business partners and customers and
expose us to legal claims as well as regulatory investigations and sanctions. In the event of a natural disaster, a computer virus,
unauthorized access, a terrorist attack, cyberattack or other disruption inside or outside the U.S., our systems may be inaccessible to
our employees, customers or business partners for an extended period of time, and our employees may be unable to perform their
duties for an extended period of time if our data or systems are disabled, manipulated, destroyed or otherwise compromised.
Like other global companies, our systems have in the past been, and will likely in the future be, subject to or targets of unauthorized
or fraudulent access, including physical or electronic break-ins or unauthorized tampering, as well as attempted cyber and other
security threats and other computer-related penetrations. The frequency and sophistication of such threats continue to increase. We
must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and
mitigate the risk of threats to our data and systems, including malware and computer virus attacks, ransomware, unauthorized
access, misuse, denial-of-service attacks, system failures and disruptions. There is no assurance that our security measures,
including information security policies, administrative, technical and physical controls and other preventative actions, will provide fully
effective protection from such events. AIG maintains cyber risk insurance, but this insurance may not cover all costs associated with
the consequences of personal, confidential or proprietary information being compromised. In some cases, such unauthorized access
may not be immediately detected. This may impede or interrupt our business operations and could adversely affect our consolidated
financial condition or results of operations.
In addition, we routinely transmit, receive and store personal, confidential and proprietary information by email and other electronic
means. Although we attempt to keep such information confidential, we may be unable to do so in all events, especially with clients,
vendors, service providers, counterparties and other third parties who may not have or use appropriate controls to protect personal,
confidential or proprietary information. Any problems caused by these third parties, including those resulting from breakdowns or other
disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks
and security breaches at a vendor could adversely affect our ability to deliver products and services to our customers and otherwise
conduct our business.
Furthermore, certain of our businesses are subject to compliance with laws and regulations enacted by U.S. federal and state
governments, the European Union or other jurisdictions or enacted by various regulatory organizations or exchanges relating to the
privacy and security of the information of clients, employees or others. The variety of applicable privacy and information security laws
and regulations could expose us to heightened regulatory scrutiny and may require us to incur significant technical, legal and other
expenses to ensure and maintain compliance. If we are found not to be in compliance with these laws and regulations, we could be
subjected to significant civil and criminal liability and exposed to reputational harm. For additional information on data protection and
cybersecurity regulations, see Item 1. Business – Regulation – U.S. Regulation – Privacy, Data Protection and Cybersecurity and –
International Regulation – Privacy, Data Protection and Cybersecurity. Additionally, the compromise of personal, confidential or
proprietary information could cause a loss of data, give rise to remediation or other expenses, expose us to liability under U.S. and
international laws and regulations, and subject us to litigation, investigations, sanctions and regulatory and law enforcement action,
and result in reputational harm and loss of business, which could have a material adverse effect on our business, cash flows, financial
condition and results of operations.
We are continuously evaluating and enhancing systems and creating new systems and processes as our business depends on our
ability to maintain and improve our technology systems for interacting with customers, brokers and employees. Due to the complexity
24 AIG | 2018 Form 10-K
ITEM 1A | Risk Factors
and interconnectedness of our systems and processes, these changes, as well as changes designed to update and enhance our
protective measures to address new threats, may increase the risk of a system or process failure or the creation of a gap in our
security measures. Any such failure or gap could adversely affect our business operations and the advancement of our business or
strategic initiatives.
Business or asset acquisitions and dispositions may expose us to certain risks. The completion of any business or asset
acquisition or disposition is subject to certain risks, including those relating to the receipt of required regulatory approvals, the terms
and conditions of regulatory approvals, the occurrence of any event, change or other circumstances that could give rise to the
termination of a transaction and the risk that parties may not be willing or able to satisfy the conditions to a transaction. As a result,
there can be no assurance that any business or asset acquisition or disposition will be completed as contemplated, or at all, or
regarding the expected timing of the completion of the acquisition or disposition. Once we complete acquisitions or dispositions, there
can be no assurance that we will realize the anticipated economic, strategic or other benefits of any transaction. For example, the
integration of businesses we acquire may not be as successful as we anticipate or there may be undisclosed risks present in such
businesses. Acquisitions involve a number of risks, including operational, strategic, financial, accounting, legal, compliance and tax
risks. Difficulties integrating an acquired business may result in the acquired business performing differently than we expected
(including through the loss of customers) or in our failure to realize anticipated expense-related efficiencies. Our existing businesses
could also be negatively impacted by acquisitions. Risks resulting from future acquisitions may have a material adverse effect on our
results of operations and financial condition. In connection with a business or asset disposition, we may also hold a concentrated
position in securities of the acquirer as part of the consideration, which subjects us to risks related to the price of equity securities and
our ability to monetize such securities.
Indemnity claims could be made against us in connection with divested businesses. We have provided financial guarantees
and indemnities in connection with the businesses we have sold, as described in greater detail in Note 16 to the Consolidated
Financial Statements. While we do not currently believe that claims under these indemnities will be material, it is possible that
significant indemnity claims could be made against us. If such a claim or claims were successful, it could have a material adverse
effect on our results of operations, cash flows and liquidity.
For additional information on these financial guarantees and indemnities see Note 16 to the Consolidated Financial Statements.
Significant legal proceedings may adversely affect our results of operations or financial condition. Like others in the
insurance and financial services industries in general, in the ordinary course of operating our businesses we face significant risk from
regulatory and governmental investigations and civil actions, litigation and other forms of dispute resolution in various domestic and
foreign jurisdictions. In our insurance and reinsurance operations, we frequently engage in litigation and arbitration concerning the
scope of coverage under insurance and reinsurance contracts, and face litigation and arbitration in which our subsidiaries defend or
indemnify their insureds under insurance contracts. AIG, our subsidiaries and their respective officers and directors are also subject to
a variety of additional types of legal disputes brought by holders of AIG securities, customers, employees and others, alleging, among
other things, breach of contractual or fiduciary duties, bad faith and violations of federal and state statutes and regulations. Certain of
these matters involve potentially significant risk of loss due to the possibility of significant jury awards and settlements, punitive
damages or other penalties. Many of these matters are also highly complex and seek recovery on behalf of a class or similarly large
number of plaintiffs. It is therefore inherently difficult to predict the size or scope of potential future losses arising from them, and
developments in these matters could have a material adverse effect on our consolidated financial condition or consolidated results of
operations for an individual reporting period.
For a discussion of certain legal proceedings, including certain tax controversies, see Notes 16 and 23 to the Consolidated Financial
Statements.
Our risk management policies and procedures may prove to be ineffective and leave us exposed to unidentified or
unanticipated risk, which could adversely affect our businesses or result in losses. We have developed and continue to
develop enterprise-wide risk management policies and procedures to mitigate risk and loss to which we are exposed.
There are, however, inherent limitations to risk management strategies because there may exist, or develop in the future, risks that we
have not appropriately anticipated or identified. If our risk management policies and procedures are ineffective, we may suffer
unexpected losses and could be materially adversely affected. As our businesses change and the markets in which we operate
evolve, our risk management framework may not evolve at the same pace as those changes. As a result, there is a risk that new
products or new business strategies may present risks that are not appropriately identified, monitored or managed. In times of market
stress, unanticipated market movements or unanticipated claims experience resulting from adverse mortality, morbidity or policyholder
behavior, the effectiveness of our risk management strategies may be limited, resulting in losses to us. In addition, there can be no
assurance that we can effectively review and monitor all risks or that all of our employees will follow our risk management policies and
procedures.
AIG | 2018 Form 10-K 25
ITEM 1A | Risk Factors
REGULATION
Our businesses are heavily regulated and changes in regulation may affect our operations, increase our insurance
subsidiary capital requirements or reduce our profitability. Our operations generally, and our insurance and reinsurance
subsidiaries, in particular, are subject to extensive and potentially conflicting supervision and regulation by national authorities and by
the various jurisdictions in which we do business. Supervision and regulation relate to numerous aspects of our business and financial
condition. Federal, state and foreign regulators also periodically review and investigate our insurance and reinsurance businesses,
including AIG-specific and industry-wide practices. The primary purpose of insurance regulation is the protection of our insurance and
reinsurance contract holders, and not our investors. The extent of domestic regulation varies, but generally is governed by state
statutes which delegate regulatory, supervisory and administrative authority to state insurance departments. In addition, federal and
state securities laws and regulations apply to certain of our insurance products that are considered ‘securities’ under such laws,
including our variable annuity contracts, variable life insurance policies and the separate accounts that issue them, as well as our
broker-dealer, investment advisor and mutual funds operations. These laws and regulations generally grant regulatory agencies and
self-regulatory organizations broad rulemaking and enforcement powers, including the power to regulate the issuance, sale and
distribution of our products and limit or restrict the conduct of business for failure to comply with applicable securities laws and
regulations.
We strive to maintain all required licenses and approvals and to comply with applicable laws and regulations. The application of and
compliance with laws and regulations applicable to our businesses, operations and legal entities are subject to interpretation. The
relevant authority may not agree with our interpretation of these laws and regulations, capital and reserving requirements, and such
authority’s interpretation may also change from time to time. Regulatory authorities also have relatively broad discretion to grant,
renew or revoke licenses and approvals. If we do not have the required licenses and approvals or do not comply with applicable
regulatory requirements, these authorities could preclude or temporarily suspend us from carrying on some or all of our activities or
impose substantial fines. Further, insurance regulatory authorities have relatively broad discretion to issue orders of supervision,
which permit them to supervise the business and operations of an insurance or reinsurance company.
In the U.S., the RBC formula is designed to measure the adequacy of an insurer’s statutory surplus in relation to the risks inherent in
its business. Every state has adopted, in substantial part, the RBC Model Law promulgated by the NAIC or a substantially similar law,
which specifies the regulatory actions the insurance regulator may take if an insurer’s RBC calculations fall below specific thresholds.
Those actions range from requiring an insurer to submit a plan describing how it would regain a specified RBC ratio to a mandatory
regulatory takeover of the company. The NAIC and certain international standard-setting bodies are also considering methodologies
for assessing group-wide regulatory capital, which might evolve into more formal group-wide capital requirements on certain
insurance companies that may augment state-law RBC standards that apply at the legal entity level, and such capital calculations
may be made, in whole or in part, on bases other than the statutory statements of our U.S. insurance subsidiaries. We cannot predict
the effect these initiatives may have on our business, consolidated results of operations, liquidity and financial condition.
See “Actions by foreign governments, regulators and international standard setters could result in substantial additional regulation to
which we may be subject” below for additional information on increased capital and other requirements that may be imposed on us.
The degree of regulation and supervision in foreign jurisdictions varies. AIG subsidiaries operating in foreign jurisdictions must satisfy
local regulatory requirements and it is possible that local licenses may require AIG Parent to meet certain conditions. Licenses issued
by foreign authorities to our subsidiaries are subject to modification and revocation. Accordingly, our insurance subsidiaries could be
prevented from conducting future business in certain of the jurisdictions where they currently operate. Adverse actions from any single
country could adversely affect our business, consolidated results of operations, liquidity and financial condition, depending on the
magnitude of the event and our financial exposure at that time in that country.
For further discussion of our regulatory environment see Item 1. Business – Regulation.
Certain provisions of Dodd-Frank remain relevant to insurance groups generally, including AIG. The Financial Stability
Oversight Council (Council) rescinded our designation as a nonbank systemically important financial institution (nonbank SIFI) on
September 29, 2017, but the Council remains authorized under Dodd-Frank to determine, subject to certain statutory and regulatory
standards, that certain nonbank financial companies be designated as nonbank SIFIs subject to supervision by the Board of
Governors of the Federal Reserve System and enhanced prudential standards. The Council may also recommend that state
insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices that we and
other insurers or other nonbank financial services companies, including insurers, engage in. Additionally, Dodd-Frank directs existing
and newly created government agencies and bodies to promulgate regulations implementing the law, which is an ongoing process.
There remains considerable uncertainty as to the potential adoption and timing of regulatory changes related to Dodd-Frank. We
cannot predict the requirements of the regulations that may be ultimately adopted or the impact they may have on our businesses,
consolidated results of operations, liquidity and financial condition.
26 AIG | 2018 Form 10-K
ITEM 1A | Risk Factors
See Item 1. Business – Regulation – U.S. Regulation – Dodd-Frank for further discussion of provisions of Dodd-Frank that remain
relevant to insurance groups generally.
Actions by foreign governments, regulators and international standard setters could result in substantial additional
regulation to which we may be subject. We cannot predict the impact laws and regulations adopted in foreign jurisdictions may
have on the financial markets generally or our businesses, results of operations or cash flows. It is possible such laws and
regulations, our status as an Internationally Active Insurance Group (IAIG) and certain standard-setting initiatives by the FSB and the
IAIS, including, but not limited to, the ongoing development of a holistic framework for the assessment and mitigation of systemic risk
and a risk-based global insurance capital standard (ICS), and implementation of Solvency II in the European Union, may significantly
alter our business practices. They may also limit our ability to engage in capital or liability management, require us to raise additional
capital, and impose burdensome requirements and additional costs. It is possible that the laws and regulations adopted in foreign
jurisdictions will differ from one another, and that they could be inconsistent with the laws and regulations of other jurisdictions
including the U.S.
For further details on these international regulations and their potential impact on AIG and its businesses, see Item 1. Business –
Regulation – International Regulation.
The USA PATRIOT Act, the Office of Foreign Assets Control regulations and similar laws and regulations that apply to us
may expose us to significant penalties. The operations of our subsidiaries are subject to laws and regulations, including, in some
cases, the USA PATRIOT Act of 2001, which require companies to know certain information about their clients and to monitor their
transactions for suspicious activities. Also, the Department of the Treasury’s Office of Foreign Assets Control administers regulations
requiring U.S. persons to refrain from doing business, or allowing their clients to do business through them, with certain organizations
or individuals on a prohibited list maintained by the U.S. government or with certain countries. The UK, the EU and other jurisdictions
maintain similar laws and regulations. The laws and regulations of other jurisdictions may sometimes conflict with those of the U.S.
Although we have instituted compliance programs to address these requirements as well as potential conflicts of law, there are
inherent risks in global transactions.
Attempts to efficiently manage the impact of Regulation XXX and Actuarial Guideline AXXX may fail in whole or in part
resulting in an adverse effect on our financial condition and results of operations. The NAIC Model Regulation “Valuation of
Life Insurance Policies” (Regulation XXX) requires insurers to establish additional statutory reserves for term life insurance policies
with long-term premium guarantees and universal life policies with secondary guarantees. In addition, NAIC Actuarial Guideline 38
(AG 38, also referred to as Guideline AXXX) clarifies the application of Regulation XXX as to certain universal life insurance policies
with secondary guarantees.
Our domestic Life and Retirement companies manage the capital impact of statutory reserve requirements under Regulation XXX and
Guideline AXXX through reinsurance transactions, to maintain their ability to offer competitive pricing and successfully market such
products. The application of Regulation XXX and Guideline AXXX involve numerous interpretations. If state insurance departments do
not agree with our interpretations or if regulations change with respect to our ability to manage the capital impact of certain statutory
reserve requirements, our statutory reserve requirements could increase, or our ability to take reserve credit for reinsurance
transactions could be reduced or eliminated. As a result, we could be required to increase prices on our products, raise capital to
replace the reserve credit provided by the reinsurance transactions or incur higher costs to obtain reinsurance, each of which could
adversely affect our competitive position, financial condition or results of operations. If our actions to efficiently manage the impact of
Regulation XXX or Guideline AXXX on future sales of term and universal life insurance products are not successful, we may incur
higher operating costs or our sales of these products may be affected.
For additional information on statutory reserving requirements under Regulation XXX and Guideline AXXX and our use of reinsurance
see Note 19 to the Consolidated Financial Statements.
Third parties we rely upon to provide certain business and administrative services on our behalf may not perform as
anticipated, which could have an adverse effect on our business and results of operations. We rely on the use of third-party
providers to deliver contracted services in a broad range of areas, including the administration or servicing of certain policies and
contracts and investment accounting and operation functions. Some of these providers are located outside the U.S., which exposes us
to business disruptions and political risks inherent when conducting business outside of the U.S. We periodically negotiate provisions
and renewals of these relationships, and there can be no assurance that such terms will remain acceptable to us or such third parties. If
such third-party providers experience disruptions or do not perform as anticipated or in compliance with applicable laws and
regulations, or we experience problems with a transition to a third-party provider, we may experience operational difficulties, an inability
to meet obligations (including, but not limited to, legal, regulatory or policyholder obligations), a loss of business and increased costs,
reputational harm, or suffer other negative consequences, all of which may have a material adverse effect on our business,
consolidated results of operations, liquidity and financial condition.
AIG | 2018 Form 10-K 27
ITEM 1A | Risk Factors
For a discussion regarding cyber risk arising from third-party providers, see “We are exposed to certain risks if we are unable to
maintain the availability of our electronic data systems and safeguard the security of our data, which could compromise our ability to
conduct business and adversely affect our consolidated financial condition or results of operations” above.
New laws and regulations may affect our businesses, results of operations, financial condition and ability to compete
effectively. Legislators, regulators and self-regulatory organizations may periodically consider various proposals that may affect our
business practices and product designs, how we sell or service certain products we offer, or the profitability of certain of our
businesses. New laws and regulations may even affect our ability to conduct certain businesses at all, including proposals relating to
restrictions on the type of activities in which financial institutions are permitted to engage. These proposals could also impose
additional taxes on a limited subset of financial institutions and insurance companies (either based on size, activities, geography or
other criteria). It is uncertain whether and how these and other such proposals would apply to us, those who sell or service our
products, or our competitors or how they could impact our ability to compete effectively, as well as our business, consolidated results
of operations, liquidity and financial condition.
An “ownership change” could limit our ability to utilize tax loss and credit carryforwards to offset future taxable income. As
of December 31, 2018, on a tax basis, we had U.S. federal net operating loss carryforwards of approximately $36.3 billion, $82 million
in capital loss carryforwards, $3.5 billion in foreign tax credits and $814 million in other tax credits (tax loss and credit carryforwards).
Our ability to use these tax attributes to offset future taxable income may be significantly limited if we experience an “ownership
change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the Code). In general, an ownership change
will occur when the percentage of AIG Parent's ownership (by value) of one or more “5-percent shareholders” (as defined in the Code)
has increased by more than 50 percent over the lowest percentage owned by such shareholders at any time during the prior three
years (calculated on a rolling basis). An entity that experiences an ownership change generally will be subject to an annual limitation
on its pre-ownership change tax loss and credit carryforwards equal to the equity value of the corporation immediately before the
ownership change, multiplied by the long-term, tax-exempt rate posted monthly by the IRS (subject to certain adjustments). The
annual limitation would be increased each year to the extent that there is an unused limitation in a prior year. The limitation on our
ability to utilize tax loss and credit carryforwards arising from an ownership change under Section 382 would depend on the value of
our equity at the time of any ownership change. If we were to experience an “ownership change”, it is possible that a significant
portion of our tax loss and credit carryforwards could expire before we would be able to use them to offset future taxable income.
On March 9, 2011, our Board adopted our Tax Asset Protection Plan (the Plan) to help protect these tax loss and credit carryforwards,
and on December 14, 2016, the Board adopted an amendment to the Plan, extending its expiration date to December 14, 2019. Our
shareholders ratified the amendment of the Plan at our 2017 Annual Meeting of Shareholders. At our 2011 Annual Meeting of
Shareholders, shareholders adopted a protective amendment to our Restated Certificate of Incorporation (Protective Amendment),
which is designed to prevent certain transfers of AIG Common Stock that could result in an “ownership change”. At our 2017 Annual
Meeting of Shareholders, our shareholders approved the amendment to our Amended and Restated Certificate of Incorporation to
adopt a successor to the Protective Amendment that contains substantially the same terms as the Protective Amendment but would
expire on June 28, 2020.
The Plan is designed to reduce the likelihood of an “ownership change” by (i) discouraging any person or group from becoming a 4.99
percent shareholder and (ii) discouraging any existing 4.99 percent shareholder from acquiring additional shares of AIG Common
Stock. The Protective Amendment generally restricts any transfer of AIG Common Stock that would (i) increase the ownership by any
person to 4.99 percent or more of AIG stock then outstanding or (ii) increase the percentage of AIG stock owned by a Five Percent
Stockholder (as defined in the Plan). Despite the intentions of the Plan and the Protective Amendment to deter and prevent an
“ownership change”, such an event may still occur. In addition, the Plan and the Protective Amendment may make it more difficult and
more expensive to acquire us, and may discourage open market purchases of AIG Common Stock or a non-negotiated tender or
exchange offer for AIG Common Stock. Accordingly, the Plan and the Protective Amendment may limit a shareholder’s ability to
realize a premium over the market price of AIG Common Stock in connection with any stock transaction.
Changes to tax laws, including U.S. legislation enacted in late 2017, could increase our corporate taxes or make some of our
products less attractive to consumers.
On December 22, 2017 President Trump signed major tax legislation into law (Public Law 115-97) (the Tax Act). The Tax Act, known
informally as the Tax Cuts and Jobs Act, reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted
numerous other changes impacting AIG and the insurance industry.
The reduction in the statutory U.S. federal corporate income tax rate is expected to positively impact AIG’s future U.S. after-tax
earnings. Other changes in the Tax Act that broaden the tax base by reducing or eliminating deductions for certain items (e.g.,
reductions to separate account dividends received deductions, disallowance of entertainment expenses, and limitations on the
deduction of certain executive compensation costs) will offset a portion of the benefits from the lower statutory rate. Other specific
28 AIG | 2018 Form 10-K
ITEM 1A | Risk Factors
changes, including the calculation of insurance tax reserves and the amortization of deferred acquisition costs, will impact the timing
of our tax expense items and could impact the pricing of certain insurance products.
In addition to changing the taxation of corporations in general and insurance companies in particular, the Tax Act temporarily reduced
certain tax rates for individuals and increased the exemption for the federal estate tax. These changes could reduce demand in the
U.S. for life insurance and annuity contracts, which would reduce our income due to lower sales of these products or potential
increased surrenders of in-force business.
Furthermore, the overall impact of the Tax Act is subject to the effect of other complex provisions in the Tax Act (including the base
erosion and anti-abuse tax (BEAT) and global intangible low-taxed income (GILTI)), which reduce a portion of the benefit from the
lower statutory U.S. federal rate. While the U.S. tax authorities issued formal guidance and proposed regulations for BEAT and other
provisions of the Tax Act, there are still certain aspects of the Tax Act that remain unclear. AIG will continue to review the impact of
both BEAT and GILTI as further guidance is issued. Any further guidance may result in changes to the interpretations and
assumptions we made and actions we may take, which as a result may impact the amounts recorded with respect to international
provisions of the Tax Act, possibly materially. In addition, if BEAT induces other countries to enact similar legislation that could impact
cross-border reinsurance transactions, AIG could be negatively impacted by increased tax costs in those countries.
Finally, it is possible that tax laws will be further changed either in a technical corrections bill or entirely new legislation. It remains
difficult to predict whether or when there will be any tax law changes or further guidance by the authorities in the U.S. or elsewhere in
the world having a material adverse effect on our business, consolidated results of operations, liquidity and financial condition, as the
impact of broad proposals on our business can vary substantially depending upon the specific changes or further guidance made and
how the changes or guidance are implemented by the authorities.
For additional information see Item 7. MD&A – Consolidated Results of Operations – U.S. Tax Reform Overview.
COMPETITION AND EMPLOYEES
We face intense competition in each of our businesses. Our businesses operate in highly competitive environments, both
domestically and overseas. Our principal competitors are other large multinational insurance organizations, as well as banks,
investment banks and other nonbank financial institutions. The insurance industry in particular is highly competitive. Within the U.S.,
our General Insurance companies compete with other stock companies, specialty insurance organizations, mutual insurance
companies and other underwriting organizations. Our Life and Retirement companies compete in the U.S. with life insurance
companies and other participants in related financial services fields. Overseas, our subsidiaries compete for business with the foreign
insurance operations of large U.S. insurers and with global insurance groups and local companies. Technological advancements and
innovation in the insurance industry may present competitive risks; technological advancements and innovation are occurring in
distribution, underwriting, claims and operations and at a pace that may increase, particularly as companies increasingly use data
analytics and technology as part of their business strategy. Our business and results of operations could be materially and adversely
affected if technological advancements or innovation limit our ability to retain existing business, write new business at adequate rates
or on appropriate terms, render our insurance products less suitable or impact our ability to adapt or deploy current products as
quickly and effectively as our competitors.
Reductions of our credit ratings or negative publicity may make it more difficult to compete to retain existing customers and to
maintain our historical levels of business with existing customers and counterparties. General Insurance companies and Life and
Retirement companies compete through a combination of risk acceptance criteria, product pricing, and terms and conditions.
Retirement services companies compete through crediting rates and the issuance of guaranteed benefits. A decline in our position as
to any one or more of these factors could adversely affect our profitability.
Competition for employees in our industry is intense, and we may not be able to attract and retain the highly skilled people
we need to support our business. Our success depends, in large part, on our ability to attract and retain key people. Due to the
intense competition in our industry for key employees with demonstrated ability, we may be unable to hire or retain such employees.
In addition, we may experience higher than expected employee turnover and difficulty attracting new employees as a result of
uncertainty from strategic actions and organizational and operational changes. Losing any of our key people also could have a
material adverse effect on our operations given their skills, knowledge of our business, years of industry experience and the potential
difficulty of promptly finding qualified replacement employees. Our business and consolidated results of operations could be materially
adversely affected if we are unsuccessful in attracting and retaining key employees.
Managing key employee succession and retention is critical to our success. We would be adversely affected if we fail to
adequately plan for the succession of our senior management and other key employees. While we have succession plans and long-
term compensation plans designed to retain our employees, our succession plans may not operate effectively and our compensation
plans cannot guarantee that the services of these employees will continue to be available to us.
AIG | 2018 Form 10-K 29
ITEM 1A | Risk Factors
Employee error and misconduct may be difficult to detect and prevent and may result in significant losses. There have been
a number of cases involving fraud or other misconduct by employees in the financial services industry in recent years and we run the
risk that employee misconduct could occur. Instances of fraud, illegal acts, errors, failure to document transactions properly or to obtain
proper internal authorization, misuse of customer or proprietary information, or failure to comply with regulatory requirements or our
internal policies may result in losses and/or reputational damage. It is not always possible to deter or prevent employee misconduct,
and the controls that we have in place to prevent and detect this activity may not be effective in all cases.
We may not be able to protect our intellectual property and may be subject to infringement claims. We rely on a combination
of contractual rights and copyright, trademark, patent and trade secret laws to establish and protect our intellectual property. Although
we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual
property. We may have to litigate to enforce and protect our intellectual property and to determine its scope, validity or enforceability,
which could divert significant resources and may not prove successful. Litigation to enforce our intellectual property rights may not be
successful and cost a significant amount of money. The inability to secure or enforce the protection of our intellectual property assets
could harm our reputation and have a material adverse effect on our business and our ability to compete. We also may be subject to
costly litigation in the event that another party alleges our operations or activities infringe upon their intellectual property rights, including
patent rights, or violate license usage rights. Any such intellectual property claims and any resulting litigation could result in significant
expense and liability for damages, and in some circumstances we could be enjoined from providing certain products or services to our
customers, or utilizing and benefiting from certain patent, copyrights, trademarks, trade secrets or licenses, or alternatively could be
required to enter into costly licensing arrangements with third parties, all of which could have a material adverse effect on our business,
consolidated results of operations and financial condition.
ESTIMATES AND ASSUMPTIONS
Estimates used in the preparation of financial statements and modeled results used in various areas of our business may
differ materially from actual experience. Our financial statements are prepared in conformity with U.S. Generally Accepted
Accounting Principles (U.S. GAAP), which requires the application of accounting policies that often involve a significant degree of
judgment. The accounting policies that we consider most dependent on the application of estimates and assumptions, and therefore
may be viewed as critical accounting estimates, are described in Item 7. MD&A — Critical Accounting Estimates. These accounting
estimates require the use of assumptions, some of which are highly uncertain at the time of estimation. These estimates are based on
judgment, current facts and circumstances, and, when applicable, internally developed models. Therefore, actual results could differ
from these estimates, possibly in the near term, and could have a material effect on our consolidated financial statements.
In addition, we employ models to price products, calculate reserves and value assets, as well as evaluate risk and determine capital
requirements, among other uses. These models rely on estimates and projections that are inherently uncertain, may use incomplete,
outdated or incorrect data or assumptions and may not operate properly. As our businesses continue to expand and evolve, the
number and complexity of models we employ has grown, increasing our exposure to error in the design, implementation or use of
models, including the associated input data, controls and assumptions and the controls we have in place to mitigate their risk may not
be effective in all cases.
Changes in accounting principles and financial reporting requirements could impact our consolidated results of operations
and financial condition. Our financial statements are subject to the application of U.S. GAAP, which is periodically revised.
Accordingly, from time to time, we are required to adopt new or revised accounting standards issued by recognized authoritative
bodies, including the Financial Accounting Standards Board (FASB).
The International Accounting Standards Board (IASB) has issued International Financial Reporting Standard (IFRS) 17, Insurance
Contracts, with an effective date of January 1, 2021. This new standard will require significant changes to accounting measurements
for long-duration insurance contracts for many of our international operations.
The FASB has revised the accounting standards for insurance contracts. The FASB adopted standards as of December 31, 2017
focused on disclosures for short-duration insurance contracts, which primarily relate to our property casualty products. In addition, the
FASB issued Accounting Standards Update (ASU) No. 2018-12 – Targeted Improvements to the Accounting for Long-Duration
Contracts, which has an effective date of January 1, 2021 and is intended to improve, simplify and enhance the accounting
measurements and disclosures for long-duration insurance contracts, which primarily relates to our life and annuity products.
Changes to the manner in which we account for long-duration products could impact our consolidated results of operations, liquidity
and financial condition.
The FASB issued ASU No. 2016-13 – Measurement of Credit Losses on Financial Instruments, which has an effective date of
January 1, 2020. This standard will change how we account for credit losses for most financial assets, trade receivables and
reinsurance receivables. The standard will replace the existing incurred loss impairment model with a new “current expected credit
loss model” that generally will result in earlier recognition of credit losses. The standard will apply to financial assets subject to credit
30 AIG | 2018 Form 10-K
ITEM 1A | Risk Factors
losses, including loans measured at amortized cost, reinsurance receivables and certain off-balance sheet credit exposures.
Additionally, the impairment of available-for-sale debt securities, including purchased credit deteriorated securities, are subject to the
new guidance and will be measured in a similar manner, except that losses will be recognized as allowances rather than reductions in
the amortized cost of the securities. The standard will impact our consolidated results of operations, liquidity and financial condition
and will require additional information to be disclosed in the Notes to the Consolidated Financial Statements.
The adoption of the newly issued standards as well as other future accounting standards could impact our reported consolidated
results of operations, liquidity and reported financial condition.
For a discussion of the impact of accounting pronouncements that have been issued but are not yet required to be implemented see
Note 2 to the Consolidated Financial Statements.
Changes in our assumptions regarding the discount rate and expected rate of return for our pension and other
postretirement benefit plans may result in increased expenses and reduce our profitability. We determine our pension and
other postretirement benefit plan costs based on assumed discount rates, expected rates of return on plan assets and trends in health
care costs. Changes in these assumptions, including from the impact of a sustained low interest rate environment or rapidly rising
interest rates, may result in increased expenses which could impact our consolidated results of operations, liquidity and financial
condition.
For further details on our pension and postretirement benefit plans see Note 21 to the Consolidated Financial Statements.
If our businesses do not perform well and/or their estimated fair values decline or the price of our common stock does not
increase, we may be required to recognize an impairment of our goodwill or to establish a valuation allowance against the
deferred income tax assets, which could have a material adverse effect on our results of operations and financial condition.
Goodwill represents the excess of the amounts we paid to acquire subsidiaries and other businesses over the fair value of their net
assets at the date of acquisition. We test goodwill at least annually for impairment. Impairment testing is performed based upon
estimates of the fair value of the “reporting unit” to which the goodwill relates. The fair value of the reporting unit is impacted by the
performance of the business and could be adversely impacted if new business, customer retention, profitability or other drivers of
performance differ from expectations, or upon the occurrence of certain events, including a significant and adverse change in
regulations, legal factors, accounting standards or business climate, or an adverse action or assessment by a regulator. If it is
determined that goodwill has been impaired, we must write down goodwill by the amount of the impairment, with a corresponding
charge to net income (loss). These write downs could have a material adverse effect on our consolidated results of operations,
liquidity and financial condition. For further discussion regarding goodwill impairment, see Item 7. MD&A – Critical Accounting
Estimates – Impairment Charges – Goodwill Impairment and Note 12 to the Consolidated Financial Statements.
Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax
assets are assessed periodically by management to determine if they are realizable. The performance of the business, including the
ability to generate future taxable income from a variety of sources and planning strategies, is factored into management’s
determination. If, based on available evidence, it is more likely than not that the deferred tax asset will not be realized, then a
valuation allowance must be established with a corresponding charge to net income. Such charges could have a material adverse
effect on our consolidated results of operations, liquidity and financial condition. For further discussion regarding deferred tax assets,
see Item 7. MD&A – Critical Accounting Estimates – Income Taxes and Note 23 to the Consolidated Financial Statements.
AIG | 2018 Form 10-K 31
ITEM 1B | Unresolved Staff Comments
There are no material unresolved written comments that were received from the SEC staff 180 days or more before the end of our
fiscal year relating to periodic or current reports under the Securities Exchange Act of 1934.
ITEM 2 | Properties
We operate from approximately 166 offices in the United States and approximately 351 offices in approximately 56 foreign countries.
The following offices are located in buildings in the United States owned by us:
General Insurance Companies:
Life and Retirement Companies:
• Stevens Point, Wisconsin
• Amarillo and Houston, Texas
Other Operations:
• 175 Water Street in New York, New York (Corporate Headquarters; also includes General Insurance companies)
• Livingston, New Jersey
• Ft. Worth, Texas
In addition, our General Insurance companies own offices in 13 foreign countries and jurisdictions including Bermuda, Ecuador,
Japan, Mexico, the UK and Venezuela. The remainder of the office space we use is leased. We believe that our leases and
properties are sufficient for our current purposes.
LOCATIONS OF CERTAIN ASSETS
As of December 31, 2018, approximately 15 percent of our consolidated assets were located outside the U.S. and Canada, including
$413 million of cash and securities on deposit with regulatory authorities in those locations.
For additional geographic information see Note 3 to the Consolidated Financial Statements.
For total carrying values of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities
see Note 6 to the Consolidated Financial Statements.
Operations outside the U.S. and Canada and assets held abroad may be adversely affected by political developments in foreign
countries, including tax changes, nationalization and changes in regulatory policy, as well as by consequence of hostilities and unrest.
The risks of such occurrences and their overall effect upon us vary from country to country and cannot be predicted. If expropriation
or nationalization does occur, our policy is to take all appropriate measures to seek recovery of any affected assets. Certain of the
countries in which our business is conducted have currency restrictions that generally cause a delay in a company’s ability to
repatriate assets and profits.
For additional information see Item 1A. Risk Factors — Business and Operations.
ITEM 3 | Legal Proceedings
For a discussion of legal proceedings see Note 16 to the Consolidated Financial Statements, which is incorporated herein by
reference.
ITEM 4 | Mine Safety Disclosures
Not applicable.
32 AIG | 2018 Form 10-K
ITEM 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Part II
ITEM 5 | Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
AIG’s common stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange (NYSE: AIG). On
December 3, 2018, AIG’s Common Stock was voluntarily delisted from the Tokyo Stock Exchange. There were approximately 24,334
stockholders of record of AIG Common Stock as of February 11, 2019.
Equity Compensation Plans
Our table of equity compensation plans will be included in the definitive proxy statement for AIG’s 2019 Annual Meeting of
Shareholders. The definitive proxy statement will be filed with the SEC no later than 120 days after the end of AIG’s fiscal year
pursuant to Regulation 14A.
Purchases of Equity Securities
The following table provides information about purchases made by or on behalf of AIG or any “affiliated purchaser” (as
defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934 (the Exchange Act)) of AIG Common Stock during the
three months ended December 31, 2018:
Period
October 1 – 31
November 1 – 30(a)
(a)
December 1 – 31
Total
Total Number
of Shares
Repurchased
Total Number of Shares
Average
Price Paid
Purchased as Part of Publicly
per Share Announced Plans or Programs
- $
11,563,973
6,510,320
18,074,293 $
-
42.99
38.07
41.22
-
11,563,973
6,510,320
18,074,293
Approximate Dollar Value of Shares
that May Yet Be Purchased Under the
Plans or Programs (in millions)
$
1,262
762 (b)
512 (b)
512
$
(a) During the November 1-30 period, we also repurchased 343,293 warrants to purchase shares of AIG Common Stock, at an average purchase price per warrant of
$8.21, for an aggregate purchase price of $3 million. During the December 1-31 period, we also repurchased 406,162 warrants to purchase shares of AIG Common
Stock, at an average purchase price per warrant of $5.22, for an aggregate purchase price of $2 million.
(b) Reflects the purchase of 343,293 and 406,162 warrants to purchase shares of AIG Common Stock in the November 1-30 and December 1-31 periods, respectively,
which reduced the dollar value of the remaining repurchase authorization.
Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG
Common Stock through a series of actions. On May 3, 2017, our Board of Directors approved an increase of $2.5 billion to the share
repurchase authorization.
During the three-month period ended December 31, 2018 we purchased approximately 18 million shares of AIG Common Stock
under this authorization for an aggregate purchase price of approximately $745 million. We also repurchased 749,455 warrants to
purchase shares of AIG Common Stock during the three-month period ended December 31, 2018 for an aggregate purchase price of
approximately $5 million.
On February 13, 2019, our Board of Directors authorized an additional increase to its previous repurchase authorization of AIG
Common Stock of $1.5 billion, resulting in an aggregate remaining authorization on such date of approximately $2.0 billion. We did
not repurchase any shares of AIG Common Stock from January 1, 2019 to February 13, 2019. Shares may be repurchased from time
to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase
transactions or otherwise (including through the purchase of warrants). Certain of our share repurchases have been and may from
time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The timing of any future share repurchases will depend
on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors.
For additional information on our share purchases see Note 17 to the Consolidated Financial Statements.
AIG | 2018 Form 10-K 33
ITEM 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Performance Graph
The following Performance Graph compares the cumulative total shareholder return on AIG Common Stock for a five-year period
(December 31, 2013 to December 31, 2018) with the cumulative total return of the S&P’s 500 stock index (which includes AIG), the
S&P Property and Casualty Insurance Index (S&P P&C Index) and the S&P Life and Health Insurance Index (S&P L&H Index).
Value of $100 Invested on December 31, 2013
(All $ as of December 31st)
$350
$300
$250
$200
$150
$100
$50
$0
2013
2014
2015
2016
2017
2018
AMERICAN INTERNATIONAL GROUP
S&P 500 INDEX
S&P 500 Property & Casualty Insurance Index
S&P 500 Life & Health Insurance Index
Dividend reinvestment has been assumed and returns have been weighted to reflect relative stock market capitalization.
AIG
S&P 500
S&P 500 Property & Casualty Insurance Index
S&P 500 Life & Health Insurance
$
2013
100.00
100.00
100.00
100.00
$
2014
110.74
113.69
115.74
101.95
$
As of December 31,
2016
2015
133.86
124.22
129.05
115.26
146.68
126.77
119.26
95.51
$
$
2017
124.67
157.22
179.52
138.85
$
2018
84.64
150.33
171.10
110.01
34 AIG | 2018 Form 10-K
ITEM 6 | Selected Financial Data
ITEM 6 | Selected Financial Data
The Selected Consolidated Financial Data should be read in conjunction with Management’s Discussion and Analysis of
Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying notes
included elsewhere herein.
(in millions, except per share data)
2018
2017
2016
2015
2014
Years Ended December 31,
$
30,614
$
31,374
$
34,393
$
36,655
$
37,254
Revenues:
Premiums
Policy fees
Net investment income
Net realized capital gains (losses)
Aircraft leasing revenue
Other income
Total revenues
Benefits, losses and expenses:
Policyholder benefits and losses incurred
Interest credited to policyholder account balances
Amortization of deferred policy acquisition costs
General operating and other expenses
Interest expense
Aircraft leasing expenses
Net (gain) loss on extinguishment of debt
Net (gain) loss on sale of divested businesses
Total benefits, losses and expenses
Income (loss) from continuing operations before income taxes
Income tax expense
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of taxes
Net income (loss)
Net income (loss) from continuing operations attributable
to noncontrolling interests
Net income (loss) attributable to AIG
$
Income (loss) per common share attributable to AIG
2,791
12,476
(130)
-
1,638
47,389
2,935
14,179
(1,380)
-
2,412
49,520
27,412
29,972
3,592
4,288
9,107
1,168
-
(5)
(68)
48,054
1,466
7,526
(6,060)
4
(6,056)
3,754
5,386
9,302
1,309
-
7
(38)
47,132
257
154
103
(42)
61
67
(6)
2,732
14,065
(1,944)
-
3,121
52,367
32,437
3,705
4,521
10,989
1,260
-
74
(545)
52,441
(74)
185
(259)
(90)
(349)
2,755
14,053
776
-
4,088
58,327
31,345
3,731
5,236
12,686
1,281
-
756
11
55,046
3,281
1,059
2,222
-
2,222
2,615
16,079
739
1,602
6,117
64,406
28,281
3,768
5,330
13,138
1,718
1,585
2,282
(2,197)
53,905
10,501
2,927
7,574
(50)
7,524
28
500
26
(5)
$
(6,084)
$
(849)
$
2,196
$
7,529
common shareholders
Basic
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss) attributable to AIG
Diluted
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss) attributable to AIG
Dividends declared per common share
$
0.04
$
(6.54)
$
(0.70)
$
1.69
$
(0.05)
(0.01)
0.04
(0.05)
(0.01)
1.28
-
(6.54)
(6.54)
-
(6.54)
1.28
(0.08)
(0.78)
(0.70)
(0.08)
(0.78)
1.28
-
1.69
1.65
-
1.65
0.81
5.31
(0.04)
5.27
5.24
(0.04)
5.20
0.50
AIG | 2018 Form 10-K 35
Year-end balance sheet data:
Total investments
Total assets
Long-term debt
Total liabilities
Total AIG shareholders' equity
Total equity
Book value per common share
ITEM 6 | Selected Financial Data
$ 314,209
$ 322,292
$ 328,175
$ 338,354
$ 355,766
491,984
34,540
434,675
56,361
57,309
65.04
498,301
31,640
432,593
65,171
65,708
72.49
498,264
30,912
421,406
76,300
76,858
496,842
29,249
406,632
89,658
90,210
515,500
31,136
408,228
106,898
107,272
76.66
75.10
77.69
Book value per common share, excluding Accumulated other
comprehensive income (loss)(a)
Adjusted book value per common share(a)
ROE
Adjusted ROE(a)
66.67
54.95
0.0 %
2.1
66.41
54.74
(8.4) %
4.1
73.41
58.57
(1.0) %
0.6
72.97
58.94
2.2 %
3.7
69.98
58.23
7.1 %
8.8
(in millions, except per share data)
Other data:
Catastrophe-related losses(b)
Prior year unfavorable development
Other-than-temporary impairments
Adjustment to federal deferred tax valuation allowance
Impact of Tax Act
Net positive (negative) adjustment from update of
Years Ended December 31,
2018
2017
2016
2015
2014
$
2,885
$
4,167
$
1,331
$
731
$
362
251
21
62
978
260
43
6,687
5,788
559
83
-
4,119
671
110
-
728
703
247
(181)
-
Life and Retirement actuarial assumptions
$
(228)
$
68
$
(427)
$
3
$
168
(a) Book value per common share excluding Accumulated other comprehensive income (loss) (AOCI), Book value per common share excluding AOCI and DTA (Adjusted
book value per common share), and return on equity – adjusted after-tax income excluding AOCI and DTA (Adjusted return on equity) are non-GAAP financial measures
and the reconciliations to the relevant GAAP financial measures are below. For additional information see Item 7. MD&A — Use of Non-GAAP Measures.
(b) Natural and man-made catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and also include certain
man-made events, such as terrorism and civil disorders that exceed the $10 million threshold.
Items Affecting Comparability Between Periods
The following are significant developments that affected multiple periods and financial statement captions.
BUSINESS ACQUISITION
On July 18, 2018, we completed the purchase of Validus.
ASSET DISPOSITIONS IN 2015, 2016 AND 2017
In 2015, we sold all of our ordinary shares of AerCap Holdings N.V. (AerCap) received as part of the consideration for the sale of
International Lease Finance Corporation (ILFC). In 2016, we sold United Guaranty to Arch Capital Group Ltd. (Arch). In 2017, we
sold Fuji Life to FWD Group and certain international insurance operations to Fairfax Financial Holdings Limited (Fairfax).
For further discussion on the 2016 and 2017 asset dispositions and the 2018 purchase of Validus, see Note 1 to the Consolidated
Financial Statements.
36 AIG | 2018 Form 10-K
ITEM 6 | Selected Financial Data
Reconciliation of Non-GAAP Measures Included in Selected Financial Data
The following table presents a reconciliation of Book value per common share to Book value per common share, excluding
AOCI and Book value per common share, excluding AOCI and DTA (Adjusted book value per common share), which are non-
GAAP measures. For additional information see Item 7. MD&A — Use of Non-GAAP Measures.
(in millions, except per share data)
Total AIG shareholders' equity
Accumulated other comprehensive income (loss)
Total AIG shareholders' equity, excluding AOCI
Deferred tax assets
Adjusted shareholders' equity
Total common shares outstanding
Book value per common share
Book value per common share, excluding AOCI
Adjusted book value per common share
$
$
At December 31,
2018
56,361 $
(1,413)
57,774
10,153
47,621
2017
2016
2015
2014
65,171 $
76,300 $
89,658 $
106,898
5,465
59,706
10,492
49,214
3,230
73,070
14,770
58,300
2,537
87,121
16,751
70,370
10,617
96,281
16,158
80,123
866,609,429
899,044,657
995,335,841
1,193,916,617
1,375,926,971
65.04 $
66.67
54.95
72.49 $
76.66 $
66.41
54.74
73.41
58.57
75.10 $
72.97
58.94
77.69
69.98
58.23
The following table presents a reconciliation of Return on equity to Adjusted return on equity, which is a non-GAAP
measure. For additional information see Item 7. MD&A — Use of Non-GAAP Measures.
Years Ended December 31,
(dollars in millions)
Net income (loss) attributable to AIG
Adjusted after-tax income attributable to AIG
Average AIG Shareholders' equity
Average AOCI
Average AIG Shareholders' equity, excluding average AOCI
Average DTA
Average adjusted Shareholders' equity
ROE
Adjusted Return on Equity
$
$
$
2018
2017
2016
2015
(6) $
(6,084) $
(849) $
2,196
$
1,064
2,231
406
2,872
2014
7,529
6,941
60,819 $
1,193
59,626
10,133
49,493 $
0.0 %
2.1
72,348
$
86,617
$ 101,558
$ 105,589
4,675
67,673
13,806
5,722
80,895
15,905
7,598
93,960
15,803
9,781
95,808
16,611
53,867
$
64,990
$
78,157
$
79,197
(8.4) %
(1.0) %
4.1
0.6
2.2 %
3.7
7.1 %
8.8
AIG | 2018 Form 10-K 37
ITEM 7 | Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Information
This Annual Report on Form 10-K and other publicly available documents may include, and officers and representatives of AIG may
from time to time make and discuss, projections, goals, assumptions and statements that may constitute “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995. These projections, goals, assumptions and statements are
not historical facts but instead represent only a belief regarding future events, many of which, by their nature, are inherently uncertain
and outside our control. These projections, goals, assumptions and statements include statements preceded by, followed by or
including words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” “goal” or
“estimate.” These projections, goals, assumptions and statements may relate to future actions, prospective services or products,
future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies
such as legal proceedings, anticipated organizational, business or regulatory changes, anticipated sales, monetization and/or
acquisitions of businesses or assets, or successful integration of acquired businesses, management succession and retention plans,
exposure to risk, trends in operations and financial results.
It is possible that our actual results and financial condition will differ, possibly materially, from the results and financial condition
indicated in these projections, goals, assumptions and statements. Factors that could cause our actual results to differ, possibly
materially, from those in the specific projections, goals, assumptions and statements include:
• changes in market and industry conditions;
•
the occurrence of catastrophic events, both natural and
man-made;
• our ability to successfully reorganize our businesses and
execute on our initiatives to improve our underwriting
capabilities and reinsurance programs, as well as
improve profitability, without negatively impacting client
relationships or our competitive position;
• our ability to successfully dispose of, monetize and/or
acquire businesses or assets or successfully integrate
acquired businesses;
• actions by credit rating agencies;
• changes in judgments concerning insurance underwriting
and insurance liabilities;
• changes in judgments concerning potential cost saving
•
opportunities;
the impact of potential information technology,
cybersecurity or data security breaches, including as a
result of cyber-attacks or security vulnerabilities;
• disruptions in the availability of our electronic data systems or
•
those of third parties;
the effectiveness of our strategies to recruit and retain key
personnel and our ability to implement effective succession plans;
• negative impacts on customers, business partners and other
stakeholders;
• our ability to successfully manage Legacy portfolios;
• concentrations in our investment portfolios;
•
the requirements, which may change from time to time, of the
global regulatory framework to which we are subject;
• significant legal, regulatory or governmental proceedings;
• changes in judgments concerning the recognition of deferred tax
assets and goodwill impairment; and
• such other factors discussed in:
– Part I, Item 1A. Risk Factors of this Annual Report; and
– this Part II, Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations (MD&A) of this
Annual Report.
We are not under any obligation (and expressly disclaim any obligation) to update or alter any projections, goals, assumptions or
other statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events or
otherwise.
38 AIG | 2018 Form 10-K
ITEM 7 | Index to Item 7
INDEX TO ITEM 7
Use of Non-GAAP Measures
Critical Accounting Estimates
Executive Summary
Overview
Financial Performance Summary
AIG's Outlook – Industry and Economic Factors
Consolidated Results of Operations
Business Segment Operations
General Insurance
Life and Retirement
Other Operations
Legacy Portfolio
Investments
Overview
Investment Highlights
Investment Strategies
Credit Ratings
Impairments
Insurance Reserves
Loss Reserves
Life and Annuity Reserves and DAC
Liquidity and Capital Resources
Overview
Analysis of Sources and Uses of Cash
Liquidity and Capital Resources of AIG Parent and Subsidiaries
Credit Facilities
Contractual Obligations
Off-Balance Sheet Arrangements and Commercial Commitments
Debt
Credit Ratings
Financial Strength Ratings
Regulation and Supervision
Dividends and Repurchases of AIG Common Stock
Dividend Restrictions
Enterprise Risk Management
Overview
Risk Governance Structure
Risk Appetite, Limits, Identification, and Measurement
Credit Risk Management
Market Risk Management
Liquidity Risk Management
Operational Risk Management
Insurance Risks
Other Business Risks
Glossary
Acronyms
Throughout the MD&A, we use certain terms and abbreviations, which are summarized in the Glossary and Acronyms.
Page
40
42
57
57
58
61
65
70
71
83
102
103
106
106
106
106
108
115
119
119
123
131
131
134
135
137
138
139
140
142
142
143
143
143
144
144
144
145
147
148
153
154
156
164
165
168
We have incorporated into this discussion a number of cross-references to additional information included throughout this Annual
Report to assist readers seeking additional information related to a particular subject.
AIG | 2018 Form 10-K 39
ITEM 7 | Use of Non-GAAP Measures
Use of Non-GAAP Measures
In Item 1. Business, Item 6. Selected Financial Data and throughout this MD&A, we present our financial condition and results of
operations in the way we believe will be most meaningful and representative of our business results. Some of the measurements we
use are “non-GAAP financial measures” under Securities and Exchange Commission rules and regulations. GAAP is the acronym for
“generally accepted accounting principles” in the United States. The non-GAAP financial measures we present may not be
comparable to similarly-named measures reported by other companies.
Book value per common share, excluding accumulated other comprehensive income (AOCI) and Book value per common
share, excluding AOCI and deferred tax assets (DTA) (Adjusted book value per common share) are used to show the amount
of our net worth on a per-share basis. We believe these measures are useful to investors because they eliminate items that can
fluctuate significantly from period to period, including changes in fair value of our available for sale securities portfolio, foreign
currency translation adjustments and U.S. tax attribute deferred tax assets. These measures also eliminate the asymmetrical impact
resulting from changes in fair value of our available for sale securities portfolio wherein there is largely no offsetting impact for certain
related insurance liabilities. We exclude deferred tax assets representing U.S. tax attributes related to net operating loss
carryforwards and foreign tax credits as they have not yet been utilized. Amounts for interim periods are estimates based on
projections of full-year attribute utilization. As net operating loss carryforwards and foreign tax credits are utilized, the portion of the
DTA utilized is included in these book value per common share metrics. Book value per common share excluding AOCI, is derived by
dividing total AIG shareholders’ equity, excluding AOCI, by total common shares outstanding. Adjusted book value per common share
is derived by dividing total AIG shareholders’ equity, excluding AOCI and DTA (Adjusted Shareholders’ Equity), by total common
shares outstanding. The reconciliation to book value per common share, the most comparable GAAP measure, is presented in Item 6.
Selected Financial Data.
Return on equity – Adjusted after-tax income excluding AOCI and DTA (Adjusted return on equity) is used to show the rate of
return on shareholders’ equity. We believe this measure is useful to investors because it eliminates items that can fluctuate
significantly from period to period, including changes in fair value of our available for sale securities portfolio, foreign currency
translation adjustments and U.S. tax attribute deferred tax assets. This measure also eliminates the asymmetrical impact resulting
from changes in fair value of our available for sale securities portfolio wherein there is largely no offsetting impact for certain related
insurance liabilities. We exclude deferred tax assets representing U.S. tax attributes related to net operating loss carryforwards and
foreign tax credits as they have not yet been utilized. Amounts for interim periods are estimates based on projections of full-year
attribute utilization. As net operating loss carryforwards and foreign tax credits are utilized, the portion of the DTA utilized is included in
Adjusted return on equity. Adjusted return on equity is derived by dividing actual or annualized adjusted after-tax income attributable
to AIG by average Adjusted Shareholders’ Equity. The reconciliation to return on equity, the most comparable GAAP measure, is
presented in Item 6. Selected Financial Data.
Adjusted after-tax income attributable to AIG is derived by excluding the tax effected adjusted pre-tax income (APTI) adjustments
described below and the following tax items from net income attributable to AIG:
• deferred income tax valuation allowance releases and charges;
• changes in uncertain tax positions and other tax items related to legacy matters having no relevance to our current businesses or
operating performance; and
• net tax charge related to the enactment of the Tax Cuts and Jobs Act (Tax Act).
We use the following operating performance measures because we believe they enhance the understanding of the underlying
profitability of continuing operations and trends of our business segments. We believe they also allow for more meaningful
comparisons with our insurance competitors. When we use these measures, reconciliations to the most comparable GAAP measure
are provided on a consolidated basis in the Consolidated Results of Operations section of this MD&A.
Adjusted revenues exclude Net realized capital gains (losses), income from non-operating litigation settlements (included in Other
income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net
investment income for GAAP purposes). Adjusted revenues is a GAAP measure for our operating segments.
40 AIG | 2018 Form 10-K
ITEM 7 | Use of Non-GAAP Measures
Adjusted pre-tax income is derived by excluding the items set forth below from income from continuing operations before income
tax. This definition is consistent across our segments. These items generally fall into one or more of the following broad categories:
legacy matters having no relevance to our current businesses or operating performance; adjustments to enhance transparency to the
underlying economics of transactions; and measures that we believe to be common to the industry. APTI is a GAAP measure for our
segments. Excluded items include the following:
• changes in fair value of securities used to hedge guaranteed
•
income or loss from discontinued operations;
living benefits;
• changes in benefit reserves and deferred policy acquisition
costs (DAC), value of business acquired (VOBA), and sales
inducement assets (SIA) related to net realized capital gains
and losses;
•
loss (gain) on extinguishment of debt;
• all net realized capital gains and losses except earned
income (periodic settlements and changes in settlement
accruals) on derivative instruments used for non-qualifying
(economic) hedging or for asset replication. Earned income
on such economic hedges is reclassified from net realized
capital gains and losses to specific APTI line items based on
the economic risk being hedged (e.g. net investment income
and interest credited to policyholder account balances);
• net loss reserve discount benefit (charge);
• pension expense related to a one-time lump sum payment to
former employees;
•
income and loss from divested businesses;
• non-operating litigation reserves and settlements;
•
•
•
restructuring and other costs related to initiatives designed to
reduce operating expenses, improve efficiency and simplify
our organization;
the portion of favorable or unfavorable prior year reserve
development for which we have ceded the risk under
retroactive reinsurance agreements and related changes in
amortization of the deferred gain; and
integration and transaction costs associated with acquired
businesses.
General Insurance
– Ratios: We, along with most property and casualty insurance companies, use the loss ratio, the expense ratio and the
combined ratio as measures of underwriting performance. These ratios are relative measurements that describe, for every $100
of net premiums earned, the amount of losses and loss adjustment expenses (which for General Insurance excludes net loss
reserve discount), and the amount of other underwriting expenses that would be incurred. A combined ratio of less than 100
indicates underwriting income and a combined ratio of over 100 indicates an underwriting loss. Our ratios are calculated using
the relevant segment information calculated under GAAP, and thus may not be comparable to similar ratios calculated for
regulatory reporting purposes. The underwriting environment varies across countries and products, as does the degree of
litigation activity, all of which affect such ratios. In addition, investment returns, local taxes, cost of capital, regulation, product
type and competition can have an effect on pricing and consequently on profitability as reflected in underwriting income and
associated ratios.
– Accident year loss and combined ratios, as adjusted: both the accident year loss and combined ratios, as adjusted, exclude
catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact
of reserve discounting. Natural and man-made catastrophe losses are generally weather or seismic events having a net impact
on AIG in excess of $10 million each and also include certain man-made events, such as terrorism and civil disorders that
exceed the $10 million threshold. We believe 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 | 2018 Form 10-K 41
ITEM 7 | Critical Accounting Estimates
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a
significant degree of judgment.
The accounting policies that we believe are most dependent on the application of estimates and assumptions,
which are critical accounting estimates, are related to the determination of:
loss reserves;
reinsurance assets;
valuation of future policy benefit liabilities and timing and extent of loss recognition;
valuation of liabilities for guaranteed benefit features of variable annuity products;
valuation of embedded derivatives for fixed index annuity and life products;
estimated gross profits to value deferred acquisition costs for investment-oriented products;
impairment charges, including other-than-temporary impairments on available for sale securities, impairments on other
invested assets, including investments in life settlements, and goodwill impairment;
allowances for loan losses;
liability for legal contingencies;
fair value measurements of certain financial assets and liabilities; and
income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax
operating profitability of the character necessary to realize the net deferred tax asset and estimates associated with the Tax Act.
These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of
estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of
operations and cash flows could be materially affected.
INSURANCE LIABILITIES
Loss Reserves
The estimate of the loss reserves relies on several key judgments:
the determination of the actuarial models used as the basis for these estimates;
the relative weights given to these models by product line;
the underlying assumptions used in these models; and
the determination of the appropriate groupings of similar product lines and, in some cases, the disaggregation of dissimilar losses
within a product line.
We use numerous assumptions in determining the best estimate of reserves for each line of business. The importance of any specific
assumption can vary by both line of business and accident year. Because actual experience can differ from key assumptions used in
establishing reserves, there is potential for significant variation in the development of loss reserves. This is particularly true for long-
tail classes of business.
All of our methods to calculate net reserves include assumptions about estimated reinsurance recoveries and their collectability.
Reinsurance collectability is evaluated independently of the reserving process and appropriate allowances for uncollectible
reinsurance are established.
42 AIG | 2018 Form 10-K
ITEM 7 | Critical Accounting Estimates
OVERVIEW OF LOSS RESERVING PROCESS AND METHODS
Our loss reserves can generally be categorized into two distinct groups. Short-tail reserves consists principally of U.S. Property and
Special Risks, Europe Property and Special Risks, U.S. Personal Insurance, and Europe and Japan Personal Insurance. Long-tail
reserves include U.S. Workers’ Compensation, U.S. Excess Casualty, U.S. Other Casualty, U.S. Financial Lines, Europe Casualty
and Financial Lines, and U.S. Run-off Long Tail Insurance Lines.
Short-Tail Reserves
For our short-tail coverages, such as property, where the nature of claims is generally high frequency with short reporting periods,
with volatility arising from occasional severe events, the process for recording non-catastrophe quarterly loss reserves is geared
toward maintaining IBNR based on percentages of net earned premiums for that business, rather than projecting ultimate loss ratios
based on reported losses. For example, the IBNR reserve required for the latest accident quarter for a product line such as
homeowners might be approximately 20 percent of the quarter’s earned premiums. This level of reserve would generally be recorded
regardless of the actual losses reported in the current quarter, thus recognizing severe events as they occur. The percent of premium
factor reflects both our expectation of the ultimate loss costs associated with the line of business and the expectation of the
percentage of ultimate loss costs that have not yet been reported. The expected ultimate loss costs generally reflect the average loss
costs from a period of preceding accident quarters that have been adjusted for changes in rate and loss cost levels, mix of business,
known exposure to unreported losses, or other factors affecting the particular line of business. The expected percentage of ultimate
loss costs that have not yet been reported would be derived from historical loss emergence patterns. For more mature quarters,
specific loss development methods would be used to determine the IBNR. For other product lines where the nature of claims is high
frequency but low severity, methods including loss development, frequency/severity or a multiple of average monthly losses may be
used to determine IBNR reserves. IBNR for claims arising from catastrophic events or events of unusual severity would be
determined in close collaboration with the claims department’s knowledge of known information, using alternative techniques or
expected percentages of ultimate loss cost emergence based on historical loss emergence of similar claim types.
Long-Tail Reserves
Estimation of ultimate net losses and loss adjustment expenses (net losses) for our long-tail casualty lines of business is a
complex process and depends on a number of factors, including the product line and volume of business, as well as estimates of
reinsurance recoveries. Experience in the more recent accident years generally provides limited statistical credibility of reported net
losses on long-tail casualty lines of business. That is because in the more recent accident years, a relatively low proportion of
estimated ultimate net incurred losses are reported or paid. Therefore, IBNR reserves constitute a relatively high proportion of net
losses.
For our longer-tail lines, we generally make actuarial and other assumptions with respect to the following:
Loss cost trend factors are used to establish expected loss ratios for subsequent accident years based on the projected loss ratios for prior
accident years.
Expected loss ratios are used for the latest accident year (i.e., accident year 2018 for the year-end 2018 loss reserve analysis) and, in some
cases for accident years prior to the latest accident year. The expected loss ratio generally reflects the projected loss ratio from prior accident
years, adjusted for the loss cost trend and the effect of rate changes and other quantifiable factors on the loss ratio. For low-frequency, high-
severity lines of business such as excess casualty, expected loss ratios generally are used for at least the three most recent accident years.
Loss development factors are used to project the reported losses for each accident year to an ultimate basis. Generally, the actual loss
development factors observed from prior accident years would be used as a basis to determine the loss development factors for the
subsequent accident years.
Tail factors are development factors used for certain longer tailed lines of business (for example, excess casualty, workers’ compensation
and general liability),to project future loss development for periods that extend beyond the available development data. The development of
losses to the ultimate loss for a given accident year for these lines may take decades and the projection of ultimate losses for an accident year
is very sensitive to the tail factors selected beyond a certain age.
AIG | 2018 Form 10-K 43
ITEM 7 | Critical Accounting Estimates
We record quarterly changes in loss reserves for each product line of business. The overall change in our loss reserves is based on the
sum of the changes for all product lines of business. For most long-tail product lines of business, the quarterly loss reserve changes
are based on the estimated current loss ratio for each subset of coverage less any amounts paid. Also, any change in estimated
ultimate losses from prior accident years deemed to be necessary based on the results of our latest detailed valuation reviews, large
loss analyses, or other analytical techniques, either positive or negative, is reflected in the loss reserve and incurred losses for the
current quarter. Differences between actual loss emergence in a given period and our expectations based on prior loss reserve
estimates are used to monitor reserve adequacy between detailed valuation reviews and may also influence our judgment with
respect to adjusting reserve estimates.
Details of the Loss Reserving Process
The process of determining the current loss ratio for each product line of business is based on a variety of factors. These include
considerations such as: prior accident year and policy year loss ratios; rate changes; and changes in coverage, reinsurance, or mix of
business. Other considerations include actual and anticipated changes in external factors such as trends in loss costs, inflation,
employment rates or unemployment duration or in the legal and claims environment. The current loss ratio for each product line of
business is intended to represent our best estimate after reflecting all of the relevant factors. At the close of each quarter, the
assumptions and data underlying the loss ratios are reviewed to determine whether the loss ratios remain appropriate. This process
includes a review of the actual loss experience in the quarter, actual rate changes achieved, actual changes in reinsurance,
quantifiable changes in coverage or mix of business, and changes in other factors that may affect the loss ratio. When this review
suggests that the previously determined loss ratio is no longer appropriate, the loss ratio is changed to reflect the revised estimates.
We conduct a comprehensive loss detailed valuation review at least annually for each product line of business in accordance with Actuarial
Standards of Practice. These standards provide that the unpaid loss estimate may be presented in a variety of ways, such as a point
estimate, a range of estimates, a point estimate based on the expected value of several reasonable estimates, or a probability
distribution of the unpaid loss amount. Our actuarial best estimate for each product line of business represents an expected value
generally considering a range of reasonably possible outcomes.
The reserve analysis for each product line of business is performed by a credentialed actuarial team in collaboration with claims,
underwriting, business unit management, risk management and senior management. Our actuaries consider the ongoing applicability
of prior data groupings and update numerous assumptions, including the analysis and selection of loss development and loss trend
factors. They also determine and select the appropriate actuarial or other methods used to estimate reserve adequacy for each
business product line, and may employ multiple methods and assumptions for each product line. These data groupings, accident year
weights, method selections and assumptions necessarily change over time as business mix changes, development factors mature
and become more credible and loss characteristics evolve. In the course of these detailed valuation reviews an actuarial best
estimate of the loss reserve is determined. The sum of these estimates for each product line of business yields an overall actuarial
best estimate for that line of business.
For certain product lines, we measure sensitivities and determine explicit ranges around the actuarial best estimate using multiple
methodologies and varying assumptions. Where we have ranges, we use them to inform our selection of best estimates of loss
reserves by major product line of business. Our range of reasonable estimates is not intended to cover all possibilities or extreme
values and is based on known data and facts at the time of estimation.
We consult with third party environmental litigation and engineering specialists, third party toxic tort claims professionals, third party
clinical and public health specialists, third party workers’ compensation claims adjusters and third party actuarial advisors to help
inform our judgments, as needed.
A critical component of our detailed valuation reviews is an internal peer review of our reserving analyses and conclusions, where
actuaries independent of the initial review evaluate the reasonableness of assumptions used, methods selected and weightings given
to different methods. In addition, each detailed valuation review is subjected to a review and challenge process by specialists in our
Enterprise Risk Management group.
44 AIG | 2018 Form 10-K
ITEM 7 | Critical Accounting Estimates
We consider key factors in performing detailed actuarial reviews, including:
an assessment of economic conditions including inflation, employment rates or unemployment duration;
changes in the legal, regulatory, judicial and social environment including changes in road safety, public health and cleanup standards;
changes in medical cost trends (inflation, intensity and utilization of medical services) and wage inflation trends;
underlying policy pricing, terms and conditions including attachment points and policy limits;
changes in claims handling philosophy, operating model, processes and related ongoing enhancements;
third-party claims reviews that are periodically performed for key product lines such as toxic tort, environmental and other complex casualty;
third-party actuarial reviews that are periodically performed for key product lines of business;
input from underwriters on pricing, terms, and conditions and market trends; and
changes in our reinsurance program, pricing and commutations.
Actuarial and Other Methods for Major Lines of Business
Our actuaries determine the appropriate actuarial methods and segmentation. This determination is based on a variety of factors
including the nature of the losses associated with the product line of business, such as the frequency or severity of the claims. In
addition to determining the actuarial methods, the actuaries determine the appropriate loss reserve groupings of data. This
determination is a judgmental, dynamic process and refinements to the groupings are made every year. The changes to groupings
may be driven by and may change to reflect observed or emerging patterns within and across product lines, or to differentiate different
risk characteristics (for example, size of deductibles and extent of third party claims specialists used by our insureds). As an example
of reserve segmentation, we write many unique subsets of professional liability, which cover different products, industry segments,
and coverage structures. While for pricing or other purposes, it may be appropriate to evaluate the profitability of each subset
individually, we believe it is appropriate to combine the subsets into larger groups for reserving purposes to produce a greater degree
of credibility in the loss experience. This determination of data segmentation and related actuarial methods is assessed, reviewed and
updated at least annually.
The actuarial methods we use most commonly include paid and incurred loss development methods, expected loss ratio methods,
including “Bornhuetter Ferguson” and “Cape Cod”, and frequency/severity models. Loss development methods utilize the actual loss
development patterns from prior accident years updated through the current year to project the reported losses to an ultimate basis
for all accident years. We also use this information to update our current accident year loss selections. Loss development methods
are generally most appropriate for classes of business that exhibit a stable pattern of loss development from one accident year to the
next, and for which the components of the product line have similar development characteristics. For example, property exposures
would generally not be combined into the same product line as casualty exposures, and primary casualty exposures would generally
not be combined into the same product line as excess casualty exposures. We continually refine our loss reserving techniques and
adopt further segmentations based on our analysis of differing emerging loss patterns for certain product lines. We generally use
expected loss ratio methods in cases where the reported loss data lacked sufficient credibility to utilize loss development methods,
such as for new product lines of business or for long-tail product lines at early stages of loss development. Frequency/severity
models may be used where sufficient frequency counts are available to apply such approaches.
Expected loss ratio methods rely on the application of an expected loss ratio to the earned premium for the product line of business to
determine the liability for loss reserves and loss adjustment expenses. For example, an expected loss ratio of 70 percent applied to an
earned premium base of $10 million for a product line of business would generate an ultimate loss estimate of $7 million. Subtracting
any paid losses and loss adjustment expenses would result in the indicated loss reserve for this product line. Under the Bornhuetter
Ferguson methods, the expected loss ratio is applied only to the expected unreported portion of the losses. For example, for a long-
tail product line of business for which only 10 percent of the losses are expected to be reported at the end of the accident year, the
expected loss ratio would be used to represent the 90 percent of losses still unreported. The actual reported losses at the end of the
accident year would be added to determine the total ultimate loss estimate for the accident year. Subtracting the reported paid losses
and loss adjustment expenses would result in the indicated loss reserve. In the example above, the expected loss ratio of 70 percent
would be multiplied by 90 percent. The result of 63 percent would be applied to the earned premium of $10 million resulting in an
estimated unreported loss of $6.3 million. Actual reported losses would be added to arrive at the total ultimate losses. If the reported
losses were $1 million, the ultimate loss estimate under the Bornhuetter Ferguson method would be $7.3 million versus the $7 million
amount under the expected loss ratio method described above. Thus, the Bornhuetter Ferguson method gives partial credibility to the
actual loss experience to date for the product line of business. Loss development methods generally give full credibility to the reported
loss experience to date. In the example above, loss development methods would typically indicate an ultimate loss estimate of
$10 million, as the reported losses of $1 million would be estimated to reflect only 10 percent of the ultimate losses.
AIG | 2018 Form 10-K 45
ITEM 7 | Critical Accounting Estimates
A key advantage of loss development methods is that they respond more quickly to any actual changes in loss costs for the product
line of business. Therefore, if loss experience is unexpectedly deteriorating or improving, the loss development method gives full
credibility to the changing experience. Expected loss ratio methods would be slower to respond to the change, as they would continue
to give more weight to a prior expected loss ratio, until enough evidence emerged to modify the expected loss ratio to reflect the
changing loss experience. On the other hand, loss development methods have the disadvantage of overreacting to changes in
reported losses if the loss experience is anomalous due to the various key factors described above and the inherent volatility in some
of the classes. For example, the presence or absence of large losses at the early stages of loss development could cause the loss
development method to overreact to the favorable or unfavorable experience by assuming it is a fundamental shift in the development
pattern. In these instances, expected loss ratio methods such as Bornhuetter Ferguson have the advantage of recognizing large
losses without extrapolating unusual large loss activity onto the unreported portion of the losses for the accident year.
The Cape Cod method is a hybrid between the loss development and Bornhuetter Ferguson methods, where the historic loss data
and loss development factor assumptions are used to determine the expected loss ratio estimate in the Bornhuetter Ferguson
method.
Frequency/severity methods generally rely on the determination of an ultimate number of claims and an average severity for each claim for
each accident year. Multiplying the estimated ultimate number of claims for each accident year by the expected average severity of
each claim produces the estimated ultimate loss for the accident year. Frequency/severity methods generally require a sufficient
volume of claims in order for the average severity to be predictable. Average severity for subsequent accident years is generally
determined by applying an estimated annual loss cost trend to the estimated average claim severity from prior accident years. In
certain cases, a structural approach may also be used to predict the ultimate loss cost. Frequency/severity methods have the
advantage that ultimate claim counts can generally be estimated more quickly and accurately than can ultimate losses. Thus, if the
average claim severity can be accurately estimated, these methods can more quickly respond to changes in loss experience than
other methods. However, for average severity to be predictable, the product line of business must consist of homogenous types of
claims for which loss severity trends from one year to the next are reasonably consistent and where there are limited changes to
deductible levels or limits. Generally these methods work best for high frequency, low severity product lines of business such as
personal auto. However, frequency and severity metrics are also used to test the reasonability of results for other product lines of
business and provide indications of underlying trends in the data. In addition, ultimate claim counts can be used as an alternative
exposure measure to earned premiums in the Cape Cod method.
Structural driver analytics seek to explain the underlying drivers of frequency/severity. A structural driver analysis of frequency/severity
is particularly useful for understanding the key drivers of uncertainty in the ultimate loss cost. For example, for the excess workers’
compensation product line of business, we have attempted to corroborate our judgment by considering the impact on severity of the
future potential for deterioration of an injured worker’s medical condition, the impact of price inflation on the various categories of
medical expense and cost of living adjustments on indemnity benefits, the impact of injured worker mortality and claim specific
settlement and loss mitigation strategies, etc., using the following:
• Claim by claim reviews, often facilitated by third party specialists, to determine the stability and likelihood of settling an injured
worker’s indemnity and medical benefits;
• Analysis of the potential for future deterioration in medical condition unlikely to be picked up by a claim file review and associated
with potentially costly medical procedures (i.e., increases in both utilization and intensity of medical care) over the course of the
injured worker’s lifetime;
• Analysis of the cost of medical price inflation for each category of medical spend (services and devices) and for cost of living
adjustments in line with statutory requirements;
• Portfolio specific mortality level and mortality improvement assumptions based on a mortality study conducted for our primary and
excess workers’ compensation portfolios and our opinion of future longevity trends for the open reported cases;
• Ground-up consideration of the reinsurance recoveries expected for the product line of business for reported claims with
extrapolation for unreported claims; and
• The effects of various run-off loss management strategies that have been developed by our run-off unit.
46 AIG | 2018 Form 10-K
ITEM 7 | Critical Accounting Estimates
In recent years, we have expanded our analysis of structural drivers to additional product lines of business as a means of
corroborating our judgments using traditional actuarial techniques. For example, we have explicitly used external estimates of future
medical inflation and mortality in estimating the loss development tail for excess of deductible primary workers’ compensation
business. Using external forecasts for items such as these can improve the accuracy and stability of our estimates.
The estimation of liability for loss reserves and loss adjustment expenses relating to asbestos and environmental pollution losses on
insurance policies written many years ago is typically subject to greater uncertainty than other types of losses. This is due to inconsistent
court decisions, as well as judicial interpretations and legislative actions that in some cases have tended to broaden coverage beyond
the original intent of such policies or have expanded theories of liability. In addition, reinsurance recoverable balances relating to
asbestos and environmental loss reserves are subject to greater uncertainty due to the underlying age of the claim, underlying legal
issues surrounding the nature of the coverage, and determination of proper policy period. For these reasons, these balances tend to
be subject to increased levels of disputes and legal collection activity when actually billed. The insurance industry as a whole is
engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its
efforts to quantify these exposures.
We continue to receive claims asserting injuries and damages from toxic waste, hazardous substances, and other environmental
pollutants and alleged claims to cover the cleanup costs of hazardous waste dump sites, referred to collectively as environmental
claims, and indemnity claims asserting injuries from asbestos. The vast majority of these asbestos and environmental losses emanate
from policies written in 1984 and prior years. Commencing in 1985, standard policies contained absolute exclusions for pollution-
related damage and asbestos. The current environmental policies that we specifically price and underwrite for environmental risks on
a claims-made basis have been excluded from the analysis.
The majority of our exposures for asbestos and environmental losses are related to excess casualty coverages, not primary
coverages. The litigation costs are treated in the same manner as indemnity amounts, with litigation expenses included within the
limits of the liability we incur. Individual significant loss reserves, where future litigation costs are reasonably determinable, are
established on a case-by-case basis.
Discussion of Key Assumptions of our Actuarial Methods
Line of
Business or Category
U.S. Workers’
Compensation
Key Assumptions
We generally use a combination of loss development and expected loss ratio methods for U.S. Workers’ Compensation
as this line of business is long-tail.
The loss cost trend assumption is not believed to be material with respect to our guaranteed cost loss reserves. This is
primarily because our actuaries are generally able to use loss development projections for all but the most recent
accident year’s reserves, so there is limited need to rely on loss cost trend assumptions for primary workers’
compensation business.
The tail factor is typically the most critical assumption, and small changes in the selected tail factor can have a material
effect on our carried reserves. For example, the tail factors beyond twenty years for guaranteed cost business could
vary by one and one-half percent below to two percent above those actually indicated in the 2018 loss reserve review.
For excess of deductible business, in our judgment, it is reasonably likely that tail factors beyond twenty years could
vary by four percent below to six percent above those actually indicated in the 2018 loss reserve review.
AIG | 2018 Form 10-K 47
Line of
Business or Category
U.S. Excess Casualty
U.S. Other Casualty
U.S. Financial Lines
Europe Casualty and
Financial Lines
U.S. Property and
Special Risks, and
Europe Property and
Special Risks
U.S. Personal
Insurance, and Europe,
and Japan Personal
Insurance
ITEM 7 | Critical Accounting Estimates
Key Assumptions
We utilize various loss cost trend assumptions for different segments of the portfolio. After evaluating the historical loss
cost trends from prior accident years since the early 1990s, in our judgment, it is reasonably likely that actual loss cost
trends applicable to the year-end 2018 loss reserve review for U.S. Excess Casualty may range five percent lower or
higher than this estimated loss trend. The loss cost trend assumption is critical for the U.S. Excess Casualty class of
business due to the long-tail nature of the losses, and is applied across many accident years. Thus, there is the
potential for the loss reserves with respect to a number of accident years (the expected loss ratio years) to be
significantly affected by changes in loss cost trends that were initially relied upon in setting the loss reserves. These
changes in loss trends could be attributable to changes in inflation or in the judicial environment, or in other social or
economic conditions affecting losses.
U.S. Excess Casualty is a long-tail class of business and any deviation in loss development factors might not be
discernible for an extended period of time subsequent to the recording of the initial loss reserve estimates for any
accident year. Mass tort claims in particular may develop over a very extended period and impact multiple accident
years, so we usually select a separate pattern for them. Thus, there is the potential for the loss reserves with respect to
a number of accident years to be significantly affected by changes in loss development factors that were initially relied
upon in setting the reserves.
After evaluating the historical loss development factors from prior accident years since the early 1990s, in our judgment,
it is reasonably likely that the actual loss development factors could vary by an amount equivalent to a six month shift
from those actually utilized in the year-end 2018 reserve review. This would impact projections both for accident years
where the selections were directly based on loss development methods as well as the a priori loss ratio assumptions for
accident years with selections based on Bornhuetter-Ferguson or Cape Cod methods. Similar to loss cost trends, these
changes in loss development factors could be attributable to changes in inflation or in the judicial environment, or in
other social or economic conditions affecting losses.
The key uncertainties for other casualty lines are similar to excess casualty, as the underlying business is long-tailed
and can be subject to variability in loss cost trends and changes in loss development factors. These may differ
significantly by line of business as coverages such as general liability, medical malpractice and environmental may be
subject to different risk drivers.
The loss cost trends for U.S. D&O business vary by year and subset, but for the most recent accident years, it is
assumed to have been generally close to zero. After evaluating the historical loss cost levels from prior accident years
since the early 1990s, including the potential effect of losses relating to the credit crisis, in our judgment, it is
reasonably likely that the actual variation in loss cost levels for these subsets could vary by approximately 10 percent
lower or higher on a year-over-year basis than the assumptions actually utilized in the year-end 2018 reserve review.
Because U.S. D&O business has exhibited highly volatile loss trends from one accident year to the next, there is the
possibility of an exceptionally high deviation. In our analysis, the effects of loss cost trend assumptions affect the
results through the a priori loss ratio assumptions used for the Bornhuetter-Ferguson and Cape Cod methods, which
impact the projections for the more recent accident years.
The selected loss development factors are also an important assumption, but are less critical than for U.S. Excess
Casualty. Because these classes are written on a claims made basis, the loss reporting and development tail is much
shorter than for U.S. Excess Casualty. However, the high severity nature of the losses does create the potential for
significant deviations in loss development patterns from one year to the next. Similar to U.S. Excess Casualty, after
evaluating the historical loss development factors from prior accident years since the early 1990s, in our judgment, it is
reasonably likely that actual loss development factors could change by an amount equivalent to a shift by six months
from those actually utilized in the year-end 2018 reserve review.
Similar to U.S. business, European Casualty and Financial Lines can be significantly impacted by loss cost trends and
changes in loss development factors. The variation in such factors can differ significantly by product and region.
For short-tail lines such as Property and Special Risks, variance in outcomes for individual large claims or events can
have a significant impact on results. These outcomes generally relate to unique characteristics of events such as
catastrophes or losses with significant business interruption claims.
Personal Insurance is short-tailed in nature similar to Property and Special Risks but less volatile. Variance in
estimates can result from unique events such as catastrophes. In addition, some subsets of this business, such as
auto liability, can be impacted by changes in loss development factors and loss cost trends.
48 AIG | 2018 Form 10-K
Line of
Business or Category
Key Assumptions
ITEM 7 | Critical Accounting Estimates
U.S. Run-off Long Tail
Insurance lines
Other Reserve Items
We historically have used a combination of loss development methods and expected loss ratio methods for excess
workers’ compensation and other run-off segments. For environmental claims, we have utilized a variety of methods
including traditional loss development approaches, claim department and other expert evaluations of the ultimate costs
for certain claims and survival ratio metrics.
U.S. Run-off Long Tail Insurance lines is an extremely long-tail class of business, with a much greater than normal
uncertainty as to the appropriate loss development factors for the tail of the loss development. Specifically for excess
workers’ compensation, after evaluating the historical loss development factors for prior accident years since the 1980s
as well as the development over the past several years of the ground up loss projections utilized to help select the loss
development factors in the tail for this class of business, in our judgment, it is reasonably likely that the tail factor
beyond 30 years could vary by 10 percent above or below that actually indicated in the 2018 loss reserve review.
Loss adjustment expenses (LAE) are separated into two broad categories, allocated loss adjustment expenses (ALAE),
also referred to as legal defense and cost containment or “legal” and unallocated loss adjustment expenses (ULAE),
which includes certain claims adjuster fees and other internal claim management costs.
We determine reserves for legal expenses for each class of business by one or more actuarial or structural driver
methods. For the majority of segments, legal costs are analyzed in conjunction with losses. For segments where they
are separately analyzed the methods used generally include development methods comparable to those described for
loss development methods. The development could be based on either the paid loss adjustment expenses or the ratio
of paid loss adjustment expenses to paid losses, or both. Other methods include the utilization of expected ultimate
ratios of paid loss expense to paid losses, based on actual experience from prior accident years or from similar product
lines of business.
The bulk of adjuster expenses are allocated and charged to individual claim files. For these expenses, we generally
determine reserves based on calendar year ratios of adjuster expenses paid to losses paid for the particular product
line of business. For other internal claim costs, which generally relate to specific claim department expenses that are
not allocated to individual claim files such as technology costs and other broad initiatives, we look at historic and
expected expenditures for these items and project these into the future.
The incidence of LAE is directly related to the frequency, complexity and level of underlying claims. As a result, a key
driver of variability in LAE is the variability in the overall claims, particularly for long tail lines.
The following sensitivity analysis table summarizes the effect on the loss reserve position of using certain alternative loss
cost trend (for accident years where we use expected loss ratio methods) or loss development factor assumptions rather
than the assumptions actually used in determining our estimates in the year-end loss reserve analyses in 2018:
December 31, 2018
(in millions)
Loss cost trends:
U.S. Excess Casualty:
5 percent increase
5 percent decrease
U.S. Financial Lines (D&O)
10 percent increase
10 percent decrease
Increase (Decrease)
to Loss Reserves
Increase (Decrease)
to Loss Reserves
$
1,150
(750)
650
(450)
Loss development factors:
U.S. Excess Casualty:
6-months slower
6-months faster
U.S. Financial Lines (D&O)
6-months slower
6-months faster
U.S. Run-off P&C Lines (Excess
$
Workers' Compensation):
10% tail factor increase
10% tail factor decrease
U.S. Workers' Compensation:
Tail factor increase(a)
Tail factor decrease(b)
1,200
(900)
950
(650)
460
(460)
1,100
(750)
(a) Tail factor increase of 2 percent for guaranteed cost business and 6 percent for deductible business.
(b) Tail factor decrease of 1.5 percent for guaranteed cost business and 4 percent for deductible business.
AIG | 2018 Form 10-K 49
ITEM 7 | Critical Accounting Estimates
FUTURE POLICY BENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS
Long-duration traditional products include whole life insurance, term life insurance, accident and health insurance, long-term care
insurance, and certain payout annuities for which the payment period is life-contingent, which include certain of our single premium
immediate annuities and structured settlements.
For long-duration traditional business, a “lock-in” principle applies. The assumptions used to calculate the benefit liabilities and
DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs.
The assumptions include mortality, morbidity, persistency, maintenance expenses, and investment returns. These assumptions are
typically consistent with pricing inputs. The assumptions also include margins for adverse deviation, principally for key assumptions
such as mortality and interest rates used to discount cash flows, to reflect uncertainty given that actual experience might deviate from
these assumptions. Establishing margins at contract inception requires management judgment. The extent of the margin for adverse
deviation may vary depending on the uncertainty of the cash flows, which is affected by the volatility of the business and the extent of
our experience with the product.
Loss recognition occurs if observed changes in actual experience or estimates result in projected future losses under loss recognition
testing. To determine whether loss recognition exists, we determine whether a future loss is expected based on updated current
assumptions. If loss recognition exists, we recognize the loss by first reducing DAC through amortization expense, and, if DAC is
depleted, record additional liabilities through a charge to policyholder benefit expense. Because of the long-term nature of many of
our liabilities subject to the “lock-in” principle, small changes in certain assumptions may cause large changes in the degree of
reserve adequacy. In particular, changes in estimates of future invested asset returns have a large effect on the degree of reserve
deficiency.
For additional information on loss recognition see Note 9 to the Consolidated Financial Statements.
Groupings for loss recognition testing are consistent with our manner of acquiring, servicing, and measuring the profitability of the
business and are applied by product groupings, including traditional life, payout annuities and long-term care insurance. Once
loss recognition has been recorded for a block of business, the old assumption set is replaced and the assumption set used for the
loss recognition would then be subject to the lock-in principle. Key judgments made in loss recognition testing include the following:
• To determine investment returns used in loss recognition tests, we typically match liabilities with assets of comparable duration, to
the extent practicable, and then project future cash flows on those assets. Assets supporting insurance liabilities are primarily
comprised of a diversified portfolio of high to medium quality fixed maturity securities, and may also include, to a lesser extent,
alternative investments. Our projections include a reasonable allowance for investment expenses and expected credit losses over
the projection horizon. A critical assumption in the projection of expected investment income is the assumed net rate of investment
return at which excess cash flows are to be reinvested. For products in which asset and liability durations are matched relatively
well, this is less of a consideration since interest on excess cash flows are not a significant component of future cash flows. For
the reinvestment rate assumption, anticipated future changes to the yield curves could have a large effect. Given the interest rate
environment applicable at the date of our most recent loss recognition tests, we assumed a modest and gradual increase in long-
term interest rates over time.
• For mortality assumptions, key judgments include the extent of industry versus own experience to base future assumptions as well
as the extent of expected mortality improvements in the future. The latter judgment is based on a combination of historical
mortality trends and advice from industry, public health and demography specialists that were consulted by AIG’s actuaries and
published industry information.
• For surrender rates, a key judgment involves the correlation between expected increases/decreases in interest rates and
increases/decreases in surrender rates. To support this judgment, we compare crediting rates on our products to expected rates on
competing products under different interest rate scenarios.
• For in-force long-term care insurance, rate increases are allowed but must be approved by state insurance regulators.
Consequently, the extent of rate increases that may be assumed requires judgment. In establishing our assumption for rate
increases for long-term care insurance, we consider historical experience as to the frequency and level of rate increases approved
by state regulators.
50 AIG | 2018 Form 10-K
ITEM 7 | Critical Accounting Estimates
Significant unrealized appreciation on investments in a low interest rate environment may cause DAC to be adjusted and additional
future policy benefit liabilities to be recorded through a charge directly to accumulated other comprehensive income (“shadow loss
recognition”). These charges are included, net of tax, with the change in net unrealized appreciation of investments. In applying
shadow loss recognition, the Company overlays unrealized gains onto loss recognition tests without revising the underlying test.
Accordingly, there is limited additional judgment in this process.
For additional information on shadow loss recognition see Note 9 to the Consolidated Financial Statements.
GUARANTEED BENEFIT FEATURES OF VARIABLE ANNUITY PRODUCTS
Variable annuity products offered by our Individual Retirement and Group Retirement product lines offer guaranteed benefit features.
These guaranteed features include guaranteed minimum death benefits (GMDB) that are payable in the event of death or other
instances, and living benefits that are payable in the event of annuitization, or, in other instances, at specified dates during the
accumulation period. Living benefits primarily include guaranteed minimum withdrawal benefits (GMWB).
For additional information on these features see Note 14 to the Consolidated Financial Statements.
The liability for GMDB, which is recorded in Future policyholder benefits, represents the expected value of benefits in excess of the
projected account value, with the excess recognized ratably through Policyholder benefits and losses incurred over the accumulation
period based on total expected fee assessments. The liabilities for GMWB, which are recorded in Policyholder contract deposits, are
accounted for as embedded derivatives measured at fair value, with changes in the fair value of the liabilities recorded in Other
realized capital gains (losses).
Our exposure to the guaranteed amounts is equal to the amount by which the contract holder’s account balance is below the amount
provided by the guaranteed feature. A variable annuity contract may include more than one type of guaranteed benefit feature; for
example, it may have both a GMDB and a GMWB. However, a policyholder can generally only receive payout from one guaranteed
feature on a contract containing a death benefit and a living benefit, i.e., the features are generally mutually exclusive (except a
surviving spouse who has a rider to potentially collect both a GMDB upon their spouse’s death and a GMWB during his or her
lifetime). A policyholder cannot purchase more than one living benefit on one contract. Declines in the equity markets, increased
volatility and a sustained low interest rate environment increase our exposure to potential benefits under the guaranteed features,
leading to an increase in the liabilities for those benefits.
For sensitivity analysis which includes the sensitivity of reserves for guaranteed benefit features to changes in the assumptions for
interest rates, equity market returns, volatility, and mortality see Estimated Gross Profits for Investment-Oriented Products below.
For additional discussion of market risk management related to these product features see Enterprise Risk Management – Insurance
Risks – Life and Retirement Companies Key Risks – Variable Annuity Risk Management and Hedging Program.
AIG | 2018 Form 10-K 51
ITEM 7 | Critical Accounting Estimates
The reserving methodology and assumptions used to measure the liabilities of our two largest guaranteed benefit features
are presented in the following table:
Guaranteed
Benefit Feature
Reserving Methodology &
Assumptions and Accounting Judgments
GMDB
We determine the GMDB liability at each balance sheet date by estimating the expected value of death benefits in excess of the
projected account balance and recognizing the excess ratably over the accumulation period based on total expected fee
assessments. For additional information on how we reserve for variable annuity products with guaranteed benefit features see
Note 14 to the Consolidated Financial Statements.
Key assumptions include:
Mortality rates, which are based upon actual experience modified to allow for variations in policy form
Lapse rates, which are based upon actual experience modified to allow for variations in policy form
Investment returns, using assumptions from a stochastic equity model
In applying asset growth assumptions for the valuation of the GMDB liability, we use a reversion to the mean methodology,
similar to that applied for DAC. For a description of this methodology see Estimated Gross Profits for Investment-Oriented
Products below.
GMWB
GMWB living benefits are embedded derivatives that are required to be bifurcated from the host contract and carried at fair
value. For additional information on how we reserve for variable annuity products with guaranteed benefit features see Note 14
to the Consolidated Financial Statements, and for information on fair value measurement of these embedded derivatives,
including how we incorporate our own non-performance risk see Note 5 to the Consolidated Financial Statements.
The fair value of the embedded derivatives is based on actuarial and capital market assumptions related to projected cash flows
over the expected lives of the contracts. Key assumptions include:
Interest rates
Equity market returns
Market volatility
Credit spreads
Equity / interest rate correlation
Policyholder behavior, including mortality, lapses, withdrawals and benefit utilization. Estimates of future policyholder
behavior are subjective and based primarily on our historical experience
In applying asset growth assumptions for the valuation of GMWBs, we use market-consistent assumptions calibrated to
observable interest rate and equity option prices
Allocation of fees between the embedded derivative and host contract
VALUATION OF EMBEDDED DERIVATIVES FOR FIXED INDEX ANNUITY AND LIFE PRODUCTS
Fixed index annuity and life products provide growth potential based in part on the performance of a market index. Certain fixed index
annuity products offer optional guaranteed benefit features similar to those offered on variable annuity products. The index crediting
feature of these products results in the recognition of an embedded derivative that is required to be bifurcated from the host contract
and carried at fair value. Option pricing models are used to estimate fair value, taking into account assumptions for future equity index
growth rates, volatility of the equity index, future interest rates, and our ability to adjust the participation rate and the cap on equity
indexed credited rates in light of market conditions and policyholder behavior assumptions.
For additional discussion of market risk management related to these product features see Enterprise Risk Management – Insurance
Risks – Life and Retirement Companies Key Risks – Variable Annuity Risk Management and Hedging Program.
ESTIMATED GROSS PROFITS FOR INVESTMENT–ORIENTED PRODUCTS
Policy acquisition costs and policy issuance costs that are incremental and directly related to the successful acquisition of new or
renewal of existing insurance contracts related to universal life and investment-type products (collectively, investment-oriented
products) are generally deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over
the expected lives of the contracts, except in instances where significant negative gross profits are expected in one or more periods.
Estimated gross profits include current and expected interest rates, net investment income and spreads, net realized capital gains and
losses, fees, surrender rates, mortality experience and equity market returns and volatility. In estimating future gross profits, lapse
assumptions require judgment and can have a material impact on DAC amortization. For fixed deferred annuity contracts, the future
spread between investment income and interest credited to policyholders is a significant judgment, particularly in a low interest rate
environment.
52 AIG | 2018 Form 10-K
ITEM 7 | Critical Accounting Estimates
If the assumptions used for estimated gross profits change, DAC and related reserves, including VOBA, SIA, guaranteed benefit
reserves and unearned revenue reserve (URR), are recalculated using the new assumptions, and any resulting adjustment is
included in income. Updating such assumptions may result in acceleration of amortization in some products and deceleration of
amortization in other products.
In estimating future gross profits for variable annuity products as of December 31, 2018, a long-term annual asset growth assumption
of 7.0 percent (before expenses that reduce the asset base from which future fees are projected) was applied to estimate the future
growth in assets and related asset-based fees. In determining the asset growth rate, the effect of short-term fluctuations in the equity
markets is partially mitigated through the use of a reversion to the mean methodology, whereby short-term asset growth above or
below the long-term annual rate assumption impacts the growth assumption applied to the five-year period subsequent to the current
balance sheet date. The reversion to the mean methodology allows us to maintain our long-term growth assumptions, while also
giving consideration to the effect of actual investment performance. When actual performance significantly deviates from the annual
long-term growth assumption, as evidenced by growth assumptions for the five-year reversion to the mean period falling below a
certain rate (floor) or above a certain rate (cap) for a sustained period, judgment may be applied to revise or “unlock” the growth rate
assumptions to be used for both the five-year reversion to the mean period as well as the long-term annual growth assumption
applied to subsequent periods. The use of a reversion to the mean assumption is common within the industry; however, the
parameters used in the methodology are subject to judgment and vary within the industry.
For additional discussion see Insurance Reserves – Life and Annuity Reserves and DAC – DAC – Reversion to the Mean.
The following table summarizes the sensitivity of changes in certain assumptions for DAC and SIA, embedded derivatives
and other reserves related to guaranteed benefits and URR, measured as the related hypothetical impact on December 31,
2018 balances and the resulting hypothetical impact on pre-tax income, before hedging.
December 31, 2018
(in millions)
Assumptions:
Net Investment Spread
Increase (decrease) in
Other
Reserves
Related to
Guaranteed
Benefits
Embedded
Derivatives
Related to
Guaranteed
Benefits
Unearned
Revenue
Reserve
DAC/SIA
Asset
Effect of an increase by 10 basis points
Effect of a decrease by 10 basis points
$
138 $
(151)
(31) $
32
20 $
(27)
(136) $
139
Equity Return(a)
Effect of an increase by 1%
Effect of a decrease by 1%
Volatility (b)
Effect of an increase by 1%
Effect of a decrease by 1%
Interest Rate(c)
Effect of an increase by 1%
Effect of a decrease by 1%
Mortality
Effect of an increase by 1%
Effect of a decrease by 1%
Lapse
Effect of an increase by 10%
Effect of an decrease by 10%
71
(67)
(1)
-
-
-
(14)
12
(134)
138
(43)
53
22
(21)
-
-
51
(51)
(86)
90
-
-
-
-
-
-
(3)
1
(22)
22
Pre-Tax
Income
285
(295)
158
(166)
20
(20)
(44)
46
(43)
41
(1,537)
2,070
1,537
(2,070)
(29)
29
(58)
58
(33)
33
32
(32)
(a) Represents the net impact of a one percent increase or decrease in long-term equity returns for GMDB reserves and net impact of a one percent increase or decrease
in the S&P 500 index on the value of the GMWB embedded derivative.
(b) Represents the net impact of a one percentage point increase or decrease in equity volatility.
(c) Represents the net impact of one percent parallel shift in the yield curve on the value of the GMWB embedded derivative. Does not represent interest rate spread
compression on investment-oriented products.
The sensitivity ranges of 10 basis points, one percent and 10 percent are included for illustrative purposes only and do not reflect the
changes in net investment spreads, equity return, volatility, interest rate, mortality or lapse used by AIG in its fair value analyses or
estimates of future gross profits to value DAC and related reserves. Changes in excess of those illustrated may occur in any period.
AIG | 2018 Form 10-K 53
ITEM 7 | Critical Accounting Estimates
The analysis of DAC, embedded derivatives and other reserves related to guaranteed benefits, and unearned revenue reserve is a
dynamic process that considers all relevant factors and assumptions described above. We estimate each of the above factors
individually, without the effect of any correlation among the key assumptions. An assessment of sensitivity associated with changes in
any single assumption would not necessarily be an indicator of future results. The effects on pre-tax income in the sensitivity analysis
table above do not reflect the related effects from our economic hedging program, which utilizes derivative and other financial
instruments and is designed so that changes in value of those instruments move in the opposite direction of changes in the
guaranteed benefit embedded derivative liabilities.
For a further discussion on guaranteed benefit features of our variable annuities and the related hedging program see Enterprise Risk
Management Insurance Risks – Life and Retirement Companies Key Risks – Variable Annuity Risk Management and Hedging
Program, Insurance Reserves – Life and Annuity Reserves and DAC – DAC – Variable Annuity Guaranteed Benefits and Hedging
Results, and Notes 5 and 14 to the Consolidated Financial Statements.
REINSURANCE ASSETS
The estimation of reinsurance recoverable involves a significant amount of judgment, particularly for latent exposures, such as
asbestos, due to their long-tail nature. Reinsurance assets include reinsurance recoverable on unpaid losses and loss adjustment
expenses that are estimated as part of our loss reserving process and, consequently, are subject to similar judgments and
uncertainties as the estimation of gross loss reserves.
We assess the collectability of reinsurance recoverable balances through either detailed reviews of the underlying nature of the
reinsurance balance or comparisons with historical trends of disputes and credit events. We record adjustments to reflect the results
of these assessments through an allowance for uncollectable reinsurance that reduces the carrying amount of reinsurance assets on
the balance sheet. This estimate requires significant judgment for which key considerations include:
• paid and unpaid amounts recoverable;
• whether the balance is in dispute or subject to legal collection;
• whether the reinsurer is financially troubled (i.e., liquidated, insolvent, in receivership or otherwise subject to formal or informal
regulatory restriction); and
• whether collateral and collateral arrangements exist.
At December 31, 2018, the allowance for estimated unrecoverable reinsurance was $140 million, or less than one percent of the
consolidated reinsurance recoverable.
For additional information on reinsurance see Note 8 to the Consolidated Financial Statements.
IMPAIRMENT CHARGES
Impairments of Investments
At each balance sheet date, we evaluate our available for sale securities holdings with unrealized losses to determine if an other-
than-temporary impairment has occurred. We also evaluate our other invested assets for impairment; these include equity method
investments in private equity funds, hedge funds and other entities as well as investments in real estate.
For additional information on the methodology and significant inputs, by investment type, that we use to determine the amount of
impairment see the discussion in Note 6 to the Consolidated Financial Statements.
Goodwill Impairment
For a discussion of goodwill impairment see Part I, Item 1A. Risk Factors – Estimates and Assumptions and Note 12 to the
Consolidated Financial Statements. In 2018, 2017 and 2016, for substantially all of the reporting units we elected to bypass the
qualitative assessment of whether goodwill impairment may exist and, therefore, performed quantitative assessments that supported
a conclusion that the fair value of all of the reporting units tested exceeded their book value. To determine fair value, we primarily use
a discounted expected future cash flow analysis that estimates and discounts projected future distributable earnings. Such analysis is
principally based on our business projections that inherently include judgments regarding business trends.
54 AIG | 2018 Form 10-K
ITEM 7 | Critical Accounting Estimates
LIABILITY FOR LEGAL CONTINGENCIES
We estimate and record a liability for potential losses that may arise from regulatory and government investigations and actions and
litigation and other forms of dispute resolution to the extent such losses are probable and can be estimated. Determining a
reasonable estimate of the amount of such losses requires significant management judgment. In many cases, it is not possible to
determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the matter is close
to resolution. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases that are in the early
stages of litigation or in which claimants seek substantial or indeterminate damages, we often cannot predict the outcome or estimate
the eventual loss or range of reasonably possible losses related to such matters. Given the inherent unpredictability of such matters,
the outcome of certain matters could, from time to time, have a material adverse effect on the company’s consolidated financial
condition, results of operations or cash flows.
For more information on legal, regulatory and litigation matters see Note 16 to the Consolidated Financial Statements.
FAIR VALUE MEASUREMENTS OF CERTAIN FINANCIAL ASSETS AND FINANCIAL LIABILITIES
For additional information about the measurement of fair value of financial assets and financial liabilities and our accounting policy
regarding the incorporation of credit risk in fair value measurements see Note 5 to the Consolidated Financial Statements.
The following table presents the fair value of fixed maturity and equity securities by source of value determination:
December 31, 2018
(in billions)
Fair value based on external sources(a)
Fair value based on internal sources
Total fixed maturity and equity securities(b)
(a) Includes $15.6 billion for which the primary source is broker quotes.
(b) Includes available for sale and other securities.
Level 3 Assets and Liabilities
Fair
Value
222
20
242
Percent
of Total
92 %
8
100 %
$
$
Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are measured and classified in a hierarchy for
disclosure purposes consisting of three levels based on the observability of inputs available in the marketplace used to measure the
fair value.
For additional information see Note 5 to the Consolidated Financial Statements.
The following table presents the amount of assets and liabilities measured at fair value on a recurring basis and classified
as Level 3:
(in billions)
Assets
Liabilities
December 31,
2018
33.7
4.4
$
Percentage
of Total
6.9 % $
1.0
December 31,
2017
35.9
4.4
Percentage
of Total
7.2 %
1.0
Level 3 fair value measurements are based on valuation techniques that use at least one significant input that is unobservable. We
consider unobservable inputs to be those for which market data is not available and that are developed using the best information
available about the assumptions that market participants would use when valuing the asset or liability. Our assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment.
We classify fair value measurements for certain assets and liabilities as Level 3 when they require significant unobservable inputs in
their valuation, including contractual terms, prices and rates, yield curves, credit curves, measures of volatility, prepayment rates,
default rates, mortality rates and correlations of such inputs.
For a discussion of the valuation methodologies for assets and liabilities measured at fair value, as well as a discussion of transfers of
Level 3 assets and liabilities see Note 5 to the Consolidated Financial Statements.
AIG | 2018 Form 10-K 55
ITEM 7 | Critical Accounting Estimates
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 (NOLs), foreign tax credits (FTCs), 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. In 2018, 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 the
U.S. tax authority. Our analysis also reflected the effect of slower utilization of our tax credits due to a reduction in the U.S. statutory
tax rate as a result of the Tax Act. Our income forecasts, coupled with our tax planning strategies, all resulted in sufficient taxable
income to achieve realization of the U.S. tax attributes prior to their expiration.
For the year ended December 31, 2018, recent changes in market conditions, including rising interest rates, impacted the unrealized
tax gains and losses in the U.S. Non-Life Companies’ available for sale securities portfolio, resulting in a decrease to the deferred tax
liability related to net unrealized tax capital gains. As of December 31, 2018, we continue to be in an overall unrealized tax gain
position with respect to the U.S. Non-Life Companies’ available for sale securities portfolio and thus concluded no valuation allowance
is necessary in the U.S. Non-Life Companies’ available for sale securities portfolio.
We also assess the recoverability of deferred tax assets related to unrealized tax capital losses in the U.S. life insurance companies’
available for sale portfolio. For the year ended December 31, 2018, recent changes in market conditions, including 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 asset related to net unrealized tax capital losses. The deferred tax asset relates to the unrealized losses for
which the carryforward period has not yet begun, and as such, when assessing its recoverability, we consider our ability and intent to
hold the underlying securities to recovery. As of December 31, 2018, based on all available evidence, we concluded that a valuation
allowance should be established on a portion of the deferred tax asset related to unrealized losses that are not more-likely-than-not to
be realized.
For a discussion of our framework for assessing the recoverability of our deferred tax asset see Note 23 to the Consolidated Financial
Statements.
Uncertain Tax Positions
Our accounting for income taxes, including uncertain tax positions, represents management’s best estimate of various events and
transactions, and requires judgment. FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) now
incorporated into Accounting Standards Codification, 740, Income Taxes (ASC 740) prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of an income tax position taken or expected to be
taken in a tax return. The standard also provides guidance on derecognition, classification, interest and penalties and additional
disclosures. We determine whether it is more likely than not that a tax position will be sustained, based on technical merits, upon
examination by the relevant taxing authorities before any part of the benefit can be recognized in the financial statements. A tax
position is measured at the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement.
We classify interest expense and penalties recognized on income taxes as a component of income taxes.
U.S. Income Taxes on Earnings of Certain Foreign Subsidiaries
The U.S. federal income tax laws applicable to determining the amount of income taxes related to differences between the book
carrying amounts and tax bases of subsidiaries are complex. Determining the amount also requires significant judgment and reliance
on reasonable assumptions and estimates.
56 AIG | 2018 Form 10-K
ITEM 7 | Critical Accounting Estimates
U.S. Tax Reform
On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act). The Tax
Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG
and the insurance industry. Additionally, the SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provided guidance on
accounting for the tax effects of the Tax Act. SAB 118 addressed situations where accounting for certain income tax effects of the Tax
Act under ASC 740 may be incomplete upon issuance of an entity’s financial statements and provided a one-year measurement
period from the enactment date to complete the accounting under ASC 740. As of December 31, 2017, we had not fully completed our
accounting for the tax effects of the Tax Act and our provision for income taxes was based in part on a reasonable estimate of the
effects on existing deferred tax balances and of certain provisions of the Tax Act.
The Tax Act includes a provision for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed
on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT)
under which taxes are imposed on certain base eroding payments to affiliated foreign companies. There are substantial uncertainties
in the interpretation of BEAT and GILTI and while certain formal guidance was issued by the U.S. tax authority, there are still aspects
of the Tax Act that remain unclear and additional guidance is expected in 2019. Such guidance may result in changes to the
interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international
provisions of the Tax Act. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred
and have made an accounting policy election to treat GILTI taxes in a similar manner.
As of December 31, 2018, we have completed our accounting for the tax effects of the Tax Act. As further guidance is issued by the
U.S. tax authority, any resulting changes in our estimates will be treated in accordance with the relevant accounting guidance.
For an additional discussion of the Tax Act see Note 23 to the Consolidated Financial Statements.
Executive Summary
OVERVIEW
This overview of the MD&A highlights selected information and may not contain all of the information that is important to current or
potential investors in our securities. You should read this Annual Report in its entirety for a more detailed description of events, trends,
uncertainties, risks and critical accounting estimates affecting us.
On July 18, 2018, we completed our acquisition of Validus Holdings, Ltd. (Validus), a leading provider of reinsurance, primary
insurance, and asset management services, for approximately $5.5 billion in cash. This transaction strengthens our global General
Insurance business by expanding our current product portfolio through additional distribution channels and advancing the tools
available to enhance underwriting. The results of Validus following the date of the acquisition are included in our General Insurance
segment starting in the third quarter of 2018. Our North America results include the results of Validus Reinsurance, Ltd. and Western
World Insurance Group, Inc., while our International results include the results of Talbot Holdings Ltd.
In February 2018, we closed a series of affiliated reinsurance transactions impacting the Legacy Portfolio. These transactions were
designed to consolidate most of our Legacy Insurance Run-Off Lines into a single legal entity, Fortitude Re, formerly known as DSA
Reinsurance Company, Ltd., a Bermuda domiciled composite reinsurer. The transactions include the cession of approximately $31
billion of reserves from our Legacy Life and Retirement Run-Off Lines and approximately $4 billion of reserves from our Legacy
General Insurance Run-Off Lines relating to business written by multiple AIG legal entities, which represented over 83 percent of the
insurance reserves in the Legacy Portfolio as of December 31, 2018. Fortitude Re has approximately $40 billion of total assets,
primarily managed by AIG Investments, and is AIG’s main run-off reinsurer with its own dedicated management team.
We formed Fortitude Group Holdings, LLC (Fortitude Holdings) to act as a holding company for Fortitude Re. On November 13, 2018,
we completed the sale of a 19.9 percent ownership interest in Fortitude Holdings to TC Group Cayman Investment Holdings, L.P.
(TCG), an affiliate of The Carlyle Group L.P. (Carlyle) (the Fortitude Re Closing). Fortitude Holdings owns 100 percent of the
outstanding common shares of Fortitude Re and AIG has an 80.1 percent ownership interest in Fortitude Holdings. In connection with
the sale, we agreed to certain investment commitment targets into various Carlyle strategies and to certain minimum investment
management fee payments within thirty-six months following the closing. We also will be required to pay a proportionate amount of an
agreed make-whole fee to the extent we fail to satisfy such investment commitment targets.
On November 6, 2018 we completed our acquisition of Glatfelter Insurance Group, a full-service broker and insurance company
providing services for specialty programs and retail operations.
AIG | 2018 Form 10-K 57
On December 31, 2018 AIG Life Ltd., a U.K. AIG Life and Retirement company, completed its acquisition of Ellipse, a specialist
provider of group life risk protection in the U.K.
See Business Segment Operations – General Insurance and Legacy Portfolio.
ITEM 7 | Executive Summary
FINANCIAL PERFORMANCE SUMMARY
Net Loss At tributable To AIG
( $ i n m i l l i o n s )
2018 and 2017 Comparison
Decrease in Net loss attributable to AIG in 2018 compared to
2017. Excluding the $6.7 billion tax charge related to the
enactment of the Tax Act in 2017, we recorded a Net loss
attributable to AIG in 2018 compared to Net income attributable to
AIG in 2017 primarily due to:
•
lower investment returns primarily driven by lower hedge fund
performance, a decline in income from fixed maturity securities
for which the fair value option was elected when compared to
higher returns on this portfolio in 2017 as a result of significant
spread tightening that occurred, losses on our fair value option
equities portfolio, and lower invested assets resulting from the
funding of the adverse development reinsurance agreement
with National Indemnity Company (NICO), a subsidiary of
Berkshire Hathaway Inc. (Berkshire), late in the first quarter of
2017;
• a net unfavorable adjustment from the review and update of Life
and Retirement actuarial assumptions compared to a net
favorable adjustment in the prior year; and
• higher general operating and other expenses.
This decrease was partially offset by:
•
lower losses incurred from General Insurance operations driven
by significantly lower catastrophe losses and lower unfavorable
prior year loss reserve development, partially offset by higher
severe losses; and
•
lower net realized capital losses.
58 AIG | 2018 Form 10-K
Adjusted Pre-Tax Income*
( $ i n m i l l i o n s )
ITEM 7 | Executive Summary
2017 and 2016 Comparison
Decreased primarily due to a $6.7 billion tax charge related to the
enactment of the Tax Act. Excluding this tax charge, net income
increased $1.5 billion due to:
•
lower losses from General Insurance operations, reflecting $1.0
billion of pre-tax unfavorable prior year loss reserve
development in 2017 driven by higher than expected loss
emergence in General Insurance primarily related to accident
year 2016 compared to $5.4 billion in 2016, partially offset by
higher catastrophe losses;
• a net favorable adjustment from the update of Life and
Retirement actuarial assumptions in 2017 compared to a net
unfavorable adjustment in the prior year;
•
•
•
lower general operating and other expenses;
lower net realized capital losses;
increased adjusted pre-tax income from the Legacy Portfolio;
and
• higher net investment income due to increased income from
alternative investments and higher appreciation on assets for
which the fair value option was elected.
This increase was partially offset by a loss on sale of divested
businesses in 2017 compared to a gain on sale of divested
businesses in 2016.
For further discussion see MD&A – Consolidated Results of
Operations.
2018 and 2017 Comparison
Adjusted pre-tax income decreased primarily due to:
•
lower investment returns primarily driven by lower hedge fund
performance, a decline in income from fixed maturity securities
for which the fair value option was elected when compared to
higher returns on this portfolio in 2017 as a result of significant
spread tightening that occurred, losses on our fair value option
equities portfolio, and lower invested assets resulting from the
funding of the adverse development reinsurance agreement
with NICO late in the first quarter of 2017;
• a net unfavorable adjustment from the review and update of
Life and Retirement actuarial assumptions compared to a net
favorable adjustment in the prior year; and
• higher general operating and other expenses.
This decrease was partially offset by lower losses incurred from
General Insurance operations driven by significantly lower
catastrophe losses and lower unfavorable prior year loss reserve
development, partially offset by higher severe losses.
AIG | 2018 Form 10-K 59
ITEM 7 | Executive Summary
2017 and 2016 Comparison
Increased primarily due to:
•
lower losses from General Insurance operations, reflecting $1.0
billion of pre-tax unfavorable prior year loss reserve
development in 2017 driven by higher than expected loss
emergence in General Insurance primarily related to accident
year 2016 compared to $5.4 billion in 2016, partially offset by
higher catastrophe losses;
• a net favorable adjustment from the update of Life and
Retirement actuarial assumptions in 2017 compared to a net
unfavorable adjustment in in the prior year;
•
•
lower general operating and other expenses;
increased adjusted pre-tax income from the Legacy Portfolio;
and
• higher net investment income due to increased income from
alternative investments and higher appreciation on assets for
which the fair value option was elected.
For further discussion see MD&A – Consolidated Results of
Operations.
* Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
General Operating and Other Expenses
( $ i n m i l l i o n s )
General operating and other expenses increased in 2018
compared to 2017 due to the acquisition of Validus, business
growth and continued investments in business platforms. General
operating and other expenses declined in 2017 compared to 2016
due to lower employee-related expenses and professional fee
reductions related to our ongoing efficiency program and
divestitures of businesses, including United Guaranty, AIG Advisor
Group, Fuji Life and NSM Insurance Group LLC (NSM).
In keeping with our broad and ongoing efforts to transform for
long-term competitiveness, general operating and other expenses
for 2018, 2017 and 2016 included approximately $395 million,
$413 million and $694 million of pre-tax restructuring and other
costs, respectively, which were primarily comprised of employee
severance charges related to efficiency initiatives.
We continue to execute initiatives focused on organizational
simplification, operational efficiency, and business rationalization.
60 AIG | 2018 Form 10-K
Return on Equity
Adjusted Return on Equity*
ITEM 7 | Executive Summary
* Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
Book Value Per Share
Book Value Per Share, excluding AOCI*
* Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
AIG’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 2018, characterized by factors such as the impact of historically low interest
rates, uncertainties in the annuity marketplace resulting from legislative and regulatory initiatives aimed at re-evaluating the standard
of care for sales of investment products and services, historically high levels of catastrophic events, slowing growth in China and
Euro-Zone economies, global trade tensions and the UK’s pending withdrawal from its membership in the European Union (the EU)
(commonly referred to as Brexit). Brexit has also affected the U.S. dollar/British pound exchange rate and increased the volatility of
exchange rates among the euro, British pound and the Japanese yen (the Major Currencies), which may continue for some time.
Impact of Changes in the Interest Rate Environment
While interest rates remain low by historical standards, interest rates during 2018, particularly in the United States, have risen, in
some cases close to highs of the last five to ten years. In early 2019, the Federal Open Market Committee of the Federal Reserve
System indicated that it expects the pace of rate increases to slow. The low interest rate environment negatively affects sales of
interest rate sensitive products in our industry and may negatively impact the profitability of our existing business as we reinvest cash
flows from investments, including increased calls and prepayments of fixed maturity securities and mortgage loans, at rates below the
average yield of our existing portfolios. As rates rise, some of these impacts may abate while there may be different impacts, some of
which are highlighted below. We actively manage our exposure to the interest rate environment through portfolio selection and asset-
AIG | 2018 Form 10-K 61
ITEM 7 | Executive Summary
liability management, including spread management strategies for our investment-oriented products and economic hedging of interest
rate risk from guarantee features in our variable and fixed index annuities.
Additionally, sustained low interest rates on discounting of projected benefit cash flows for our pension plans may result in higher
pension expense.
Annuity Sales and Surrenders
The sustained low interest rate environment has a significant impact on the annuity industry. Low long-term interest rates put pressure
on investment returns, which may negatively affect sales of interest rate sensitive products and reduce future profits on certain
existing fixed rate products. However, our disciplined rate setting has helped to mitigate some of the pressure on investment spreads.
Rapidly rising interest rates could create the potential for increased sales, but may also drive higher surrenders. Customers are,
however, currently buying fixed annuities with surrender charge periods of four to seven years in pursuit of higher returns, which may
help mitigate increased early surrenders in a rising rate environment. In addition, older contracts that have higher minimum interest
rates and continue to be attractive to the contract holders have driven better than expected persistency in Fixed Annuities, although
the reserves for such contracts have continued to decrease over time in amount and as a percentage of the total annuity portfolio. We
will closely monitor surrenders of Fixed Annuities as contracts with lower minimum interest rates come out of the surrender charge
period in a more attractive rate environment. Low interest rates have also driven growth in our fixed index annuity products, which
provide additional interest crediting, tied to favorable performance in certain equity market indices and the availability of guaranteed
living benefits. Changes in interest rates significantly impact the valuation of our liabilities for annuities with guaranteed income
features and the value of the related hedging portfolio.
Reinvestment and Spread Management
We actively monitor fixed income markets, including the level of interest rates, credit spreads and the shape of the yield curve. We
also frequently review our interest rate assumptions and actively manage the crediting rates used for new and in-force business.
Business strategies continue to evolve to maintain profitability of the overall business in light of the interest rate environment. A low
interest rate environment puts margin pressure on pricing of new business and on existing products, due to the challenge of investing
new money or recurring premiums and deposits, and reinvesting investment portfolio cash flows, in the low interest rate environment.
In addition, there is investment risk associated with future premium receipts from certain in-force business. Specifically, the
investment of these future premium receipts may be at a yield below that required to meet future policy liabilities.
The contractual provisions for renewal of crediting rates and guaranteed minimum crediting rates included in products may reduce
spreads in a sustained low interest rate environment and thus reduce future profitability. Although this interest rate risk is partially
mitigated through the asset-liability management process, product design elements and crediting rate strategies, a sustained low
interest rate environment may negatively affect future profitability.
For additional information on our investment and asset-liability management strategies see Investments.
For investment-oriented products in our Individual Retirement, Group Retirement, Life Insurance and Institutional Markets businesses,
our spread management strategies include disciplined pricing and product design for new business, modifying or limiting the sale of
products that do not achieve targeted spreads, using asset-liability management to match assets to liabilities to the extent practicable,
and actively managing crediting rates to help mitigate some of the pressure on investment spreads. Renewal crediting rate
management is done under contractual provisions that were designed to allow crediting rates to be reset at pre-established intervals
in accordance with state and federal laws and subject to minimum crediting rate guarantees. We will continue to adjust crediting rates
on in-force business to mitigate the pressure on spreads from declining base yields, but our ability to lower crediting rates may be
limited by the competitive environment, contractual minimum crediting rates, and provisions that allow rates to be reset only at pre-
established intervals. As interest rates rise, we may need to raise crediting rates on in-force business for competitive and other
reasons potentially reducing the impact of investing in a higher interest rate environment.
Of the aggregate fixed account values of our Individual Retirement and Group Retirement annuity products, 66 percent were crediting
at the contractual minimum guaranteed interest rate at December 31, 2018. The percentage of fixed account values of our annuity
products that are currently crediting at rates above one percent was 66 percent and 69 percent at December 31, 2018 and 2017,
respectively. These businesses continue to focus on pricing discipline and strategies to manage the minimum guaranteed interest
crediting rates offered on new sales in the context of regulatory requirements and competitive positioning. In the core universal life
business in our Life Insurance business, 65 percent of the account values were crediting at the contractual minimum guaranteed
interest rate at December 31, 2018.
62 AIG | 2018 Form 10-K
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
ITEM 7 | Executive Summary
December 31, 2018
Contractual Minimum Guaranteed
Interest Rate
(in millions)
Individual Retirement*
<=1%
> 1% - 2%
> 2% - 3%
> 3% - 4%
> 4% - 5%
> 5% - 5.5%
Total Individual Retirement
Group Retirement*
1%
> 1% - 2%
> 2% - 3%
> 3% - 4%
> 4% - 5%
> 5% - 5.5%
Total Group Retirement
Universal life insurance
1%
> 1% - 2%
> 2% - 3%
> 3% - 4%
> 4% - 5%
> 5% - 5.5%
Total universal life insurance
Total
Percentage of total
1-50 Basis
At Contractual Points Above
Minimum
Guarantee Guarantee
More than 50
Basis Points
Minimum Above Minimum
Guarantee
$
$
$
$
$
$
$
1,432 $
6,845
12,540
9,646
536
34
31,033 $
1,659 $
6,058
15,178
836
7,064
174
30,969 $
- $
87
279
1,575
3,024
265
5,230 $
67,232 $
66 %
4,464 $
153
273
45
-
-
4,935 $
3,002 $
848
3
-
-
-
3,853 $
- $
24
578
497
224
-
1,323 $
10,111 $
10 %
Total
24,829
8,406
12,890
9,698
540
39
56,402
7,112
7,357
15,181
836
7,064
174
37,724
18,933 $
1,408
77
7
4
5
20,434 $
2,451 $
451
-
-
-
-
2,902 $
- $
367
1,075
7
-
-
-
478
1,932
2,079
3,248
265
8,002
24,785 $ 102,128
1,449 $
24 %
100 %
*
Individual Retirement and Group Retirement amounts shown include fixed options within variable annuity products.
General Insurance
The impact of low interest rates on our General Insurance segment is primarily on our long-tail Casualty line of business. We expect
limited impacts on our existing long-tail Casualty business as the duration of our assets is slightly longer than that of our liabilities.
Sustained low interest rates would potentially impact new and renewal business for the long-tail Casualty line as we may not be able
to adjust our future pricing consistent with our profitability objectives to fully offset the impact of investing at lower rates. However, we
will continue to maintain pricing discipline and risk selection.
In addition, for our General Insurance segment and General Insurance Run-Off Lines reported within the Legacy Portfolio, sustained
low interest rates may unfavorably affect the net loss reserve discount for workers’ compensation, and to a lesser extent could
favorably impact assumptions about future medical costs, the combined net effect of which could result in higher net loss reserves.
AIG | 2018 Form 10-K 63
ITEM 7 | Executive Summary
Standard of Care Developments
The SEC, federal and state lawmakers and state insurance regulators continue their efforts at evaluating what is an appropriate
regulatory framework around a standard of care for the sale of investment products and services. For example, on April 18, 2018, the
SEC proposed a package of rulemakings and interpretations designed to address the standard of care issues and the transparency of
retail investors’ relationships with investment advisors and broker-dealers. Additionally, on July 18, 2018, the New York State
Department of Financial Services adopted a best interest standard of care regulation applicable to annuity and life transactions
through issuance of the First Amendment to Insurance Regulation 187 – Suitability and Best Interests in Life Insurance and Annuity
Transactions (Regulation 187). The compliance date for Regulation 187 is August 1, 2019 for annuity products and February 1, 2020
for life products. As amended, Regulation 187 requires producers to act in their client’s best interest when making point-of-sale and in-
force recommendations, and provide in writing the basis for the recommendation, as well as the facts and analysis to support the
recommendation. The amended regulation also imposes additional duties on life insurance companies in relation to these
transactions, such as requiring insurers to establish and maintain procedures designed to prevent financial exploitation and abuse.
We will implement and enhance processes and procedures, where needed, to comply with this regulation. Other states, such as
Nevada, Maryland and New Jersey, have also proposed similar standard of care regulations applicable to insurance producers and/or
insurance companies. We continue to closely follow these proposals and other relevant federal and state-level regulatory and
legislative developments in this area. While we cannot predict the long-term impact of these developments on our Life and Retirement
businesses, we believe our diverse product offerings and distribution relationships position us to compete effectively in this evolving
marketplace.
Impact of Currency Volatility
Currency volatility remains acute. Such volatility affected line item components of income for those businesses with substantial
international operations. In particular, growth trends in net premiums written reported in U.S. dollars can differ significantly from those
measured in original currencies. The net effect on underwriting results, however, is significantly mitigated, as both revenues and
expenses are similarly affected.
These currencies may continue to fluctuate, in either direction, especially as a result of the UK’s announced exit from the EU, and
such fluctuations will affect net premiums written growth trends reported in U.S. dollars, as well as financial statement line item
comparability.
General Insurance businesses are transacted in most major foreign currencies. The following table presents the average of
the quarterly weighted average exchange rates of the Major Currencies, which have the most significant impact on our
businesses:
Years Ended December 31,
Rate for 1 USD
Currency:
GBP
EUR
JPY
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Percentage Change
0.75
0.84
110.50
0.78
0.90
112.44
0.73
0.90
109.19
(4) %
(7) %
(2) %
7 %
- %
3 %
Unless otherwise noted, references to the effects of foreign exchange in the General Insurance discussion of results of operations are
with respect to movements in the Major Currencies included in the preceding table.
Other Industry Developments
On September 7, 2017, the UK Ministry of Justice announced a proposal to increase the Ogden rate from negative 0.75 percent to
between zero and one percent. 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. We will continue to monitor the progress of potential changes to
the Ogden rate.
64 AIG | 2018 Form 10-K
ITEM 7 | 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-
year period ended December 31, 2018. 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.
The following table presents our consolidated results of operations and other key financial metrics:
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Percentage Change
Year Ended December 31,
(in millions)
Revenues:
Premiums
Policy fees
Net investment income
Net realized capital losses
Other income
Total revenues
$
30,614 $
2,791
12,476
(130)
1,638
47,389
$
31,374
2,935
14,179
(
1,380
2,412
49,520
)
34,393
2,732
14,065
(
1,944
3,121
52,367
)
Benefits, losses and expenses:
Policyholder benefits and losses incurred
Interest credited to policyholder account balances
Amortization of deferred policy acquisition costs
General operating and other expenses
Interest expense
(Gain) loss on extinguishment of debt
Net gain on sale of divested businesses
Total benefits, losses and expenses
Income (loss) from continuing operations before
income tax expense (benefit)
Current
Deferred
Income tax expense (benefit)
Income (loss) from continuing operations
Income (loss) from discontinued operations,
net of income tax expense (benefit)
Net income (loss)
Less: Net income (loss) attributable to
noncontrolling interests
Net loss attributable to AIG
27,412
3,754
5,386
9,302
1,309
7
(38)
47,132
257
336
(182)
154
103
(42)
61
29,972
3,592
4,288
9,107
1,168
)5(
)68(
48,054
1,466
636
6,890
7,526
6,060
(
)
4
6,056
)
(
$
67
(6) $
28
6,084
)
(
$
Years Ended December 31,
Return on equity
Adjusted Return on equity
(in millions, except per share data)
Balance sheet data:
Total assets
Long-term debt
Total AIG shareholders’ equity
Book value per common share
Book value per common share, excluding AOCI
Adjusted book value per common share
32,437
3,705
4,521
10,989
1,260
74
(
545
52,441
)
)74(
576
391
185
259
)
)
(
(
)90(
(
349
)
500
849
(
)
2018
0.0 %
2.1
(2) %
(5)
(12)
91
(32)
(4)
(9)
5
26
2
12
NM
44
(2)
(82)
(47)
NM
(98)
NM
NM
NM
139
100 %
2017
(8.4) %
4.1
(9) %
7
1
29
(23)
(5)
(8)
(3)
(5)
(17)
(7)
NM
88
(8)
NM
10
NM
NM
NM
NM
NM
(94)
NM %
2016
(1.0) %
0.6
December 31,
December 31,
2018
2017
$
491,984
$
498,301
34,540
56,361
65.04
66.67
54.95
31,640
65,171
72.49
66.41
54.74
AIG | 2018 Form 10-K 65
The following table presents a reconciliation of pre-tax income/net income (loss) attributable to AIG to adjusted pre-tax
income/adjusted after-tax income attributable to AIG:
ITEM 7 | Consolidated Results of Operations
Year Ended December 31,
2018
Total Tax
(Benefit)
(in millions, except per share data)
Pre-tax
Charge
Pre-tax income/net income (loss), including
$
257 $
154 $
2017
Total Tax
(Benefit)
Pre-tax
Charge
2016
Total Tax
(Benefit)
Pre-tax
Charge
After
Tax
$ 1,466 $
7,526 $
(6,063)
$
(74) $
185 $
(21)
After
Tax
15
(21)
After
Tax
(288)
(561)
noncontrolling interests
Noncontrolling interest
Pre-tax income/net income (loss) attributable
to AIG
Changes in uncertain tax positions and other tax
adjustments
Deferred income tax valuation allowance charges
Impact of Tax Act
Changes in fair value of securities used to hedge
guaranteed living benefits
Changes in benefit reserves and DAC, VOBA and
SIA related to net realized capital gains (losses)
Unfavorable (favorable) prior year development and
related amortization changes ceded
under retroactive reinsurance agreements
(Gain) loss on extinguishment of debt
Net realized capital losses(a)
Noncontrolling interest on
net realized capital losses
(Income) loss from discontinued operations
Income from divested businesses
Non-operating litigation reserves and settlements
Net loss reserve discount (benefit) charge
Pension expense related to a one-time lump sum
payment to former employees
Integration and transaction costs associated with
acquired businesses
Restructuring and other costs
Adjusted pre-tax income/Adjusted after-tax
$
257 $
154 $
(6)
$ 1,466 $
7,526 $
(6,084)
$
(74) $
185 $
(849)
(48)
(21)
-
48
21
-
(488)
(43)
488
43
(6,687)
6,687
63
(83)
-
(63)
83
-
154
32
122
(146)
(51)
(95)
(120)
(42)
(78)
(6)
(3)
(3)
(303)
(106)
(197)
(195)
(68)
(127)
675
7
193
142
1
41
(38)
19
(371)
-
124
395
(8)
4
(79)
-
26
83
533
6
152
46
42
(30)
15
(292)
-
98
312
303
(5)
1,380
(68)
(129)
187
106
(2)
506
(41)
(45)
65
197
(3)
874
7
(4)
(27)
(84)
122
(42)
74
1,944
(15)
26
561
(27)
48
1,383
(545)
(41)
(427)
(309)
(14)
(150)
(61)
90
(236)
(27)
(277)
60
21
39
147
51
96
-
413
-
145
-
268
-
694
-
243
-
451
income
$ 1,409 $
324 $
1,064
$ 3,158 $
906 $
2,231
$ 1,415 $
448 $
406
Weighted average diluted shares outstanding
Loss per common share attributable
to AIG (diluted)
Adjusted after-tax income per
common share attributable to AIG (diluted)(b)
910.1
(0.01)
1.17
$
$
930.6
1,091.1
$
(6.54)
$
2.34
$
(0.78)
$
0.36
(a) Includes all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for
non-qualifying (economic) hedging or for asset replication.
(b) For 2017 and 2016, because we reported a net loss attributable to AIG common shareholders from continuing operations, all common stock equivalents are anti-dilutive
and are therefore excluded from the calculation of diluted shares and diluted per share amounts. However, because we reported adjusted after-tax income, the
calculation of adjusted after-tax income per diluted share includes 22,412,682 dilutive shares and 30,326,772 dilutive shares for 2017 and 2016, respectively.
66 AIG | 2018 Form 10-K
ITEM 7 | Consolidated Results of Operations
PRE-TAX INCOME COMPARISON FOR 2018 AND 2017
Pre-tax income decreased in 2018 compared to 2017 primarily due to:
•
lower investment returns primarily driven by lower hedge fund performance, a decline in income from fixed maturity securities for
which the fair value option was elected compared to higher returns on this portfolio in 2017 as a result of significant spread
tightening that occurred, losses on our fair value option equities portfolio, and lower invested assets resulting from the funding of
the adverse development reinsurance agreement with NICO late in the first quarter of 2017;
• a net unfavorable adjustment from the review and update of Life and Retirement actuarial assumptions compared to a net
favorable adjustment in the prior year; and
• higher general operating and other expenses due to the acquisition of Validus, business growth and continued investments in
business platforms.
Partially offset by:
•
lower losses incurred from General Insurance operations driven by significantly lower catastrophe losses and lower unfavorable
prior year loss reserve development, partially offset by higher severe losses; and
•
lower net realized capital losses due to:
– Life and Retirement guaranteed living benefits, net of hedges, which reflected net realized capital gains in 2018 compared to
net realized capital losses in 2017, primarily due to changes in the movement in the non-performance or “own credit” risk
adjustment (NPA), which is not hedged as part of our economic hedging program (see Insurance Reserves – Life and Annuity
Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results);
– Partially offset by losses on the sale of securities in 2018 due to a decline in the credit and equity markets in the fourth quarter
of 2018 compared to gains in the prior year.
PRE-TAX INCOME (LOSS) COMPARISON FOR 2017 AND 2016
Pre-tax results increased in 2017 compared to 2016 primarily due to:
• an increase in General Insurance Adjusted pre-tax income due to unfavorable prior year loss reserve development of $1.0 billion in
2017 driven by higher than expected loss emergence in General Insurance primarily related to accident year 2016 compared to
$5.4 billion in 2016, partially offset by higher aggregate pre-tax catastrophe losses of $4.2 billion, which included losses from
Hurricanes Harvey, Irma and Maria, the earthquake in Mexico and the wildfires in California, compared to catastrophe losses of
$1.3 billion in the prior year;
•
lower general operating and other expenses reflecting strategic actions to reduce expenses and divestitures of businesses,
including United Guaranty, AIG Advisor Group, Inc. (AIG Advisor Group), Fuji Life and NSM;
• a net favorable adjustment from the update of Life and Retirement actuarial assumptions compared to a net unfavorable
adjustment in the prior year;
• higher Adjusted pre-tax income from the Legacy Portfolio;
• an increase in net investment income due to higher income on alternative investments, primarily in our hedge fund portfolio and
higher gains on assets for which we elected the fair value option, which more than offset lower invested assets and blended
investment yields on new investments that were lower than the average yield of our existing portfolios; and
• a decrease in net realized capital losses reflecting:
– foreign exchange gains in 2017 compared to foreign exchange losses in the prior year due to $910 million of remeasurement
losses for a short-term intercompany balance in 2016; and
– lower other-than-temporary impairments.
Partially offset by:
• movement in the NPA, driven by tightening credit spreads and lower expected GMWB payments due to higher equity markets, and
higher derivative losses from variable annuity GMWB, net of hedges, including losses from guaranteed living benefit embedded
derivatives, net of hedging, primarily due to a higher net unfavorable adjustment from updates of actuarial assumptions; and
• gains in the prior year on the sale of a portion of our investment in People’s Insurance Company (Group) of China Limited and
PICC Property & Casualty Company Limited (collectively, our PICC Investment).
AIG | 2018 Form 10-K 67
ITEM 7 | Consolidated Results of Operations
The increase in pre-tax results was partially offset by lower income from divested businesses in 2017 compared to the prior year due
to gains on the sales of United Guaranty, AIG Advisor Group and NSM, partially offset by losses on the agreements to sell Fuji Life to
FWD Group and certain insurance operations and assets to Fairfax.
U.S. TAX REFORM OVERVIEW
On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act). The Tax
Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG
and the insurance industry. At December 31, 2017, we originally recorded a provisional estimate of income tax effects of the Tax Act
of $6.7 billion, including a tax charge of $6.7 billion attributable to the reduction in the U.S. corporate income tax rate and tax benefit
of $38 million related to the deemed repatriation tax. Our provisional estimate of $6.7 billion was based in part on a reasonable
estimate of the effects of the statutory income tax rate reduction on existing deferred tax balances and of certain provisions of the Tax
Act. We filed our 2017 consolidated U.S. income tax return and have completed our review of the primary impact of the Tax Act
provisions on our deferred taxes. As a result, we consider the accounting for the effects of the rate change on deferred tax balances
to be complete and no material measurement period changes were recorded for this item.
Changes specific to the insurance industry include the calculation of insurance tax reserves and related transition adjustments,
amortization of specified policy acquisition expenses, treatment of separate account dividends received deductions and computation
of pro-ration adjustments. Provisions of the Tax Act with broader application include reductions or elimination of deductions for certain
items, e.g., reductions to corporate dividends received deductions, disallowance of entertainment expenses and limitations on the
deduction of certain executive compensation costs. These provisions, generally, result in an increase in AIG’s taxable income.
The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on
the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT)
under which taxes are imposed on certain base eroding payments to affiliated foreign companies. There are substantial uncertainties
in the interpretation of BEAT and GILTI and while certain formal guidance was issued by the U.S. tax authority, there are still aspects
of the Tax Act that remain unclear and additional guidance is either still pending or expected in 2019. Such guidance may result in
changes to the interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect
to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax
charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner.
During the period ended December 31, 2018, we have completed our review of 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 the U.S. tax
authority. While the prescribed SAB 118 measurement period has ended, there are still certain aspects of the Tax Act that remain
unclear, including the complex interplay of the new tax rules with the rules governing the utilization of our tax attributes, and formal
guidance from the U.S. tax authority is still pending. We will continue to review the impact of any additional guidance issued by the
U.S. tax authority on our valuation allowance analysis in accordance with the relevant accounting guidance. Accordingly, as of
December 31, 2018, we consider the determination of the need for a valuation allowance related to the Tax Act to be complete based
on our analysis of existing tax law and relevant tax guidance, and no measurement period adjustment was recorded.
Repatriation Assumptions
As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed are subject to a one-time
deemed repatriation tax. Going forward, foreign earnings not taxed as part of the one-time deemed repatriation (or otherwise taxed
currently under the GILTI or subpart F regimes) will generally be exempt from U.S. tax upon repatriation. Notwithstanding the
changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future
repatriations of foreign earnings. For 2018, we consider our foreign earnings with respect to certain operations in Canada, South
Africa, the Far East, Latin America, Bermuda as well as the European, Asia Pacific and Middle East regions to be indefinitely
reinvested. These earnings relate to ongoing operations and have been reinvested in active business operations. While, following the
enactment of the Tax Act, distributions from foreign affiliates are, generally, not subject to U.S. income tax, such distributions may be
subject to local withholding taxes. A deferred tax liability of approximately $100 million to $150 million related to such withholding
taxes has not been recorded for those foreign subsidiaries whose earnings are considered to be indefinitely reinvested. Deferred
taxes, if necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.
Deemed Repatriation Tax & Impact on Liquidity
The Tax Act requires companies to pay a one-time transition tax, net of tax credits, related to applicable foreign taxes paid, on
previously untaxed current and accumulated earnings and profits of certain of our foreign subsidiaries. We were able to reasonably
estimate the deemed repatriation tax and originally recorded a provisional estimated tax benefit of $38 million at December 31, 2017.
68 AIG | 2018 Form 10-K
ITEM 7 | Consolidated Results of Operations
We have completed our review of post-1986 earnings and profits of our foreign affiliates. Incorporating additional IRS guidance issued
with respect to the deemed repatriation tax, as well as the relevant basis adjustments, we recognized a measurement period tax
charge of $62 million. The effect of deemed repatriation tax, which has now been determined to be complete, resulted in a liability of
$24 million.
INCOME TAX EXPENSE ANALYSIS
For the year ended December 31, 2018, the effective tax rate on income from continuing operations was 59.9 percent. The effective
tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to
•
tax charges of:
– $62 million measurement period adjustment related to the deemed repatriation tax,
– $48 million net charge primarily related to the accrual of IRS interest (including interest related to uncertain tax positions),
– $44 million associated with the effect of foreign operations,
– $21 million of additional U.S. taxes imposed on income of our foreign subsidiaries under international provisions of the Tax Act,
– $21 million valuation allowance activity related to certain foreign subsidiaries and state jurisdictions, and
– $29 million of non-deductible transfer pricing charges;
• partially offset by tax benefits of
– $72 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to
the disposal of available for sale securities,
– $37 million of tax exempt income, and
– $13 million of excess tax deductions related to share based compensation payments recorded through the income statement.
The effect of foreign operations is primarily related to income and losses in our foreign operations taxed at statutory tax rates different
than 21 percent and foreign income subject to U.S. taxation.
For the year ended December 31, 2017, the effective tax rate on income from continuing operations was not meaningful. The effective
tax rate differs from the 2017 statutory tax rate of 35 percent primarily due to
•
tax charges of:
– $6.7 billion associated with the enactment of the Tax Act discussed above,
– $660 million of tax charges and related interest associated with increases in uncertain tax positions primarily related to cross
border financing transactions and other open tax issues,
– $69 million associated with the effect of foreign operations, and
– $35 million of non-deductible transfer pricing charges;
• partially offset by tax benefits of:
– $201 million of tax exempt income,
– $184 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to
the disposal of available for sale securities, and
– $40 million of excess tax deductions related to share based compensation payments recorded through the income statement in
accordance with relevant accounting literature.
The effect of foreign operations is primarily related to losses incurred in our European operations taxed at a statutory tax rate lower
than 35 percent and other foreign taxes.
For the year ended December 31, 2016, the effective tax rate on loss from continuing operations was not meaningful. The effective
tax rate on loss from continuing operations differs from the statutory tax rate of 35 percent primarily due to
•
tax charges of:
– $234 million associated with the effect of foreign operations,
– $216 million of tax and related interest associated with increases in uncertain tax positions related to cross border financing
transactions,
– $118 million related to disposition of subsidiaries,
– $102 million related to non-deductible transfer pricing charges, and
– $83 million related to increases in the deferred tax asset valuation allowances associated with U.S. federal and certain foreign
jurisdictions;
AIG | 2018 Form 10-K 69
ITEM 7 | Consolidated Results of Operations
• partially offset by tax benefits of:
– $253 million related to tax exempt income,
– $164 million associated with a portion of the U.S. Life Insurance companies capital loss carryforwards previously treated as
expired that was restored and utilized,
– $116 million related to the impact of an agreement reached with the Internal Revenue Service (IRS) related to certain tax issues
under audit, and
– $132 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to
the disposal of available for sale securities.
The effect of foreign operations is primarily related to foreign exchange losses incurred by our foreign subsidiaries related to the
weakening of the British pound following the Brexit vote taxed at a statutory tax rate lower than 35 percent.
For additional information see Note 23 to the Consolidated Financial Statements.
Business Segment Operations
Our business operations consist of General Insurance, Life and Retirement, Other Operations, and a Legacy Portfolio.
General Insurance consists of two operating segments: North America and International. Life and Retirement consists of four
operating segments: Group Retirement, Individual Retirement, Life Insurance and Institutional Markets. Other Operations consists of
businesses and items not allocated to our other businesses, which are primarily AIG Parent, Blackboard and Fuji Life, which was sold
on April 30, 2017. Our Legacy Portfolio consists of our Legacy Life and Retirement Run-Off Lines, Legacy General Insurance Run-Off
Lines, and Legacy Investments. Effective February 2018, Fortitude Re is included in our Legacy Portfolio.
The following table summarizes Adjusted pre-tax income (loss) from our business segment operations. See also Note 3 to
the Consolidated Financial Statements.
Years Ended December 31,
(in millions)
Core business:
General Insurance
North America
International
General Insurance
Life and Retirement
Individual Retirement
Group Retirement
Life Insurance
Institutional Markets
Life and Retirement
Other Operations
Consolidations, eliminations and other adjustments
Total Core
Legacy Portfolio
Adjusted pre-tax income
2018
2017
2016
$
(8) $
(461)
(469)
1,681
933
330
246
3,190
(1,584)
59
1,196
213
$
1,409 $
(232) $
(581)
(813)
2,289
1,004
274
264
3,831
(1,405)
75
1,688
1,470
3,158 $
(2,399)
348
(2,051)
-
2,269
931
(37)
265
3,428
(1,011)
42
408
1,007
1,415
70 AIG | 2018 Form 10-K
ITEM 7 | Business Segment Operations | General Insurance
General Insurance
General Insurance is managed by our geographic markets of North America and International. Our
global presence is reflected in our multinational capabilities to provide our Commercial Lines and
Personal Insurance products within these geographic markets.
PRODUCTS AND DISTRIBUTION
North
America
International
Liability: Products include general liability, environmental, commercial automobile liability, workers’ compensation, excess casualty
and crisis management insurance products. Casualty also includes risk- sharing and other customized structured programs for large
corporate and multinational customers.
Financial Lines: Products include professional liability insurance for a range of businesses and risks, including directors and officers
liability (D&O), mergers and acquisitions (M&A), fidelity, employment practices, fiduciary liability, cyber risk, kidnap and ransom, and
errors and omissions insurance (E&O).
Property: Products include commercial and industrial property insurance products and services that cover exposures to man-made
and natural disasters, including business interruption.
Special Risks: Products include aerospace, political risk, trade credit, portfolio solutions, energy-related property insurance products,
surety, marine and crop insurance.
Personal Lines: Products include personal auto and property in selected markets and insurance for high net worth individuals offered
through AIG Private Client Group (PCG) in the U.S. that covers auto, homeowners, umbrella, yacht, fine art and collections. In
addition, we offer extended warranty insurance and services covering electronics, appliances, and HVAC.
Accident & Health: Products include voluntary and sponsor-paid personal accident and supplemental health products for individuals,
employees, associations and other organizations, as well as a broad range of travel insurance products and services for leisure and
business travelers.
General Insurance products in North America and International markets are distributed through various channels, including captive
and independent agents, brokers, affinity partners, airlines and travel agents, and retailers. Our distribution network is aided by our
competitive position to write multiple-national and cross-border risks in both Commercial Lines and Personal Insurance.
BUSINESS STRATEGY
Profitable Growth: Deploy capital efficiently to act opportunistically and optimize diversity within the portfolio to grow in profitable
lines, geographies and customer segments. Look to inorganic growth opportunities in profitable markets and segments to expand our
capabilities and footprint.
Reinsurance Optimization: Strategically partner with reinsurers to reduce exposure to losses arising from frequency of large
catastrophic events and the severity from individual risk losses. We will optimize our reinsurance program to manage volatility and
protect the balance sheet from tail events and unpredictable net losses in support of our profitable growth objectives.
Underwriting Excellence: Empower and increase accountability of the underwriter and continue to integrate underwriting, claims and
actuarial to enable better decision making. Focus on enhancing risk selection, driving consistent underwriting best practices and
building robust monitoring standards to improve underwriting results.
AIG | 2018 Form 10-K 71
ITEM 7 | Business Segment Operations | General Insurance
COMPETITION AND CHALLENGES
Operating in a highly competitive industry, General Insurance competes against several hundred companies, specialty insurance
organizations, mutual companies and other underwriting organizations in the U.S. In international markets, we compete for business
with the foreign insurance operations of large global insurance groups and local companies in specific market areas and product
types. Insurance companies compete through a combination of risk acceptance criteria, product pricing, service and terms and
conditions. General Insurance seeks to distinguish itself in the insurance industry primarily based on its well-established brand, global
franchise, multinational capabilities, financial and capital strength, innovative products, claims expertise to handle complex claims,
expertise in providing specialized coverages and customer service.
We serve our business and individual customers on a global basis — from the largest multinational corporations to local businesses
and individuals. Our clients benefit from our substantial underwriting expertise.
Our challenges include:
•
long-tail Commercial Lines exposures that create added challenges to pricing and risk management;
• over capacity in certain lines of business that creates downward market pressure on pricing;
•
tort environment volatility in certain jurisdictions and lines of business; and
• volatility in claims arising from natural and man-made catastrophes.
OUTLOOK—INDUSTRY AND ECONOMIC FACTORS
Below is a discussion of the industry and economic factors impacting our operating segments:
General Insurance – North America
Commercial Lines over recent years has experienced challenging market conditions, with widespread surplus capacity increasing
competition and suppressing rates across multiple classes of business. However, we are seeing growing market support for rate
increases in certain U.S. liability segments (outside of workers’ compensation), with increasing traction in excess casualty, D&O and
commercial auto, where rates are supported by a trend of higher loss cost inflation. On the shorter tailed lines, the market is
supporting higher rates for accounts which suffered losses from major catastrophe events in 2017 and 2018. We continue to achieve
positive rate increases across a number of lines and classes of business as a result of our disciplined underwriting strategy and focus
on risk selection. Further, we continue to achieve growth in several of our Commercial Lines high margin businesses, although these
market segments remain highly competitive.
Personal Insurance growth prospects are supported by the need for full life cycle products and coverage, increases in personal
wealth accumulation, and awareness of insurance protection and risk management. We compete in the high net worth market,
accident and health insurance, travel insurance, and warranty services and will continue to expand our innovative products and
services to distribution partners and clients.
General Insurance – International
We believe our global presence provides Commercial Lines and Personal Insurance a distinct competitive advantage, as the demand
for multinational cross-border coverage and services increases due to the growing number of international customers, while giving us
the ability to respond quickly to local market conditions and build client relationships.
The Commercial Lines market continues to be highly competitive, due to increased market capacity and ample availability of capital.
Despite this, we continue to grow our most profitable segments and diversify our portfolio across all regions by expanding into new
product lines (e.g. cyber), new client segments (e.g. middle market) and new distribution channels (e.g. digital and national brokers)
while remaining a market leader in key developed and developing markets. We are maintaining our underwriting discipline and
continuing our risk selection strategy to improve profitability.
Personal Insurance focuses on individual customers, as well as group and corporate clients. Although market competition within
Personal Insurance has increased, we continue to benefit from the underwriting quality, portfolio diversity, and low volatility of the
short-tailed risk in these business lines.
72 AIG | 2018 Form 10-K
ITEM 7 | Business Segment Operations | General Insurance
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Percentage Change
GENERAL INSURANCE RESULTS
Years Ended December 31,
(in millions)
Underwriting results:
Net premiums written
Decrease in unearned premiums
Net premiums earned
Losses and loss adjustment expenses incurred(a)
Acquisition expenses:
Amortization of deferred policy acquisition costs
Other acquisition expenses
Total acquisition expenses
General operating expenses
Underwriting loss
Net investment income
Adjusted pre-tax loss
Loss ratio(a)
Acquisition ratio
General operating expense ratio
Expense ratio
Combined ratio(a)
Adjustments for accident year loss ratio, as adjusted
and accident year combined ratio, as adjusted:
Catastrophe losses and reinstatement premiums
Prior year development, net of (additional) return
premium on loss sensitive business
Adjustment for ceded premiums under reinsurance
contracts related to prior accident years and other
Accident year loss ratio, as adjusted
Accident year combined ratio, as adjusted
$ 26,407 $ 25,438 $ 28,393
1,193
29,586
25,103
588
26,026
21,642
1,098
27,505
20,824
4,596
1,385
5,981
3,837
(3,137)
2,668
(469) $
75.7
21.7
14.0
35.7
111.4
$
3,765
1,388
5,153
3,712
(4,481)
3,668
4,121
1,732
5,853
4,235
(5,605)
3,554
83.2
19.8
14.3
34.1
117.3
84.8
19.8
14.3
34.1
118.9
(10.5)
(16.1)
(4.4)
(1.5)
(4.0)
(18.5)
0.3
64.0
99.7
(0.1)
63.0
97.1
-
61.9
96.0
4 %
87
6
(4)
22
-
16
3
30
(27)
(10) %
(51)
(12)
(14)
(9)
(20)
(12)
(12)
20
3
(7.5)
1.9
(0.3)
1.6
(5.9)
5.6
2.5
0.4
1.0
2.6
(1.6)
-
-
-
(1.6)
(11.7)
14.5
(0.1)
1.1
1.1
(813) $
(2,051)
42 %
60 %
(a) Consistent with our definition of APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have
ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.
The following table presents General Insurance net premiums written by operating segment, showing change on both
reported and constant dollar basis:
Years Ended December 31,
Percentage Change in
U.S. dollars
Percentage Change in
Original Currency
(in millions)
North America(a)(b)
International(c)
Total net premiums
written
2018
2017
2016 2018 vs. 2017
2017 vs. 2016
2018 vs. 2017
2017 vs. 2016
$ 11,383 $ 10,973 $ 13,026
15,367
14,465
15,024
$ 26,407 $ 25,438 $ 28,393
4 %
4
4 %
(16) %
(6)
(10) %
4 %
1
3 %
(16) %
(4)
(10) %
(a) As a result of the Validus acquisition, 2018 includes additional Net premiums written for North America and International of $500 million and $371 million, respectively.
(b) As a result of the Glatfelter acquisition, 2018 includes additional Net premiums written for North America of $27 million.
(c) As a result of the merger of AIUI Japan and Fuji Fire and Marine Insurance Company (Fuji), Fuji’s fiscal reporting period was conformed to that of AIUI Japan (Japan
Merger Impact). Therefore, 2018 includes approximately $300 million for two additional months of Net premiums written from Fuji. This also resulted in Fuji’s annual
policy renewal period being reported in the second quarter of 2018 compared to the third quarter of the prior year.
AIG | 2018 Form 10-K 73
The following tables present General Insurance accident year catastrophes and severe losses by geography(a) and number
of events:
ITEM 7 | Business Segment Operations | General Insurance
Catastrophes(b)
(in millions)
Year Ended December 31, 2018
Flooding
Windstorms and hailstorms
Wildfire
Earthquakes
Volcanic eruptions
Reinstatement premiums
Total catastrophe-related charges
Year Ended December 31, 2017
Flooding
Windstorms and hailstorms
Wildfire
Tropical cyclone
Earthquakes
Reinstatement premiums
Total catastrophe-related charges
Year Ended December 31, 2016
Flooding
Windstorms and hailstorms
Wildfire
Earthquakes
Other
Reinstatement premiums
Total catastrophe-related charges
# of
Events
North
America
International
Total
3
23
5
3
1
-
35
$
16 $
1,123
712
19
16
(33)
154 $
791
4
82
2
(1)
$
1,853 $
1,032 $
170
1,914
716
101
18
(34)
2,885
- (c) $
962 $
158 $
1,120
20
2
1
1
-
24
3
19
2
3
1
-
28
1,771
562
-
-
(23)
616
10
66
41
-
3,272 $
891 $
$
$
134 $
631
129
25
-
(2)
$
917
27 $
127
7
205
40
3
409
2,387
572
66
41
(23)
4,163
161
758
136
230
40
1
1,326
(a) Geography: North America primarily includes insurance businesses in the United States, Canada and Bermuda. International includes insurance businesses in Japan,
the United Kingdom, Europe, the Asia Pacific region, Latin America, Puerto Rico, Australia, the Middle East and Africa. Geography results are presented before
consideration of internal reinsurance agreements.
(b) Natural and man-made catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and also include certain
man-made events, such as terrorism and civil disorders that exceed the $10 million threshold.
(c) Flooding events reported in 2017 are a subset of windstorm events.
Severe Losses(d)
Years Ended December 31,
(in millions)
2018(e)
2017(e)
2016
# of
Events
North
America
International
42 $
27 $
24 $
300 $
203 $
110 $
376 $
273 $
323 $
Total
676
476
433
(d) Severe losses are defined as non-catastrophe individual first party losses, surety losses and trade credit losses greater than $10 million, net of related reinsurance and
salvage and subrogation.
(e) The amounts presented for 2018, are net of $207 million of recoveries, $96 million in North America and $111 million in International, under aggregate reinsurance
contracts. Eligible incurred losses under these agreements exceeded the applicable aggregate attachment point in the third quarter of 2018. The amount presented for
2017 is net of $121 million of recoveries, $65 million in North America and $56 million in International, under an aggregate reinsurance contract. Eligible incurred losses
under this agreement exceeded the applicable aggregate attachment point in the fourth quarter of 2017. There were no aggregate recoveries included in the amounts
presented or 2016.
74 AIG | 2018 Form 10-K
NORTH AMERICA RESULTS
Years Ended December 31,
(in millions)
Underwriting results:
Net premiums written
(Increase) decrease in unearned premiums
Net premiums earned
Losses and loss adjustment expenses incurred(a)
Acquisition expenses:
Amortization of deferred policy acquisition costs
Other acquisition expenses
Total acquisition expenses
General operating expenses
Underwriting loss
Net investment income
Adjusted pre-tax loss
Loss ratio(a)
Acquisition ratio
General operating expense ratio
Expense ratio
Combined ratio(a)
Adjustments for accident year loss ratio, as adjusted
and accident year combined ratio, as adjusted:
Catastrophe losses and reinstatement premiums
ITEM 7 | Business Segment Operations | General Insurance
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Percentage Change
$ 11,383 $ 10,973 $ 13,026
938
13,964
482
11,455
931
12,314
10,776
11,646
15,692
1,859
515
2,374
1,477
(2,313)
2,305
1,305
485
1,790
1,396
1,444
718
2,162
1,550
(3,377)
3,145
(5,440)
3,041
4 %
(16) %
93
7
(7)
42
6
33
6
32
(27)
(49)
(18)
(26)
(10)
(32)
(17)
(10)
38
3
$
(8) $
(232) $
(2,399)
97 %
90 %
87.5
19.3
12.0
31.3
118.8
101.7
15.6
12.2
27.8
129.5
112.4
15.5
11.1
26.6
139.0
(14.2)
3.7
(0.2)
3.5
(10.7)
(15.1)
(28.7)
(6.6)
13.6
Prior year development, net of (additional) return premium
on loss sensitive business
Adjustment for ceded premiums under reinsurance contracts
related to prior accident years and other
Accident year loss ratio, as adjusted
Accident year combined ratio, as adjusted
(3.1)
(3.6)
(37.9)
0.8
70.1
101.4
(0.3)
69.1
96.9
-
67.9
94.5
0.5
1.1
1.0
4.5
(a) Consistent with our definition of APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have
ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.
Business and Financial Highlights
The North America General Insurance business is focused on making progress towards improved underwriting results and
efficiencies. This includes strengthening our talent base; ongoing investment in pricing and monitoring tools; continuous review of our
risk appetite combined with enhanced focus on portfolio management and individual business strategy; reduction of our gross and net
limits; and increased use of reinsurance.
Adjusted pre-tax loss decreased in the year ended December 31, 2018 compared to the prior year, primarily due to lower catastrophe
losses and lower unfavorable prior year loss reserve development, partially offset by lower net investment income mainly due to lower
investment returns on alternative investments and higher severe losses. Net premiums written increased primarily due to growth in
Personal Insurance, lower ceded premiums driven by changes in the 2018 reinsurance programs and the inclusion of the Validus
acquisition.
For further discussion on prior year loss reserve development see Insurance Reserves.
For a discussion of 2018 reinsurance programs see Part II, Item 7 Management's Discussion and Analysis of Financial
Condition Results of Operation - Enterprise Risk Management.
AIG | 2018 Form 10-K 75
(10.7)
0.1
1.1
1.2
(9.5)
(22.1)
34.3
(0.3)
1.2
2.4
ITEM 7 | Business Segment Operations | General Insurance
2018 and 2017 Comparison
Adjusted pre-tax loss decreased primarily due to:
• significantly lower catastrophe losses; and
•
lower unfavorable prior year loss reserve development.
These were partially offset by:
•
lower investment returns on alternative investments, primarily driven by
less robust private equity and hedge fund performance compared to 2017,
and a decline in income from securities for which the fair value option was
elected as well as lower interest and dividends due to lower invested assets
resulting from the first quarter 2017 funding of the adverse development
reinsurance agreement with NICO;
• higher severe losses;
• higher acquisition ratio primarily driven by changes in portfolio mix, higher
insurance taxes, licenses and fees, and changes in the 2018 reinsurance
programs; and
• higher general operating expenses due to the inclusion of the Validus and
Glatfelter acquisition; however general operating expense ratio decreased
slightly.
2017 and 2016 Comparison
Adjusted pre-tax loss decreased primarily due to:
•
•
•
lower unfavorable prior year loss reserve development (decrease by $4.9
billion);
lower acquisition expenses driven by lower production, the impact of the
reinsurance agreement with Swiss Re Group, and lower insurance taxes,
licenses and fees;
lower general operating expenses driven by lower employee-related
expenses and other expense reduction initiatives; and
• higher net investment income reflecting higher income on alternative
investments and gains on securities where we elected the fair value option
partially offset by lower interest and dividends due to lower invested assets
resulting from the first quarter 2017 funding of the adverse development
reinsurance agreement with NICO.
This decrease was partially offset by:
• higher severe losses; and
• higher catastrophe losses primarily driven by hurricanes Harvey, Irma and
Maria and the California wildfires.
North America Adjusted Pre-Tax Loss
(in millions)
North America Adjusted Pre-Tax Loss
(in millions)
76 AIG | 2018 Form 10-K
North America Net Premiums Written
(in millions)
ITEM 7 | Business Segment Operations | General Insurance
2018 and 2017 Comparison
Net premiums written increased primarily due to:
• growth in the Travel business within Personal Insurance;
•
lower ceded premiums due to changes in the 2018 reinsurance programs;
and
•
the inclusion of the Validus and Glatfelter acquisitions.
This increase was partially offset by:
•
lower production primarily in Property, Programs business, and D&O
products within Financial Lines mainly due to underwriting actions taken to
strengthen our portfolio and to maintain pricing discipline; and
• exiting of certain businesses in Accident & Health in 2017.
North America Net Premiums Written
(in millions)
2017 and 2016 Comparison
Net premiums written decreased primarily due to:
•
lower production primarily in Casualty, commercial property within Property,
D&O products within Financial Lines and programs business due to
continued underwriting actions to strengthen our portfolio and to maintain
pricing discipline; and
• higher ceded premiums related to the additional layer of coverage added to
the North American catastrophe reinsurance cover for 2017.
This decrease was partially offset by:
•
•
•
the growth of PCG business within Personal Lines and travel insurance
within Accident & Health;
recognition of ceded return premiums on our excess of loss reinsurance
covers; and
lower ceded premiums related to the reinsurance arrangement with the
Swiss Re Group partially offset by lower assumed premium from the quota
share reinsurance agreement with United Guaranty.
AIG | 2018 Form 10-K 77
North America Combined Ratios
ITEM 7 | Business Segment Operations | General Insurance
2018 and 2017 Comparison
The decrease in the combined ratio reflected a decrease in the loss ratio partially
offset by an increase in the expense ratio.
The decrease in the loss ratio reflected:
• significantly lower catastrophe losses; and
•
lower unfavorable prior year loss reserve development.
These decreases in the loss ratio were partially offset by a higher current accident
year loss ratio, as adjusted, driven primarily by higher severe losses.
The increase in the expense ratio reflected a higher acquisition ratio primarily due to
changes in portfolio mix, higher insurance taxes, licenses and fees, and changes in
the 2018 reinsurance programs.
North America Combined Ratios
2017 and 2016 Comparison
The decrease in the combined ratio reflected a decrease in the loss ratio slightly offset
by an increase in the expense ratio.
The decrease in the loss ratio was primarily due to lower prior year unfavorable
development. Prior year reserve development is net of the losses ceded under the
NICO reinsurance agreement as well as the amortization of the related deferred gain.
This decrease in the loss ratio was partially offset by:
• higher catastrophe losses primarily driven by hurricanes Harvey, Irma and Maria,
and the California wildfires; and
• a slightly elevated current accident year loss ratio, as adjusted, driven primarily by
higher severe losses and an increase in loss estimates in Casualty and Financial
Lines reflecting the result of 2017 detailed valuation reviews, partially offset by
lower current accident year losses in Personal Insurance.
The increase in the expense ratio was primarily due to a higher general operating
expense ratio primarily driven by a decrease in net premiums earned reflecting
portfolio optimization, which more than offset expense reductions.
78 AIG | 2018 Form 10-K
INTERNATIONAL RESULTS
Years Ended December 31,
(in millions)
Underwriting results:
Net premiums written
Decrease in unearned premiums
Net premiums earned
Losses and loss adjustment expenses incurred
Acquisition expenses:
Amortization of deferred policy acquisition costs
Other acquisition expenses
Total acquisition expenses
General operating expenses
Underwriting loss(a)
Net investment income
Adjusted pre-tax income (loss)
Loss ratio
Acquisition ratio
General operating expense ratio
Expense ratio
Combined ratio
Adjustments for accident year loss ratio, as adjusted
and accident year combined ratio, as adjusted:
Catastrophe losses and reinstatement premiums
Prior year development, net of (additional) return premium
on loss sensitive business
Adjustment for ceded premiums under reinsurance
contracts related to prior accident years
Accident year loss ratio, as adjusted
Accident year combined ratio, as adjusted
ITEM 7 | Business Segment Operations | General Insurance
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Percentage Change
$ 15,024 $ 14,465 $ 15,367
255
15,622
9,411
106
14,571
9,996
167
15,191
10,048
$
2,737
870
3,607
2,360
(824)
363
(461) $
2,460
903
3,363
2,316
(1,104)
523
(581) $
66.1
23.7
15.5
39.2
68.6
23.1
15.9
39.0
2,677
1,014
3,691
2,685
(165)
513
348
60.2
23.6
17.2
40.8
105.3
107.6
101.0
(6.8)
(6.1)
(2.6)
(0.2)
(4.3)
(1.0)
-
59.1
98.3
-
58.2
97.2
-
56.6
97.4
4 %
58
4
1
11
(4)
7
2
25
(31)
21 %
(2.5)
0.6
(0.4)
0.2
(2.3)
(0.7)
4.1
NM
0.9
1.1
(6) %
(58)
(7)
6
(8)
(11)
(9)
(14)
NM
2
NM %
8.4
(0.5)
(1.3)
(1.8)
6.6
(3.5)
(3.3)
NM
1.6
(0.2)
(a) As a result of the Japan Merger Impact, 2018 includes two additional months of operating earnings increasing Net premiums written, Net premiums earned, Losses and
loss adjustment expenses incurred, and Adjusted pre-tax income by approximately $300 million, $300 million, $200 million and $15 million, respectively.
Business and Financial Highlights
The International General Insurance business is focused on underwriting profits and improved efficiency, further improving
underwriting margins, and growing profitably in segments and geographies that support our growth strategy. This includes creating
operating leverage by improving the expense ratio, a focus on new business sales in Japan, a strategic review of the use of
reinsurance and leveraging Talbot, International’s newly acquired Lloyd’s of London insurance syndicate.
Adjusted pre-tax loss decreased in 2018 compared to the same period in the prior year primarily due to significantly lower unfavorable
prior year loss reserve development, partially offset by higher severe and catastrophe losses and lower net investment income.
For further discussion on prior year loss reserve development see Insurance Reserves.
Net premiums written, excluding the impact of foreign exchange, increased primarily due to the inclusion of the Validus acquisition
and business growth, partially offset by the sale of certain insurance operations and assets to Fairfax.
AIG | 2018 Form 10-K 79
International Adjusted Pre-Tax Income (Loss)
(in millions)
International Adjusted Pre-Tax Income (Loss)
(in millions)
ITEM 7 | Business Segment Operations | General Insurance
2018 and 2017 Comparison
Adjusted pre-tax loss decreased primarily due to significantly lower
unfavorable prior year loss reserve development.
This decrease was partially offset by:
• higher catastrophe losses;
• higher current accident year loss ratio, as adjusted, driven primarily by
higher severe losses; and
•
lower net investment income driven by weaker market performance of
equity securities for which the fair value option was elected, a decrease in
alternative investments portfolio holdings and lower income from equity
method investments.
2017 and 2016 Comparison
Adjusted pre-tax loss in 2017 compared to adjusted pre-tax income in 2016
was primarily due to:
• higher catastrophe losses primarily driven by hurricanes Maria, Harvey and
Irma;
• higher prior year unfavorable loss reserve development impacted by
unfavorable loss emergence in Europe Casualty and Property; and
• higher current accident year loss ratio, as adjusted, in Europe Casualty,
partially offset by improvements in our Europe and Japan Personal
Insurance businesses.
These were partially offset by lower general operating expenses driven by
lower employee-related expenses and other expense reduction initiatives.
80 AIG | 2018 Form 10-K
International Net Premiums Written
(in millions)
International Net Premiums Written
(in millions)
ITEM 7 | Business Segment Operations | General Insurance
2018 and 2017 Comparison
Net premiums written, excluding the impact of foreign exchange, increased
due to:
• growth in Accident & Health and Personal Lines business in Asia Pacific
and in the Financial Lines business in Europe;
inclusion of the Validus acquisition; and
the Japan Merger Impact.
•
•
This increase was partially offset by:
• sale of certain insurance operations and assets to Fairfax;
•
lower business production in Japan because of delayed product
introduction related to the Japan Merger Impact and exit from unprofitable
distribution channels;
• higher ceded premiums due to changes in 2018 reinsurance programs;
and
•
lower production primarily driven by portfolio remediation efforts.
2017 and 2016 Comparison
Net premiums written decreased, excluding the impact of foreign exchange,
primarily due to:
•
•
the sale of our interest in the Ascot business and certain of our insurance
operations to Fairfax; and
lower production in our Japan business reflecting our focus on profitability
combined with a competitive market environment.
AIG | 2018 Form 10-K 81
ITEM 7 | Business Segment Operations | General Insurance
2018 and 2017 Comparison
The decrease in the combined ratio reflected a lower loss ratio partially offset by a
slightly higher expense ratio.
This decrease in the loss ratio was primarily driven by significantly lower unfavorable
prior year loss reserve development partially offset by:
• a higher current accident year loss ratio, as adjusted, driven primarily by higher
severe losses; and
• higher catastrophe losses.
The slight increase in the expense ratio was primarily driven by a higher acquisition
ratio mainly due to changes in business mix combined with changes in 2018
reinsurance programs.
2017 and 2016 Comparison
The increase in the combined ratio reflected a higher loss ratio partially offset by a
decrease in the expense ratio.
The higher loss ratio reflected:
• higher catastrophe losses primarily driven by hurricanes Maria, Harvey and
Irma;
• higher prior year unfavorable loss reserve development impacted by unfavorable
loss emergence in Europe Casualty and Property; and
• a higher current accident year loss ratio, as adjusted, in Europe Casualty driven
by an increase in loss estimates as a result of 2017 year-end detailed reserve
valuation reviews slightly offset by lower severe losses and improved current
accident year performance in Europe and Japan Personal Insurance.
The decrease in the expense ratio was primarily due to:
• a lower general operating expense ratio driven by lower employee-related
expenses and other expense reduction initiatives; and
• a lower acquisition ratio driven by the sale of our interest in the Ascot business.
International Combined Ratios
International Combined Ratios
82 AIG | 2018 Form 10-K
ITEM 7 | Business Segment Operations | Life and Retirement
Life and Retirement
PRODUCTS AND DISTRIBUTION
Individual
Retirement
Variable Annuities: Products include variable annuities that offer a combination of growth potential, death benefit
features and income protection features. Variable annuities are distributed primarily through banks, wirehouses,
and regional and independent broker-dealers.
Index Annuities: Products include fixed index annuities that provide growth potential based in part on the
performance of a market index. Certain fixed index annuity products offer optional income protection features.
Fixed index annuities are distributed primarily through banks, broker dealers, independent marketing organizations
and independent insurance agents.
Fixed Annuities: Products include single premium fixed annuities, immediate annuities and deferred income
annuities. The Fixed Annuities product line maintains its industry-leading position in the U.S. bank distribution
channel by designing products collaboratively with banks and offering an efficient and flexible administration
platform.
Retail Mutual Funds: Includes our mutual fund sales and related administration and servicing operations. Retail
Mutual Funds are distributed primarily through broker-dealers.
Group
Retirement
Group Retirement: Products and services include group mutual funds, group fixed annuities, group variable
annuities, individual annuity and investment products, and financial planning and advisory services.
Products and services are marketed by The Variable Annuity Life Insurance Company (VALIC) under the VALIC
brand and include investment offerings and plan administrative and compliance services. VALIC career financial
advisors and independent financial advisors provide retirement plan participants with enrollment support and
comprehensive financial planning services.
Life
Insurance
Life Insurance: In the U.S., products primarily include term life and universal life insurance distributed through
independent marketing organizations, independent insurance agents, financial advisors and direct marketing.
International operations include the distribution of life and health products in the U.K. and Ireland.
Institutional
Markets
Institutional Markets: Products primarily include stable value wrap products, structured settlement and pension
risk transfer annuities, corporate- and bank-owned life insurance and guaranteed investment contracts (GICs).
Institutional Markets products are primarily distributed through specialized marketing and consulting firms and
structured settlement brokers.
Federal Home Loan Bank (FHLB) Funding Agreements are issued through our Individual Retirement, Group Retirement and
Institutional Markets operating segments. Funding agreements are issued by our U.S. Life and Retirement companies to FHLBs in
their respective districts at floating rates over specified periods, which can be prepaid at our discretion. Proceeds are generally
invested in fixed income securities and other suitable investments to generate spreads. These investment contracts do not have
mortality or morbidity risk and are similar to GICs.
AIG | 2018 Form 10-K 83
ITEM 7 | Business Segment Operations | Life and Retirement
BUSINESS STRATEGY
Deliver client-centric solutions through our unique franchise by bringing together a broad portfolio of life insurance, retirement
and institutional products offered through an extensive, multichannel distribution network. Life and Retirement focuses on ease of
doing business, offering valuable solutions, and expanding and deepening its distribution relationships across multiple channels.
Position market leading businesses to serve growing needs by continually enhancing product solutions, service delivery and
digital capabilities while using data and analytics in an innovative manner to improve customer experience.
Individual Retirement will continue to capitalize on the
opportunity to meet consumer demand for guaranteed income
by maintaining innovative variable and index annuity products,
while also managing risk from guarantee features through
risk-mitigating product design and well-developed economic
hedging capabilities.
Our fixed annuity products provide diversity in our annuity
product suite by offering stable returns for retirement savings.
Group Retirement continues to enhance its technology
platform to improve the customer experience for plan
sponsors and individual participants. VALIC’s self-service
tools paired with its career financial advisors provide a
compelling service platform. Group Retirement’s strategy also
involves providing financial planning services for its clients
and meeting their need for income in retirement.
Life Insurance in the U.S. will continue to position itself for
growth and changing market dynamics while continuing to
execute strategies to enhance returns. Our focus is on
materializing success from a multi-year effort of building
state-of-the-art platforms and underwriting innovations, which
are expected to bring process improvements and cost
efficiencies.
In the U.K., AIG Life Insurance will continue to focus on
growing the business organically and through potential
acquisition opportunities.
Institutional Markets continues to grow its assets under
management across multiple product lines, including stable
value wrap, GICs and pension risk transfer annuities. Our
growth strategy is opportunistic and allows us to pursue
select transactions that meet our risk-adjusted return
requirements.
Enhance Operational Effectiveness by simplifying processes and operating environments to increase competitiveness, improve
service and product capabilities and facilitate delivery of our target customer experience. We continue to invest in technology to
improve operating efficiency and ease of doing business for our distribution partners and customers. We believe that simplifying our
operating models will enhance productivity and support further profitable growth.
Manage our Balance Sheet through a rigorous approach to our products and portfolio. We match our product design and high quality
investments with our asset and liability exposures to maximize our ability to meet cash and liquidity needs under various operating
scenarios.
Deliver Value Creation and Manage Capital by striving to deliver solid earnings through disciplined pricing, sustainable underwriting
improvements, expense reductions, and diversification of risk, while optimizing capital allocation and efficiency within insurance
entities to enhance return on equity.
84 AIG | 2018 Form 10-K
ITEM 7 | Business Segment Operations | Life and Retirement
COMPETITION AND CHALLENGES
Life and Retirement operates in the highly competitive insurance and financial services industry in the U.S. and select international
markets, competing against various financial services companies, including banks and other life insurance and mutual fund
companies. Competition is primarily based on product pricing and design, distribution, financial strength, customer service and ease
of doing business.
Our business remains competitive due to its long-standing market leading positions, innovative products, distribution relationships
across multiple channels, customer-focused service and strong financial ratings.
Our primary challenges include:
a sustained low interest rate environment, which makes it difficult to profitably price new products and puts margin pressure on
existing business due to lower reinvestment yields;
increased competition in our primary markets, including aggressive pricing of annuities by private equity-backed annuity writers,
increased competition and consolidation of employer groups in the group retirement planning market, and peers with different
profitability targets in the pension risk transfer space;
increasingly complex new and proposed regulatory requirements, which have affected industry growth; and
upgrading our technology and underwriting processes while managing general operating expenses.
OUTLOOK—INDUSTRY AND ECONOMIC FACTORS
Below is a discussion of the industry and economic factors impacting our specific operating segments:
Individual Retirement
Increasing life expectancy and reduced expectations for traditional retirement income from defined benefit programs and fixed income
securities are leading Americans to seek additional financial security as they approach retirement. The strong demand for individual
variable and fixed index annuities with guaranteed income features has attracted increased competition in this product space. In
response to the continued low interest rate environment, which has added pressure to profit margins, we have developed guaranteed
income benefits for both variable and fixed index annuities with margins that are less sensitive to the level of interest rates.
Changes in the interest rate environment can have a significant impact on sales, surrender rates, investment returns, guaranteed
income features, and spreads in the annuity industry.
Group Retirement
Group Retirement competes in the defined contribution market under the VALIC brand. VALIC is a leading retirement plan provider in
the U.S. for K-12 schools and school districts, higher education, healthcare, government and other not-for-profit institutions. The
defined contribution market is a highly efficient and competitive market that requires support for both plan sponsors and individual
participants. To meet this challenge, VALIC is investing in a client-focused technology platform to support improved compliance and
self-service functionality. VALIC’s service model pairs self-service tools with its career financial advisors who provide individual plan
participants with enrollment support and comprehensive financial planning services.
Changes in the interest rate environment can have a significant impact on investment returns, guaranteed income features, and
spreads, and a moderate impact on sales and surrender rates.
AIG | 2018 Form 10-K 85
ITEM 7 | Business Segment Operations | Life and Retirement
Life Insurance
Consumers have a significant need for life insurance, whether it is used for income replacement for their surviving family, estate
planning or wealth transfer. Additionally, consumers use life insurance to provide living benefits in case of chronic, critical or terminal
illnesses, and to supplement retirement income.
In response to consumer needs and a sustained low interest rate environment, our Life Insurance product portfolio will continue to
promote products with lower long-duration interest rate risk and mitigate exposure to products that have long-duration interest rate
risk through sales levels and hedging strategies.
As life insurance ownership remains at historical lows in the U.S. and the U.K., efforts to expand the reach and increase the
affordability of life insurance are critical. The industry is investing in consumer-centric efforts to reduce traditional barriers to securing
life protection by simplifying the sales and service experience. Digitally enabled processes and tools provide a fast, friendly and
simple path to life insurance protection.
Institutional Markets
Institutional Markets serves a variety of needs for corporate clients. Demand is driven by a number of factors including the
macroeconomic and regulatory environment. We expect to see continued growth in the pension risk transfer market as corporate plan
sponsors look to transfer asset or liability, longevity, administrative and operational risks associated with their defined benefit plans.
Changes in the interest rate environment can have a significant impact on investment returns and net investment spreads, as well as
reduce the tax efficiency associated with institutional life insurance products, dampening organic growth opportunities.
For additional discussion of the impact of market interest rate movement on our Life and Retirement business see Executive
Summary – AIG’s Outlook – Industry and Economic Factors – Impact of Changes in the Interest Rate Environment.
LIFE AND RETIREMENT RESULTS
Years Ended December 31,
(in millions)
Revenues:
Premiums
Policy fees
Net investment income
Other income
Total adjusted revenues
Benefits and expenses:
Policyholder benefits and losses incurred
Interest credited to policyholder account balances
Amortization of deferred policy acquisition costs
General operating and other expenses*
Interest expense
Total operating expenses
Adjusted pre-tax income
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Percentage Change
$
2,592 $
2,669
7,922
953
14,136
4,046 $
2,798
7,816
926
15,586
2,288
2,590
7,622
1,278
13,778
4,179
3,513
680
2,412
162
10,946
5,247
3,360
743
2,296
109
11,755
$
3,190 $
3,831 $
3,496
3,449
613
2,700
92
10,350
3,428
(36) %
(5)
1
3
(9)
(20)
5
(8)
5
49
(7)
(17) %
77 %
8
3
(28)
13
50
(3)
21
(15)
18
14
12 %
*
Includes general operating expenses, non-deferrable commissions, other acquisition expenses, advisory fee expenses and other expenses.
Our insurance companies generate significant revenues from investment activities. As a result, the operating segments in Life and
Retirement are subject to variances in net investment income on the asset portfolios that support insurance liabilities and surplus.
For additional information on our investment strategy, asset-liability management process and invested asset composition see
Investments.
86 AIG | 2018 Form 10-K
ITEM 7 | Business Segment Operations | Life and Retirement
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Percentage Change
INDIVIDUAL RETIREMENT RESULTS
Years Ended December 31,
(in millions)
Revenues:
Premiums
Policy fees
Net investment income
Advisory fee and other income
Benefits and expenses:
$
52 $
91 $
804
3,827
655
767
4,013
643
Policyholder benefits and losses incurred
Interest credited to policyholder account balances
Amortization of deferred policy acquisition costs
Non deferrable insurance commissions
Advisory fee expenses
General operating expenses
Interest expense
Adjusted pre-tax income
$
Fixed Annuities base net investment spread:
261
1,679
630
324
238
443
82
1,681 $
161
1,616
415
308
241
426
58
2,289 $
Base yield
Cost of funds
Fixed Annuities base net investment spread
4.60 %
2.65
1.95 %
4.80 %
2.65
2.15 %
4.90 %
2.74
2.16 %
163
709
3,878
1,008
173
1,684
298
226
570
488
50
2,269
(43) %
5
(5)
2
62
4
52
5
(1)
4
41
(27) %
(20) bps
-
(20) bps
(44) %
8
3
(36)
(7)
(4)
39
36
(58)
(13)
16
1 %
(10) bps
(9)
(1) bps
Business and Financial Highlights
The market environment continues to reflect uncertainties in the annuity business resulting from a sustained low interest rate
environment. While interest rates increased during 2018, rates remain low relative to historical levels. Premiums and deposits
improved in 2018 compared to 2017 but were lower than 2016. Premiums and deposits in 2018 included deposits from FHLB funding
agreements. Net flows in 2018 deteriorated compared to 2017 and 2016 and continued to be negative primarily due to higher
surrenders and withdrawals, mainly in Retail Mutual Funds.
Excluding the impact of the review and update of actuarial assumptions, adjusted pre-tax income decreased in 2018 compared to
2017 and 2016. In 2018 compared to 2017, results reflect decreased Fixed Annuity base spread income primarily due to lower
reinvestment yields and decreased gains on securities for which the fair value option was elected, and higher Variable Annuity DAC
amortization and reserves due to lower equity market performance. Partially offsetting these decreases were higher policy and
advisory fees, and increased base spread income for Index Annuities. In 2017 compared to 2016, results reflected higher gains on
securities for which the fair value option was elected, higher net investment spread for Indexed Annuities, higher policy fees, and
higher returns from alternative investments. Offsetting these increases were decreased net investment income due to reduction of the
size of the hedge fund portfolio as well as impact of the sale of the Advisor Group in May 2016 resulting in decreased advisory fee
income, advisory fee expenses, and general operating expenses. In addition, Fixed Annuities base net investment spread in 2017
declined compared to 2016 primarily due to lower reinvestment yields.
AIG | 2018 Form 10-K 87
Individual Retirement Adjusted Pre-Tax Income
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
2018 and 2017 Comparison
Adjusted pre-tax income decreased primarily due to:
a net unfavorable adjustment from the review and update of actuarial
assumptions of $52 million in 2018, compared to a net favorable adjustment
of $242 million in the prior year;
a decline in net investment income, primarily from lower gains on fixed
maturity securities for which the fair value option was elected when
compared to 2017 where returns were higher as a result of significant spread
tightening that occurred and lower bond call and tender income;
a decline in Fixed Annuity base spread income primarily driven by lower
reinvestment yields and volumes; and
higher Variable Annuity DAC amortization and reserves due to lower equity
market performance.
Partially offsetting these decreases were:
higher Index Annuity base portfolio income reflecting growth in assets from
increased sales; and
higher policy fees primarily driven by asset growth in Index and Variable
Annuities.
88 AIG | 2018 Form 10-K
Individual Retirement Adjusted Pre-Tax Income
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
2017 and 2016 Comparison
Adjusted pre-tax income increased primarily due to:
higher net investment income, which included higher gains on securities for
which the fair value option was elected and higher returns on alternative
investments, partially offset by a reduction in the overall size of the hedge
fund portfolio;
higher base net investment spread primarily in Variable and Index Annuities
driven by growth in invested assets, and disciplined pricing and active
crediting rate management; and
higher policy fees due to growth in annuity account values driven by
improved equity market performance.
Partially offsetting these increases were:
lower net favorable adjustment from the review and update of actuarial
assumptions which was $242 million in 2017 compared to $369 million in
2016;
increases in reserves primarily due to additional reserves for guaranteed
benefits in 2017 compared to a reduction in 2016;
excluding the impact of actuarial assumption updates, higher DAC
amortization due to system conversions and model refinements, partially
offset by a decrease driven by improved equity market performance;
higher commission expense primarily due to growth in account values driven
by improved equity market performance and the allocation of reinsurance risk
charges, as all U.S. Life and Retirement segments benefited from the
reduction in the required statutory capital resulting from a reinsurance
agreement entered into in 2016 involving certain whole life, term life and
universal life businesses (life insurance reinsurance transactions); and
the sale of the Advisor Group in May 2016, which drove the decreases in
advisory fee income, advisory expenses and general operating expenses,
and resulted in a net $13 million decrease in adjusted pre-tax income.
AIG | 2018 Form 10-K 89
ITEM 7 | Business Segment Operations | Life and Retirement
INDIVIDUAL RETIREMENT GAAP PREMIUMS, PREMIUMS AND DEPOSITS, SURRENDERS AND NET
FLOWS
For Individual Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums decreased
in 2018 compared to 2017, primarily due to competitive market rates. Premiums decreased in 2017 compared to 2016, primarily due
to strong annuity sales in 2016 driven by higher equity market volatility, which made immediate annuities more attractive to customers
seeking less volatile returns.
Premiums and deposits is a non-GAAP financial measure that includes, in addition to direct and assumed premiums, deposits
received on investment-type annuity contracts, FHLB funding agreements and mutual funds under administration.
Net flows for annuity products in Individual Retirement represent premiums and deposits less death, surrender and other withdrawal
benefits. Net flows for mutual funds represent deposits less withdrawals. Deposits from FHLB funding agreements were excluded
from net flows of Individual Retirement, as net flows from these funding agreements are not considered part of the metric to measure
Individual Retirement’s core recurring performance.
The following table presents a reconciliation of Individual Retirement GAAP premiums to premiums and deposits:
Years Ended December 31,
(in millions)
Premiums
Deposits
Other
Premiums and deposits
The following table presents surrenders as a percentage of average reserves:
Years Ended December 31,
Surrenders as a percentage of average reserves
Fixed Annuities
Variable and Index Annuities
$
2018
52 $
15,577
(8)
2017
91 $
11,819
(4)
$
15,621 $
11,906 $
2016
163
15,898
1
16,062
2018
2017
2016
8.2 %
6.5
6.7 %
6.0
7.6 %
5.2
The following table presents reserves for Fixed Annuities and Variable and Index Annuities by surrender charge category:
At December 31,
2018
2017
(in millions)
No surrender charge
Greater than 0% - 2%
Greater than 2% - 4%
Greater than 4%
Non-surrenderable
Total reserves
Fixed
Annuities
$
30,036 $
1,037
2,429
15,217
1,608
$
50,327 $
Variable
and Index
Annuities
19,036
6,229
9,781
33,244
474
68,764
Fixed
Annuities
$
32,299 $
1,704
1,560
13,329
1,665
$
50,557 $
Variable
and Index
Annuities
18,896
6,045
9,470
34,677
429
69,517
Individual Retirement annuities are typically subject to a four- to seven-year surrender charge period, depending on the product. For
Fixed Annuities, the proportion of reserves subject to surrender charge at December 31, 2018 has increased compared to December
31, 2017 due to improved net flows driven by higher Fixed Annuity sales, combined with fewer policyholders reaching the end of the
surrender charge period in 2018 compared to 2017. The increase in reserves with no surrender charge contributed to the increase in
the surrender rate for Variable and Index Annuities in 2018 compared to the prior year. Increases in market interest rates in 2018
contributed to the increase in the surrender rate for Fixed Annuities in 2018 compared to the prior year.
90 AIG | 2018 Form 10-K
A discussion of the significant variances in premiums and deposits and net flows for each product line follows:
Individual Retirement Premiums and Deposits (P&D) and Net Flows
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
2018 and 2017 Comparison
• Fixed Annuities premiums and deposits increased primarily
due to higher broker dealer and bank distribution sales driven
by favorable market conditions. Net flows continued to be
negative but improved primarily due to higher premiums and
deposits, partially offset by increased surrenders.
• Variable and Index Annuities premiums and deposits
increased primarily due to higher index annuity sales driven
by expanded distribution and market growth, partially offset
by lower variable annuity sales driven by lower bank and
broker dealer distribution sales. Sales were also positively
impacted by easing industry uncertainty caused by the DOL
Fiduciary Rule, which was vacated in June 2018. Index
annuity net flows increased primarily due to higher sales but
were partially offset by increased surrenders. Variable
annuity net flows remained negative and deteriorated
primarily due to lower sales and higher surrenders.
• Funding Agreements premiums and deposits in 2018
reflected deposits from FHLB funding agreements, which
were excluded from reported net flows.
• Retail Mutual Funds net flows remained negative and
deteriorated reflecting lower deposits and higher withdrawals
due to continued negative industry trends in U.S. equity
actively managed funds and the impact of underperformance
within our largest fund.
AIG | 2018 Form 10-K 91
Individual Retirement Premiums and Deposits and Net Flows
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
2017 and 2016 Comparison
• Fixed Annuities premiums and deposits decreased,
primarily due to disciplined pricing in the continued low
interest rate environment and strong sales in 2016 driven by
higher equity market volatility, which made fixed annuities
more attractive to customers seeking less volatile returns.
Although premiums and deposits were lower compared to
2016, annuity sales in the second half of 2017 improved
compared to the same period in 2016. Net flows declined and
continued to be negative reflecting lower premiums and
deposits, partially offset by lower surrenders.
• Variable and Index Annuities premiums and deposits and
net flows declined, reflecting a continued decrease in variable
annuity industry sales due in part to uncertainty around the
implementation of the DOL Fiduciary Rule at the time,
partially offset by slightly higher index annuity sales. Lower
premiums and deposits combined with higher surrenders
resulted in a decrease in net flows.
• Retail Mutual Funds had negative net flows compared to
positive net flows in 2016, reflecting lower deposits and
higher withdrawals due to negative industry trends in U.S.
equity actively managed funds and uncertainty surrounding
the DOL Fiduciary Rule at the time.
92 AIG | 2018 Form 10-K
GROUP RETIREMENT RESULTS
Years Ended December 31,
(in millions)
Revenues:
Premiums
Policy fees
Net investment income
Advisory fee and other income
Benefits and expenses:
Policyholder benefits and losses incurred
Interest credited to policyholder account balances
Amortization of deferred policy acquisition costs
Non deferrable insurance commissions
Advisory fee expenses
General operating expenses
Interest expense
Adjusted pre-tax income
Base net investment spread:
Base yield
Cost of funds
Base net investment spread
Business and Financial Highlights
ITEM 7 | Business Segment Operations | Life and Retirement
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Percentage Change
$
34 $
27 $
446
2,172
239
427
2,164
230
85
1,122
95
117
91
406
42
933 $
74
1,115
84
108
83
348
32
1,004 $
$
27
383
2,146
213
28
1,135
129
85
75
360
26
931
4.50 %
2.73
1.77 %
4.53 %
2.76
1.77 %
4.71 %
2.89
1.82 %
26 %
4
-
4
15
1
13
8
10
17
31
(7) %
(3) bps
(3)
- bps
- %
11
1
8
164
(2)
(35)
27
11
(3)
23
8 %
(18) bps
(13)
(5) bps
Group Retirement is focused on implementing initiatives to grow its business. However, external factors, including increased
competition and the consolidation of healthcare providers and other employers in target markets, continue to impact Group
Retirement’s customer retention. Premiums and deposits increased in 2018 compared to 2017 and decreased slightly in 2017
compared to 2016. Premiums and deposits in 2018 included deposits from FHLB funding agreement. Net flows deteriorated in 2018
compared to 2017 and 2016 and continued to be negative primarily due to higher surrenders, partially offset by increased premiums
and deposits in 2018 and slightly decreased premiums and deposits in 2017 compared to 2016.
Excluding the impact of the review and update of actuarial assumptions, adjusted pre-tax income decreased in 2018 compared to
2017 due to increases in general operating expenses and higher variable annuity DAC amortization and reserves due to lower equity
market performance partially offset by higher policy fees and net investment income. Excluding the impact of the review and update of
actuarial assumptions, adjusted pre-tax income increased in 2017 compared to 2016. In 2017, results reflected higher gains on
securities for which the fair value option was elected, higher returns from alternative investments, increased policy and advisory fees,
and lower general operating expenses. Partially offsetting these increases were lower base net investment yields partially mitigated
by crediting rate management and a reduction in the overall size of the hedge fund portfolio.
AIG | 2018 Form 10-K 93
Group Retirement Adjusted Pre-Tax Income
(in millions)
Group Retirement Adjusted Pre-Tax Income
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
2018 and 2017 Comparison
Adjusted pre-tax income decreased primarily due to:
• higher general operating expenses, which reflected continued investments in
people and technology, and higher legal expenses; and
• higher Variable Annuity DAC amortization and reserves due to lower equity
market performance.
Partially offsetting these decreases were:
• higher policy and advisory fees, net of expenses, primarily driven by growth
in assets; and
• higher net investment income, primarily from the receipt of non-recurring
payments on structured securities and higher commercial mortgage loan
prepayments, partially offset by lower gains on fixed maturity securities for
which the fair value option was elected when compared to 2017 where
returns were higher as a result of significant spread tightening that
occurred.
2017 and 2016 Comparison
Adjusted pre-tax income increased primarily due to:
• a net favorable adjustment from the review and update of actuarial
assumptions of $13 million in 2017 compared to a $47 million net unfavorable
adjustment in 2016;
• higher net investment income, which included higher gains on securities for
which the fair value option was elected and higher returns on alternative
investments, partially offset by a reduction in the overall size of the hedge
fund portfolio;
• higher policy and advisory fees, net of expenses, due to growth in account
values driven by improved equity market performance; and
•
lower general operating expenses primarily due to reduced legal expenses,
partially offset by higher spending for implementation of the DOL Fiduciary
Rule.
Partially offsetting these increases were:
• higher policyholder benefits primarily due to increases in reserves for
guaranteed benefits;
•
lower base net investment spread primarily due to lower reinvestment yields,
partially mitigated by effective crediting rate management; and
• higher commission expense primarily due to the allocation of reinsurance risk
charges from life insurance reinsurance transactions.
94 AIG | 2018 Form 10-K
ITEM 7 | Business Segment Operations | Life and Retirement
GROUP RETIREMENT GAAP PREMIUMS, PREMIUMS AND DEPOSITS, SURRENDERS AND NET
FLOWS
For Group Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums in 2018, which
primarily represent immediate annuities, increased compared to 2017 and 2016. Overall, premiums is not a significant driver of the
Group Retirement results.
Premiums and deposits is a non-GAAP financial measure that includes, in addition to direct and assumed premiums, deposits
received on investment-type annuity contracts, FHLB funding agreement and mutual funds under administration.
Net flows for annuity products included in Group Retirement represent premiums and deposits less death, surrender and other
withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals. Deposits from FHLB funding agreement was
excluded from net flows of Group Retirement, as net flows from this funding agreement is not considered part of the metric to
measure Group Retirement’s core recurring performance.
The following table presents a reconciliation of Group Retirement GAAP premiums to premiums and deposits:
Years Ended December 31,
(in millions)
Premiums
Deposits
Premiums and deposits
2018
34 $
8,605
8,639 $
$
$
2017
27 $
7,523
7,550 $
2016
27
7,543
7,570
The following table presents Group Retirement surrenders as a percentage of average reserves and mutual funds under
administration:
Years Ended December 31,
Surrenders as a percentage of average reserves and mutual funds
2018
11.3 %
2017
8.6 %
2016
8.8 %
The following table presents reserves for Group Retirement annuities by surrender charge category:
At December 31,
(in millions)
No surrender charge(b)
Greater than 0% - 2%
Greater than 2% - 4%
Greater than 4%
Non-surrenderable
Total reserves
2018 (a)
2017 (a)
$
$
65,500
650
1,115
5,868
612
73,745
$
$
69,006
1,087
1,344
5,270
439
77,146
(a) Excludes mutual fund assets under administration of $17.9 billion and $20.2 billion at December 31, 2018 and 2017, respectively.
(b) Group Retirement amounts in this category include General Account reserves of approximately $6.3 billion, at December 31, 2018 and 2017, which are subject to 20
percent annual withdrawal limitations at the participant level and General Account reserves of $4.7 billion and $4.5 billion at December 31, 2018 and 2017 respectively,
which are subject to 20 percent annual withdrawal limitations at the plan level.
Group Retirement annuities are typically subject to a five- to seven-year surrender charge period, depending on the product. At
December 31, 2018, Group Retirement annuity reserves decreased compared to December 31, 2017 primarily due to a decrease in
separate account assets. The surrender rate in 2018 increased compared to 2017 primarily due to higher surrenders, including
approximately $1.6 billion of large plan surrenders.
AIG | 2018 Form 10-K 95
A discussion of the significant variances in premiums and deposits and net flows follows:
Group Retirement Premiums and Deposits and Net Flows
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
2018 and 2017 Comparison
Net flows deteriorated and continued to be negative primarily
due to higher surrenders, including approximately $1.6 billion of
large plan surrenders, partially offset by increased deposits.
External factors including consolidation of healthcare providers
and other employers in target markets, continue to impact
Group Retirement customer retention. Premiums and deposits
in 2018 reflected deposits from FHLB funding agreement, which
were excluded from reported net flows.
Group Retirement Premiums and Deposits and Net Flows
(in millions)
2017 and 2016 Comparison
Net flows declined and continued to be negative primarily due to
surrenders, including plan surrenders of approximately $460
million. In addition, premiums and deposits decreased slightly
primarily due to lower index annuity sales, partially offset by
significantly higher deposits from plan acquisitions.
96 AIG | 2018 Form 10-K
LIFE INSURANCE RESULTS
Years Ended December 31,
(in millions)
Revenues:
Premiums
Policy fees
Net investment income
Other income
Benefits and expenses:
Policyholder benefits and losses incurred
Interest credited to policyholder account balances
Amortization of deferred policy acquisition costs
Non deferrable insurance commissions
General operating expenses
Interest expense
Adjusted pre-tax income
$
2,619
374
(50)
89
620
25
330 $
2,444
376
239
109
601
13
274 $
ITEM 7 | Business Segment Operations | Life and Retirement
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Percentage Change
$
1,554 $
1,258
1,137
58
1,530 $
1,430
1,044
52
1,407
1,319
1,035
57
2,452
386
182
155
668
12
(37)
2 %
(12)
9
12
7
(1)
NM
(18)
3
92
20 %
9 %
8
1
(9)
-
(3)
31
(30)
(10)
8
NM %
Business and Financial Highlights
Life Insurance is focused on selling profitable new products through strategic channels to enhance future returns. Results for 2018
reflect growth in universal life deposits, and growth in term and international life and health premiums, offset by lower group benefits
premiums. Adjusted pre-tax income increased in 2018 compared to 2017 primarily due to higher net investment income driven by
growth in invested assets, favorable mortality, and actuarial reserve and reinsurance refinements, offset by higher general operating
expenses. Adjusted pre-tax income increased in 2017 compared to 2016 reflecting the impact of favorable actuarial assumption
updates in 2017 compared to net unfavorable adjustments in 2016, improved group benefit results, decreased general operating
expenses and favorable individual life mortality.
Life Insurance Adjusted Pre-Tax Income
(in millions)
2018 and 2017 Comparison
Adjusted pre-tax income increased primarily due to:
•
favorable reserve and reinsurance refinements;
• higher net investment income primarily due to increases in base
portfolio income driven by growth in invested assets and higher
alternative returns; and
•
favorable mortality.
Partially offsetting these increases were:
• a net unfavorable adjustment from the annual review and update of
actuarial assumptions of $63 million compared to a net favorable
adjustment in the prior year for $29 million; and
• higher general operating expenses primarily due to growth in
international life offset by a reduction in group benefits expenses. In
addition, prior-year general operating expenses were reduced by the
impact of new business reinsurance.
AIG | 2018 Form 10-K 97
Life Insurance Adjusted Pre-Tax Income (Loss)
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
2017 and 2016 Comparison
Adjusted pre-tax income increased in 2017 compared to a loss in 2016 primarily
due to:
• a net favorable adjustment from the review and update of actuarial
assumptions of $29 million in 2017 compared to a $92 million net
unfavorable adjustment in 2016;
•
lower commissions and general operating expenses primarily due to
the strategic decision to refocus the group benefits business, partially
offset by the allocation of reinsurance risk charges from life insurance
reinsurance transactions. In addition, lower general operating
expenses in 2017 reflected the impact of new business reinsurance;
•
favorable loss experience and a reserve reduction in group benefits
business;
•
favorable mortality experience in individual life business; and
• excluding the impact of the actuarial assumption updates, lower DAC
amortization primarily due to lapse assumptions on international life.
LIFE INSURANCE GAAP PREMIUMS AND PREMIUMS AND DEPOSITS
Premiums for Life Insurance represent amounts received on traditional life insurance policies, primarily term life, international life and
health and group benefits. Premiums, excluding the effect of foreign exchange, increased in 2018 compared to 2017 and 2016.
Premiums for 2018 included favorable ceded premium reinsurance refinements in domestic life business.
Premiums and deposits for Life Insurance is a non-GAAP financial measure that includes direct and assumed premiums as well as
deposits received on universal life insurance.
The following table presents a reconciliation of Life Insurance GAAP premiums to premiums and deposits:
Years Ended December 31,
(in millions)
Premiums
Deposits
Other
Premiums and deposits
2018
1,554 $
1,649
711
3,914 $
$
$
2017
1,530 $
1,518
707
3,755 $
2016
1,407
1,419
693
3,519
98 AIG | 2018 Form 10-K
A discussion of the significant variances in premiums and deposits follows:
Life Insurance Premiums and Deposits
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
Premiums and deposits, excluding the effect of foreign exchange,
increased in 2018 compared to 2017 and in 2017 compared to
2016, primarily due to growth in universal life, term life and
international life and health, including assumed premiums on
business distributed by Laya Healthcare. This increase was
partially offset by lower group benefits premiums.
INSTITUTIONAL MARKETS RESULTS
Years Ended December 31,
(in millions)
Revenues:
Premiums
Policy fees
Net investment income
Other income
Benefits and expenses:
Policyholder benefits and losses incurred
Interest credited to policyholder account balances
Amortization of deferred policy acquisition costs
Non deferrable insurance commissions
General operating expenses
Interest expense
Adjusted pre-tax income
Business and Financial Highlights
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Percentage Change
$
$
952 $
161
786
1
2,398 $
174
595
1
1,214
338
5
28
56
13
246 $
2,568
253
5
28
44
6
264 $
691
179
563
-
843
244
4
32
41
4
265
(60) %
(7)
32
-
(53)
34
-
-
27
117
247 %
(3)
6
NM
205
4
25
(13)
7
50
(7) %
- %
Institutional Markets continued to opportunistically grow its assets under management, which drove the increase in net investment
spread over recent years. Product distribution continues to be strong and the business is focused on maintaining pricing discipline to
achieve attractive risk adjusted return.
AIG | 2018 Form 10-K 99
Institutional Markets Adjusted Pre-Tax Income
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
2018 and 2017 Comparison
Decreases in premiums and policyholder benefits were primarily due to pension
risk transfer business written in 2017. Growth in reserves and assets under
management drove the increase in net investment income with similar impact to
policyholder benefits and interest credited.
Adjusted pre-tax income decreased primarily due to:
• a decrease in policy fees due to lower stable value wrap notional
amounts; and
• higher general operating expenses due to investment in business growth.
Institutional Markets Adjusted Pre-Tax Income
(in millions)
2017 and 2016 Comparison
Increases in premiums and policyholder benefits were primarily due to pension
risk transfer business written in 2017. Growth in reserves and assets under
management drove the increase in net investment income with similar impact to
policyholder benefits.
Adjusted pre-tax income was comparable to 2016.
100 AIG | 2018 Form 10-K
ITEM 7 | Business Segment Operations | Life and Retirement
INSTITUTIONAL MARKETS GAAP PREMIUMS AND PREMIUMS AND DEPOSITS
Premiums for Institutional Markets primarily represent amounts received on pension risk transfer or structured settlement annuities
with life contingencies. Premiums decreased in 2018 compared to 2017 and increased in 2017 compared to 2016 primarily driven by
the pension risk transfer business written in 2017.
Premiums and deposits for Institutional Markets is a non-GAAP financial measure that includes direct premiums as well as deposits
received on investment-type annuity contracts, including GICs and FHLB funding agreements. Deposits increased in 2018 compared
to 2017 due to FHLB funding agreements.
The following table presents a reconciliation of Institutional Markets GAAP premiums to premiums and deposits:
Years Ended December 31,
(in millions)
Premiums
Deposits
Other
Premiums and deposits
2018
952 $
2,015
65
3,032 $
$
$
2017
2,398 $
1,821
28
4,247 $
2016
691
1,434
28
2,153
A discussion of the significant variances in premiums and deposits follows:
Institutional Markets Premiums and Deposits
($ in millions)
Premiums and deposits decreased in 2018 compared to 2017 due
to lower sales in pension risk transfer and structured settlements,
partially offset by $1.4 billion in FHLB funding agreements.
Premiums and deposits increased in 2017 compared to 2016
primarily driven by higher pension risk transfer business, partially
offset by lower structured settlement sales.
AIG | 2018 Form 10-K 101
ITEM 7 | Business Segment Operations | Ot he r Op er at io n s
Other Operations
The following table presents Other Operations results:
Years Ended December 31,
(in millions)
Adjusted pre-tax income (loss) by activities:
United Guaranty
Fuji Life
Parent and Other:
Corporate general operating expenses
Interest expense
Other income, net
Total Parent and Other
Adjusted pre-tax loss before eliminations
Consolidation, eliminations and other adjustments
Adjusted pre-tax loss
2018 AND 2017 COMPARISON
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Percentage Change
$
$
- $
-
- $
43
522
14
(726)
(1,066)
208
(1,584)
(1,584)
59
(1,525) $
(769)
(968)
289
(1,448)
(1,405)
75
(1,330) $
(666)
(983)
102
(1,547)
(1,011)
42
(969)
NM %
NM
6
(10)
(28)
(9)
(13)
(21)
(15) %
NM %
207
(15)
2
183
6
(39)
79
(37) %
Parent and Other adjusted pre-tax loss increased compared to the prior year as a result of higher interest expense due to debt
issuances totaling $2.5 billion at the end of the first quarter of 2018 and decreases in other income as a result of lower income on
securities for which we elected the fair value option and available for sale investments. The pre-tax loss increase was partially offset
by declines in general operating expenses related to one time payments for executive leadership in 2017.
Fuji Life was sold on April 30, 2017.
2017 AND 2016 COMPARISON
Adjusted pre-tax loss increased primarily due to the sale of United Guaranty during the fourth quarter of 2016.
Parent and Other adjusted pre-tax loss decreased as a result of gains on securities for which we elected the fair value option, partially
offset by higher general operating expenses related to one time payments for executive leadership changes in 2017.
Fuji Life adjusted pre-tax results increased primarily as a result of increases in underwriting income as a result of new products
launched during 2016 as well as growth within existing product lines. Fuji Life was sold on April 30, 2017.
102 AIG | 2018 Form 10-K
ITEM 7 | Business Segment Operations | Le g a c y P o r t f ol io
Legacy Portfolio
Legacy Portfolio represents exited or discontinued product lines, policy forms or distribution channels. Effective February 2018, our
Bermuda-domiciled composite reinsurer, Fortitude Re, formerly known as DSA Reinsurance Company, Ltd. is included in our Legacy
Portfolio.
Legacy Life and Retirement Run-Off Lines - Reserves consist of certain structured settlements, pension risk transfer annuities
and single premium immediate annuities written prior to April 2012. Also includes exposures to whole life, long-term care and
exited accident & health product lines.
Legacy General Insurance Run-Off Lines - Reserves consist of excess workers’ compensation, environmental exposures and
exposures to other products within General Insurance that are no longer actively marketed. Also includes the remaining reserves
in Eaglestone Reinsurance Company (Eaglestone).
Legacy Investments – Includes investment classes that we have placed into run-off including holdings in direct investments as
well as investments in global capital markets and global real estate.
BUSINESS STRATEGY
For Legacy insurance lines, securing the interests of our policyholders and insureds is paramount. We have considered and continue
to evaluate the following strategies for these lines:
• Third-party and affiliated reinsurance and retrocessions to improve capital efficiency
• Commutations of assumed reinsurance and direct policy buy-backs
• Enhance insured policyholder options and claims resolution strategies
• Enhanced asset liability management and expense management
For Legacy investments, our business strategy is to maximize liquidity to AIG Parent and minimize book value impairments while
sourcing for our insurance companies attractive assets for their portfolios.
SALE OF NON-CONTROLLING INTEREST IN FORTITUDE
Fortitude Re was established during the first quarter of 2018 in connection with a series of affiliated reinsurance transactions related
to our Legacy Portfolio. Those reinsurance transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines
into a single legal entity. As of December 31, 2018, the affiliated transactions included the cession of approximately $31 billion of
reserves from our Legacy Life and Retirement Run-Off Lines and approximately $4 billion of reserves from our Legacy General
Insurance Run-Off Lines related to business written by multiple wholly-owned AIG subsidiaries. In the second quarter of 2018, we
formed Fortitude Holdings, a wholly-owned subsidiary of AIG, to act as a holding company for Fortitude Re.
On November 13, 2018, we completed the sale of a 19.9 percent ownership interest in Fortitude Holdings to TCG, an affiliate of The
Carlyle Group L.P. (Carlyle) (the Fortitude Re Closing). Fortitude Holdings owns 100 percent of the outstanding common shares of
Fortitude Re and AIG has an 80.1 percent ownership interest in Fortitude Holdings.
Subject to certain adjustments specified in the Purchase Agreement, we will receive total consideration of approximately $476 million,
which is based on Fortitude Re’s total shareholder’s equity of $2.9 billion as of March 31, 2018 excluding planned distributions that
the parties will seek to cause to be paid to us on a non-pro rata basis prior to the end of the 18th month following the Fortitude Re
Closing, subject to regulatory approvals (the Target Distribution). $381 million of the purchase price was paid at the Fortitude Re
Closing and up to $95 million will be paid following December 31, 2023 (the Deferred Payment), subject to the purchase price
adjustment described below. To the extent we do not receive all or a portion of the Target Distribution within 18 months of the
Fortitude Re Closing, TCG will pay us up to an additional $100 million.
As part of the establishment of Fortitude Re, we implemented a capital maintenance agreement (CMA) with Fortitude Re that remains
in effect so long as we own at least 50 percent of Fortitude Re. If there are any CMA funding obligations that occur within 18 months
of the Fortitude Re Closing, we will fund those obligations on a non-dilutive basis to TCG, but only if, and to the extent, we actually
receive the Target Distribution prior to the expiration of such period.
The affiliated reinsurance transactions executed in the first quarter of 2018 with Fortitude Re resulted in prepaid insurance assets on
the ceding subsidiaries’ balance sheets of approximately $2.5 billion (after-tax). These assets have been eliminated in AIG’s
consolidated financial statements since the counterparties were wholly owned. In the event of a sale of a controlling interest in
AIG | 2018 Form 10-K 103
ITEM 7 | Business Segment Operations | Le g a c y P o r t f ol io
Fortitude Holdings, our Legacy Portfolio may recognize a loss for the portion of the unamortized balance of these assets and related
deferred acquisition costs of $0.5 billion (after-tax) that are not recoverable, if any, in the period in which our interest in Fortitude
Holdings becomes non-controlling. This loss would be incremental to any gain or loss recognized on the sale of our controlling
interest in Fortitude Holdings.
We have also agreed to a post-closing purchase price adjustment wherein we will reimburse TCG for certain changes in property
casualty related reserves, based on an agreed methodology, that occurs on or prior to December 31, 2023, up to the value of TCG’s
investment in Fortitude Holdings. Any amount due to TCG in respect of this will be offset by the amount of the Deferred Payment
otherwise due from TCG to us.
In connection with the sale, we agreed to certain investment commitment targets into various Carlyle strategies and to certain
minimum investment management fee payments within thirty-six months following the closing. We also will be required to pay a
proportionate amount of an agreed make-whole fee to the extent we fail to satisfy such investment commitment targets.
As contemplated by the Purchase Agreement, we, Fortitude Holdings and TCG entered into an Amended and Restated Limited
Liability Company Operating Agreement of Fortitude Holdings, governing the rights of the parties thereto. In addition, Fortitude Re and
certain of our U.S. based insurance subsidiaries entered into (1) Investment Management Agreements with an affiliate of TCG (the
Investment Manager), pursuant to which the Investment Manager will provide certain investment management and advisory services
with respect to certain asset classes and (2) Fortitude Re entered into an Exclusivity Agreement with TCG pursuant to which the
Investment Manager will be the exclusive provider of investment management and advisory services with respect to certain new
business acquired by Fortitude Re following the Fortitude Re Closing with respect to certain asset classes. For additional information
relating to the sale of a 19.9 percent ownership interest in Fortitude Holdings, see Note 1 to the Consolidated Financial Statements.
LEGACY PORTFOLIO RESULTS
Years Ended December 31,
(in millions)
Revenues:
Premiums
Policy fees
Net investment income
Other income (loss)
Total adjusted revenues
Benefits and expenses:
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Percentage Change
$
480 $
120
2,325
114
3,039
590 $
137
2,776
888
4,391
674
142
2,913
1,521
5,250
Policyholder benefits and losses and loss adjustment
expenses incurred
2,057
1,998
3,084
Interest credited to policyholder account balances
Amortization of deferred policy acquisition costs
General operating and other expenses
Interest expense
Total benefits and expenses
Adjusted pre-tax income
Adjusted pre-tax income by type:
General Insurance Run-Off Lines
Life and Retirement Run-Off Lines
Legacy Investments
Adjusted pre-tax income
236
105
398
30
241
76
484
122
2,826
2,921
213 $
1,470 $
76 $
17
120
213 $
221 $
406
843
1,470 $
$
$
$
267
108
502
282
4,243
1,007
(237)
(224)
1,468
1,007
104 AIG | 2018 Form 10-K
(19) %
(12) %
(12)
(16)
(87)
(31)
3
(2)
38
(18)
(75)
(3)
(86) %
(66) %
(96)
(86)
(86) %
(4)
(5)
(42)
(16)
(35)
(10)
(30)
(4)
(57)
(31)
46 %
NM %
NM
(43)
46 %
ITEM 7 | Business Segment Operations | Le g a c y P o r t f ol io
Business and Financial Highlights
In February 2018, we used $2.6 billion of existing Legacy Portfolio cash and investment assets to capitalize Fortitude Re in order to
enable it to assume insurance risk and other economic risk from U.S. and Bermudian insurance companies. These assets included
approximately $1.6 billion of capital released by Eaglestone, an affiliated entity, to AIG Parent as a result of the commutation of certain
property and casualty risks from other AIG subsidiaries, which were subsequently ceded to Fortitude Re. Fortitude Re also has
additional eligible regulatory capital under the Bermuda Monetary Authority capital framework in the form of $550 million in letter of
credit agreements with guarantees from AIG Parent. In 2018, Fortitude Re disbursed $444 million of tax sharing payments to AIG
Parent.
Legacy Portfolio Adjusted Pre-Tax Income
(in millions)
Legacy Portfolio Adjusted Pre-Tax Income
(in millions)
2018 and 2017 Comparison
Adjusted pre-tax income decreased due to:
lower Legacy Life and Retirement earnings compared to 2017
due to lower net investment income and loss recognition from
the update to actuarial assumptions in 2018 of $105 million
mainly attributable to higher claims costs on the cancer
products portfolio;
lower Legacy General Insurance earnings compared to 2017
due to lower net investment income, Japanese catastrophe
losses in 2018 and a change in premium earning patterns on
certain environmental business in 2018; and
Legacy Investment earnings compared to 2017 due to
continued dispositions of non- insurance investment assets,
primarily driven by the sale of the life settlements portfolio in
2017 and lower gain on fair value option portfolios in 2018
2017 and 2016 Comparison
Adjusted pre-tax income increased due to:
increased Legacy Life and Retirement adjusted pre-tax income due
to the absence of any significant loss recognition on certain payout
annuities from the update of actuarial assumptions in 2017 compared
to 2016. Loss recognition from the update to actuarial assumptions in
2017 was $14 million mainly attributable to the Long-Term Care
portfolio;
increased Legacy General Insurance adjusted pre-tax income due to
the absence of any significant prior year development in 2017
compared to 2016.
This increase was partially offset by decreased Legacy Investment
adjusted pre-tax income in 2017 compared to 2016 driven by the
decreased value of the remaining Legacy Investment portfolio post-
sales.
AIG | 2018 Form 10-K 105
ITEM 7 | Investments
Investments
OVERVIEW
Our investment strategies are tailored to the specific business needs of each operating unit. The investment objectives are driven by
the respective operating segments and AIG Parent. The primary objectives are generation of investment income, preservation of
capital, liquidity management and growth of surplus to support the insurance products. The majority of assets backing our insurance
liabilities consist of fixed maturity securities.
Investment Highlights in 2018
A rise in interest rates and widening credit spreads, as well as the adoption of the Recognition and Measurement of Financial Assets and
Financial Liabilities Standard (Financial Instruments Recognition and Measurement Standard) on January 1, 2018, which resulted in the
reclassification of unrealized gains in our equity securities to retained earnings, and in a net unrealized loss in our investment portfolio. Net
unrealized gains in our available for sale portfolio decreased to approximately $3.6 billion as of December 31, 2018 from approximately $13.9
billion as of December 31, 2017.
We continued to make investments in structured securities and other fixed maturity securities and increased lending activities in mortgage loans
with favorable risk compared to return characteristics to improve yields and increase net investment income.
Lower investment returns in our hedge fund portfolio and a decline in income from fixed maturity securities for which the fair value option was
elected when compared to 2017 where returns were higher as a result of significant spread tightening that occurred, as well as negative
performance of our fair value option equity securities portfolio.
During 2018, we reduced our hedge fund portfolio by approximately $1.8 billion as a result of redemptions consistent with our planned reduction
of exposure.
Blended investment yields on new investments were lower than blended rates on investments that were sold, matured or called.
In the first quarter of 2018, we sold our remaining interest in Arch, which we received as part of the consideration for selling United Guaranty to
Arch in 2016.
Our acquisition of Validus closed in the third quarter of 2018 and our acquisition of Glatfelter closed during the fourth quarter of 2018, increasing
our investment portfolio by approximately $6.6 billion and $0.4 billion, respectively.
We agreed to sell certain private equity funds in our portfolio during the second half of 2018.
Investment Strategies
Investment strategies are based on considerations that include the local and general market conditions, liability duration and cash
flow characteristics, rating agency and regulatory capital considerations, legal investment limitations, tax optimization and
diversification.
Some of our key investment strategies are as follows:
• Fixed maturity securities held by the U.S. insurance companies included in General Insurance consist of a mix of instruments that
meet our current risk-return, tax, liquidity, credit quality and diversification objectives.
• Outside of the U.S., fixed maturity securities held by General Insurance companies consist primarily of high-grade securities
generally denominated in the currencies of the countries in which we operate.
• Our fundamental strategy across all of our investment portfolios is to optimize the duration characteristics of the assets within a
target range based on comparable liability characteristics, to the extent practicable.
• AIG Parent, included in Other Operations, actively manages its assets and liabilities in terms of products, counterparties and
duration. AIG Parent’s liquidity sources are held primarily in the form of cash, short-term investments and publicly traded,
investment-grade rated fixed maturity securities. Based upon an assessment of its immediate and longer-term funding needs, AIG
Parent purchases publicly traded, investment-grade rated fixed maturity securities that can be readily monetized through sales or
repurchase agreements. These securities allow us to diversify sources of liquidity while reducing the cost of maintaining sufficient
liquidity.
106 AIG | 2018 Form 10-K
ITEM 7 | Investments
Attribution of Net Investment Income to Operating Segments
Net investment income is attributed to our businesses based on internal models consistent with the nature of the underlying
businesses.
For General Insurance — North America and International and Legacy General Insurance Run-Off Lines, we estimate investable
funds based primarily on loss reserves and unearned premiums. The allocation of net investment income of the General Insurance
companies to segments is calculated based on these estimated investable funds, consistent with the approximate duration of the
liabilities and the required economic capital allocation for each segment
For Life and Retirement — Individual Retirement, Group Retirement, Life Insurance, and Institutional Markets and Legacy Life and
Retirement Run-Off Lines, net investment income is attributed based on invested assets from segregated product line portfolios held
in our Life and Retirement companies. All invested assets of the Life and Retirement companies in excess of liabilities are allocated
based on estimates of required economic capital allocation for each segment.
Asset Liability Measurement
For the General Insurance companies, the duration of liabilities for long-tail casualty lines is greater than that of other lines. As a
result, the investment strategy within the General Insurance companies focuses on growth of surplus and preservation of capital,
subject to liability and other business considerations.
The General Insurance companies invest primarily in fixed maturity securities issued by corporations, municipalities and other
governmental agencies and also invest in structured securities collateralized by, among other assets, residential and commercial real
estate and commercial mortgage loans. While invested assets backing reserves of the General Insurance companies are primarily
invested in conventional fixed maturity securities, we have continued to allocate a portion of our investment activity into asset classes
that offer higher yields, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate
asset-backed investments for their risk-return attributes, as well as to manage our exposure to potential changes in interest rates.
This asset diversification has maintained stable average yields while the overall credit ratings of our fixed maturity securities were
largely unchanged. We expect to continue to pursue this investment strategy to meet the General Insurance companies’ liquidity,
duration and credit quality objectives as well as current risk-return and tax objectives.
In addition, a portion of the surplus of General Insurance is invested in a diversified portfolio of alternative investments which seeks to
balance liquidity, volatility and growth. Although these alternative investments are subject to periodic earnings fluctuations, they have
historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader
portfolio.
Fixed maturity securities of the General Insurance companies’ domestic operations, with an average duration of 3.8 years, are
currently comprised of corporate bonds, structured securities, taxable municipal bonds and government and agency bonds as well as
tax-exempt securities, which provide attractive risk-adjusted after-tax returns. The majority of these high quality investments are rated
A or higher based on composite ratings.
Fixed maturity securities held in the General Insurance companies’ foreign operations are of high quality, primarily rated A or higher
based on composite ratings, with an average duration of 3.3 years.
The investment strategy of the Life and Retirement companies is to maximize net investment income and portfolio value, subject to
liquidity requirements, capital constraints, diversification requirements, asset-liability management and available investment
opportunities.
The Life and Retirement companies use asset-liability management as a primary tool to monitor and manage risk in their businesses.
The Life and Retirement companies' fundamental investment strategy is to maintain a diversified, high to medium quality portfolio of
fixed maturity securities that, to the extent practicable, complements the characteristics of liabilities, including duration, which is a
measure of sensitivity to changes in interest rates. The investment portfolio of each product line is tailored to the specific
characteristics of its insurance liabilities, and as a result, certain portfolios are shorter in duration and others are longer in duration.
An extended low interest rate environment may result in a lengthening of liability durations from initial estimates, primarily due to lower
lapses, which may require us to further extend the duration of the investment portfolio.
The Life and Retirement companies invest primarily in fixed maturity securities issued by corporations, municipalities and other
governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and
commercial mortgage loans.
In addition, the Life and Retirement companies seek to enhance returns through investments in a diversified portfolio of alternative
investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved
AIG | 2018 Form 10-K 107
ITEM 7 | Investments
yields in excess of the fixed maturity portfolio yields. While a diversified portfolio of alternative investments remains a fundamental
component of the investment strategy of the Life and Retirement companies, we have reduced the overall size of the hedge fund
portfolio, in light of changing market conditions and perceived market opportunities, and to continue reducing the size of the private
equity portfolio.
Fixed maturity securities of the Life and Retirement companies domestic operations, with an average duration of 7.0 years, are
comprised primarily of taxable corporate bonds, as well as taxable municipal and government bonds, and agency and non-agency
structured securities. The majority of these investments are held in the available for sale portfolio and are rated investment grade
based on its composite ratings.
Fixed maturity securities held in the Life and Retirement companies foreign operations are of high quality, primarily rated A or higher
based on composite ratings, with an average duration of 17.0 years.
NAIC Designations of Fixed Maturity Securities
The Securities Valuation Office (SVO) of the National Association of Insurance Companies (NAIC) evaluates the investments of U.S.
insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called ‘NAIC Designations.’ In
general, NAIC Designations of ‘1’ highest quality, or ‘2’ high quality, include fixed maturity securities considered investment grade,
while NAIC Designations of ‘3’ through ‘6’ generally include fixed maturity securities referred to as below investment grade. The NAIC
has adopted revised rating methodologies for certain structured securities, including non-agency RMBS and CMBS, which are
intended to enable a more precise assessment of the value of such structured securities and increase the accuracy in assessing
expected losses to better determine the appropriate capital requirement for such structured securities. These methodologies result in
an improved NAIC Designation for such securities compared to the rating typically assigned by the three major rating agencies. The
following tables summarize the ratings distribution of U.S. Insurance Companies fixed maturity security portfolio by NAIC Designation,
and the distribution by composite AIG credit rating, which is generally based on ratings of the three major rating agencies.
For a full description of the composite AIG credit ratings see Credit Ratings.
The following table presents the fixed maturity security portfolio categorized by NAIC Designation, at fair value:
December 31, 2018
(in millions)
NAIC Designation
Other fixed maturity securities
Mortgage-backed, asset-backed and collateralized
Total*
1
2
$ 83,266 $ 68,652 $
63,402
3,110
$ 146,668 $ 71,762 $
Total
Investment
Grade
151,918
66,512
218,430
3
4
5
$
$
6,523 $
706
7,229 $
5,958 $ 1,895 $
412
38
6,370 $ 1,933 $
6
119 $
4,095
4,214 $
Total
Below
Investment
Grade
Total
14,495 $ 166,413
71,763
19,746 $ 238,176
5,251
* Excludes $2.6 billion of fixed maturity securities for which no NAIC Designation is available because they are held in legal entities within U.S. Insurance Companies that
do not require a statutory filing.
The following table presents the fixed maturity security portfolio categorized by composite AIG credit rating, at fair value:
December 31, 2018
(in millions)
Composite AIG Credit Rating
Other fixed maturity securities
Mortgage-backed, asset-backed and collateralized
Total*
$
AAA/AA/A
$
82,798 $
49,521
132,319 $
Total
Investment
Grade
152,407 $
53,731
206,138 $
BBB
69,609 $
4,210
73,819 $
BB
6,174 $
1,220
7,394 $
B
5,960 $
661
6,621 $
Total
Below
Investment
Grade
14,006 $
18,032
32,038 $
CCC and
Lower
1,872 $
16,151
18,023 $
Total
166,413
71,763
238,176
* Excludes $2.6 billion of fixed maturity securities for which no NAIC Designation is available because they are held in legal entities within U.S. Insurance Companies that
do not require a statutory filing.
Credit Ratings
At December 31, 2018, approximately 88 percent of our fixed maturity securities were held by our domestic entities. Approximately 17
percent of these securities were rated AAA by one or more of the principal rating agencies, and approximately 15 percent were rated
below investment grade or not rated. Our investment decision process relies primarily on internally generated fundamental analysis
and internal risk ratings. Third-party rating services’ ratings and opinions provide one source of independent perspective for
consideration in the internal analysis.
108 AIG | 2018 Form 10-K
ITEM 7 | Investments
Moody’s Investors Service Inc. (Moody’s), Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc. (S&P), or
similar foreign rating services rate a significant portion of our foreign entities’ fixed maturity securities portfolio. Rating services are not
available for some foreign-issued securities. Our Credit Risk Management department closely reviews the credit quality of the foreign
portfolio’s non-rated fixed maturity securities. At December 31, 2018, approximately 24 percent of such investments were either rated
AAA or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities rated AAA, and approximately 7
percent were below investment grade or not rated. Approximately 28 percent of the foreign entities’ fixed maturity securities portfolio is
comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.
Composite AIG Credit Ratings
With respect to our fixed maturity securities, the credit ratings in the table below and in subsequent tables reflect: (a) a composite of
the ratings of the three major rating agencies, or when agency ratings are not available, the rating assigned by the NAIC SVO (over
99 percent of total fixed maturity securities), or (b) our equivalent internal ratings when these investments have not been rated by any
of the major rating agencies or the NAIC. The “Non-rated” category in those tables consists of fixed maturity securities that have not
been rated by any of the major rating agencies, the NAIC or us.
For a discussion of credit risks associated with Investments see Enterprise Risk Management.
The following table presents the composite AIG credit ratings of our fixed maturity securities calculated on the basis of their
fair value:
(in millions)
Rating:
Other fixed maturity
securities
AAA
AA
A
BBB
Below investment grade
Non-rated
Total
Mortgage-backed, asset-
backed and collateralized
AAA
AA
A
BBB
Below investment grade
Non-rated
Total
Total
AAA
AA
A
BBB
Below investment grade
Non-rated
Total
$
$
$
$
$
$
Available for Sale
Other
Total
December 31, December 31,
2017
2018
December 31,
December 31,
December 31,
December 31,
2018
2017
2018
2017
11,170 $
27,766
11,644 $
29,560
2,619 $
106
2,656 $
212
13,789 $
27,872
40,142
69,564
14,511
45,049
70,636
13,173
1,356
300
-
1,745
138
17
41,498
69,864
14,511
1,333
164,486 $
1,073
171,135 $
-
4,381 $
-
4,768 $
1,333
168,867 $
28,859 $
12,019
6,964
4,058
12,923
30,306 $
8,158
7,760
4,414
17,194
481 $
911
818 $
610
29,340 $
12,930
290
152
5,096
382
163
6,004
7,254
4,210
18,019
82
64,905 $
25
67,857 $
104
7,034 $
27
8,004 $
186
71,939 $
40,029 $
39,785
41,950 $
37,718
3,100 $
1,017
3,474 $
822
43,129 $
40,802
47,106
73,622
27,434
52,809
75,050
30,367
1,646
452
5,096
2,127
301
6,021
48,752
74,074
32,530
1,415
229,391 $
1,098
238,992 $
104
11,415 $
27
12,772 $
1,519
240,806 $
14,300
29,772
46,794
70,774
13,190
1,073
175,903
31,124
8,768
8,142
4,577
23,198
52
75,861
45,424
38,540
54,936
75,351
36,388
1,125
251,764
AIG | 2018 Form 10-K 109
Available-for-Sale Investments
The following table presents the fair value of our available-for-sale securities:
(in millions)
Bonds available for sale:
U.S. government and government sponsored entities
Obligations of states, municipalities and political subdivisions
Non-U.S. governments
Corporate debt
Mortgage-backed, asset-backed and collateralized:
RMBS
CMBS
CDO/ABS
Total mortgage-backed, asset-backed and collateralized
Total bonds available for sale(a)
Equity securities available for sale:
Common stock
Preferred stock
Mutual funds
Total equity securities available for sale(b)
Total
ITEM 7 | Investments
Fair Value at
December 31,
2018
Fair Value at
December 31,
2017
$
$
3,260
16,001
14,525
130,700
34,377
12,701
17,827
64,905
229,391
-
-
-
-
229,391
$
$
2,656
18,644
15,659
134,176
37,234
13,841
16,782
67,857
238,992
1,061
533
114
1,708
240,700
(a) At December 31, 2018 and 2017, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $28.8 billion and
$31.5 billion, respectively.
(b) As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and
accounted for as available for sale securities.
The following table presents the fair value of our aggregate credit exposures to non-U.S. governments for our fixed maturity
securities:
December 31,
2018
1,645
1,038
905
794
783
518
454
453
409
380
7,191
14,570
$
$
December 31,
2017
1,791
1,051
923
1,214
1,623
608
432
493
513
409
6,659
15,716
$
$
(in millions)
Japan
Canada
France
United Kingdom
Germany
Netherlands
United Arab Emirates
Indonesia
Mexico
Norway
Other
Total
110 AIG | 2018 Form 10-K
ITEM 7 | Investments
The following table presents the fair value of our aggregate European credit exposures by major sector for our fixed
maturity securities:
(in millions)
Euro-Zone countries:
France
Germany
Netherlands
Ireland
Belgium
Spain
Italy
Luxembourg
Finland
Austria
Other - EuroZone
Total Euro-Zone
Remainder of Europe:
United Kingdom
Switzerland
Sweden
Norway
Russian Federation
Other - Remainder of Europe
Total - Remainder of Europe
Total
December 31, 2018
Non-
Sovereign
Financial
Institution
Financial Structured
Products
Corporates
Total
$
$
$
$
$
905 $
783
518
65
258
42
1
-
107
142
621
3,442 $
794 $
30
132
380
101
130
1,567 $
5,009 $
1,649 $
158
894
-
132
216
120
35
49
9
81
3,343 $
3,497 $
1,110
371
41
17
37
5,073 $
8,416 $
1,888 $
2,305
1,056
478
785
810
386
341
72
5
227
8,353 $
8,247 $
870
136
145
122
104
9,624 $
17,977 $
- $
-
103
951
-
-
-
1
-
-
-
1,055 $
3,601 $
-
-
-
-
-
3,601 $
4,656 $
4,442
3,246
2,571
1,494
1,175
1,068
507
377
228
156
929
16,193
16,139
2,010
639
566
240
271
19,865
36,058
December 31,
2017
Total
$
$
$
$
$
4,169
3,803
2,868
1,071
1,216
1,009
694
436
163
37
1,013
16,479
16,975
2,299
658
618
284
287
21,121
37,600
AIG | 2018 Form 10-K 111
Investments in Municipal Bonds
At December 31, 2018, the U.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality
tax-exempt bonds with 91 percent of the portfolio rated A or higher.
The following table presents the fair values of our available for sale U.S. municipal bond portfolio by state and municipal
bond type:
ITEM 7 | Investments
(in millions)
State:
New York
California
Texas
Illinois
Massachusetts
Florida
Virginia
Ohio
Washington
Georgia
Pennsylvania
Washington D.C.
Maryland
All other states(a)
Total(b)(c)
State
General
Obligation
December 31, 2018
Local
General
Obligation
Revenue
Total
Fair
Value
December 31,
2017
Total Fair Value
$
$
18 $
610
156
79
403
50
8
63
205
102
126
20
156
377
2,373 $
439 $
368
579
143
-
-
2
5
-
87
14
-
92
282
2,011 $
2,677 $
1,835
957
757
408
492
531
417
268
256
213
320
84
2,402
3,134 $
2,813
1,692
979
811
542
541
485
473
445
353
340
332
3,061
11,617 $ 16,001 $
3,562
3,275
1,992
908
966
666
639
575
650
566
418
497
380
3,550
18,644
(a) We did not have material credit exposure to the government of Puerto Rico.
(b) Excludes certain university and not-for-profit entities that issue their bonds in the corporate debt market. Includes industrial revenue bonds.
(c) Includes $367 million of pre-refunded municipal bonds.
112 AIG | 2018 Form 10-K
Investments in Corporate Debt Securities
The following table presents the industry categories of our available for sale corporate debt securities:
ITEM 7 | Investments
Industry Category
(in millions)
Financial institutions:
Money Center/Global Bank Groups
Regional banks — other
Life insurance
Securities firms and other finance companies
Insurance non-life
Regional banks — North America
Other financial institutions
Utilities
Communications
Consumer noncyclical
Capital goods
Energy
Consumer cyclical
Basic
Other
Total*
Fair Value at
December 31,
2018
Fair Value at
December 31,
2017
$
9,602 $
630
3,201
389
4,648
6,263
9,966
17,542
9,249
16,410
7,237
12,350
9,498
5,271
18,444
$
130,700 $
9,295
562
3,603
386
4,893
6,320
9,906
18,655
9,756
15,873
7,797
13,171
9,166
6,123
18,670
134,176
* At December 31, 2018 and December 31, 2017, respectively, approximately 89 and 91 percent of these investments were rated investment grade.
Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, was 5.4 percent
and 5.5 percent at December 31, 2018 and December 31, 2017, respectively. While the energy investments are primarily investment
grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair
value.
Investments in RMBS
The following table presents AIG’s RMBS available for sale securities:
(in millions)
Agency RMBS
Alt-A RMBS
Subprime RMBS
Prime non-agency
Other housing related
Total RMBS(a)(b)
Fair Value at
December 31,
2018
14,695 $
9,780
2,982
6,211
709
34,377 $
Fair Value at
December 31,
2017
15,002
11,624
2,947
6,891
770
37,234
$
$
(a) Includes approximately $10.3 billion and $12.3 billion at December 31, 2018, and December 31, 2017, respectively, of certain RMBS that had experienced deterioration
in credit quality since their origination. For additional discussion on Purchased Credit Impaired (PCI) Securities see Note 6 to the Consolidated Financial Statements.
(b) The weighted average expected life was seven years at December 31, 2018 and six years at December 31, 2017.
Our underwriting practices for investing in RMBS, other asset-backed securities (ABS) and CDOs take into consideration the quality
of the originator, the manager, the servicer, security credit ratings, underlying characteristics of the mortgages, borrower
characteristics, and the level of credit enhancement in the transaction.
AIG | 2018 Form 10-K 113
Investments in CMBS
The following table presents our CMBS available for sale securities:
(in millions)
CMBS (traditional)
Agency
Other
Total
ITEM 7 | Investments
Fair Value at
December 31,
2018
9,975 $
2,047
679
12,701 $
Fair Value at
December 31,
2017
11,092
2,093
656
13,841
$
$
The fair value of CMBS holdings remained stable throughout 2018. The majority of our investments in CMBS are in tranches that
contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit
transactions, broadly diversified across property types and geographical areas.
Investments in CDOs
The following table presents our CDO available for sale securities by collateral type:
(in millions)
Collateral Type:
Bank loans (CLO)
Other
Total
Commercial Mortgage Loans
Fair value at
December 31,
2018
Fair value at
December 31,
2017
$
$
8,164 $
56
8,220 $
8,112
94
8,206
At December 31, 2018, we had direct commercial mortgage loan exposure of $32.9 billion. All commercial mortgage loans were
current or performing according to their restructured terms.
The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized
cost:
(dollars in millions)
December 31, 2018
State:
New York
California
Texas
New Jersey
Florida
Massachusetts
Illinois
Pennsylvania
Washington D.C.
Ohio
Other states
Foreign
Total*
Number
of
Class
Loans Apartments
Offices
Retail
Industrial
Hotel
Others
Total
Percent
of
Total
98
78
53
45
87
14
18
25
12
27
228
79
764
$
2,009 $ 4,082 $
1,308
1,256
45
159
243
444
21
311
10
790
1,201
$ 11,190 $ 9,870 $ 5,645 $
512 $
283
185
422
589
549
11
567
-
199
1,326
1,002
490
344
1,049
358
635
456
80
401
179
1,869
3,320
393 $
535
102
41
224
26
19
47
-
235
773
679
100 $
831
125
28
218
-
-
25
19
-
460
717
3,074 $ 2,523 $
- $
48
5
33
35
-
22
-
-
5
73
359
580 $
7,096
3,495
2,017
1,618
1,583
1,453
952
740
731
628
5,291
7,278
32,882
22 %
11
6
5
5
4
3
2
2
2
16
22
100 %
114 AIG | 2018 Form 10-K
December 31, 2017
State:
New York
California
Texas
Massachusetts
New Jersey
Florida
Pennsylvania
Illinois
Ohio
Washington D.C.
Other states
Foreign
Total*
97
86
55
21
42
81
25
15
26
11
253
71
783
$
1,673 $ 3,716 $
438
1,055
327
934
701
384
667
46
319
84
74
22
315
304
163
11
232
359
1,790
964
821
1,464
8,163 $ 8,700 $ 5,361 $
556 $
301
160
410
486
435
577
11
205
-
1,466
754
$
265 $
313
83
-
41
227
47
25
240
-
696
86
105 $
845
154
-
28
19
26
-
-
19
564
629
2,023 $ 2,389 $ 1,960 $
177 $
360
38
27
32
69
-
23
5
-
160
1,069
ITEM 7 | Investments
6,492
3,312
1,696
1,522
1,300
1,153
746
678
624
610
5,640
4,823
28,596
23 %
12
6
5
4
4
3
2
2
2
20
17
100 %
* Does not reflect allowance for credit losses.
For additional discussion on commercial mortgage loans see Note 7 to the Consolidated Financial Statements.
Impairments
The following table presents impairments by investment type:
Years Ended December 31,
(in millions)
Other-than-temporary Impairments:
Fixed maturity securities, available for sale
Equity securities, available for sale(a)
Private equity funds and hedge funds
Subtotal
Other impairments:
Investments in life settlements(b)
Other investments
Real estate
Total
2018
2017
2016
$
$
251 $
-
-
251
-
-
79
330 $
216 $
11
33
260
360
20
61
701 $
480
7
72
559
397
66
10
1,032
(a) Upon the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer required to be evaluated for
other-than-temporary impairments.
(b) Impairments include $360 million related to investments in our life settlements portfolio that were sold in 2017.
Our investments in life settlements are monitored for impairment on a contract-by-contract basis quarterly. An investment in life
settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds would not be sufficient to
recover our estimated future carrying amount. This amount is defined as the current carrying amount for the investment in life
settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life
settlements are written down to their estimated fair value. This is determined on a discounted cash flow basis, incorporating current
market mortality assumptions and market yields or by repricing to the anticipated sale price as appropriate.
Impairments on life settlements in 2016 were partially attributable to an increase in policy premiums required to keep policies in force
which resulted in lower future expected net cash flows that were insufficient to recover our net investment on certain policies.
Impairments on life settlements in 2017 were mainly attributable to write-downs of the policies to the purchase price as agreed in the
sale of the life settlements portfolio. We sold the remaining portion of our life settlements portfolio in 2017.
AIG | 2018 Form 10-K 115
ITEM 7 | Investments
Other-Than-Temporary Impairments
To determine other-than-temporary impairments, we use fundamental credit analyses of individual securities without regard to rating
agency ratings. Based on this analysis, we expect to receive cash flows sufficient to cover the amortized cost of all below investment
grade securities for which credit impairments were not recognized.
The following tables present other-than-temporary impairment charges recorded in earnings on fixed maturity securities,
equity securities, private equity funds and hedge funds.
Other-than-temporary impairment charges by investment type and impairment type:
(in millions)
Year Ended December 31, 2018
Impairment Type:
Severity
Change in intent
Foreign currency declines
Issuer-specific credit events
Adverse projected cash flows
Total
Year Ended December 31, 2017
Impairment Type:
Severity
Change in intent
Foreign currency declines
Issuer-specific credit events
Adverse projected cash flows
Total
Year Ended December 31, 2016
Impairment Type:
Severity
Change in intent
Foreign currency declines
Issuer-specific credit events
Adverse projected cash flows
Total
RMBS CDO/ABS
CMBS
Other Fixed
Maturity
Equities/Other
Invested Assets*
Total
$
$
$
$
$
$
- $
-
-
62
2
64 $
- $
-
-
24
4
28 $
- $
-
-
116
47
163 $
- $
-
-
9
-
9 $
- $
-
-
41
-
41 $
- $
-
-
1
-
1 $
- $
-
-
20
-
20 $
- $
-
-
32
-
32 $
- $
-
-
38
-
38 $
- $
87
15
56
-
158 $
- $
9
11
95
-
115 $
- $
46
18
214
-
278 $
- $
-
-
-
-
- $
2 $
-
-
42
-
44 $
15 $
-
-
64
-
79 $
-
87
15
147
2
251
2
9
11
234
4
260
15
46
18
433
47
559
*
Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments. Upon the adoption of the Financial
Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer required to be evaluated for other-than-temporary
impairments.
We recorded other-than-temporary impairment charges in the years ended December 31, 2018, 2017 and 2016 related to:
•
issuer-specific credit events;
• securities that we intend to sell or for which it is more likely than not that we will be required to sell;
• declines due to foreign exchange rates;
• adverse changes in estimated cash flows on certain structured securities; and
• securities that experienced severe market valuation declines.
In addition, impairments are recorded on real estate and investments in life settlements.
In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities
that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost
and the expected undiscounted recoverable value over the remaining life of the security. The accretion that was recognized for these
securities in earnings was $530 million in 2018, $669 million in 2017 and $767 million in 2016.
For a discussion of our other-than-temporary impairment accounting policy see Note 6 to the Consolidated Financial Statements.
116 AIG | 2018 Form 10-K
Items(e)
5,126
3,645
4,423
13,194
2,352
626
704
3,682
7,478
4,271
5,127
16,876
December 31, 2018
Aging(a)
(dollars in millions)
Investment grade
bonds
0-6 months
7-11 months
12 months or more
The following table shows the aging of the pre-tax unrealized losses of fixed maturity securities, the extent to which the fair
value is less than amortized cost or cost, and the number of respective items in each category:
ITEM 7 | Investments
Less Than or Equal
to 20% of Cost(b)
Unrealized
Greater Than 20%
to 50% of Cost(b)
Unrealized
Greater Than 50%
of Cost(b)
Unrealized
Cost(c)
Loss Items(e)
Cost(c)
Loss Items(e)
Cost(c)
Loss Items(e)
Cost(c)
Total
Unrealized
Loss(d)
$ 36,559 $
839
5,121 $
98 $
27,272
35,368
1,210
3,633
1,732
4,381
168
487
29
36
116
181
4 $
3 $
12
37
-
18
53 $
21 $
Total
$ 99,199 $ 3,781 13,135 $
753 $
Below investment
grade bonds
0-6 months
7-11 months
12 months or more
Total
Total bonds
0-6 months
7-11 months
12 months or more
Total(e)
$
7,344 $
259
2,322 $
465 $
157
25 $
26 $
1,438
2,097
93
179
591
650
101
225
26
59
33
39
5
44
$ 10,879 $
531
3,563 $
791 $
242
97 $
75 $
$ 43,903 $ 1,098
7,443 $
563 $
186
29 $
29 $
28,710
37,465
1,303
4,224
1,911
5,031
269
712
$ 110,078 $ 4,312 16,698 $
1,544 $
62
175
423
45
76
5
62
150 $
96 $
(a) Represents the number of consecutive months that fair value has been less than cost by any amount.
(b) Represents the percentage by which fair value is less than cost at December 31, 2018.
(c) For bonds, represents amortized cost.
4
-
12
16
22
4
31
57
26
4
43
73
1 $
36,660 $
-
5
27,440
35,873
6 $
99,973 $
5 $
7,835 $
2
15
1,544
2,366
22 $
11,745 $
6 $
44,495 $
2
20
28,984
38,239
28 $
111,718 $
872
1,246
1,860
3,978
438
123
269
830
1,310
1,369
2,129
4,808
(d) The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the
amortization of certain DAC.
(e) Item count is by CUSIP by subsidiary.
Change in Unrealized Gains and Losses on Investments
The change in net unrealized gains and losses on investments in 2018 was primarily attributable to decreases in the fair value of fixed
maturity securities. For 2018, net unrealized losses related to fixed maturity securities decreased by $9.9 billion due primarily to an
increase in rates and a widening of credit spreads.
The change in net unrealized gains and losses on investments in 2017 was primarily attributable to increases in the fair value of fixed
maturity securities. For 2017, net unrealized gains related to fixed maturity and equity securities increased by $4.3 billion due primarily
to a decrease in rates and a narrowing of credit spreads.
For further discussion of our investment portfolio see also Note 6 to the Consolidated Financial Statements.
AIG | 2018 Form 10-K 117
Net Realized Capital Gains and Losses
The following table presents the components of Net realized capital losses:
Years Ended December 31,
(in millions)
Sales of fixed maturity securities
Sales of equity securities(a)
Other-than-temporary impairments:
Severity
Change in intent
Foreign currency declines
Issuer-specific credit events
Adverse projected cash flows
Provision for loan losses
Foreign exchange transactions
Variable annuity embedded derivatives, net of related hedges
All other derivatives and hedge accounting
Impairments on investments in life settlements
Loss on sale of private equity funds
Other(b)
Net realized capital losses
ITEM 7 | Investments
2018
(145) $
16
-
(87)
(15)
(147)
(2)
(92)
(182)
304
338
-
(321)
203
(130) $
2017
425 $
88
2016
1
1,057
(2)
(9)
(11)
(234)
(4)
(50)
489
(1,374)
(368)
(360)
-
30
(1,380) $
(15)
(46)
(18)
(433)
(47)
10
(1,226)
(1,243)
299
(397)
-
114
(1,944)
$
$
(a) In 2016, includes realized gains on the sale of a portion of our holdings in People’s Insurance Company (Group) of China Limited and PICC Property & Casualty
Company Limited (collectively, our PICC Investment).
(b) In 2018, primarily includes $96 million and $49 million of realized gains on the sale of shares of OneMain Holdings, Inc. and an investment in Castle Holdings LLC’s
aircraft assets, respectively. In 2016, primarily includes $107 million of realized gains due to a purchase price adjustment on the sale of Class B shares of Prudential
Financial, Inc. and losses of $253 million from the sale of a portion of our Life Settlements portfolio.
Net realized capital losses in 2018 decreased compared to 2017 due primarily to derivative gains in 2018 compared to derivative
losses in 2017. Net realized capital losses in 2018 were primarily related to a loss on the sale of a portion of our private equity
portfolio, foreign exchange losses, and other-than-temporary impairment charges, which more than offset derivative gains.
Net realized capital losses decreased in 2017 compared to 2016 due primarily to foreign exchange gains in 2017 compared to losses
in the prior year and lower other-than-temporary impairments. Net realized capital losses in 2017 consisted primarily of losses on
variable annuity embedded derivatives, net of related hedges, and impairments, which were partially offset by gains on the sales of
securities and foreign exchange gains.
Variable annuity embedded derivatives, net of related hedges, reflected gains in 2018 compared to losses in 2017 primarily due to
changes in the non-performance or “own credit” risk adjustment used in the valuation of the variable annuities with guaranteed
minimum withdrawal benefits (GMWB) embedded derivative, which are not hedged as part of our economic hedging program.
For additional discussion of market risk management related to these product features see MD&A – Enterprise Risk Management –
Insurance Risks – Life and Retirement Companies Key Risks – Variable Annuity Risk Management and Hedging Programs. For more
information on the economic hedging target and the impact to pre-tax income of this program see Insurance Reserves – Life and
Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results in this MD&A.
Net realized capital losses in 2016 were primarily related to foreign exchange losses, derivative losses, and impairments, which were
higher than the gain recognized on the sale of a portion of our PICC Investment. Foreign exchange gains (losses) were primarily due
to $910 million of remeasurement losses in 2016 for a short term intercompany balance that was matched with available for sale
investments in fixed maturity securities denominated in the same foreign currencies. Unrealized gains and losses on the available for
sale investments were recorded in other comprehensive income resulting in an immaterial impact on our overall equity or book value
per share from this arrangement.
For further discussion of our investment portfolio see also Note 6 to the Consolidated Financial Statements.
118 AIG | 2018 Form 10-K
ITEM 7 | Insurance Reserves
Insurance Reserves
LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (LOSS RESERVES)
The following table presents the components of our gross and net loss reserves by segment and major lines of business*:
At December 31,
2018
2017
Net liability for
Reinsurance Gross liability
Net liability
Reinsurance Gross liability
unpaid losses
recoverable on
for unpaid
for unpaid
recoverable on
for unpaid
and loss unpaid losses and
losses and
losses and unpaid losses and
losses and
adjustment
loss adjustment loss adjustment
loss adjustment
loss adjustment loss adjustment
expenses
expenses
expenses
expenses
expenses
expenses
$
4,772 $
5,318 $
10,090
$
5,690 $
4,974 $
10,664
(in millions)
General Insurance:
U.S. Workers' Compensation
(net of discount)
U.S. Excess Casualty
U.S. Other Casualty
U.S. Financial Lines
U.S. Property and Special risks
U.S. Personal Insurance
UK/Europe Casualty and Financial Lines
UK/Europe Property and Special risks
UK/Europe and Japan Personal Insurance
Other product lines
Unallocated loss adjustment expenses
4,715
4,288
5,315
6,534
1,706
7,022
2,988
2,264
6,105
1,834
4,576
4,661
1,960
2,748
1,001
1,789
1,251
553
2,522
1,307
9,291
8,949
7,275
9,282
2,707
8,811
4,239
2,817
8,627
3,141
4,802
5,149
5,104
5,410
1,380
6,986
2,022
2,348
5,804
1,974
Total General Insurance
47,543
27,686
75,229
46,669
Legacy Portfolio - Run-off Lines:
U.S. Run-off Long Tail Insurance lines
(net of discount)
Other run-off product lines
Unallocated loss adjusted expenses
Total Legacy Portfolio - Run-off Lines
Other Operations (Blackboard)
3,862
104
397
4,363
43
3,689
66
115
3,870
134
7,551
170
512
8,233
177
4,465
153
370
4,988
28
4,053
4,793
1,962
968
194
1,156
632
349
2,307
1,258
22,646
3,675
65
111
3,851
211
8,855
9,942
7,066
6,378
1,574
8,142
2,654
2,697
8,111
3,232
69,315
8,140
218
481
8,839
239
Total
$
51,949 $
31,690 $
83,639
$
51,685 $
26,708 $
78,393
* Includes loss reserve discount of $2.0 billion and $1.8 billion for the years ended December 31, 2018, and 2017, respectively. For discussion of loss reserve discount see
Note 13 to the Consolidated Financial Statements.
AIG | 2018 Form 10-K 119
ITEM 7 | Insurance Reserves
PRIOR YEAR DEVELOPMENT
The following table summarizes incurred (favorable) unfavorable prior year development net of reinsurance by segment:
Years Ended December 31,
(in millions)
General Insurance:
North America*
International
Total General Insurance
Legacy Portfolio - Run-off Lines
Other Operations
Total prior year (favorable) unfavorable development
2018
2017
2016
$
$
$
328 $
38
366 $
(4)
-
362 $
371 $
628
999 $
(21)
-
978 $
5,286
156
5,442
402
(56)
5,788
* Includes the amortization attributed to the deferred gain at inception from the NICO adverse development reinsurance agreement of $233 million and $288 million in the
year ended December 31, 2018 and 2017, respectively. Consistent with our definition of APTI, prior year development excludes the portion of (favorable) unfavorable
prior year reserve development for which we have ceded the risk under the NICO reinsurance agreements of $834 million and $359 million for the year ended
December 31, 2018 and 2017, respectively, and related changes in amortization of the deferred gain of $162 million and $56 million over those same periods
Net Loss Development – 2018
During 2018, we recognized adverse prior year net loss reserve development of $362 million net. This unfavorable development was
primarily a result of the following:
• Unfavorable development in US Excess Casualty, driven by the combination of construction Defect and construction wrap claims
from accident year 2015 and prior where we reacted to significant increases in severity and longer claim reporting patterns, as well
as higher than expected loss severity in accident years 2016 and 2017, which led to an increase in estimates for these accident
years;
• Unfavorable development in U.S. Financial Lines, primarily from Directors & Officers (D&O) and Employment Practices Liability
(EPLI) policies covering Corporate and National Insureds as well as Private and Not-for-Profit insureds. This development was
predominantly in accident years 2014-2017 and resulted largely from increases in severity as the frequency of class action lawsuits
increased in those years.
• Favorable development in US Commercial Property and Specialty Lines due to reductions in our estimates for 2017 Catastrophes
and favorable development from the attritional losses in Commercial Property and Specialty .
• Unfavorable development in US Personal Lines reflecting an increase in estimates in respect of the California Wildfires and
Hurricane Irma in 2017.
• Adverse development in Financial Lines in Europe and other areas across the world that have seen increases in the frequency and
severity of large losses.
Our analyses and conclusions about prior year reserves also help inform our judgments about the current accident year loss and loss
adjustment expense ratios we selected.
For further details of prior year development by line of business, see Note 13 to the Consolidated Financial Statements. For a
discussion of actuarial methods employed for major classes of business, see also Critical Accounting Estimates.
120 AIG | 2018 Form 10-K
The following tables summarize incurred (favorable) unfavorable prior year development net of reinsurance, by segment and
major lines of business, and by accident year groupings:
ITEM 7 | Insurance Reserves
Years Ended December 31, 2018
(in millions)
General Insurance North America:
U.S. Workers' Compensation
U.S. Excess casualty
U.S. Other casualty
U.S. Financial lines
U.S. Property and special risks
U.S. Personal insurance
Other product lines
Total General Insurance North America
General Insurance International:
UK/Europe casualty and financial lines
UK/Europe property and special risks
UKEurope and Japan Personal insurance
Other product lines
Total General Insurance International
Legacy Portfolio - Run-off Lines
Total
2017 2016 & Prior
$
$
$
$
18 $
336
(19)
209
(483)
248
19
328 $
63 $
(24)
(116)
115
38 $
67 $
146
46
109
(427)
258
26
225 $
(17) $
(21)
(83)
(32)
(153) $
(4)
44
(49)
190
(65)
100
(56)
(10)
(7)
103
80
(3)
(33)
147
191
(48)
Total prior year (favorable) unfavorable development
$
362 $
116 $
246
Net Loss Development – 2017
During 2017, we recognized unfavorable prior year loss reserve development of $978 million. This unfavorable development was
primarily a result of the following:
• Unfavorable development in U.S. Excess Casualty and U.S. Other Casualty, driven primarily by increases in underlying severity
and greater than expected emerging loss experience in accident year 2016 as well as increased development from claims related
to construction defects and construction wrap business (largely from accident years 2006 and prior).
• Unfavorable development in U.S. Financial Lines, primarily from Directors & Officers (D&O) policies covering privately owned and
not-for-profit insureds. This development was predominantly in accident year 2016 and resulted largely from increases in
bankruptcy-related claims and fiduciary liability claims for large educational institutions.
• Higher than expected losses for Europe Casualty and Financial Lines, including a significant increase in large claims activity in our
Europe long-tail business, with a large proportion emanating from accident year 2016. In addition, we increased our loss reserves
as a result of the decision made by the UK Ministry of Justice to reduce the discount rate applied to lump-sum bodily injury
payouts, known as the Ogden rate.
•
In addition, we also observed higher than expected losses in our Europe Property and Special Risks business driven by
unexpected development on various large claims across the property, aviation, marine, and trade credit segments.
AIG | 2018 Form 10-K 121
ITEM 7 | Insurance Reserves
Net Loss Development – 2016
During 2016, we recognized adverse prior year loss reserve development of $5.8 billion. This unfavorable development was primarily
a result of the following:
• Higher than expected losses emerging across several casualty product lines, especially in recent accident years (generally, 2011
to 2015) driven by increased frequency and severity of claims. This recent accident year loss emergence caused us to increase
loss development factors applied across many accident years.
• Loss development factors including workers’ compensation tail factors, also increased due to an observed lengthening of loss
reporting patterns relative to prior expectations.
•
Increases in loss trend assumptions to reflect the latest observed increases in frequency and severity and the impact of these
increased loss trends on expected loss ratios.
• Changes in weights we apply to the various actuarial methods to better align with updated trends.
We note that for certain categories of claims (e.g., construction defect claims and environmental claims) and for reinsurance
recoverable, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of
occurrence becomes available to us. These reclassifications are shown as development in the respective years in the tables above.
Significant Reinsurance Agreements
In the first quarter of 2017, we entered into an adverse development reinsurance agreement with NICO, under which we transferred to
NICO 80 percent of the reserve risk on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior.
Under this agreement, we ceded to NICO 80 percent of the losses on subject business paid on or after January 1, 2016 in excess of
$25 billion of net paid losses, up to an aggregate limit of $25 billion. We account for this transaction as retroactive reinsurance. This
transaction resulted in a gain, which under U.S. GAAP retroactive reinsurance accounting is deferred and amortized into income over
the settlement period. NICO created a collateral trust account as security for their claim payment obligations to us, into which they
deposited the consideration paid under the agreement, and Berkshire Hathaway Inc. has provided a parental guarantee to secure
NICO’s obligations under the agreement.
For a description of AIG’s catastrophe reinsurance protection for 2018, see Enterprise Risk Management – Insurance Risks – General
Insurance Companies Key Risks – Natural Catastrophe Risk.
The table below shows the calculation of the deferred gain on the adverse development reinsurance agreement as of
December 31, 2018 and 2017, showing the effect of discounting of loss reserves and amortization of the deferred gain.
(in millions)
Gross Covered Losses
Covered reserves before discount
Inception to date losses paid
Attachment point
Covered losses above attachment point
Deferred Gain Development
Covered losses above attachment ceded to NICO (80%)
Consideration paid including interest
Pre-tax deferred gain before discount and amortization
Discount on ceded losses(a)
Pre-tax deferred gain before amortization
Inception to date amortization of deferred gain at inception
Inception to date amortization attributed to changes in deferred gain(b)
Deferred gain liability reflected in AIG's balance sheet
December 31, December 31,
2017
2018
$
$
$
$
23,033 $
19,331
(25,000)
17,364 $
13,891 $
(10,188)
3,703
(1,719)
1,984
(461)
(141)
1,382 $
26,654
14,788
(25,000)
16,442
13,153
(10,188)
2,965
(1,539)
1,426
(228)
(31)
1,167
(a) For the period from inception to December 31, 2018, the accretion of discount and a reduction in effective interest rates was offset by changes in estimates of the
amount and timing of future recoveries under the adverse development reinsurance agreement.
(b) Excluded from our definition of APTI.
122 AIG | 2018 Form 10-K
The following table presents the rollforward of activity in the deferred gain from the adverse development reinsurance
agreement:
ITEM 7 | Insurance Reserves
(in millions)
Balance at beginning of year, net of discount
Gain at inception
Unfavorable prior year reserve development ceded to NICO(a)
Amortization attributed to deferred gain at inception(b)
Amortization attributed to changes in deferred gain(c)
Changes in discount on ceded loss reserves
Balance at end of year, net of discount
Years Ended
December 31,
2018
1,167 $
-
738
(233)
(110)
(180)
1,382 $
2017
-
1,116
310
(228)
(31)
-
1,167
$
$
(a) Prior year reserve development ceded to NICO under the retroactive reinsurance agreement is deferred under U.S. GAAP.
(b) Represents amortization of the deferred gain recognized in APTI.
(c) Excluded from APTI and included in U.S. GAAP.
The lines of business subject to this agreement have been the source of the majority of the prior year adverse development charges
over the past several years. The agreement is expected to result in lower capital charges for reserve risks at our U.S. insurance
subsidiaries. In addition, we would expect future net investment income to decline as a result of lower invested assets.
For a summary of significant reinsurers see Item 7. MD&A – Enterprise Risk Management – Insurance Operations Risks – General
Insurance Companies Key Insurance Risks – Reinsurance Recoverable.
LIFE AND ANNUITY RESERVES AND DAC
The following section provides discussion of life and annuity reserves and deferred policy acquisition costs.
Update of Actuarial Assumptions
The life insurance companies review and update actuarial assumptions at least annually, generally in the third quarter. Assumption
setting standards vary between investment-oriented products and traditional long-duration products.
Investment-oriented products
The Life Insurance Companies review and update estimated gross profit projections used to amortize DAC and related items (which
may include VOBA, SIA, guaranteed benefit reserves and unearned revenue reserves) for investment-oriented products. Estimated
gross profit projections include assumptions for investment-related returns and spreads, product-related fees and expenses, mortality
gains and losses, policyholder behavior and other factors. In estimating future gross profits, lapse assumptions require judgment and
can have a material impact on DAC amortization. If the assumptions used for estimated gross profits change significantly, DAC and
related reserves are recalculated using the new projections, and any resulting adjustment is included in income. Updating such
projections may result in acceleration of amortization in some products and deceleration of amortization in other products.
The Life Insurance Companies also review assumptions related to their respective GMWB living benefits that are accounted for as
embedded derivatives and measured at fair value. The fair value of these embedded derivatives is based on actuarial assumptions,
including policyholder behavior, as well as capital market assumptions.
Various assumptions were updated, including the following effective September 30, 2018:
• we decreased our reversion to the mean rates (gross of fees) to 2.92 percent from 3.74 percent for the Variable Annuity product
line in Individual Retirement and to 1.90 percent from 3.78 percent for the Variable Annuity product line in Group Retirement. Our
separate account long-term asset growth rate assumption related to equity market performance remained unchanged at 7.0
percent; and
• we lowered our ultimate projected yields on invested assets by approximately three to six basis points on most annuity deposits
and by approximately 12 to 19 basis points on most life insurance deposits. Projected yields are graded from a weighted average
net GAAP book yield of existing assets supporting the business based on the value of the assets to a weighted average yield
based on the duration of the assets excluding assets that mature during the grading period. The grading period is three years for
annuity products and five years for life insurance products.
AIG | 2018 Form 10-K 123
ITEM 7 | Insurance Reserves
The reversion to the mean rate is updated quarterly based on market returns and can change dramatically in periods where market
returns move significantly. Effective December 31, 2018, the reversion to the mean rate (gross of fees) was 5.38 percent for the
Variable Annuity product line in Individual Retirement and 5.48 percent for the Variable Annuity product line in Group Retirement.
Traditional long-duration products
For traditional long-duration products, which include whole life insurance, term life insurance, accident and health insurance, long-
term care insurance, and life-contingent single premium immediate annuities and structured settlements, a “lock-in” principle applies.
The assumptions used to calculate the benefit liabilities and DAC are set when a policy is issued and do not change with changes in
actual experience, unless a loss recognition event occurs. Loss recognition occurs if observed changes in actual experience or
estimates result in projected future losses under loss recognition testing. Underlying assumptions are reviewed periodically and
updated as appropriate.
In addition to the third quarter annual assumption update, the life companies adjusted assumptions and models on the Legacy Life
and Retirement Run-Off Lines during the fourth quarter resulting in loss recognition of $105 million.
The following table presents the increase (decrease) in Adjusted pre-tax income resulting from the update of actuarial
assumptions for the domestic life insurance companies, by segment and product line:
Years Ended December 31,
(in millions)
Life and Retirement:
Individual Retirement
Fixed Annuities
Variable and Indexed Annuities
$
Total Individual Retirement
Group Retirement
Life Insurance
Institutional Markets
Total Life and Retirement
Legacy Life and Retirement Run-off
Total increase (decrease) in adjusted pre-tax income from update of assumptions $
2018
2017
2016
40 $
(92)
(52)
17
(63)
-
(98)
(110)
(208) $
130 $
112
242
13
29
-
284
(14)
270 $
330
39
369
(47)
(92)
-
230
(614)
(384)
The following table presents the increase (decrease) in pre-tax income resulting from the update of actuarial assumptions in
the domestic life insurance companies, by line item as reported in Results of Operations:
Years Ended December 31,
(in millions)
Policy fees
Interest credited to policyholder account balances
Amortization of deferred policy acquisition costs
Policyholder benefits and losses incurred
Increase (decrease) in adjusted pre-tax income
Change in DAC related to net realized capital gains (losses)
Net realized capital gains (losses)
Increase (decrease) in pre-tax income
2018
(237) $
-
273
(244)
(208)
35
(55)
(228) $
2017
(2) $
49
184
39
270
44
(246)
68 $
2016
(54)
65
325
(720)
(384)
13
(56)
(427)
$
$
In 2018, Adjusted pre-tax income included a net unfavorable adjustment of $208 million, primarily in Variable Annuities driven by
reductions to the GMWB full surrender assumption, in Life Insurance primarily due to strengthening reserves for certain riders and
interest crediting model refinements, and in Legacy Accident & Health Insurance loss recognition. The unfavorable adjustments were
partially offset by favorable adjustments in Life Insurance primarily due to lower lapse and mortality assumptions and a reduction in
IBNR reserves and in Individual Retirement due to lower lapse assumptions in Fixed Annuities and refinements to partial withdrawal
assumptions in Variable Annuities.
In 2017, adjusted pre-tax income included a net favorable adjustment of $270 million, primarily driven by lower lapse assumptions in
Fixed Annuities, improved mortality assumptions in Life Insurance, and an increase in the reversion to the mean rates in Variable
Annuities. The favorable adjustments were partially offset by lower spread assumptions in Fixed Annuities and a loss recognition
expense on long-term care business in the Legacy Life and Retirement Run-Off Lines.
124 AIG | 2018 Form 10-K
In 2016, adjusted pre-tax income included a net unfavorable adjustment of $384 million, primarily driven by $622 million of loss
recognition reserves for pre-2010 payout annuities in the Legacy Portfolio, and an increase in Life Insurance reserves for universal life
with secondary guarantees. These unfavorable adjustments were partially offset by favorable adjustments, primarily due to lower
lapse assumptions in Fixed Annuities.
The adjustments related to the update of actuarial assumptions in each period are discussed by segment below.
ITEM 7 | Insurance Reserves
Update of Actuarial Assumptions by Segment
Individual Retirement
The update of actuarial assumptions resulted in net favorable (unfavorable) adjustments to adjusted pre-tax income of Individual
Retirement of $(52) million, $242 million and $369 million in 2018, 2017 and 2016, respectively.
In Fixed Annuities, the update of estimated gross profit assumptions resulted in a net favorable adjustment of $40 million and $130
million in 2018 and 2017, respectively, which reflected lower lapse assumptions, partially offset by lower spread assumptions. In 2016,
a net favorable adjustment of $330 million reflected lower lapse assumptions, primarily due to lower long-term interest rates, as well
as updates to spread assumptions.
In Variable and Index Annuities, the update of estimated gross profit assumptions resulted in a net unfavorable adjustment of $92
million in 2018, primarily due to refinements to the GMWB partial withdrawal assumptions in Variable Annuities and the multi-year
index strategy crediting parameters in Index Annuities. The unfavorable adjustments were partially offset by lower GMWB lapse
assumptions in Variable Annuities. In 2017, a net favorable adjustment of $112 million was primarily due to an increase in the
reversion to the mean rate used for projecting future estimated gross profit for variable annuity products and changes in volatility
assumptions. The net favorable adjustment was partially offset by a decrease in the separate account long-term asset growth rate
assumption from 7.5 percent to 7.0 percent (before expenses that reduce the asset base from which future fees are projected) and an
unfavorable adjustment in connection with the conversion to a new modeling platform for Index Annuities. In 2016, a net favorable
adjustment of $39 million was primarily due to favorable updates to assumptions for volatility, lapses, mortality and policy expenses,
partially offset by a decrease in the separate account long-term asset growth rate assumption from 8.5 percent to 7.5 percent (before
expenses that reduce the asset base from which future fees are projected). The net favorable adjustment included a net unfavorable
adjustment of approximately $24 million in connection with the conversion to a new modeling platform for variable annuities, primarily
due to refinements to assumptions for guaranteed minimum interest rates and investment fees, partially offset by the impact of other
refinements identified during the conversion.
Group Retirement
In Group Retirement, the update of estimated gross profit assumptions resulted in a favorable adjustment of $17 million in 2018,
primarily due to improved premium persistency assumptions. In 2017, a net favorable adjustment of $13 million was primarily due to
an increase in the reversion to the mean rate used for projecting future estimated gross profit for variable annuity products and
changes in maintenance expense assumptions. The net favorable adjustment was partially offset by a decrease in the separate
account long-term asset growth rate assumption from 7.5 percent to 7.0 percent (before expenses that reduce the asset base from
which future fees are projected) and decreases in fixed annuity spread and separate account fee assumptions. In 2016, a net
unfavorable adjustment of $47 million was primarily due to refinements in lapse and partial withdrawal assumptions and a decrease in
the separate account long-term asset growth rate assumption from 8.5 percent to 7.5 percent (before expenses that reduce the asset
base from which future fees are projected).
Life Insurance
In Life Insurance, the update of actuarial assumptions resulted in a net unfavorable adjustment of $63 million in 2018, primarily due to
strengthening reserves for certain riders, decreased lapses and interest crediting model refinements. The unfavorable adjustments
were partially offset by favorable adjustments driven by updates to mortality assumptions and a reduction to IBNR reserves. In 2017,
a net favorable adjustment of $29 million was primarily due to improved mortality assumptions, partially offset by lower spread
assumptions. In 2016, a net unfavorable adjustment of $92 million was primarily due to refinement to reserves for universal life
insurance with secondary guarantees due to lower assumed lapse rates. The update to Life Insurance assumptions in 2016 also
included lower spread assumptions.
AIG | 2018 Form 10-K 125
ITEM 7 | Insurance Reserves
Legacy Portfolio
In Legacy Portfolio, the update of actuarial assumptions resulted in a net unfavorable adjustment of $110 million in 2018, primarily due
to $105 million of loss recognition expense on accident and health business (other than long-term care) in the Legacy Life and
Retirement Run-Off Lines resulting from assumption and model refinements. In 2017, a net unfavorable adjustment of $14 million was
primarily due to $13 million of loss recognition expense on long-term care business in the Legacy Life and Retirement Run-Off Lines
resulting from model enhancements. In 2016, Legacy Life and Retirement Run-Off Lines recorded $622 million of loss recognition
expense on payout annuities. The loss recognition reflected the establishment of additional reserves primarily as a result of mortality
experience studies, which indicated increased longevity, particularly on disabled lives on a block of structured settlements
underwritten prior to 2010.
Variable Annuity Guaranteed Benefits and Hedging Results
Our Individual Retirement and Group Retirement businesses offer variable annuity products with GMWB riders that provide
guaranteed living benefit features. The liabilities for GMWB are accounted for as embedded derivatives measured at fair value. The
fair value of the embedded derivatives may fluctuate significantly based on market interest rates, equity prices, credit spreads, market
volatility, policyholder behavior and other factors.
In addition to risk-mitigating features in our variable annuity product design, we have an economic hedging program designed to
manage market risk from GMWB, including exposures to changes in interest rates, equity prices, credit spreads and volatility. The
hedging program utilizes derivative instruments, including but not limited to equity options, futures contracts and interest rate swap
and swaption contracts, as well as fixed maturity securities with a fair value election.
For additional discussion of market risk management related to these product features see Enterprise Risk Management – Insurance
Risks – Life and Retirement Companies Key Risks – Variable Annuity Risk Management and Hedging Programs.
Differences in Valuation of Embedded Derivatives and Economic Hedge Target
The variable annuity hedging program utilizes an economic hedge target, which represents an estimate of the underlying economic
risks in our GMWB riders. The economic hedge target differs from the U.S. GAAP valuation of the GMWB embedded derivatives
primarily due to the following:
• The economic hedge target includes 100 percent of rider fees in present value calculations; the U.S. GAAP valuation reflects only
those fees attributed to the embedded derivative such that the initial value at contract issue equals zero;
• The economic hedge target uses best estimate actuarial assumptions and excludes explicit risk margins used for U.S. GAAP
valuation, such as margins for policyholder behavior, mortality, and volatility; and
• The economic hedge target excludes the non-performance or “own credit” risk adjustment used in the U.S. GAAP valuation, which
reflects a market participant’s view of our claims-paying ability by incorporating an additional spread (the NPA spread) to the swap
curve used to discount projected benefit cash flows. Because the discount rate includes the NPA spread and other explicit risk
margins, the U.S. GAAP valuation is generally less sensitive to movements in interest rates and other market factors, and to
changes from actuarial assumption updates, than the economic hedge target. For more information on our valuation methodology
for embedded derivatives within policyholder contract deposits see Note 5 to the Consolidated Financial Statements.
The market value of the hedge portfolio compared to the economic hedge target at any point in time may be different and is not
expected to be fully offsetting. In addition to the derivatives held in conjunction with the variable annuity hedging program, the Life and
Retirement companies have cash and invested assets available to cover future claims payable under these guarantees. The primary
sources of difference between the change in the fair value of the hedging portfolio and the economic hedge target include:
• Basis risk due to the variance between expected and actual fund returns, which may be either positive or negative;
• Realized volatility versus implied volatility;
• Actual versus expected changes in the hedge target driven by assumptions not subject to hedging, particularly policyholder
behavior; and
• Risk exposures that we have elected not to explicitly or fully hedge.
126 AIG | 2018 Form 10-K
The following table presents a reconciliation between the fair value of the U.S. GAAP embedded derivatives and the value of
our economic hedge target:
ITEM 7 | Insurance Reserves
(in millions)
Reconciliation of embedded derivatives and economic hedge target:
Embedded derivative liability
Exclude non-performance risk adjustment
Embedded derivative liability, excluding NPA
Adjustments for risk margins and differences in valuation
Economic hedge target liability
Impact on Pre-tax Income (Loss)
December 31,
2018
December 31,
2017
$
$
1,943 $
(2,615)
4,558
(2,377)
2,181 $
1,994
(1,947)
3,941
(1,557)
2,384
The impact on our pre-tax income (loss) of the variable annuity guaranteed living benefits and related hedging results includes
changes in the fair value of the GMWB embedded derivatives, and changes in the fair value of related derivative hedging instruments,
both of which are recorded in Other realized capital gains (losses). Realized capital gains (losses), as well as net investment income
from changes in the fair value of fixed maturity securities used in the hedging program, are excluded from adjusted pre-tax income of
Individual Retirement and Group Retirement.
The change in the fair value of the embedded derivatives and the change in the value of the hedging portfolio are not expected to be
fully offsetting, primarily due to the differences in valuation between the economic hedge target, the U.S. GAAP embedded derivatives
and the fair value of the hedging portfolio, as discussed above. When corporate credit spreads widen, the change in the NPA spread
generally reduces the fair value of the embedded derivative liabilities, resulting in a gain, and when corporate credit spreads narrow or
tighten, the change in the NPA spread generally increases the fair value of the embedded derivative liabilities, resulting in a loss. In
addition to changes driven by credit market-related movements in the NPA spread, the NPA balance also reflects changes in business
activity and in the net amount at risk from the underlying guaranteed living benefits.
The following table presents the net increase (decrease) to consolidated pre-tax income (loss) from changes in the fair value
of the GMWB embedded derivatives and related hedges, excluding related DAC amortization:
Years Ended December 31,
(in millions)
Change in fair value of embedded derivatives, excluding update of
actuarial assumptions and NPA
Change in fair value of variable annuity hedging portfolio:
Fixed maturity securities
Interest rate derivative contracts
Equity derivative contracts
Change in fair value of variable annuity hedging portfolio
Change in fair value of embedded derivatives excluding update of actuarial
assumptions and NPA, net of hedging portfolio
Change in fair value of embedded derivatives due to NPA spread
Change in fair value of embedded derivatives due to change in NPA volume
Change in fair value of embedded derivatives due to update of actuarial assumptions
Total change due to update of actuarial assumptions and NPA
Net impact on pre-tax income (loss)
By Consolidated Income Statement line
Net investment income
Net realized capital gains (losses)
Net impact on pre-tax income (loss)
2018
2017
2016
$
(244) $
1,423 $
-
(154)
(470)
312
(312)
(556)
388
280
38
706
150 $
(154) $
304
150 $
146
(70)
(1,347)
(1,271)
152
(840)
(352)
(188)
(1,380)
(1,228) $
146 $
(1,374)
(1,228) $
120
(194)
(919)
(993)
(993)
(286)
257
(101)
(130)
(1,123)
120
(1,243)
(1,123)
$
$
$
AIG | 2018 Form 10-K 127
ITEM 7 | Insurance Reserves
The net impact on pre-tax income from the GMWB embedded derivatives and related hedges in 2018 (excluding related DAC
amortization) was primarily driven by gains from the impact of widening credit spreads on the NPA spread, and higher interest rates,
partially offset by losses from the impact of the change in credit spreads and the move from an economic to a GAAP discount basis.
In 2017, the net impact on pre-tax income was primarily driven by losses from actuarial assumption updates to lapse and volatility
assumptions, tightening credit spreads on the NPA spread and the impact on the NPA volume of lower expected GMWB payments,
driven by higher equity markets. In 2016, the net impact on pre-tax income was primarily driven by the impact of rising interest rates
and equity markets late in the fourth quarter of 2016, which resulted in fair value losses in the hedging portfolio, which were not offset
by decreases in the embedded derivative liabilities as the risk margins and other assumptions used in the U.S. GAAP valuation
caused the embedded derivatives to be less sensitive to market changes than the related hedge portfolio. In addition, 2016 included
losses from actuarial assumption updates due to lapse and mortality assumptions.
The change in the fair value of the GMWB embedded derivatives, excluding NPA and update of actuarial assumptions, in 2018
reflected losses from lower equity markets and the impact of moving from an economic to a GAAP discount basis, offset by increases
in interest rates and widening credit spreads. In 2018, the hedge losses were driven by losses from higher interest rates and widening
credit spreads, offset by gains from lower equity markets. In 2017, the change in the fair value of embedded derivatives, excluding
update of actuarial assumptions and NPA, was largely offset by the related hedging portfolio. However, in 2016, the change in fair
value of embedded derivatives, excluding update of actuarial assumptions and NPA, reflected losses on the hedging portfolio driven
by improvements in both interest rates and equity markets late in the fourth quarter of 2016, which were not offset by decreases in
embedded derivative liabilities.
Fair value gains or losses in the hedging portfolio are typically not fully offset by increases or decreases in liabilities on a U.S. GAAP
basis, due to the NPA and other risk margins used for U.S. GAAP valuation that cause the embedded derivatives to be less sensitive
to changes in market rates than the hedge portfolio. On an economic basis, the changes in the fair value of the hedge portfolio were
partially offset by the decrease in the economic hedge target, as discussed below.
Change in Economic Hedge Target
The decrease in the economic hedge target liability in 2018 was primarily due to higher interest rates and widening of credit spreads,
offset by lower equity markets. The decrease in the economic hedge target liability in 2017 was primarily due to positive equity
markets, partially offset by tighter credit spreads and lower equity volatility.
Change in Fair Value of the Hedging Portfolio
The changes in the fair value of the economic hedge target and, to a lesser extent, the embedded derivative valuation under U.S.
GAAP, were offset in part by the following changes in the fair value of the variable annuity hedging portfolio:
• Changes in the fair value of fixed maturity securities, primarily corporate bonds for which the fair value option has been elected,
are used as a capital-efficient way to economically hedge interest rate and credit spread-related risk. The change in the fair value
of the corporate bond hedging program in 2018 reflected losses due to increases in interest rates, and widening of credit spreads.
The net gains in 2017 were primarily due to tightening of credit spreads. The net gains in 2016 reflected the impact of credit
spreads tightening and decreases in market interest rates in the first nine months of 2016, partially offset by an increase in rates in
the fourth quarter of 2016. The change in the fair value of the hedging bonds, which is excluded from the adjusted pre-tax income
of the Individual Retirement and Group Retirement segments, is reported in net investment income on the Consolidated
Statements of Income (Loss).
• Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions and futures, resulted in net losses
driven by higher interest rates in 2018. The small net loss in 2017 reflected increases in rates in the latter half of 2017, partially
offset by the impact of interest rate declines in the first half of 2017. The net losses in 2016 reflected increases in rates in the fourth
quarter of 2016, which more than offset the impact of interest rate declines in the first nine months of 2016.
• The change in the fair value of equity derivative contracts, which included futures and options, resulted in gains in 2018, and
losses in 2017 and 2016, which varied based on the relative change in equity market returns in the respective periods.
128 AIG | 2018 Form 10-K
ITEM 7 | Insurance Reserves
DAC
The following table summarizes the major components of the changes in DAC, including VOBA, within the Life and
Retirement companies, excluding DAC of the Legacy Portfolio:
Years Ended December 31,
(in millions)
Balance, beginning of year
Acquisition costs deferred
Amortization expense:
Update of assumptions included in adjusted pre-tax income
Related to realized capital gains and losses
All other operating amortization
Increase (decrease) in DAC due to foreign exchange
Change related to unrealized depreciation (appreciation) of investments
Balance, end of year*
2018
7,637 $
1,164
307
5
(987)
(22)
1,029
9,133 $
2017
7,571 $
970
194
293
(937)
26
(480)
7,637 $
2016
7,174
1,026
315
276
(928)
(40)
(252)
7,571
$
$
* DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $9.4 billion, $8.9 billion and $8.4 billion at December 31, 2018,
2017 and 2016, respectively.
The net adjustments to DAC amortization from the update of actuarial assumptions for estimated gross profits, including those
reported within change in DAC related to net realized capital gains (losses), represented four percent, two percent and four percent of
the DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments as of December 31, 2018,
2017 and 2016, respectively.
Reversion to the Mean
The reversion to the mean rate is updated quarterly based on market returns and can change dramatically in periods where market
returns move significantly. The five-year reversion to the mean period did not meet the criteria for adjustment in 2018 which would
have otherwise required a reset of the start date used in the calculation of the average gross long-term return rate. The long-term
growth assumption used in our reversion to the mean methodology remained unchanged at 7.0 percent in 2018.
In 2017, we updated the long-term annual growth assumption applied to subsequent periods used in our reversion to the mean
methodology for estimating future estimated gross profits for variable annuity products, from 7.5 percent to 7.0 percent (before
expenses that reduce the asset base from which future fees are projected). The five-year reversion to the mean period has met the
criteria for adjustment in 2017. As a result, the average gross long-term return measurement start date was reset to December 31,
2011 for Individual Retirement and June 30, 2013 for Group Retirement; the reversion to the mean rates (gross of fees) were
increased to 3.74 percent in Individual Retirement and 3.78 percent in Group Retirement. Sustained favorable equity market
performance in excess of long-term assumptions could result in additional unlocking in the Individual Retirement or Group Retirement
variable annuity product lines in the future, with a positive effect on pre-tax income in the period of the unlocking.
In 2016, the long-term annual asset growth assumption was updated from 8.5 percent to 7.5 percent. The five-year reversion to the
mean period did not meet the criteria for adjustment in 2016.
For additional discussion of assumptions related to our reversion to the mean methodology see Critical Accounting Estimates –
Estimated Gross Profits for Investment-Oriented Products.
DAC and Reserves Related to Unrealized Appreciation of Investments
DAC and Reserves for universal life and investment-type products (collectively, investment-oriented products) are adjusted at each
balance sheet date to reflect the change in DAC, unearned revenue, and benefit reserves with an offset to Other comprehensive
income (OCI) as if securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at
current yields (shadow Investment-Oriented Adjustments). Similarly, for long-duration traditional products, significant unrealized
appreciation of investments in a sustained low interest rate environment may cause additional future policy benefit liabilities (shadow
Loss Adjustments) with an offset to OCI to be recorded.
Shadow adjustments to DAC and unearned revenue generally move in the opposite direction of the change in unrealized appreciation
of the available for sale securities portfolio, reducing the reported DAC and unearned revenue balance when market interest rates
decline. Conversely, shadow adjustments to benefit reserves generally move in the same direction as the change in unrealized
appreciation of the available for sale securities portfolio, increasing reported future policy benefit liabilities balance when market
interest rates decline.
AIG | 2018 Form 10-K 129
ITEM 7 | Insurance Reserves
Market interest rates increased in 2018, which resulted in a $8.3 billion decrease in the unrealized appreciation of fixed maturity
securities held to support businesses in the Life and Retirement companies at December 31, 2018 compared to December 31, 2017.
At December 31, 2018, the shadow Investment-Oriented Adjustments reflected increases in DAC and unearned revenues and a
decrease in future policy benefit liabilities compared to December 31, 2017, while the shadow Loss Adjustments reflected a decrease
in future policy benefit liabilities.
Reserves
The following table presents a rollforward of insurance reserves by operating segments for Life and Retirement, including
future policy benefits, policyholder contract deposits, other policy funds, and separate account liabilities, as well as Retail
Mutual Funds and Group Retirement mutual fund assets under administration:
Years Ended December 31,
(in millions)
Individual Retirement
Balance at beginning of year, gross
Premiums and deposits
Surrenders and withdrawals
Death and other contract benefits
Subtotal
Change in fair value of underlying assets and reserve accretion, net of
policy fees
Cost of funds*
Other reserve changes
Balance at end of year
Reinsurance ceded
Total Individual Retirement insurance reserves and mutual fund assets
Group Retirement
Balance at beginning of year, gross
Premiums and deposits
Surrenders and withdrawals
Death and other contract benefits
Subtotal
Change in fair value of underlying assets and reserve accretion, net of
policy fees
Cost of funds*
Other reserve changes
Balance at end of year
Total Group Retirement insurance reserves and mutual fund assets
Life Insurance
Balance at beginning of year, gross
Premiums and deposits
Surrenders and withdrawals
Death and other contract benefits
Subtotal
Change in fair value of underlying assets and reserve accretion, net of
policy fees
Cost of funds*
Other reserve changes
Balance at end of year
Reinsurance ceded
Total Life Insurance reserves
2018
2017
2016
$
$
$
$
$
$
138,571 $
15,621
(14,081)
(3,316)
(1,776)
129,321 $
11,906
(10,943)
(3,089)
(2,126)
(5,302)
1,540
(304)
132,729
(318)
132,411 $
97,306 $
8,639
(10,652)
(606)
(2,619)
(4,106)
1,106
(2)
91,685
91,685 $
19,424 $
3,559
(943)
(465)
2,151
(1,124)
374
(1,106)
19,719
(1,216)
18,503 $
10,098
1,528
(250)
138,571
(322)
138,249 $
88,622 $
7,550
(8,019)
(562)
(1,031)
8,617
1,098
-
97,306
97,306 $
18,397 $
3,484
(569)
(575)
2,340
(889)
376
(800)
19,424
(1,055)
18,369 $
121,474
16,062
(10,027)
(2,991)
3,044
3,657
1,614
(468)
129,321
(371)
128,950
84,145
7,570
(7,589)
(536)
(555)
3,923
1,109
-
88,622
88,622
18,006
3,391
(650)
(522)
2,219
(1,033)
386
(1,181)
18,397
(1,085)
17,312
130 AIG | 2018 Form 10-K
Institutional Markets
Balance at beginning of year, gross
Premiums and deposits
Surrenders and withdrawals
Death and other contract benefits
Subtotal
Change in fair value of underlying assets and reserve accretion, net of
policy fees
Cost of funds*
Other reserve changes
Balance at end of year
Reinsurance ceded
Total Institutional Markets reserves
Total insurance reserves and mutual fund assets
Balance at beginning of year, gross
Premiums and deposits
Surrenders and withdrawals
Death and other contract benefits
Subtotal
Change in fair value of underlying assets and reserve accretion, net of
policy fees
Cost of funds*
Other reserve changes
Balance at end of year
Reinsurance ceded
Total insurance reserves and mutual fund assets
* Excludes amortization of deferred sales inducements
ITEM 7 | Insurance Reserves
$
$
$
$
18,580 $
3,032
(1,745)
(655)
632
179
338
110
19,839
(43)
19,796 $
15,385 $
4,247
(1,291)
(343)
2,613
245
253
84
18,580
(3)
18,577 $
273,881 $
30,851
(27,421)
(5,042)
(1,612)
251,725 $
27,187
(20,822)
(4,569)
1,796
(10,353)
3,358
(1,302)
263,972
(1,577)
262,395 $
18,071
3,255
(966)
273,881
(1,380)
272,501 $
14,216
2,153
(1,283)
(617)
253
256
244
416
15,385
(3)
15,382
237,841
29,176
(19,549)
(4,666)
4,961
6,803
3,353
(1,233)
251,725
(1,459)
250,266
Insurance reserves of Life and Retirement, as well as Retail Mutual Funds and Group Retirement mutual fund assets under
administration, were comprised of the following balances:
(in millions)
Future policy benefits
Policyholder contract deposits
Other policy funds
Separate account liabilities
Total insurance reserves*
Mutual fund assets
Total insurance reserves and mutual fund assets
* Excludes reserves related to the Legacy Portfolio.
Liquidity and Capital Resources
OVERVIEW
December 31,
2018
14,739 $
$
137,718
295
79,960
232,712
31,260
263,972 $
$
December 31,
2017
13,592
130,735
401
90,819
235,547
38,334
273,881
Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations. It is defined as cash and
unencumbered assets that can be monetized in a short period of time at a reasonable cost. We endeavor to manage our liquidity
prudently through various risk committees, policies and procedures, and a stress testing and liquidity risk framework established by
our Treasury group with oversight by Enterprise Risk Management (ERM). Our liquidity risk framework is designed to manage liquidity
at both AIG Parent and its subsidiaries to meet our financial obligations for a minimum of six months under a liquidity stress scenario.
See Enterprise Risk Management — Risk Appetite, Limits, Identification, and Measurement and Enterprise Risk Management —
Liquidity Risk Management below for additional information.
AIG | 2018 Form 10-K 131
ITEM 7 | Liquidity and Capital Resources
Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth, and
cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital generation is
derived from the profitability of our insurance subsidiaries. We must comply with numerous constraints on our minimum capital
positions. These constraints drive the requirements for capital adequacy at AIG and the individual businesses and are based on
internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual capital
levels are monitored on a regular basis, and using ERM’s stress testing methodology, we evaluate the capital impact of potential
macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of both AIG and our insurance
subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to
policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or events.
Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable capital
resources. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher
surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in significant additional cash
or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal restrictions could limit our ability to
transfer funds freely, either to or from our subsidiaries.
Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability and
capital management actions. Liability management actions may include, but are not limited to, repurchasing or redeeming outstanding
debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not limited to, paying
dividends to our shareholders and share and/or warrant repurchases.
LIQUIDITY AND CAPITAL RESOURCES ACTIVITY FOR 2018
SOURCES
AIG Parent Funding from Subsidiaries
During 2018, AIG Parent received $4.2 billion in dividends from subsidiaries. Of this amount, $1.7 billion consisted of dividends in
the form of cash and fixed maturity securities from our General Insurance companies, $2.5 billion consisted of dividends and loan
repayments in the form of cash from our Life and Retirement companies and $48 million consisted of dividends in the form of cash
from our Other category.
AIG Parent also received a net amount of $938 million in tax sharing payments in the form of cash from our insurance businesses
in 2018, reflecting $120 million that was reimbursed by AIG Parent to our insurance businesses during the fourth quarter of 2018
primarily as a result of adjustments made to prior-year tax sharing payments. The tax sharing payments may be subject to further
adjustment in future periods.
Debt Issuance
In March 2018, we issued $750 million aggregate principal amount of 4.200% Notes Due 2028; $1.0 billion aggregate principal
amount of 4.750% Notes Due 2048; and $750 million aggregate principal amount of 5.750% Fixed-To-Floating Rate Series A-9
Junior Subordinated Debentures Due 2048 (Junior Subordinated Debentures). We used the net proceeds from these offerings for
general corporate purposes, including funding a portion of the consideration for the acquisition of Validus.
Sale of Non-controlling Interest in Fortitude
In November 2018, we completed our sale of a non-controlling interest in Fortitude Re for $476 million. We received $381 million
of the purchase price at closing and will receive up to $95 million of deferred compensation which is subject to certain purchase
price adjustments. To the extent we do not receive all or a portion of the Target Distribution within 18 months of the Fortitude Re
Closing, TCG will pay us up to an additional $100 million.
132 AIG | 2018 Form 10-K
ITEM 7 | Liquidity and Capital Resources
USES
Debt Reduction
In May 2018, we redeemed all of our outstanding 8.000% Series A-7 Junior Subordinated Debentures and 8.625% Series A-
8 Junior Subordinated Debentures in each case for a redemption price of 100 percent of the principal amount, plus accrued and
unpaid interest, for approximately $15 million and $7 million, respectively.
In October 2018, our subsidiary Validus Reinsurance, Ltd. redeemed its outstanding Floating Rate Deferrable Interest Junior
Subordinated Notes due July 30, 2037 at a redemption price of 100 percent of the principal amount, plus accrued and unpaid
interest, for a net amount of approximately $90 million. In December 2018, Validus Reinsurance, Ltd. redeemed its outstanding (i)
U.S. dollar-denominated Floating Rate Deferrable Interest Subordinated Notes due September 15, 2036, (ii) euro-denominated
Floating Rate Deferrable Interest Subordinated Notes due September 15, 2036 and (iii) Floating Rate Deferrable Interest
Subordinated Notes due September 15, 2037, each at a redemption price of 100 percent of the principal amount, plus accrued and
unpaid interest, for an aggregate amount of approximately $162 million. In addition, in December 2018, Validus redeemed its
outstanding (i) Junior Subordinated Deferrable Interest Debentures due June 15, 2036 and (ii) Junior Subordinated Deferrable
Interest Debentures due June 15, 2037, each at a redemption price of 100 percent of the principal amount, plus accrued and
unpaid interest, for an aggregate net amount of approximately $295 million.
We also made other repurchases of and repayments on debt instruments of approximately $3.2 billion during 2018. AIG Parent
made interest payments on its debt instruments totaling $914 million during 2018.
Validus Acquisition and Redemption of Preference Shares
On July 18, 2018, we completed our acquisition of Validus for approximately $5.5 billion in cash. Following the consummation of
the acquisition, AIG executed a guarantee, dated July 26, 2018, with respect to Validus’ outstanding Series A Preference Shares
and Series B Preference Shares (together, the Preference Shares), pursuant to which AIG provided a full and unconditional
guarantee of Validus’ obligations with respect to the Preference Shares. In addition, AIG executed a guarantee, dated July 26,
2018, with respect to Validus’ aggregate outstanding 8.875% Senior Notes due 2040 (the Notes), pursuant to which AIG provided a
full and unconditional guarantee of Validus’ obligations with respect to the Notes. AIG also entered into certain letter of credit
agreements in support of the Validus companies.
In October 2018, Validus redeemed all of its outstanding Preference Shares at a redemption price of $26,000 per Preference
Share for approximately $416 million in the aggregate.
Dividend
We paid a cash dividend of $0.32 per share on AIG Common Stock during each quarter of 2018 totaling $1.1 billion.
Repurchase of Common Stock
We repurchased approximately 36.5 million shares of AIG Common Stock during 2018, for an aggregate purchase price of
approximately $1.7 billion.
AIG | 2018 Form 10-K 133
ANALYSIS OF SOURCES AND USES OF CASH
The following table presents selected data from AIG's Consolidated Statements of Cash Flows:
ITEM 7 | Liquidity and Capital Resources
Years Ended December 31,
(in millions)
Sources:
Net cash provided by (used in) operating activities
Net cash provided by other investing activities
Changes in policyholder contract balances
Issuance of long-term debt
Net cash provided by other financing activities
Total sources
Uses:
Net cash used in operating activities
Acquisition of businesses, net of cash and restricted cash acquired
Repayments of long-term debt
Purchases of AIG Common Stock
Dividends paid
Purchases of warrants
Net cash used in other financing activities
Total uses
Effect of exchange rate changes on cash and restricted cash
Increase (decrease) in cash and restricted cash
2018
2017
2016
$
61 $
- $
5,494
6,179
4,734
-
16,468
-
(5,717)
(3,672)
(1,739)
(1,138)
(11)
(3,559)
14,041
2,123
3,356
-
3,502
3,252
4,059
5,954
377
19,520
17,144
(7,818)
-
(3,698)
(6,275)
(1,172)
(3)
(28)
-
-
(4,082)
(11,460)
(1,372)
(309)
-
(15,836)
(11)
621 $
(18,994)
(17,223)
(29)
497 $
55
(24)
$
The following table presents a summary of AIG’s Consolidated Statement of Cash Flows:
Years Ended December 31,
(in millions)
Summary:
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and restricted cash
Increase (decrease) in cash and restricted cash
Cash and restricted cash at beginning of year
Change in cash of businesses held for sale
Cash and restricted cash at end of year
Operating Cash Flow Activities
2018
2017
2016
61 $
(223)
794
(11)
621
2,737
-
3,358 $
(7,818) $
14,041
(5,697)
(29)
497
2,107
133
2,737 $
3,502
3,252
(6,833)
55
(24)
2,238
(107)
2,107
$
$
Insurance companies generally receive most premiums in advance of the payment of claims or policy benefits. The ability of
insurance companies to generate positive cash flow is affected by the frequency and severity of losses under their insurance policies,
policy retention rates and operating expenses.
Interest payments totaled $1.3 billion in 2018 compared to $1.2 billion in 2017 and $1.3 billion in 2016. Excluding interest payments,
AIG had operating cash inflows of $1.4 billion in 2018 compared to operating cash outflows of $6.6 billion in 2017 and operating cash
inflows of $4.8 billion in 2016. The operating cash outflows in 2017 were primarily due to payment for the adverse development
reinsurance agreement entered into with NICO.
134 AIG | 2018 Form 10-K
ITEM 7 | Liquidity and Capital Resources
Investing Cash Flow Activities
Net cash used in investing activities in 2018 was $0.2 billion compared to cash provided by investing activities of $14.0 billion in 2017
and $3.3 billion in 2016. Net cash used in investing activities in 2018 included our acquisition of Validus for approximately $5.5 billion
in cash. Net cash provided by investing activities in 2017 primarily included sales of certain investments to fund the adverse
development reinsurance agreement entered into with NICO. Net cash provided by investing activities in 2016 primarily included $2.8
billion of net cash proceeds from the sales of United Guaranty, Ascot and AIG Advisor Group.
Financing Cash Flow Activities
Net cash used in financing activities in 2018 reflected:
• approximately $1.1 billion in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each quarter of 2018;
• approximately $1.7 billion to repurchase approximately 36.5 million shares of AIG Common Stock; and
• approximately $1.1 billion in net inflows from the issuance and repayment of long-term debt.
Net cash used in financing activities in 2017 included:
• approximately $1.2 billion in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each quarter of 2017;
• approximately $6.3 billion to repurchase approximately 100 million shares of AIG Common Stock; and
• approximately $342 million in net outflows from the issuance and repayment of long-term debt.
Net cash used in financing activities in 2016 included:
• approximately $1.4 billion in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each quarter of 2016;
• approximately $11.5 billion to repurchase approximately 201 million shares of AIG Common Stock;
• approximately $309 million to repurchase approximately 17 million warrants to purchase shares of AIG Common Stock; and
• approximately $1.9 billion in net inflows from the issuance and repayment of long-term debt.
LIQUIDITY AND CAPITAL RESOURCES OF AIG PARENT AND SUBSIDIARIES
AIG Parent
As of December 31, 2018, AIG Parent had approximately $8.3 billion in liquidity sources. AIG Parent’s liquidity sources are primarily
held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities. Fixed maturity
securities primarily include U.S. government and government sponsored entity securities, U.S. agency mortgage-backed securities,
corporate and municipal bonds and certain other highly rated securities. AIG Parent actively manages its assets and liabilities in terms
of products, counterparties and duration. Based upon an assessment of funding needs, the liquidity sources can be readily monetized
through sales or repurchase agreements or contributed as admitted assets to regulated insurance companies. AIG Parent liquidity is
monitored through the use of various internal liquidity risk measures. AIG Parent’s primary sources of liquidity are dividends,
distributions, loans and other payments from subsidiaries and credit facilities. AIG Parent’s primary uses of liquidity are for debt
service, capital and liability management, and operating expenses.
We believe that we have sufficient liquidity and capital resources to satisfy our reasonably foreseeable future requirements and meet
our obligations to our creditors, debt-holders and insurance company subsidiaries. We expect to access the debt markets from time to
time to meet funding requirements as needed.
We utilize our capital resources to support our businesses, with the majority of capital allocated to our insurance operations. Should
we have or generate more capital than is needed to support our business strategies (including organic growth or acquisition
opportunities) or mitigate risks inherent to our business, we may develop plans to distribute such capital to shareholders via dividends
or share repurchase authorizations or deploy such capital towards liability management.
In the normal course, it is expected that a portion of the capital released by our insurance operations, by our other operations or
through the utilization of AIG’s deferred tax assets may be available to support our business strategies, for distribution to shareholders
or for liability management.
In developing plans to distribute capital, AIG considers a number of factors, including, but not limited to: AIG’s business and strategic
plans, expectations for capital generation and utilization, AIG’s funding capacity and capital resources in comparison to internal
benchmarks, as well as rating agency expectations, regulatory standards and internal stress tests for capital.
AIG | 2018 Form 10-K 135
The following table presents AIG Parent's liquidity sources:
(In millions)
Cash and short-term investments(a)
Unencumbered fixed maturity securities(b)
Total AIG Parent liquidity
Available capacity under syndicated credit facility(c)
Total AIG Parent liquidity sources
ITEM 7 | Liquidity and Capital Resources
$
As of
As of
December 31, 2018 December 31, 2017
2,114
5,172
7,286
4,500
11,786
626
3,168
3,794
4,500
8,294
$
$
$
(a) Cash and short-term investments include reverse repurchase agreements totaling $22 million and $1.7 billion as of December 31, 2018 and December 31, 2017,
respectively.
(b) Unencumbered securities consist of publicly traded, investment grade rated fixed maturity securities. Fixed maturity securities primarily include U.S. government and
government sponsored entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.
(c) For additional information relating to this syndicated credit facility see Credit Facilities below.
Insurance Companies
We expect that our insurance companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and
meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations
and, to the extent necessary, monetization of invested assets. Our insurance companies’ liquidity resources are primarily held in the
form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.
Each of our material insurance companies’ liquidity is monitored through various internal liquidity risk measures. The primary sources
of liquidity are premiums, fees, reinsurance recoverables and investment income and maturities. The primary uses of liquidity are paid
losses, reinsurance payments, benefit claims, surrenders, withdrawals, interest payments, dividends, expenses, investment
purchases and collateral requirements.
Our General Insurance companies may require additional funding to meet capital or liquidity needs under certain circumstances.
Large catastrophes may require us to provide additional support to our affected operations. Downgrades in our credit ratings could put
pressure on the insurer financial strength ratings of our subsidiaries, which could result in non-renewals or cancellations by
policyholders and adversely affect a subsidiary’s ability to meet its own obligations. Increases in market interest rates may adversely
affect the financial strength ratings of our subsidiaries, as rating agency capital models may reduce the amount of available capital
relative to required capital. Other potential events that could cause a liquidity strain include an economic collapse of a nation or region
significant to our operations, nationalization, catastrophic terrorist acts, pandemics or other events causing economic or political
upheaval.
Management believes that because of the size and liquidity of our Life and Retirement companies’ investment portfolios, normal
deviations from projected claim or surrender experience would not create significant liquidity risk. Furthermore, our Life and
Retirement companies’ products contain certain features that mitigate surrender risk, including surrender charges. However, in times
of extreme capital markets disruption, liquidity needs could outpace resources. As part of their risk management framework, our Life
and Retirement companies continue to evaluate and, where appropriate, pursue strategies and programs to improve their liquidity
position and facilitate their ability to maintain a fully invested asset portfolio.
Certain of our U.S. insurance companies are members of the Federal Home Loan Banks (FHLBs) in their respective districts.
Borrowings from FHLBs are used to supplement liquidity or for other uses deemed appropriate by management. Our U.S. General
Insurance companies had outstanding borrowings from FHLBs in an aggregate amount of approximately $115 million and $190
million at December 31, 2018 and December 31, 2017, respectively. Our U.S. Life and Retirement companies had no outstanding
borrowings in the form of cash advances from FHLBs at both December 31, 2018 and 2017, respectively. In addition, $3.4 billion and
$606 million were due to FHLBs in the respective districts of our U.S. Life and Retirement companies at December 31, 2018 and
December 31, 2017, respectively, under funding agreements issued through our Individual Retirement, Group Retirement and
Institutional Markets operating segments, which were reported in Policyholder contract deposits.
Certain of our U.S. Life and Retirement companies have programs, which began in 2012, that lend securities from their investment
portfolio to supplement liquidity or for other uses as deemed appropriate by management. Under these programs, these U.S. Life and
Retirement companies lend securities to financial institutions and receive cash as collateral equal to 102 percent of the fair value of
the loaned securities. Cash collateral received is invested in short-term investments. Additionally, the aggregate amount of securities
that a Life and Retirement company is able to lend under its program at any time is limited to five percent of its general account
statutory-basis admitted assets. Our U.S. Life and Retirement companies had $884 million and $2.9 billion of securities subject to
these agreements at December 31, 2018 and December 31, 2017, respectively, and $904 million and $3.0 billion of liabilities to
borrowers for collateral received at December 31, 2018 and December 31, 2017, respectively.
136 AIG | 2018 Form 10-K
ITEM 7 | Liquidity and Capital Resources
AIG generally manages capital between AIG Parent and our insurance companies through internal, Board-approved policies and
limits, as well as management standards. In addition, AIG Parent has unconditional capital maintenance agreements (CMAs) in place
with certain subsidiaries. Nevertheless, regulatory and other legal restrictions could limit our ability to transfer capital freely, either to
or from our subsidiaries.
In February 2018, AIG Parent entered into a CMA with Fortitude Re. Among other things, the CMA provides that AIG Parent will
maintain available statutory capital and surplus in each of Fortitude Re’s long term business fund and general business account at or
above a stress threshold percentage of its projected enhanced capital requirement in respect of the applicable fund, as defined under
Bermuda law. As of December 31, 2018, the stress threshold percentage under this CMA was 125 percent.
AIG Parent and/or certain subsidiaries are parties to several letter of credit agreements with various financial institutions, which issue
letters of credit from time to time in support of our insurance companies. Letters of credit issued in support of the General Insurance
companies totaled approximately $3.9 billion at December 31, 2018. Letters of credit issued in support of the Life and Retirement
companies totaled approximately $907 million at December 31, 2018. Letters of credit issued in support of Fortitude Re totaled $550
million at December 31, 2018.
During 2016, we created a new Switzerland-domiciled international holding company, AIG International Holdings, GmbH (AIGIH),
which is intended to be the ultimate holding company for all of our international entities. This international holding company structure
is part of our ongoing efforts to simplify our organizational structure, and is expected to facilitate the optimization of our international
capital strategy from both a regulatory and a tax perspective. Through February 12, 2019, substantially all of our international
operations have been transferred to AIGIH. We will continue to monitor our international holding company structure in light of
regulatory, tax and other developments, to ensure that this strategy continues to be effective.
In 2018, our General Insurance companies collectively paid a total of approximately $1.7 billion in dividends in the form of cash and
fixed maturity securities to AIG Parent. The fixed maturity securities primarily included U.S. government and government-sponsored
entity securities, U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities.
In 2018, our Life and Retirement companies collectively paid a total of approximately $2.5 billion in dividends and loan repayments in
the form of cash to AIG Parent.
Tax Matters
If the settlement agreements in principle are concluded in our ongoing dispute related to the disallowance of foreign tax credits
associated with cross border financing transactions, we will be required to make a payment to the U.S. Treasury. Although we can
provide no assurance regarding whether the non-binding settlements will be finalized, the amount we currently expect to pay based
on current proposed settlement terms is approximately $1.7 billion, including obligations of AIG Parent and subsidiaries. This amount
is net of payments previously made with respect to cross border financing transactions involving matters dating back to 1997 and
other matters largely related to the same tax years. There remains uncertainty with regard to whether the settlements in principle will
ultimately be approved by the relevant authorities as well as the amount and timing of any potential payments, which are not likely to
be made before sometime in early 2020.
For additional information regarding this matter see Note 23 to the Consolidated Financial Statements.
CREDIT FACILITIES
We maintain a committed, revolving syndicated credit facility (the Facility) as a potential source of liquidity for general corporate
purposes. The Facility provides for aggregate commitments by the bank syndicate to provide unsecured revolving loans and/or
standby letters of credit of up to $4.5 billion without any limits on the type of borrowings and is scheduled to expire in June 2022.
As of December 31, 2018, a total of $4.5 billion remains available under the Facility. Our ability to utilize the Facility is not contingent
on our credit ratings. However, our ability to utilize the Facility is conditioned on the satisfaction of certain legal, operating,
administrative and financial covenants and other requirements contained in the Facility. These include covenants relating to our
maintenance of a specified total consolidated net worth and total consolidated debt to total consolidated capitalization. Failure to
satisfy these and other requirements contained in the Facility would restrict our access to the Facility and could have a material
adverse effect on our financial condition, results of operations and liquidity. We expect to utilize the Facility from time to time, and may
use the proceeds for general corporate purposes.
AIG | 2018 Form 10-K 137
ITEM 7 | Liquidity and Capital Resources
CONTRACTUAL OBLIGATIONS
The following table summarizes contractual obligations in total, and by remaining maturity:
December 31, 2018
(in millions)
Insurance operations
Loss reserves(a)
Insurance and investment contract liabilities
Borrowings
Interest payments on borrowings
Operating leases
Other long-term obligations
Total
Other
Borrowings
Interest payments on borrowings
Operating leases
Other long-term obligations
Total
Consolidated
Loss reserves(a)
Insurance and investment contract liabilities
Borrowings
Interest payments on borrowings
Operating leases
Other long-term obligations(b)
Total(c)
(a) Represents undiscounted loss reserves.
Total
Payments
$
87,394 $
254,021
1,333
852
760
-
344,360 $
24,635 $
15,249
127
403
40,414 $
87,394 $
254,021
25,968
16,101
887
403
384,774 $
$
$
$
$
$
2019
22,467 $
16,783
-
50
203
-
39,503 $
1,271 $
1,050
46
115
2,482 $
22,467 $
16,783
1,271
1,100
249
115
41,985 $
Payments due by Period
2020 -
2021
2022 -
2023
Thereafter
24,465 $
33,734
331
99
252
-
58,881 $
3,029 $
1,949
54
175
5,207 $
24,465 $
33,734
3,360
2,048
306
175
64,088 $
12,790 $
28,964
-
99
132
-
41,985 $
3,271 $
1,682
18
82
5,053 $
12,790 $
28,964
3,271
1,781
150
82
47,038 $
27,672
174,540
1,002
604
173
-
203,991
17,064
10,568
9
31
27,672
27,672
174,540
18,066
11,172
182
31
231,663
(b) Primarily includes contracts to purchase future services and other capital expenditures.
(c) Does not reflect unrecognized tax benefits of $4.7 billion. See Note 23 to the Consolidated Financial Statements for additional information.
Loss Reserves
Loss reserves relate to our General Insurance companies and represent estimates of future loss and loss adjustment expense
payments based on historical loss development payment patterns. Due to the significance of the assumptions used, the payments by
period presented above could be materially different from actual required payments. We believe that our General Insurance
companies maintain adequate financial resources to meet the actual required payments under these obligations.
Insurance and Investment Contract Liabilities
Insurance and investment contract liabilities, including GIC liabilities, relate to our Life and Retirement companies. These liabilities
include various investment-type products with contractually scheduled maturities, including periodic payments. These liabilities also
include benefit and claim liabilities, of which a significant portion represents policies and contracts that do not have stated contractual
maturity dates and may not result in any future payment obligations. For these policies and contracts (i) we are not currently making
payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or
(iii) payment may occur due to a surrender or other non-scheduled event beyond our control.
We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits.
These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by
expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts
presented could be materially different from actual required payments. The amounts presented in this table are undiscounted and
exceed the future policy benefits and policyholder contract deposits included in the Consolidated Balance Sheets.
We believe that our Life and Retirement companies have adequate financial resources to meet the payments actually required under
these obligations. These subsidiaries have substantial liquidity in the form of cash and short-term investments. In addition, our Life
and Retirement companies maintain significant levels of investment grade rated fixed maturity securities, including substantial
holdings in government and corporate bonds, and could seek to monetize those holdings in the event operating cash flows are
138 AIG | 2018 Form 10-K
ITEM 7 | Liquidity and Capital Resources
insufficient. We expect liquidity needs related to GIC liabilities to be funded through cash flows generated from maturities and sales of
invested assets.
Borrowings
Our borrowings exclude those incurred by consolidated investments and include hybrid financial instrument liabilities recorded at fair
value. We expect to repay the long-term debt maturities and interest accrued on borrowings by AIG through maturing investments and
dispositions of invested assets, future cash flows from operations, cash flows generated from invested assets, future debt issuance
and other financing arrangements. Borrowings supported by assets of AIG include various notes and bonds payable as well as GIAs
that are supported by cash and investments held by AIG Parent and certain non-insurance subsidiaries for the repayment of those
obligations.
OFF-BALANCE SHEET ARRANGEMENTS AND COMMERCIAL COMMITMENTS
The following table summarizes Off-Balance Sheet Arrangements and Commercial Commitments in total, and by remaining
maturity:
December 31, 2018
Amount of Commitment Expiring
(in millions)
Insurance operations
Guarantees:
Standby letters of credit
Guarantees of indebtedness
All other guarantees(a)
Commitments:
Investment commitments(b)
Commitments to extend credit
Letters of credit
Total(c)
Other
Guarantees:
Liquidity facilities(d)
Standby letters of credit
All other guarantees
Commitments:
Investment commitments(b)
Commitments to extend credit
Letters of credit
Total(c)(e)
Consolidated
Guarantees:
Liquidity facilities(d)
Standby letters of credit
Guarantees of indebtedness
All other guarantees(a)
Commitments:
Investment commitments(b)
Commitments to extend credit
Letters of credit
Total(c)(e)
Total Amounts
Committed
2019
2020 -
2021
2022 -
2023
Thereafter
$
$
$
$
$
$
182 $
58
72
5,587
2,476
5
8,380 $
74 $
85
-
431
-
17
607 $
171 $
58
14
2,443
1,556
5
4,247 $
- $
85
-
35
-
17
137 $
74 $
- $
267
58
72
6,018
2,476
22
8,987 $
256
58
14
2,478
1,556
22
4,384 $
- $
-
23
1,675
617
-
2,315 $
- $
-
-
58
-
-
58 $
- $
-
-
23
- $
-
21
1,137
218
-
1,376 $
- $
-
-
176
-
-
176 $
- $
-
-
21
1,733
617
-
2,373 $
1,313
218
-
1,552 $
11
-
14
332
85
-
442
74
-
-
162
-
-
236
74
11
-
14
494
85
-
678
(a) Excludes potential amounts for indemnification obligations included in asset sales agreements. For further information on indemnification obligations see Note 16 to the
Consolidated Financial Statements.
(b) Includes commitments to invest in private equity funds, hedge funds and other funds and commitments to purchase and develop real estate in the United States and
abroad. The commitments to invest in private equity funds, hedge funds and other funds are called at the discretion of each fund, as needed for funding new
investments or expenses of the fund. The expiration of these commitments is estimated in the table above based on the expected life cycle of the related fund,
consistent with past trends of requirements for funding. Investors under these commitments are primarily insurance and real estate subsidiaries.
(c) Does not include guarantees, CMAs or other support arrangements among AIG consolidated entities.
AIG | 2018 Form 10-K 139
ITEM 7 | Liquidity and Capital Resources
(d) Primarily represents liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.
(e) Excludes commitments with respect to pension plans. The annual pension contribution for 2019 is expected to be approximately $79 million for U.S. and non-U.S. plans.
Arrangements with Variable Interest Entities
We enter into various arrangements with variable interest entities (VIEs) in the normal course of business, and we consolidate a VIE
when we are the primary beneficiary of the entity.
For a further discussion of our involvement with VIEs see Note 10 to the Consolidated Financial Statements.
Indemnification Agreements
We are subject to financial guarantees and indemnity arrangements in connection with our sales of businesses. These arrangements
may be triggered by declines in asset values, specified business contingencies, the realization of contingent liabilities, litigation
developments, or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to
time limitations, defined by contract or by operation of law, such as by prevailing statutes of limitation. Depending on the specific
terms of the arrangements, the maximum potential obligation may or may not be subject to contractual limitations.
For additional information regarding our indemnification agreements see Note 16 to the Consolidated Financial Statements.
We have recorded liabilities for certain of these arrangements where it is possible to estimate them. These liabilities are not material
in the aggregate. We are unable to develop a reasonable estimate of the maximum potential payout under some of these
arrangements. Overall, we believe that it is unlikely we will have to make any material payments under these arrangements.
DEBT
The following table provides the rollforward of AIG’s total debt outstanding:
Year Ended December 31, 2018
(in millions)
Debt issued or guaranteed by AIG:
AIG general borrowings:
Notes and bonds payable
Junior subordinated debt
AIG Japan Holdings Kabushiki Kaisha
Validus notes and bonds payable
AIGLH notes and bonds payable
AIGLH junior subordinated debt
Total AIG general borrowings
AIG borrowings supported by assets:(a)
MIP notes payable
Series AIGFP matched notes and bonds payable
GIAs, at fair value
Notes and bonds payable, at fair value
Total AIG borrowings supported by assets
Total debt issued or guaranteed by AIG
Debt not guaranteed by AIG:
Validus junior subordinated debt
Other subsidiaries' notes, bonds, loans and
mortgages payable(c)
Debt of consolidated investments(d)
Total debt not guaranteed by AIG
Total debt
Balance at
December 31,
Maturities
Effect of
Balance at
and
Foreign
Other
December 31,
2017
Issuances Repayments Exchange
Changes
2018
$
20,339 $
1,727 $
(1,107) $
(137) $
31
$
841
334
-
281
361
742
(22)
-
-
-
-
-
-
-
-
(13)
(3)
-
-
-
22,156
2,469
(1,129)
(153)
356
21
2,707
181
3,265
25,421
-
190
6,029
6,219
-
-
188
-
188
2,657
-
-
2,077
2,077
(364)
-
(727)
(129)
(1,220)
(2,349)
(539)
(284)
(628)
(1,451)
8
-
-
-
8
-
-
38
38
-
-
359
1
-
391
-
-
(4) (b)
(3) (b)
(7)
539
262
888 (e)
1,689
2,073
(145)
384
20,853
1,548
331
359
282
361
23,734
-
21
2,164
49
2,234
25,968
-
168
8,404
8,572
$
31,640 $
4,734 $
(3,800) $
(107) $
$
34,540
(a) AIG Parent guarantees all such debt, except for MIP notes payable and Series AIGFP matched notes and bonds payable, which are direct obligations of AIG Parent.
Collateral posted to third parties was $1.5 billion and $2.0 billion at December 31, 2018 and 2017, respectively. This collateral primarily consists of securities of the U.S.
government and government sponsored entities and generally cannot be repledged or resold by the counterparties.
(b) Primarily represents adjustments to the fair value of debt.
(c) Includes primarily borrowings with Federal Home Loan Banks by our U.S. insurance companies. These borrowings are short term in nature and related activity is
presented net of issuances and maturities and repayments.
140 AIG | 2018 Form 10-K
(d) At December 31, 2018, includes debt of consolidated investment vehicles related to real estate investments of $3.7 billion, affordable housing partnership investments
of $1.8 billion and other securitization vehicles of $2.9 billion. At December 31, 2017, includes debt of consolidated investment vehicles related to real estate
investments of $2.5 billion, affordable housing partnership investments of $1.8 billion and other securitization vehicles of $1.7 billion.
(e) Includes the effect of consolidating previously unconsolidated partnerships.
ITEM 7 | Liquidity and Capital Resources
TOTAL DEBT OUTSTANDING
(in millions)
Debt Maturities
The following table summarizes maturing debt at December 31, 2018 of AIG (excluding $8.4 billion of borrowings of
consolidated investments) for the next four quarters:
(in millions)
AIG general borrowings
AIG borrowings supported by assets
Other subsidiaries' notes, bonds, loans and
mortgages payable
Total
First
Quarter
2019
Second
Quarter
2019
$
$
- $
22
115
137 $
- $
19
-
19 $
Third
Quarter
2019
999 $
136
Fourth
Quarter
2019
- $
95
Total
999
272
-
1,135 $
2
97 $
117
1,388
See Note 15 to the Consolidated Financial Statements for additional details on debt outstanding.
AIG | 2018 Form 10-K 141
CREDIT RATINGS
Credit ratings estimate a company’s ability to meet its obligations and may directly affect the cost and availability of
financing to that company. The following table presents the credit ratings of AIG and certain of its subsidiaries as of February 8,
2019. Figures in parentheses indicate the relative ranking of the ratings within the agency’s rating categories; that ranking refers only
to the major rating category and not to the modifiers assigned by the rating agencies.
ITEM 7 | Liquidity and Capital Resources
Short-Term Debt
Moody’s
S&P
Senior Long-Term Debt
Moody’s(a)
S&P(b)
Fitch(c)
BBB+ (4th of 9)
AIG
P-2 (2nd of 3)
A-2 (2nd of 8)
Baa 1 (4th of 9) BBB+ (4th of 9)
AIG Financial Products Corp.(d)
P-2
A-2
Baa 1
BBB+
-
Stable Outlook
Stable Outlook Negative Outlook
Negative Outlook
Stable Outlook
Stable Outlook Negative Outlook
(a) Moody’s appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within the rating categories.
(b) S&P ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(c) Fitch ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(d) AIG guarantees all obligations of AIG Financial Products Corp.
These credit ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the
rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be
withdrawn at our request.
We are party to some agreements that contain “ratings triggers.” Depending on the ratings maintained by one or more rating
agencies, these triggers could result in (i) the termination or limitation of credit availability or a requirement for accelerated repayment,
(ii) the termination of business contracts or (iii) a requirement to post collateral for the benefit of counterparties.
In the event of a downgrade of AIG’s long-term senior debt ratings, AIGFP and certain other AIG entities would be required to post
additional collateral under some derivative and other transactions, or certain of the counterparties of AIGFP or of such other AIG
entities would be permitted to terminate such transactions early.
The actual amount of collateral that we would be required to post to counterparties in the event of such downgrades, or the aggregate
amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected
transactions and other factors prevailing at the time of the downgrade.
For a discussion of the effects of downgrades in our credit ratings see Note 11 to the Consolidated Financial Statements herein and
Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit.
FINANCIAL STRENGTH RATINGS
Financial Strength ratings estimate an insurance company’s ability to pay its obligations under an insurance policy. The
following table presents the ratings of our significant insurance subsidiaries as of February 8, 2019.
National Union Fire Insurance Company of Pittsburgh, Pa.
Lexington Insurance Company
American Home Assurance Company (US)
American General Life Insurance Company
The Variable Annuity Life Insurance Company
United States Life Insurance Company in the City of New York
AIG Europe S.A.
American International Group UK Ltd.
AIG General Insurance Co. Ltd.
Validus Reinsurance, Ltd.
A.M. Best
S&P
Fitch
Moody’s
A
A
A
A
A
A
NR
A
NR
A
A+
A+
A+
A+
A+
A+
A+
A+
A+
A
A
A
A
A+
A+
A+
NR
NR
NR
A
A2
A2
A2
A2
A2
A2
A2
A2
NR
A2
These financial strength ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any
time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances.
For a discussion of the effects of downgrades in our financial strength ratings see Note 11 to the Consolidated Financial Statements
herein and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit.
142 AIG | 2018 Form 10-K
ITEM 7 | Liquidity and Capital Resources
REGULATION AND SUPERVISION
For a discussion of our regulation and supervision by different regulatory authorities in the United States and abroad, including with
respect to our liquidity and capital resources see Item 1. Business — Regulation and Item 1A. Risk Factors — Regulation.
DIVIDENDS AND REPURCHASES OF AIG COMMON STOCK
On February 8, 2018, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March
29, 2018 to shareholders of record on March 15, 2018. On May 2, 2018, our Board of Directors declared a cash dividend on AIG
Common Stock of $0.32 per share, payable on June 28, 2018 to shareholders of record on June 14, 2018. On August 2, 2018, our
Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on September 28, 2018 to
shareholders of record on September 17, 2018. On October 31, 2018, our Board of Directors declared a cash dividend on AIG
Common Stock of $0.32 per share, payable on December 26, 2018 to shareholders of record on December 12, 2018.
On February 13, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March
29, 2019 to shareholders of record on March 15, 2019. The payment of any future dividends will be at the discretion of our Board of
Directors and will depend on various factors, as discussed further in Note 17 to the Consolidated Financial Statements.
Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG
Common Stock through a series of actions. On May 3, 2017, our Board of Directors approved an increase of $2.5 billion to the share
repurchase authorization.
During 2018, we repurchased approximately 36.5 million shares of AIG Common Stock for an aggregate purchase price of
approximately $1.7 billion pursuant to this authorization.
On February 13, 2019, our Board of Directors authorized an additional increase to its previous repurchase authorization of AIG
Common Stock of $1.5 billion, resulting in an aggregate remaining authorization on such date of approximately $2.0 billion. Shares
may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or
automatic repurchase transactions or otherwise (including through the purchase of warrants). Certain of our share repurchases have
been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans. The timing of any future share
repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and
other factors.
DIVIDEND RESTRICTIONS
Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by regulatory authorities.
For a discussion of restrictions on payments of dividends by our subsidiaries see Note 19 to the Consolidated Financial Statements.
AIG | 2018 Form 10-K 143
ITEM 7 | Enterprise Risk Management
Enterprise Risk Management
Risk management includes the identification and measurement of various forms of risk, the establishment of risk thresholds and the
creation of processes intended to maintain risks within these thresholds while optimizing returns. We consider risk management an
integral part of managing our core businesses and a key element of our approach to corporate governance.
OVERVIEW
We have an integrated process for managing risks throughout our organization in accordance with our firm-wide risk appetite. Our
Board of Directors has oversight responsibility for the management of risk. Our Enterprise Risk Management (ERM) Department
supervises and integrates the risk management functions in each of our business units, providing senior management with a
consolidated view of AIG’s major risk positions. Within each business unit, senior leaders and executives approve risk-taking policies
and targeted risk tolerance within the framework provided by ERM. ERM supports our businesses and management by embedding
risk management in our key day-to-day business processes and in identifying, assessing, quantifying, managing, monitoring,
reporting, and mitigating the risks taken by our businesses and AIG overall. Nevertheless, our risk management efforts may not
always be successful and material adverse effects on our business, results of operations, cash flows, liquidity or financial condition
may occur.
RISK GOVERNANCE STRUCTURE
Our risk governance structure fosters the development and maintenance of a risk and control management culture that encompasses
all significant risk categories impacting our lines of business and functions. Accountability for the implementation and oversight of risk
policies is aligned with individual corporate executives, with the risk committees receiving regular reports regarding compliance with
each policy to support risk governance at our corporate level as well as in each business unit. We review our governance and
committee structure on a regular basis and make changes as appropriate to continue to effectively manage and govern our risks and
risk-taking.
Our Board of Directors oversees the management of risk through its Risk and Capital Committee (RCC) and Audit Committee. Those
committees regularly interact with other committees of the Board of Directors described below. Our Chief Risk Officer (CRO) reports
to both the RCC and our Chief Executive Officer (CEO).
The Group Risk Committee (GRC): The GRC is the senior management group responsible for assessing all significant risk issues
on a global basis to protect our financial strength, optimize our intrinsic value, and protect our reputation. The GRC is chaired by our
CRO. Its membership includes the Executive Leadership Team (ELT) and other senior executives from across our corporate functions
and business units. Our CRO reports periodically on behalf of the GRC to both the RCC and the Audit Committee of the Board of
Directors. Our CRO is also a member of the ELT providing ERM the opportunity to contribute to, review, monitor and consider the
impact of changes in strategy.
Management committees that support the GRC are described below. These committees are comprised of senior executives and
experienced business representatives from a range of functions and business units throughout AIG and its subsidiaries. These
committees are charged with identifying, analyzing and reviewing specific risk matters within their respective mandates. In addition,
various working groups (e.g. reputational risk, control agenda) are in place in support of the GRC to manage and monitor the various
risks across the organization.
Financial Risk Group (FRG): The FRG is responsible for the oversight of financial risks taken by AIG and our subsidiaries. Its
mandate includes overseeing our aggregate credit, market, interest rate, capital, liquidity and model risks, as well as asset-liability
management, derivatives activity, and foreign exchange transactions. It provides the primary corporate-level review function for all
proposed transactions and business practices that are significant in size, complex in scope, or that present heightened legal,
reputational, accounting or regulatory risks. The FRG is chaired by our CRO. Membership of the FRG also includes our CFO, Chief
Investment Officer (CIO) and Treasurer.
Business Unit Risk Committees: Each of our major insurance businesses has established a risk committee that serves as the
senior management committee responsible for risk oversight at the individual business unit level. The risk committees are responsible
for the identification, assessment and monitoring of all sources of risk within their respective portfolios. Specific responsibilities include
setting risk tolerances, reviewing the capital allocation framework, insurance portfolio optimization, and providing oversight of risk-
adjusted metrics. Together, these committees provide comprehensive risk oversight throughout the organization.
144 AIG | 2018 Form 10-K
ITEM 7 | Enterprise Risk Management
Risk and Capital
Committee (RCC)
Group Risk Committee
(GRC)
Financial Risk Group
(FRG)
Business Unit Risk
Committees
(General Insurance,
Life and Retirement)
RISK APPETITE, LIMITS, IDENTIFICATION, AND MEASUREMENT
Risk Appetite Framework
Our Risk Appetite Framework integrates stakeholder interests, strategic business goals and available financial resources. We balance
these by seeking to take measured risks that are expected to generate repeatable, sustainable earnings and create long-term value
for our shareholders. The framework includes our risk appetite statement approved by the Board of Directors or a committee thereof
and a set of supporting tools, including risk tolerances, risk limits and policies, which we use to manage our risk profile and financial
resources.
We articulate our aggregate risk-taking by setting risk tolerances and thresholds on capital and liquidity measures. These measures
are set at the AIG Parent level as well as the legal entity level and cover consolidated and insurance company capital and liquidity
ratios. We must comply with standards for capital adequacy and maintain sufficient liquidity to meet all our obligations as they come
due in accordance with our internal capital management and liquidity policies. Our risk tolerances take into consideration regulatory
requirements, rating agency expectations, and business needs. The GRC routinely reviews the level of risk taken by the consolidated
organization in relation to the established risk tolerances. A consolidated risk report is also presented periodically, as required, to the
RCC by our CRO.
Risk Limits
A key component of our Risk Appetite Framework is having a process in place that establishes and maintains appropriate limits on the
material risks identified for our core businesses and facilitates monitoring and meeting of both internal and external stakeholder
expectations. Our objectives include:
• Establishing risk monitoring, providing early warning indicators, and ensuring timely oversight and enforceability of limits;
• Defining a consistent and transparent approach to limits governance; and
• Aligning our business activities with our risk appetite statement.
AIG | 2018 Form 10-K 145
ITEM 7 | Enterprise Risk Management
To support the monitoring and management of AIG’s and its business units’ material risks, ERM has an established limits framework
that employs a three-tiered hierarchy:
• Board-level risk tolerances are AIG’s aggregate capital and liquidity limits. They define the minimum level of capital and liquidity
that we should maintain. These board-level risk tolerances require RCC approval.
• AIG management level limits are risk type specific limits at the AIG consolidated level. These limits are defined and calibrated to
constrain our concentration in specific risk types, to protect against taking risks that exceed the amount of overall capital AIG has
available, and to protect against excess earnings volatility. These limits are approved by our CRO with consultation from the GRC.
• BU and legal entity level limits are set to address key risks identified by ERM for the business unit and legal entities, protect
capital and liquidity at legal entities and/or meet legal entity specific requirements of regulators and rating agencies. These limits
are defined by the business unit and legal entity Risk Officers.
All limits are reviewed by the GRC or relevant business unit risk committees on a periodic basis and revisions, if applicable, are
approved by those committees.
The business units are responsible for measuring and monitoring their risk exposures. ERM is responsible for monitoring compliance
with limits and providing regular, timely reporting to our senior management and risk committees. Limit breaches are required to be
reported in a timely manner and are documented and escalated in accordance with their level of severity or materiality.
Risk Identification and Measurement
One tool we use to inform our Risk Appetite Framework is risk identification. We conduct risk identification through a number of
processes at the business unit and corporate level focused on capturing our material risks and key areas of focus for follow-up risk
management actions. A key initiative is our integrated bottom-up risk identification and assessment process down to the product-line
level. These processes are used as a critical input to enhance and develop our analytics for measuring and assessing risks across
the organization.
We employ various approaches to measure, monitor, and manage risk exposures, including the utilization of a variety of metrics and
early warning indicators. We use a proprietary internal capital and stress testing framework to measure our quantifiable risks for both
insurance and non-insurance operations.
The internal capital framework quantifies our aggregate economic risk at a given confidence interval, after taking into account a level
of diversification benefits between risk factors and business lines. We leverage the internal capital framework to help inform our
consolidated risk consumption and profile as well as risk and capital allocation for our businesses.
The stress testing framework assesses our aggregate exposure to our most significant financial and insurance risks, including the risk
in each of our key insurance company subsidiaries in relation to its capital needs under stress, risks inherent in our non-insurance
company subsidiaries, and risks to AIG consolidated capital. The framework measures risk over multiple time horizons and under
different levels of stress, and includes multi-factor stresses as well as single factor sensitivities that are designed to reflect AIG’s risk
characteristics. We use this information to support the assessment of resources needed at the AIG Parent level to support our
subsidiaries and capital resources required to maintain consolidated company target capitalization levels.
We evaluate and manage risk in material topics as shown below. These topics are discussed in more detail in
the following pages:
Credit Risk Management
Market Risk Management
Liquidity Risk Management
Operational Risk Management
Insurance Risks
Other Business Risks
146 AIG | 2018 Form 10-K
ITEM 7 | Enterprise Risk Management
CREDIT RISK MANAGEMENT
Overview
Credit risk is defined as the risk that our customers or counterparties are unable or unwilling to repay their contractual obligations
when they become due. Credit risk may also result from a downgrade of a counterparty’s credit ratings or a widening of its credit
spreads.
We devote considerable resources to managing our direct and indirect credit exposures. These exposures may arise from, but are not
limited to, fixed income investments, equity securities, deposits, commercial paper investments, reverse repurchase agreements and
repurchase agreements, corporate and consumer loans, leases, reinsurance recoverables, counterparty risk arising from derivatives
activities, collateral extended to counterparties, insurance risk cessions to third parties, financial guarantees, letters of credit, and
certain General Insurance businesses.
Governance
Our credit risks are managed by teams of credit professionals, subject to ERM oversight and various control processes. Their primary
role is to assure appropriate credit risk management in accordance with our credit policies and procedures relative to our credit risk
parameters. Our Chief Credit Officer (CCO) and credit executives are primarily responsible for the development, implementation and
maintenance of a risk management framework, which includes the following elements related to our credit risks:
• developing and implementing our company-wide credit policies and procedures;
• approving delegated credit authorities to our credit executives and qualified credit professionals;
• developing methodologies for quantification and assessment of credit risks, including the establishment and maintenance of our
internal risk rating process;
• managing a system of credit and program limits, as well as the approval process for credit transactions, above limit exposures, and
concentrations of risk that may exist or be incurred;
• evaluating, monitoring, reviewing and reporting of credit risks and concentrations regularly with senior management; and
• approving appropriate credit reserves, credit-related other-than-temporary impairments and corresponding methodologies for all
credit portfolios.
We monitor and control our company-wide credit risk concentrations and attempt to avoid unwanted or excessive risk accumulations,
whether funded or unfunded. To minimize the level of credit risk in some circumstances, we may require mitigants, such as third-party
guarantees, reinsurance or collateral, including commercial bank-issued letters of credit and trust collateral accounts. We treat these
guarantees, reinsurance recoverables, and letters of credit as credit exposure and include them in our risk concentration exposure
data. We also monitor closely the quality of any trust collateral accounts.
For further information on our credit concentrations and credit exposures see Investments – Available-for-Sale Investments.
AIG | 2018 Form 10-K 147
ITEM 7 | Enterprise Risk Management
Our credit risk management framework incorporates the following elements:
Risk Identification
Risk Measurement
Risk Limits
including the ongoing capture and monitoring of all existing, contingent, potential and emerging credit
risk exposures, whether funded or unfunded
comprising risk ratings, default probabilities, loss given default and expected loss parameters,
exposure calculations, stress testing and other risk analytics
including, but not limited to, a system of single obligor or risk group-based AIG-wide house limits and
sub-limits for corporates, financial institutions, sovereigns and sub-sovereigns when appropriate and
a defined process for identifying, evaluating, documenting and approving, if appropriate, breaches of
and exceptions to such limits
Risk Delegations
a comprehensive credit risk delegation framework from the Chief Credit Officer (CCO) to authorized
credit professionals throughout the company
Risk Evaluation, Monitoring
and Reporting
including the ongoing analysis and assessment of credit risks, trending of those risks and reporting of
other key risk metrics and limits to the CCO and senior management, as may be required
Credit Reserving
including but not limited to development of a proper framework, policies and procedures for
establishing accurate identification of (i) Allowance for Loan and Lease Losses, and (ii) other-than-
temporary impairments for securities portfolios
MARKET RISK MANAGEMENT
Market risk is defined as the risk of adverse impact due to systemic movements in one or more of the following market risk drivers:
equity and commodity prices, residential and commercial real estate values, interest rates, credit spreads, foreign exchange, inflation,
and their levels of volatility.
We are engaged in a variety of insurance, investment and other financial services businesses that expose us to market risk, directly
and indirectly. We are exposed to market risks primarily within our insurance and capital markets activities, on both the asset and
liability side of our balance sheet through on- and off-balance sheet exposures. The Risk Officer within each business is responsible
for creating a framework to properly identify these risks, then ensuring that they are appropriately measured, monitored and managed
in accordance with the risk governance framework established by the Chief Market Risk Officer (CMRO).
The scope and magnitude of our market risk exposures is managed under a robust framework that contains defined risk limits and
minimum standards for managing market risk in a manner consistent with our risk appetite statement. Our market risk management
framework focuses on quantifying the financial repercussions of changes in these broad market observables, as opposed to the
idiosyncratic risks associated with individual assets that are addressed through our credit risk management function.
Many of our market risk exposures, including exposures to interest rates and equity, are associated with the asset and liability
exposures of our Life and Retirement companies. These exposures are generally long-term in nature. Examples of liability-related
exposures include interest rate sensitive surrenders in our fixed deferred annuity product portfolio. Also, we have equity market risk
sensitive surrenders in our variable annuity product portfolio. These interactive asset-liability types of risk exposures are regularly
monitored in accordance with the risk governance framework noted above.
148 AIG | 2018 Form 10-K
Risk Identification
Market risk focuses on quantifying the financial repercussions of changes in broad, external, predominantly market-observable risks.
Financial repercussions can include an adverse impact on results of operations, financial condition, liquidity and capital.
Each of the following systemic risks is considered a market risk:
ITEM 7 | Enterprise Risk Management
Equity prices
Residential and
commercial real
estate values
Interest rates
Credit spreads
We are exposed to changes in equity market prices affecting a variety of instruments. Changes in equity
prices can affect the valuation of publicly traded equity shares, investments in private equity, hedge funds,
mutual funds, exchange-traded funds, and other equity-linked capital market instruments as well as equity-
linked insurance products, including but not limited to index annuities, variable annuities, indexed universal
life insurance and variable universal life insurance.
Our investment portfolios are exposed to the risk of changing values in a variety of residential and
commercial real estate investments. Changes in residential/commercial real estate prices can affect the
valuation of residential/commercial mortgages, residential/commercial mortgage-backed securities and other
structured securities with underlying assets that include residential/commercial mortgages, trusts that
include residential/commercial real estate and/or mortgages, residential mortgage insurance and
reinsurance contracts and commercial real estate investments.
Interest rate risk can arise from a mismatch in the interest rate exposure of assets versus liabilities. Lower
interest rates generally result in lower investment income and make some of our product offerings less
attractive to investors. Conversely, higher interest rates are typically beneficial for the opposite reasons.
However, when rates rise quickly, there can be an asymmetric GAAP accounting effect where the existing
securities lose market value, which is largely reported in Other comprehensive income, and the offsetting
decrease in the value of certain liabilities may not be recognized. Changes in interest rates can affect the
valuation of fixed maturity securities, financial liabilities, insurance contracts including but not limited to
universal life, fixed rate annuities, variable annuities and derivative contracts. Additionally, for Variable
Annuity, Index Annuity, and Equity Indexed Universal Life products, deviations in actual versus expected
policyholder behavior can be driven by fluctuations in various market variables, including interest rates.
Policies with guaranteed living benefit options or riders are also subject to the risk of actual benefit utilization
being different than expected.
Credit spreads measure an instrument’s risk premium or yield relative to that of a comparable duration,
default-free instrument. Changes in credit spreads can affect the valuation of fixed maturity securities,
including but not limited to corporate bonds, ABS, mortgage-backed securities, AIG-issued debt obligations,
credit derivatives and derivative credit valuation adjustments. Much like higher interest rates, wider credit
spreads with unchanged default losses mean more investment income in the long term. In the short term,
quickly rising spreads will cause a loss in the value of existing fixed maturity securities, which is largely
reported in Other comprehensive income. A precipitous widening of credit spreads may also signal a
fundamental weakness in the credit worthiness of bond obligors, potentially resulting in default losses.
Foreign exchange
(FX) rates
Commodity prices
We are a globally diversified enterprise with income, assets and liabilities denominated in, and capital
deployed in, a variety of currencies. Changes in FX rates can affect the valuation of a broad range of
balance sheet and income statement items as well as the settlement of cash flows exchanged in specific
transactions.
Changes in commodity prices (the value of commodities) can affect the valuation of publicly-traded
commodities, commodity indices and derivatives on commodities and commodity indices. We are exposed
to commodity prices primarily through their impact on the prices and credit quality of commodity producers’
debt and equity securities in our investment portfolio.
Inflation
Changes in inflation can affect the valuation of fixed maturity securities, including AIG-issued debt
obligations, derivatives and other contracts explicitly linked to inflation indices, and insurance contracts
where the claims are linked to inflation either explicitly, via indexing, or implicitly, through medical costs or
wage levels.
AIG | 2018 Form 10-K 149
ITEM 7 | Enterprise Risk Management
Governance
Market risk is overseen at the corporate level within ERM through the CMRO, who reports directly to the CRO. The CMRO is
supported by a dedicated team of professionals within ERM. Market Risk is managed by our finance, treasury and investment
management corporate functions, collectively, and in partnership with ERM. The CMRO is primarily responsible for the development
and maintenance of a risk management framework that includes the following key components:
• written policies that define the rules for our market risk-taking activities and provide clear guidance regarding their execution and
management;
• a limit framework that aligns with our Board-approved risk appetite statement;
•
independent measurement, monitoring and reporting for line of business, business unit and enterprise-wide market risks; and
• clearly defined authorities for all individuals and committee roles and responsibilities related to market risk management.
These components facilitate the CMRO’s identification, measurement, monitoring, reporting and management of our market risks.
Risk Measurement
Our market risk measurement framework was developed with the main objective of communicating the range and scale of our market
risk exposures. At the firm-wide level market risk is measured in a manner that is consistent with AIG’s risk appetite statement. This is
designed to ensure that we remain within our stated risk tolerance levels and can determine how much additional market risk taking
capacity is available within our framework. Our risk appetite is currently defined in terms of capital and liquidity levels. At the market
risk level, the framework measures our overall exposure to each systemic market risk change on an economic basis.
In addition, we continue to use enhanced economic, GAAP accounting and statutory capital-based risk measures at the market risk
level, business-unit level and firm-wide levels. This process aims to ensure that we have a comprehensive view of the impact of our
market risk exposures.
We use a number of approaches to measure our market risk exposure, including:
Sensitivity
analysis
measures the impact from a unit change in
a market risk input
Examples include:
• a one basis point increase in yield on fixed maturity securities,
• a one basis point increase in credit spreads of fixed maturity
securities, and
• a one percent increase in prices of equity securities.
Scenario analysis
uses historical, hypothetical, or
forward-looking macroeconomic scenarios
to assess and report exposures
• a 100 basis point parallel shift in the yield curve, or
• a 20 percent immediate and simultaneous decrease in
world-wide equity markets.
Stress testing
a special form of scenario analysis in
which the scenarios are designed to lead
to a material adverse outcome
Scenarios may also utilize a stochastic framework to arrive at a
probability distribution of losses.
•
the stock market crash of October 1987 or the widening of
yields or spreads of RMBS or CMBS during 2008.
150 AIG | 2018 Form 10-K
ITEM 7 | Enterprise Risk Management
Market Risk Sensitivities
The following table provides estimates of sensitivity to changes in yield curves, equity prices and foreign currency
exchange rates on our financial instruments and excludes approximately $168.9 billion and $163.6 billion as of December
31, 2018 and December 31, 2017, respectively, of insurance liabilities. AIG believes that the interest rate sensitivities of these
insurance and other liabilities serve as an offset to the net interest rate risk of the financial assets presented in the table
below.
Balance Sheet Exposure
Economic Effect
(dollars in millions)
Sensitivity factor
Interest rate sensitive assets:
Fixed maturity securities
Mortgage and other loans receivable(a)
Derivatives:
Interest rate contracts
Equity contracts
Other contracts
Total interest rate sensitive assets
Interest rate sensitive liabilities:
Policyholder contract deposits:
Investment-type contracts(a)
Variable annuity and other embedded
derivatives
Long-term debt(a) (d)
Total interest rate sensitive liabilities
Sensitivity factor
$
Derivatives:
Equity contracts(e)
Equity and alternative investments:
Real estate investments
Private equity
Hedge funds
Common equity
PICC Investment
Other investments
Total derivatives, equity and alternative
December 31,
2018
December 31,
2017
December 31,
2017
100 bps parallel increase in all yield curves
December 31,
2018
$
$
237,460
39,656
$
248,195
28,799
$
867
383
80
278,446 (b) $
(29)
501
(675)
276,791 (b) $
(13,831)
(1,993)
(1,196)
21
26
(16,973)
$
$
(14,998)
(1,566)
(1,343)
36
42
(17,829)
$
(120,602)
$
(114,326)
$
6,217 (c)
$
7,363 (c)
(4,116)
(24,635)
(149,353)
(4,148)
(24,445)
$
(142,919)
383
8,935
4,787
4,179
792
448
903
501
8,258
5,540
5,768
1,215
549
761
1,537
1,807
9,561
$
20% decline in stock prices and
alternative investments
$
2,175
1,803
11,341
862 (f)
1,228 (f)
(1,787)
(957)
(836)
(158)
(90)
(181)
(1,652)
(1,108)
(1,153)
(243)
(110)
(152)
investments
$
20,427
$
22,592
$
(3,147)
$
(3,190)
Policyholder contract deposits:
Variable annuity and other
embedded derivatives(e)
Total liability
Sensitivity factor
Foreign currency-denominated net
asset position:
Great Britain pound
Euro
Hong Kong dollar
All other foreign currencies
Total foreign currency-denominated net
asset position(g)
$
$
$
(4,116)
(4,116)
$
$
(4,148)
(4,148)
(982)
$
$
(982)
10% depreciation of all foreign currency
exchange rates against the U.S. dollar
(655)
(655)
$
$
$
1,861
1,330
585
1,587
2,026
1,349
562
2,622
$
$
(186)
(133)
(58)
(159)
(203)
(135)
(56)
(262)
$
5,363
$
6,559
$
(536)
$
(656)
AIG | 2018 Form 10-K 151
ITEM 7 | Enterprise Risk Management
(a) The economic effect is the difference between the estimated fair value and the effect of a 100 bps parallel increase in all yield curves on the estimated fair value. The
estimated fair values for Mortgage and other loans receivable, Policyholder contract deposits (Investment-type contracts) and Long-term debt were $40,152 million,
$121,374 million and $23,929 million at December 31, 2018, respectively. The estimated fair values for Mortgage and other loans receivable, Policyholder contract
deposits (Investment-type contracts) and Long-term debt were $29,523 million, $122,196 million and $25,970 million at December 31, 2017, respectively.
(b) At December 31, 2018, the analysis covered $278.4 billion of $285.8 billion interest-rate sensitive assets. Excluded were $3.5 billion of loans. In addition, $3.9 billion of
assets across various asset categories were excluded due to modeling limitations. At December 31, 2017, the analysis covered $276.8 billion of $289.6 billion interest-
rate sensitive assets. Excluded were $8.2 billion of loans. In addition, $4.6 billion of assets across various asset categories were excluded due to modeling limitations.
(c) Beginning in the third quarter of 2018, the economic effect presented for Policyholder contract deposits - investment-type contracts has been refined to better reflect the
economic effect on the balance sheet and is calculated as the change to the estimated fair value from a 100 bps parallel increase in all yield curves on the estimated fair
value. Historically, the calculation was the change between the carrying value and the estimated fair value from a 100 bps parallel increase in all yield curves on the
estimated fair value. Prior period presentation has been revised to conform to the current period approach.
(d) At December 31, 2018, the analysis excluded $8.4 billion of long-term debt related to debt of consolidated investments, $643 million of AIGLH borrowings, $359 million
of Validus borrowings, $168 million of borrowings from FHLB and $331 million of AIG Japan Holdings loans. At December 31, 2017, the analysis excluded $6.0 billion of
long-term debt related to debt of consolidated investments, $642 million of AIGLH borrowings, $190 million of borrowings from the FHLB and $334 million of AIG Japan
Holdings loans.
(e) The balance sheet exposures for equity contracts and variable annuity and other embedded derivatives are also reflected under “Interest rate sensitive liabilities” above,
and are not additive.
(f) Beginning in the third quarter of 2018, the economic effect calculation presented for Derivatives - equity contracts is calculated using an internal risk calculation model.
The prior period presentation of the economic effect was calculated as the effect of a 20 percent decline on the estimated fair value. Prior period presentation has been
revised to conform to the current period approach.
(g) The majority of the foreign currency exposure is reported on a one quarter lag.
The sensitivity analysis is an estimate and should not be viewed as predictive of our future financial performance. We cannot ensure
that our actual losses in any particular period will not exceed the amounts indicated above.
Interest rate sensitivity is defined as change in its value with respect to plus a 100 basis point change in the interest rate environment,
calculated as: scenario value minus base value, where base value is the value of the derivative under the yield curves as of the
period end and scenario value is the value reflecting a 100 basis point parallel increase in all yield curves.
We evaluate our interest rate risk without the effect of any correlation among other key market risks or other assumptions used for
calculating the fair value of our financial assets and liabilities. This scenario does not measure changes in value resulting from non-
parallel shifts in the yield curve, which could produce different results.
We evaluate our equity price risk without the effect of any correlation among other key market risks or other assumptions used for
calculating the fair value of our financial assets and liabilities. This scenario considers the direct impact of declines in equity prices
and not changes in asset-based fees, changes in the estimated gross profits used for amortizing DAC, or changes in any other
assumptions used to calculate the fair value of the embedded derivatives related to the living benefit features within variable annuity
products. In addition, this scenario does not reflect the impact of basis risk, such as projections about the future performance of the
underlying contract holder funds and actual fund returns, which we use as a basis for developing our hedging strategy.
Foreign currency-denominated net asset position reflects our consolidated non-U.S. dollar assets less our consolidated non-U.S
dollar liabilities on a GAAP basis, with certain adjustments. We use a bottom-up approach in managing our foreign currency exchange
rate exposures with the objective of protecting statutory capital at the regulated insurance entity level. At the AIG consolidated level,
we monitor our foreign currency exposures against single currency and aggregate currency portfolio limits.
Our foreign currency-denominated net asset position at December 31, 2018, decreased by $1.2 billion compared to December 31,
2017. The decrease was primarily due to a $669 million decrease in our Japanese yen position and a $264 million decrease in our
Canadian dollar position, each due to an increase in loss reserves.
For illustrative purposes, we modeled our sensitivities based on a 100 basis point increase in yield curves, a 20 percent decline in
equities and alternative assets, and a 10 percent depreciation of all foreign currency exchange rates against the U.S. dollar. The
estimated results presented in the table above should not be taken as a prediction, but only as a demonstration of the potential effects
of such events.
The sensitivity factors utilized for 2018 and presented above were selected based on historical data from 1998 to 2018, as follows
(see the table below):
• a 100 basis point parallel shift in the yield curve is consistent with a one standard deviation movement of the benchmark ten-year
treasury yield;
• a 20 percent drop for equity and alternative investments is broadly consistent with a one standard deviation movement in the S&P
500; and
• a 10 percent depreciation of foreign currency exchange rates is consistent with a one standard deviation movement in the U.S.
dollar (USD)/Japanese yen (JPY) exchange rate.
152 AIG | 2018 Form 10-K
ITEM 7 | Enterprise Risk Management
Standard
Suggested
a Multiple of
Change/
of Standard
on Standard Deviation for
Period Deviation 2018 Scenario Standard Deviation
Return
Deviation
1997-2017 Period)
2018 Scenario as
2018 2018 as a Multiple Original 2017 Scenario (based
10-Year Treasury
1998-2018
S&P 500
USD/JPY
1998-2018
1998-2018
0.01
0.17
0.11
0.01
0.20
0.10
1.06
1.17
0.92
-
(0.06)
0.03
0.34
0.37
0.25
0.01
0.20
0.10
Risk Monitoring and Limits
The risk monitoring responsibilities, owned by the business units, include ensuring compliance with market risk limits and escalation
and remediation of limit breaches. Such activities must be reported to the ERM Market Risk team by the relevant business unit. This
monitoring approach is aligned with our overall risk limits framework.
To control our exposure to market risk, we rely on a three-tiered hierarchy of limits that the CMRO closely monitors and reports to our
CRO, senior management and risk committees.
For further information on our three-tiered hierarchy of limits see Risk Appetite, Limits, Identification, and Measurement – Risk Limits
herein.
LIQUIDITY RISK MANAGEMENT
Liquidity risk is defined as the risk that our financial condition will be adversely affected by the inability or perceived inability to meet
our short-term cash, collateral or other financial obligations. Failure to appropriately manage liquidity risk can result in insolvency,
reduced operating flexibility, increased costs, reputational harm and regulatory action.
AIG and its legal entities seek to maintain sufficient liquidity both during the normal course of business and under defined liquidity
stress scenarios to ensure that sufficient cash will be available to meet the obligations as they come due.
AIG Parent liquidity risk tolerance levels are designed to allow us to meet our financial obligations for a minimum of six months under
a liquidity stress scenario. We maintain liquidity limits and minimum coverage ratios designed to ensure that funding needs are met
under varying stress conditions. If we project that we will breach these tolerances, we will assess and determine appropriate liquidity
management actions. However, the market conditions in effect at that time may not permit us to achieve an increase in liquidity
sources or a reduction in liquidity requirements.
Risk Identification
The following sources of liquidity and funding risks could impact our ability to meet short-term financial obligations as they
come due.
Market/Monetization
Risk
Assets may not be readily transformed into cash due to unfavorable market conditions. Market liquidity risk
may limit our ability to sell assets at reasonable values to meet liquidity needs.
Cash Flow Mismatch
Risk
Discrete and cumulative cash flow mismatches or gaps over short-term horizons under both expected and
adverse business conditions may create future liquidity shortfalls.
Event Funding Risk
Additional funding may be required as the result of a trigger event. Event funding risk comes in many forms
and may result from a downgrade in credit ratings, a market event, or some other event that creates a
funding obligation or limits existing funding options.
Financing Risk
We may be unable to raise additional cash on a secured or unsecured basis due to unfavorable market
conditions, AIG-specific issues, or any other issue that impedes access to additional funding.
Governance
Liquidity risk is overseen at the corporate level within ERM. The CRO has responsibility for the oversight of the Liquidity Risk
Management Framework and delegates the day-to-day implementation of this framework to the AIG Treasurer. Our corporate treasury
function manages liquidity risk, subject to ERM oversight and various control processes.
The Liquidity Risk Management Framework is guided by the liquidity risk tolerance as set forth in the Board-approved risk appetite
statement. The principal objective of this framework is to establish minimum liquidity requirements that protect our long-term viability
and ability to fund our ongoing business, and to meet short-term financial obligations in a timely manner in both normal and stressed
conditions.
AIG | 2018 Form 10-K 153
ITEM 7 | Enterprise Risk Management
Our Liquidity Risk Management Framework includes a number of liquidity and funding policies and monitoring tools to address AIG-
specific, broader industry and market-related liquidity events.
Risk Measurement
Comprehensive cash flow projections under normal conditions are the primary component for identifying and measuring liquidity risk.
We produce comprehensive liquidity projections over varying time horizons that incorporate all relevant liquidity sources and uses and
include known and likely cash inflows and outflows. In addition, we perform stress testing by identifying liquidity stress scenarios and
assessing the effects of these scenarios on our cash flow and liquidity.
We use a number of approaches to measure our liquidity risk exposure, including:
Minimum Liquidity
Limits
Minimum Liquidity Limits specify the amount of assets required to be maintained in order to meet obligations
as they arise over a specified time horizon under stressed liquidity conditions.
Coverage Ratios
Coverage Ratios measure the adequacy of available liquidity sources, including the ability to monetize
assets to meet the forecasted cash flows over a specified time horizon. The portfolio of assets is selected
based on our ability to convert those assets into cash under the assumed stressed conditions and within the
specified time horizon.
Cash Flow
Forecasts
Stress Testing
Cash Flow Forecasts measure the liquidity needed for a specific legal entity over a specified time horizon.
Asset liquidity and Coverage Ratios are re-measured under defined liquidity stress scenarios that will impact
net cash flows, liquid assets and/or other funding sources.
Relevant liquidity reporting is produced and reported regularly to AIG Parent and business unit risk committees. The frequency,
content, and nature of reporting will vary for each business unit and legal entity, based on its complexity, risk profile, activities and
size.
OPERATIONAL RISK MANAGEMENT
Overview
Operational risk is defined as the risk of loss, or other adverse consequences, resulting from inadequate or failed internal processes,
people, systems, or from external events. Operational risk includes legal, regulatory, technology, compliance, third party and business
continuity risks, but excludes business and strategy risks.
Operational risk is inherent in each of our business units and functions and can have many impacts, including but not limited to:
unexpected economic losses or gains, reputational harm due to negative publicity, regulatory action from supervisory agencies and
operational and business disruptions, and/or damage to customer relationships.
Governance
Our operational risk governance sets the requirements necessary to embed a risk management culture throughout the organization.
AIG and its consolidated subsidiaries establish and maintain operational risk and controls governance forums that include
representatives from the relevant business units and functions to appropriately manage significant operational risk exposures. At an
enterprise level, the GRC oversees operational risk along with the Risk Officers.
Operational risk is overseen at the corporate level within ERM through the Head of Operational Controls and Governance, who
reports directly to our CRO. The Head of Operational Controls and Governance is responsible for the development and maintenance
of the operational risk framework that includes policies, standards and deployment of systems.
154 AIG | 2018 Form 10-K
ITEM 7 | Enterprise Risk Management
Risk Identification, Measurement and Monitoring
The ORM function within ERM oversees the operational risk policy and risk and control framework, which includes risk identification,
assessment, measurement, management and monitoring of operational risk exposures. ORM supports the Head of Operational
Controls and Governance and has responsibility to provide an aggregate view of our operational risk profile. As part of the framework,
we employ a Three Lines of Defense model whereby the first line consists of business units and functions that own and manage AIG
risks, the second line consists of ERM and other control functions and serves as an independent advisor to the first line and has risk
oversight responsibilities, and the third line consists of our Internal Audit Group that provides independent assurance covering
aspects of the First and Second Lines of Defense, in each case, to strengthen the governance, capability and delivery of operational
risk management tools and methods. As a part of our ongoing transformation efforts, the business leaders assume full ownership and
accountability for the risks and controls in their operating units, including support functions, for the operational risks that arise in their
own processes and activities and ERM performs an independent review and challenge function. In line with the Three Lines of
Defense Model, the ORM programs include, but are not limited to, several key components outlined below:
• Risk Event Capture – enables every employee to identify, document, and escalate operational risk events, with a view to
enhancing processes and promoting lessons learned.
• Risk Assessments – allows for the assessment, measurement and management of the key operational risks within our business
units and helps inform on the efficacy of our control environment.
• Key Risk Indicators – enhances the ongoing monitoring and mitigation of operational risks and facilitate risk reporting.
•
Issues Management – enables a consistent tracking of issues across the firm, including policy and process exceptions, control
deficiencies and findings from risk and control assessment activities.
• Scenario Analyses – executed by first- and second-line professionals to identify potential risks that could result in financial losses
in order to identify the financial implications of the risk to the firm and support the prioritization of operational risk treatment.
ORM, working together with other control and assurance functions (e.g., Compliance, Financial Controls Unit / Sarbanes Oxley,
Global Business Continuity, and Internal Audit) through the risk and control framework, provides an independent view of operational
risks for each business, and works with the business unit CRO and business unit Owner of the Control Agenda, whose responsibilities
include coordinating identification, assessment, control and mitigation of risks to the operating environment and promoting awareness,
to facilitate implementation of the above programs. This includes coverage of operational risks related to core insurance activities,
investing, model risk, technology (including cyber security, identify and access management, data privacy and data security), third-
party providers, as well as compliance and regulatory matters. Based on the results of the risk identification and assessment efforts
above, business leaders are accountable for tracking and remediating identified issues in line with our risk-monitoring procedures.
Governance committees support these efforts and promote transparency enabling improved management decision making.
The risk and control framework facilitates the identification and mitigation of operational risk issues and is
designed to:
ensure first line accountability and ownership of risks and controls;
promote role clarity among the business and risk and control functions;
enhance transparency, risk management governance and culture;
foster greater consistency in identifying, measuring and ranking material risks;
proactively address potential risk issues and assign clear ownership and accountability for risk treatment; and
manage the development of technology solutions that support the objectives above.
Cybersecurity Risk
Cybersecurity risk is an important, constant, and evolving focus for AIG and the insurance and financial services industries in general.
The increased sophistication and activities of unauthorized parties attempting to access our systems and fraudulently induce
employees, clients, vendors or other third parties or users of our systems to disclose sensitive information is an ever-present risk and
frequent attack vector against AIG. The goal of such unauthorized parties is to gain access to AIG’s data and systems to learn
confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage. Cybersecurity risks may
also derive from human error, fraud or malice on the part of AIG employees or third parties who have authorized access to AIG’s
systems or information.
AIG | 2018 Form 10-K 155
ITEM 7 | Enterprise Risk Management
ERM works closely with and supports the risk management practices of the business units and functions that form the first line of
defense against the cybersecurity risks that we face, including the risks that emerge as a result of the execution of our business
strategies and our corresponding exposure to new products, clients, industry segments and regions, through initiatives such as
investments in technological infrastructure, education and training for employees and vendors, and monitoring of industry
developments. As part of our overarching cybersecurity strategy, we employ a variety of tactics to monitor and assess threat levels,
remediate our exposures and enhance our systems and applications security. We also seek to build upon our capabilities by recruiting
talent in the fields of information technology and data security. In addition to being required to comply with a vast array of privacy, data
protection and cybersecurity laws, AIG participates in discussions of cybersecurity risks with law enforcement, government officials,
as well as peer and industry groups.
AIG’s Board of Directors and its Technology Committee are regularly briefed by management on AIG’s cybersecurity matters,
including threats, policies, practices and ongoing efforts to improve security. As part of our disclosure controls and procedures, ERM
and Internal Audit are charged with ensuring that the members of management responsible for disclosure controls are informed in a
timely manner of known cybersecurity risks and incidents that may materially impact our operations so that timely public disclosure
can be made as appropriate. There is no guarantee that the measures AIG takes and the resources AIG devotes to protect against
cybersecurity risk will provide absolute security or recoverability of AIG’s systems given the complexity and frequency of the risk,
which AIG may not always be able to anticipate or adequately address. For additional information regarding the data protection and
cybersecurity regulations to which we are subject, see Item 1. Business – Regulation – U.S. Regulation – Privacy, Data Protection
and Cybersecurity and – International Regulation – Privacy, Data Protection and Cybersecurity. For additional discussion of
cybersecurity risks, see Part I, Item 1A. Risk Factors – Business and Operations.
INSURANCE RISKS
Insurance risk is defined as the risk of actual claims experience and/or policyholder behavior being materially different than expected
at the inception of an insurance contract. Uncertainties related to insurance risk include the amount and timing of cash flows from
premiums, commissions, expenses, claims and claim settlement expenses paid or received under a contract.
Except as described above, we manage our business risk oversight activities through our insurance operations. A primary goal in
managing our insurance operations is to achieve an acceptable risk-adjusted return on equity. To achieve this goal, we must be
disciplined in risk selection, premium adequacy, and appropriate terms and conditions to cover the risk accepted.
We operate our insurance businesses on a global basis, and we are exposed to a wide variety of risks with different time horizons.
We manage these risks throughout the organization, both centrally and locally, through a number of procedures:
• pre-launch approval of product design, development and distribution;
• underwriting approval processes and authorities;
• exposure limits with ongoing monitoring;
• pricing and risk selection models;
• price approval processes;
• modeling and reporting of aggregations and limit concentrations at multiple levels (policy, line of business, product group, country,
•
•
individual/group, correlation and catastrophic risk events);
risk transfer tools such as reinsurance, both internal and third-party;
review and challenge of reserves to ensure comprehensive analysis with established escalation procedures to provide appropriate
transparency in reserving decisions and judgments made in the establishment of reserves;
• business line actuarial briefings and actuarial financial judgment regular reviews with ERM and business management;
• management of relationship between assets and liabilities, including hedging;
• experience monitoring and assumption updates;
•
risk reporting and active risk management which includes meetings and collaboration between ERM and the business;
• enhanced pricing models; and
• compliance with financial reporting and capital and solvency targets.
We closely manage insurance risk by monitoring and controlling the nature and geographic location of the risks in each line of
business underwritten, the terms and conditions of the underwriting and the premiums we charge for taking on the risk. We analyze
concentrations of risk using various modeling techniques, including both probability distributions (stochastic) and/or single-point
estimates (deterministic) approaches.
156 AIG | 2018 Form 10-K
ITEM 7 | Enterprise Risk Management
Risk Identification
• General Insurance companies — risks covered include property, casualty, fidelity/surety, accident and health, aviation, and
management liability. We manage risks in the General Insurance business through aggregations and limitations of concentrations
at multiple levels: policy, line of business, geography, industry and legal entity.
• Life and Retirement companies — risks include mortality and morbidity in the insurance-oriented products and insufficient
cash flows to cover contract liabilities, longevity risk in the retirement savings-oriented products and policyholder behavior. We
manage risks through product design, sound medical and non-medical underwriting, and external reinsurance programs.
We purchase reinsurance for our insurance operations. Reinsurance facilitates insurance risk management (retention,
volatility, concentrations) and capital planning. We may purchase reinsurance on a pooled basis. Pooling of our reinsurance risks
enables us to purchase reinsurance more efficiently at a consolidated level, manage global counterparty risk and relationships and
manage global catastrophe risks.
Governance
Insurance risks are monitored at the business unit level within ERM and overseen by the business unit chief risk officer, who reports
directly to our CRO. The framework includes the following key components:
• written policies that define the rules for our insurance risk-taking activities;
• a limit framework focused on key insurance risks that aligns with our Board-approved risk appetite statement; and
• clearly defined authorities for all individuals and committee roles and responsibilities related to insurance risk management.
Risk Measurement, Monitoring and Limits
We use a number of approaches to measure our insurance risk exposure, including:
Stochastic methods. Stochastic methods are used to measure and monitor risks including natural catastrophe, reserve and
premium risk. We develop probabilistic estimates of risk based on our exposures, historical observed volatility or industry-
recognized models in the case of catastrophe risk.
Scenario analysis. Scenario or deterministic analysis is used to measure and monitor risks such as terrorism or to estimate
losses due to man-made catastrophic scenarios.
Experience studies. Ongoing assessment of mortality, longevity, morbidity and policyholder behavior experience relative to that
assumed in pricing and valuation and that experienced in the general market.
In addition, there are risk specific assessment tools in place to better manage the variety of insurance risks to which we are exposed.
We monitor concentrations of exposure through insurance limits aggregated along dimensions such as geography, industry, or
counterparty.
The risk monitoring responsibilities of the business units include ensuring compliance with insurance risk limits and escalation and
remediation of limit breaches. Such activities are reported to management by the relevant business unit for informative decision-
making on a regular basis. This monitoring approach is aligned with our overall risk limits framework.
Risk limits have a consistent framework used across AIG, its business units, and legal entities. This includes escalation thresholds in
cases where measurement is particularly challenging.
For further information on our three-tiered hierarchy of limits see Risk Appetite, Limits, Identification, and Measurement – Risk Limits
herein.
General Insurance Companies’ Key Risks
We manage our risks through risk review and selection processes, exposure limitations, exclusions, deductibles, self-insured
retentions, coverage limits, attachment points, and reinsurance. This management is supported by sound underwriting practices,
pricing procedures and the use of actuarial analysis to help determine overall adequacy of provisions for insurance. Underwriting
practices and pricing procedures incorporate historical experience, changes in underlying exposure, current regulation and judicial
decisions as well as proposed or anticipated regulatory changes.
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ITEM 7 | Enterprise Risk Management
For General Insurance companies, risks primarily include the following:
• Loss Reserves – The potential inadequacy of the liabilities we establish for unpaid losses and loss adjustment expenses is a key
risk faced by the General Insurance companies. There is significant uncertainty in factors that may drive the ultimate development
of losses compared to our estimates of losses and loss adjustment expenses. We manage this uncertainty through internal
controls and oversight of the loss reserve setting process, as well as reviews by external experts. For further information see
Critical Accounting Estimates – Insurance Liabilities – Loss Reserves herein.
• Underwriting – The potential inadequacy of premiums charged for future risk periods on risks underwritten in our portfolios can
impact the General Insurance companies’ ability to achieve an underwriting profit. We develop pricing based on our estimates of
losses and expenses, but factors such as market pressures and the inherent uncertainty and complexity in estimating losses may
result in premiums that are inadequate to generate underwriting profit. This may be driven by adverse economic conditions,
unanticipated emergence of risks or increase in frequency of claims, worse than expected prepayment of policies, investment
results, or unexpected or increased costs or expenses.
• Catastrophe Exposure – Our business is exposed to various catastrophic events in which multiple losses can occur and affect
multiple lines of business in any calendar year. Natural disasters, such as hurricanes, earthquakes and other catastrophes, have
the potential to adversely affect our operating results. Other risks, such as man-made catastrophes or pandemic disease, could
also adversely affect our business and operating results to the extent they are covered by our insurance products. Concentration of
exposure in certain industries or geographies may cause us to suffer disproportionate losses.
• Single Risk Loss Exposure – Our business is exposed to loss events that have the potential to generate losses from a single
insured client. Events such as fires or explosions can result in loss activity for our clients. The net risk to us is managed to
acceptable limits established by our GRC through a combination of internal underwriting standards and external reinsurance.
Furthermore, single risk loss exposure is managed and monitored on both a segregated and aggregated basis.
• Reinsurance – Since we use reinsurance to limit our losses, we are exposed to risks associated with reinsurance including the
unrecoverability of expected payments from reinsurers due to either an inability or unwillingness to pay, contracts that do not
respond properly to the event or actual reinsurance coverage that is different than anticipated. The inability or unwillingness to pay
is considered credit risk and is monitored through our credit risk management framework.
Natural Catastrophe Risk
We manage catastrophe exposure with multiple approaches such as setting risk limits based on aggregate Probable Maximum Loss
(PML) modeling, monitoring overall exposures and risk accumulations, and purchasing catastrophe reinsurance through both the
traditional reinsurance and capital markets in addition to other reinsurance protections.
We use third-party catastrophe risk models and other tools to evaluate and simulate frequency and severity of catastrophic events
and associated losses to our portfolios of exposures. We apply a proprietary multi-model approach to account for relative strengths
and weaknesses of vendor models and make adjustments to modeled losses to account for loss adjustment expenses, model biases,
data quality and non-modeled risks.
We perform post-catastrophe event studies to identify model weaknesses, underwriting gaps, and improvement opportunities.
Lessons learned from post-catastrophe event studies are incorporated into the modeling and underwriting processes of risk pricing
and selection. The majority of policies exposed to catastrophic risks are one-year contracts that allow us to adjust our underwriting
guidelines, pricing and exposure accumulation in a relatively short period.
We recognize that climate change has implications for insurance industry exposure to natural catastrophe risk. With multiple levels of
risk management processes in place, we actively analyze the latest climate science and policy to anticipate potential changes to our
risk profile, pricing models and strategic planning. For example, we continually consider changes in climate and weather patterns as
an integral part of the underwriting process. In addition, we are committed to providing innovative insurance products and services to
help our clients be proactive against the threat of climate change, including expanding natural disaster resilience, promoting
adaptation, and reducing greenhouse gas emissions. Our internal product development, underwriting, modeling, and sustainability
practices will continue to adapt to and evolve with the developing risk exposures attributed to climate change.
Our natural catastrophe exposure is primarily driven by the U.S. and Japan, though our overall exposure is diversified across multiple
countries. For example, we have exposures to additional perils such as European windstorms and floods and seismic events across
the Pacific Rim. Within the U.S., we have significant hurricane exposure in Florida, the Gulf of Mexico, the Northeast U.S. and mid-
Atlantic regions. Events impacting the Northeast U.S. and the mid-Atlantic may result in a higher share of industry losses than other
regions primarily due to our relative share of exposure in those regions. Within the U.S., we have significant earthquake exposure in
California, the Pacific Northwest and New Madrid regions. Earthquakes impacting the Pacific Northwest and New Madrid regions may
result in a higher share of industry losses than other regions primarily due to our relative share of exposure in these regions.
158 AIG | 2018 Form 10-K
ITEM 7 | Enterprise Risk Management
The estimates below are the Occurrence Exceedance Probability (OEP) losses, which reflect losses that may occur in any single
event due to the defined peril. The 1-in-100 and 1-in-250 PMLs are the probable maximum losses from a single natural catastrophe
event with probability of 1 percent and 0.4 percent in a year, respectively.
The following table presents an overview of OEP modeled losses for top perils and countries:
At December 31, 2018
(in millions)
Exposures:
U.S. Hurricane (1-in-100)(a)
U.S. Earthquake (1-in-250)(b)
Japanese Typhoon (1-in-100)(c)
Japanese Earthquake (1-in-250)(d)
Net of
Reinsurance
Net of
Reinsurance, After Tax(e)
Percent of Total
Shareholder Equity
$
$
1,278 $
1,639
448
446 $
1,010
1,295
354
352
1.8 %
2.3
0.6
0.6 %
(a) The U.S. hurricane loss estimate includes losses to Commercial and Personal Property from hurricane hazards of wind and storm surge.
(b) The U.S. earthquake loss estimates represent exposure to Commercial and Personal Property, Workers’ Compensation (U.S.) and A&H business lines.
(c) Japan Typhoon loss estimate represents exposure to Commercial and Personal Property.
(d) Japan Earthquake loss estimate represents exposure to Commercial and Personal Property and A&H business lines.
(e) Taxed at the statutory tax rate of 21 percent for both the U.S. and Japanese modeled losses. The majority of Japan exposures are ceded to our U.S. Pool.
AIG’s 1-in-100 worldwide all peril OEP has reduced more than 15 percent from prior year, inclusive of Validus. The OEP estimates
provided above reflect our in-force portfolios for exposures at October 1, 2018 for Validus and September 30, 2018 for the remainder
of the exposure. The catastrophe reinsurance program is as of January 1, 2019. Other reinsurance covers are as of December 31,
2018.
AIG, along with other property casualty insurance and reinsurance companies, uses industry-recognized catastrophe models and
applies proprietary modeling processes and assumptions to arrive at loss estimates. The use of different methodologies and
assumptions could materially change the projected losses. Since there is no industry standard for assumptions and preparation of
insured data for use in these models, our modeled losses may not be comparable to estimates made by other companies.
Also, the modeled results are based on the assumption that all reinsurers fulfill their obligations to us under the terms of the
reinsurance arrangements. However, reinsurance recoverables may not be fully collectible. Therefore, these estimates are inherently
uncertain and may not accurately reflect our exposure to these events.
Our 2019 catastrophe reinsurance program provides protection on both an aggregate and occurrence basis. It is a worldwide program
that provides differing per occurrence and aggregate attachment points for North America, Japan, and Rest of World (that also has
some regional/country variations). The program includes $2 billion of limit for either per occurrence or aggregate exposure that is
shared across the regional towers.
Our coverage for North America includes:
• Per occurrence protection of up to $4 billion excess of $750 million, including $2 billion of limit in excess of $2.75 billion that is
shared across the regional occurrence and aggregate towers
• Aggregate protection utilizing the $2 billion of shared limit attaching excess $750 Million for 40% of the limit and excess $1 billion
for 60% of the limit, with a $100 million per occurrence deductible
• Up to $500 million of aggregate or occurrence North America specific limit to supplement the shared limit in the event that this
erodes
• A $275 million occurrence catastrophe cover specific to our U.S. high net worth personal lines business, with varying attachment
points tailored towards specific geographies
Our coverage for exposure outside North America includes:
• Japan per occurrence coverage of $550 million excess of $200 million and includes both personal and commercial exposure
• Rest of World per occurrence coverage up to $425 million, with a retention of either $50 million, $75 million or $125 million
depending on the zone/country
• Rest of World and Japan dedicated aggregate protection of $250 million excess $250 million with a $20 million per occurrence
deductible
• Rest of World and Japan $2 billion of per occurrence or aggregate shared limit
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ITEM 7 | Enterprise Risk Management
We have also purchased property per risk covers that provide protection against large losses globally, which include those emanating
from non-critical catastrophe events (all events except for named windstorm and earthquake) globally as well as critical catastrophe
events (named windstorm and earthquake) outside North America.
For Validus Reinsurance Limited, our catastrophe protection comes from a variety of reinsurance protections but is largely providing
$400 million of limit excess $300 million of retention from world-wide exposure via an aggregate excess of loss cover with an
additional $450 million of limit excess $700 million via the Tailwind Re Cat Bond for US, Puerto Rico and Canada named storm
losses.
Actual results in any period are likely to vary, perhaps materially, from the modeled scenarios. The occurrence of one or more severe
events could have a material adverse effect on our financial condition, results of operations and liquidity.
For additional information see also Item 1A. Risk Factors — Reserves and Exposures.
Terrorism Risk
We actively monitor terrorism risk and manage exposures to losses from terrorist attacks. We have set risk limits based on modeled
losses from certain terrorism attack scenarios. Terrorism risks are modeled using a third-party vendor model for various terrorism
attack modes and scenarios. Adjustments are made to account for vendor model gaps and the nature of the General Insurance
companies’ exposures. Examples of modeled scenarios are conventional bombs of different sizes, anthrax attacks and nuclear
attacks.
Our largest terrorism exposures are in New York City, and estimated losses are largely driven by the Property and Workers’
Compensation lines of business. At our largest exposure location, modeled losses for a five-ton bomb attack net of the Terrorism Risk
Insurance Program (TRIP) and reinsurance recoveries are estimated to be $2.8 billion based on the exposures as of September 30,
2018.
Our exposure to terrorism risk in the U.S. is mitigated by TRIP in addition to limited private reinsurance protections. TRIP covers
terrorist attacks within the United States or U.S. missions and against certain U.S. carriers or vessels and excludes certain lines of
business as specified by applicable law. In 2019, TRIP covers 81 percent of insured losses above a deductible, decreasing to 80
percent in 2020. The current estimate of our deductible is approximately $2.0 billion for 2018.
We offer terrorism coverage in many other countries through various insurance products and participate in country terrorism pools
when applicable. International terrorism exposure is estimated using scenario-based modeling and exposure concentration is
monitored routinely. Targeted reinsurance purchases are made for some lines of business to cover potential losses due to terrorist
attacks. We also rely on the government-sponsored and government-arranged terrorism reinsurance programs, including pools, in
force in applicable non-U.S. jurisdictions.
Life and Retirement Companies’ Key Risks
We manage risk through product design, experience monitoring, pricing actions, risk limitations, reinsurance and active monitoring
and management of the relationships between assets and liabilities, including hedging.
For Life and Retirement companies, risks include the following:
• Longevity risk – represents the risk of an increase in value of a policy or benefit as a result of actual mortality rates being lower
than the expected mortality rates. This risk could arise from medical advancement and longer-term societal health changes. This
risk exists in a number of our product lines but is most significant for our annuity products, structured settlements and pension risk
transfer business.
• Morbidity risk – represents the risk arising from actual morbidity (e.g. illness, disability or disease) incidence rate being higher
than expected or the length of the claims extending longer than expected resulting in a higher overall benefit payout. This risk
could arise from longer-term medical advances in detection and treatment for various diseases and medical conditions. This risk
exists in a number of our product lines such as group benefits and long-term care businesses – which are in run-off or no longer
being sold.
• Mortality risk – represents the risk of loss arising from actual mortality rates being higher than expected mortality rates. This risk
could arise from pandemics or other events, including longer-term societal changes that cause higher-than-expected mortality.
This risk exists in a number of our product lines, but is most significant for our life insurance products.
160 AIG | 2018 Form 10-K
ITEM 7 | Enterprise Risk Management
• Policyholder behavior risk (including full and partial surrender/lapse risk) – represents the risk that actual policyholder
behavior differs from expected behavior in a manner that has an adverse effect on our operating results. There are many related
assumptions made when products are sold, including how long the contracts will persist and other assumptions which impact the
expected utilization of contract benefits, options and guarantees. Actual experience can vary significantly from these assumptions.
This risk is impacted by a number of factors including changes in market conditions, especially changes in the levels of interest
rate and equity markets, tax law, regulations, competitive landscape and policyholder preferences. This risk exists in many of our
product lines, but most notably within the annuity portfolio of business.
The emergence of significant adverse experience compared to the initial assumptions at policy issuance or updated assumption
would require an adjustment to DAC and benefit reserves, which could have a material adverse effect on our consolidated results of
operations for a particular period.
For additional discussion of the impact of actual and expected experience on DAC and benefit reserves see Critical Accounting
Estimates – Future Policy Benefits for Life and Accident and Health Insurance Contracts and Critical Accounting Estimates –
Guaranteed Benefit Features of Variable Annuity Products. For additional discussion of business risks see Item 1A. Risk Factors —
Business and Operations.
Variable Annuity Risk Management and Hedging Programs
Our Individual and Group Retirement businesses offer variable annuity products with guaranteed living benefit (GLB) riders that
guarantee a certain level of lifetime benefits. GLBs are accounted for as embedded derivatives measured at fair value, with changes
in the fair value recorded in Other realized capital gains (losses). GLB features subject the Life and Retirement companies to market
risk, including exposure to changes in interest rates, equity prices, credit spreads and market volatility.
Variable annuity product design is the first step in managing our exposure to these market risks. Risk mitigation features of our
variable annuity product design include GLB rider fees indexed to an equity market volatility index, which can provide additional fee
assessments in periods of increased market volatility, required minimum allocations to fixed accounts to reduce overall equity
exposure, and for some of the variable annuity products, the utilization of volatility control funds, which reduce equity exposure in the
funds in response to changes in market volatility, even under sudden or extreme market movements.
After reflecting our product risk-mitigating features, we hedge our remaining economic exposure to market risk within GLB features
through our variable annuity hedging program, which is designed to offset certain changes in the economic value of these GLB
embedded derivatives, within established thresholds. The hedging program is designed to provide additional protection against large
and combined movements in interest rates, equity prices, credit spreads and market volatility under multiple scenarios.
Our hedging program utilizes an economic hedge target, which represents our estimate of the underlying economic risks in our GLB
riders, based on the present value of the future expected benefit payments for the GLB, less the present value of future GLB rider
fees, over numerous stochastic scenarios. This stochastic projection method uses best estimate assumptions for policyholder
behavior (including mortality, lapses, withdrawals and benefit utilization) in conjunction with market scenarios calibrated to observable
equity and interest rate option prices. Policyholder behaviors are regularly evaluated to compare current assumptions to actual
experience and, if appropriate, changes are made to the policyholder behavior assumptions. The risk of changes in policyholder
behavior is not explicitly hedged and such differences between expected and actual policyholder behaviors will result in hedge
ineffectiveness.
Due to differences between the calculation of the economic hedge target and U.S. GAAP valuation of the embedded derivative, which
include differences in the treatment of rider fees and exclusion of certain risk margins and other differences in discount rates, we
expect relative movements in the economic hedge target and the U.S. GAAP embedded derivative valuation will vary over time with
changes in equity markets, interest rates and credit spreads.
For information on the impact on our consolidated pre-tax income from the change in fair value of the embedded derivatives and the
hedging portfolio, as well as additional discussion of differences between the economic hedge target and the valuation of the
embedded derivatives see Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and
Hedging Results.
In designing our hedging portfolio for our variable annuity hedging program, we make assumptions and projections about the future
performance of the underlying contract holder funds. To project future account value changes, we make assumptions about how each
of the underlying funds will perform. We map the contract holder funds to a set of publicly traded indices that we believe best
represent the liability to be hedged. Basis risk exists due to the variance between these assumptions and actual fund returns, which
may result in variances between changes in the hedging portfolio and changes in the economic hedge target. Net hedge results and
the cost of hedging are also impacted by differences between realized volatility and implied volatility.
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ITEM 7 | Enterprise Risk Management
For index annuity and universal life products, we have a hedging program designed to manage the index crediting strategies
associated with index annuity and index life products. This hedging program is designed to offset the economic risk with respect to the
index returns for the current crediting rate reset period, and utilizes derivative instruments, including but not limited to equity index
options and futures contracts. Similarly as with the variable annuities, there are differences between the calculation of the economic
hedge target and U.S. GAAP valuation of the index annuity and index life embedded derivatives, which can lead to variances in their
relative movements.
To manage the capital market exposures embedded within the economic hedge target, we identify and hedge market sensitivities to
changes in equity markets, interest rates, volatility and for variable annuities, credit spreads. Each hedge program purchases
derivative instruments or securities having sensitivities that offset corresponding sensitivities in the associated economic hedge
targets, within internally defined threshold limits. Since the relative movements of the hedging portfolio and the economic hedge target
vary over time or with market changes, the net exposure can be outside the threshold limits, and adjustments to the hedging portfolio
are made periodically to return the net exposure to within the threshold limits.
Our hedging programs utilize various derivative instruments, including but not limited to equity options, futures contracts, interest rate
swaps and swaptions, as well as other hedging instruments. In addition, within the variable annuities hedging program, we purchase
certain fixed income securities and elect the fair value option as a capital efficient way to manage interest rate and credit spread
exposures. To minimize counterparty credit risk the majority of the derivative instruments utilized within the hedging programs are
cleared through global exchanges. Over the counter derivatives utilized within the hedging programs are highly collateralized.
The hedging programs are monitored on a daily basis to ensure that the economic hedge targets and the associated derivative
portfolios are within the threshold limits, pursuant to the approved hedging strategy. Daily risk monitoring verifies that the net risk
exposures are within the approved net risk exposure threshold limits. In addition, monthly stress tests are performed to determine the
program’s effectiveness relative to the applicable limits, under an array of combined severe market stresses in equity prices, interest
rates, volatility and credit spreads. Finally, hedging strategies are reviewed regularly to gauge their effectiveness in managing our
market exposures in the context of our overall risk appetite.
Reinsurance Activities
Reinsurance is used primarily to manage overall capital adequacy and mitigate the insurance loss (Life and Non-Life) exposure
related to certain events such as natural and man-made catastrophes or death events. Our subsidiaries operate worldwide primarily
by underwriting and accepting risks for their direct account on a gross basis and reinsuring a portion of the exposure on either an
individual risk or an aggregate basis to the extent those risks exceed the desired retention level. In addition, as a condition of certain
direct underwriting transactions, we may be required by clients, agents or regulation to cede all or a portion of risks to specified
reinsurance entities, such as captives, other insurers, local reinsurers and compulsory pools.
Reinsurance markets include:
• Traditional local and global reinsurance markets including those in the United States, Bermuda, London and Europe, accessed
directly and through reinsurance intermediaries;
• Capital markets through insurance-linked securities and collateralized reinsurance transactions, such as catastrophe bonds,
sidecars and similar vehicles; and
• Other insurers that engage in both direct and assumed reinsurance.
The form of reinsurance we may choose from time to time will generally depend on whether we are seeking:
• proportional reinsurance, whereby we cede a specified percentage of premiums and losses to reinsurers;
• non-proportional or excess of loss reinsurance, whereby we cede all or a specified portion of losses in excess of a specified
amount on a per risk, per occurrence (including catastrophe reinsurance) or aggregate basis; or
•
facultative contracts that reinsure individual policies.
We continually evaluate the relative attractiveness of different forms of reinsurance contracts and different markets that may be used
to achieve our risk and profitability objectives.
Reinsurance contracts do not relieve our subsidiaries from their direct obligations to insureds. However, an effective reinsurance
program substantially mitigates our exposure to potentially significant losses.
In certain markets, we are required to participate on a proportional basis in reinsurance pools based on our relative share of direct
writings in those markets. Such mandatory reinsurance generally covers higher-risk consumer exposures such as assigned-risk
automobile and earthquake, as well as certain commercial exposures such as workers’ compensation.
162 AIG | 2018 Form 10-K
ITEM 7 | Enterprise Risk Management
Reinsurance Recoverable
AIG’s reinsurance recoverable assets are comprised of:
• Paid losses recoverable – balances due from reinsurers for losses and loss adjustment expenses paid by our subsidiaries and
billed, but not yet collected.
• Ceded loss reserves – ultimate ceded reserves for losses and loss adjustment expenses, including reserves for claims reported
but not yet paid and estimates for IBNR.
• Ceded reserves for unearned premiums.
• Life and Annuity reinsurance recoverables (ceded policy and claim reserves).
At December 31, 2018, total reinsurance recoverable assets were $38.2 billion. These assets include general reinsurance paid losses
recoverable of $1.5 billion, ceded loss reserves of $32.0 billion including reserves for incurred but not reported (IBNR) claims, and
ceded reserves for unearned premiums of $3.0 billion, as well as life reinsurance recoverable of $1.7 billion. The methods used to
estimate IBNR and to establish the resulting ultimate losses involve projecting the frequency and severity of losses over multiple
years. These methods are continually reviewed and updated by management. Any adjustments are reflected in income. We believe
that the amount recorded for ceded loss reserves at December 31, 2018 reflects a reasonable estimate of the ultimate losses
recoverable. Actual losses may, however, differ from the reserves currently ceded.
The Reinsurance Credit Department (RCD) conducts periodic detailed assessments of the financial strength and condition of current
and potential reinsurers, both foreign and domestic. The RCD monitors both the financial condition of reinsurers as well as the total
reinsurance recoverable ceded to reinsurers, and sets limits with regard to the amount and type of exposure we are willing to take
with reinsurers. As part of these assessments, we attempt to identify whether a reinsurer is appropriately licensed, assess its financial
capacity and liquidity, and evaluate the local economic and financial environment in which a foreign reinsurer operates. The RCD
reviews the nature of the risks ceded and the need for measures, including collateral to mitigate credit risk. For example, in our treaty
reinsurance contracts, we frequently include provisions that require a reinsurer to post collateral or use other measures to reduce
exposure when a referenced event occurs. Furthermore, we limit our unsecured exposure to reinsurers through the use of credit
triggers such as insurer financial strength rating downgrades, declines in regulatory capital, or relevant risk-based capital (RBC) ratios
fall below certain levels. We also set maximum limits for reinsurance recoverable exposure, which in some cases is the recoverable
amount plus an estimate of the maximum potential exposure from unexpected events for a reinsurer. In addition, credit executives
within ERM review reinsurer exposures and credit limits and approve reinsurer credit limits above specified levels. Finally, even where
we conclude that uncollateralized credit risk is acceptable, we require collateral from active reinsurance counterparties where it is
necessary for our subsidiaries to recognize the reinsurance recoverable assets for statutory accounting purposes. At December 31,
2018, we held $20.2 billion of collateral, in the form of funds withheld, securities in reinsurance trust accounts and/or irrevocable
letters of credit, in support of reinsurance recoverable assets from unaffiliated reinsurers.
The following table presents information for each reinsurer representing in excess of five percent of our total reinsurance
recoverable assets:
At December 31, 2018
(in millions)
Reinsurer:
S&P
Rating(a) Rating(a)
Gross
A.M.
Best Reinsurance
Assets
Percent of
Reinsurance
Assets(b)
Collateral
Held(c)
Uncollateralized
Reinsurance
Assets
Berkshire Hathaway Group of Companies
Swiss Reinsurance Group of Companies
AA+
AA-
A++ $
A+ $
14,375 (d)
4,507
37.7 % $
11.8 % $
12,913
2,285
$
$
1,462
2,222
(a) The financial strength ratings reflect the ratings of the various reinsurance subsidiaries of the companies listed as of January 29, 2019.
(b) Total reinsurance assets include both Property Casualty and Life and Retirement reinsurance recoverable.
(c) Excludes collateral held in excess of applicable treaty balances.
(d) Includes $13.8 billion recoverable under the 2011 retroactive asbestos reinsurance transaction and the 2017 Adverse Development Reinsurance agreement.
At December 31, 2018, we had no significant reinsurance recoverable due from any individual reinsurer that was financially troubled.
Reinsurer capital levels continued to increase in 2018, thereby increasing the industry’s underwriting capacity, which resulted in
continued competition and lower rates for 2019 renewals. Reduced profitability associated with lower rates could potentially result in
reduced capacity or rating downgrades for some reinsurers. The RCD, in conjunction with the credit executives within ERM, reviews
these developments, monitors compliance with credit triggers that may require the reinsurer to post collateral, and seeks to use other
appropriate means to mitigate any material risks arising from these developments.
For further discussion of reinsurance recoverable see Critical Accounting Estimates – Reinsurance Assets
AIG | 2018 Form 10-K 163
ITEM 7 | Enterprise Risk Management
OTHER BUSINESS RISKS
Derivative Transactions
We utilize derivatives principally to enable us to hedge exposure to interest rates, currencies, credit, commodities, equities and other
risks. Credit risk associated with derivative counterparties exists for a derivative contract when that contract has a positive fair value to
us. The maximum potential exposure will increase or decrease during the life of the derivative commitments as a function of maturity
and market conditions. All derivative transactions must be transacted within counterparty limits that have been approved by ERM.
We evaluate counterparty credit quality by internal analysis consistent with the AIG Credit Policy. We utilize various credit
enhancements, including letters of credit, guarantees, collateral, credit triggers, credit derivatives, margin agreements and
subordination to reduce the credit risk relating to outstanding financial derivative transactions. We require credit enhancements in
connection with specific transactions based on, among other things, the creditworthiness of the counterparties, and transaction size
and maturity. Furthermore, we enter into certain agreements that have the benefit of set-off and close-out netting provisions, such as
ISDA Master Agreements. These provisions provide that, in the case of an early termination of a transaction, we can set off
receivables from a counterparty against payables to the same counterparty arising out of all covered transactions. As a result, where
a legally enforceable netting agreement exists, the fair value of the transaction with the counterparty represents the net sum of
estimated fair values.
The fair value of our interest rate, currency, credit, commodity and equity swaps, options, swaptions, and forward commitments,
futures, and forward contracts reported as a component of Other assets, was approximately $0.9 billion at both December 31, 2018
and December 31, 2017. Where applicable, these amounts have been determined in accordance with the respective master netting
agreements.
The following table presents the fair value of our derivatives portfolios in asset positions by internal counterparty credit
rating:
At December 31,
(in millions)
Rating:
AAA
AA
A
BBB
Below investment grade*
Total
* Below investment grade includes not rated.
2018
2017
37
4
81
619
174
915
$
$
12
5
151
526
228
922
$
$
For additional discussion related to derivative transactions see Note 11 to the Consolidated Financial Statements.
164 AIG | 2018 Form 10-K
G l o s s a r y
Glossary
Accident year The annual calendar accounting period in which loss events occurred, regardless of when the losses are actually
reported, booked or paid.
Accident year combined ratio, as adjusted The combined ratio excluding catastrophe losses and related reinstatement premiums,
prior year development, net of premium adjustments, and the impact of reserve discounting.
Accident year loss ratio, as adjusted The loss ratio excluding catastrophe losses and related reinstatement premiums, prior year
development, net of premium adjustments, and the impact of reserve discounting.
Acquisition ratio Acquisition costs divided by net premiums earned. Acquisition costs are those costs incurred to acquire new and
renewal insurance contracts and also include the amortization of VOBA and DAC. Acquisition costs vary with sales and include, but
are not limited to, commissions, premium taxes, direct marketing costs and certain costs of personnel engaged in sales support
activities such as underwriting.
Additional premium represents a premium on an insurance policy over and above the initial premium imposed at the beginning of
the policy. An additional premium may be assessed if the insured’s risk is found to have increased significantly.
Adjusted revenues exclude Net realized capital gains (losses), income from non-operating litigation settlements (included in Other
income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net
investment income for GAAP purposes).
Assets under administration include assets under management and Retail Mutual Funds and Group Retirement mutual fund assets
that we sell or administer.
Assets under management include assets in the general and separate accounts of our subsidiaries that support liabilities and
surplus related to our life and annuity insurance products and the notional value of stable value wrap contracts.
Base Spread Net investment income excluding income from alternative investments and other enhancements, less interest credited
excluding amortization of sales inducement assets.
Base Yield Net investment income excluding income from alternative investments and other enhancements, as a percentage of
average base invested asset portfolio, which excludes alternative investments, other bond securities and certain other investments for
which the fair value option has been elected.
Book value per common share, excluding accumulated other comprehensive income (AOCI) and Book value per common
share, excluding AOCI and deferred tax assets (DTA) (Adjusted book value per common share) are non-GAAP measures and
are used to show the amount of our net worth on a per-share basis. Book value per common share excluding AOCI is derived by
dividing total AIG shareholders’ equity, excluding AOCI, by total common shares outstanding. Adjusted book value per common share
is derived by dividing total AIG shareholders’ equity, excluding AOCI and DTA (Adjusted Shareholders’ Equity), by total common
shares outstanding.
Casualty insurance Insurance that is primarily associated with the losses caused by injuries to third persons, i.e., not the insured,
and the legal liability imposed on the insured as a result.
Combined ratio Sum of the loss ratio and the acquisition and general operating expense ratios.
CSA Credit Support Annex A legal document generally associated with an ISDA Master Agreement that provides for collateral
postings which could vary depending on ratings and threshold levels.
CVA Credit Valuation Adjustment The CVA adjusts the valuation of derivatives to account for nonperformance risk of our
counterparty with respect to all net derivative assets positions. Also, the CVA reflects the fair value movement in AIGFP's asset
portfolio that is attributable to credit movements only, without the impact of other market factors such as interest rates and foreign
exchange rates. Finally, the CVA also accounts for our own credit risk in the fair value measurement of all derivative net liability
positions and liabilities where AIG has elected the fair value option, when appropriate.
DAC Deferred Policy Acquisition Costs Deferred costs that are incremental and directly related to the successful acquisition of new
business or renewal of existing business.
AIG | 2018 Form 10-K 165
G l o s s a r y
DAC Related to Unrealized Appreciation (Depreciation) of Investments An adjustment to DAC and Reserves for investment-
oriented products, equal to the change in DAC and Unearned Revenue amortization that would have been recorded if fixed maturity
securities available for sale and also, prior to 2018, equity securities at fair value had been sold at their stated aggregate fair value
and the proceeds reinvested at current yields. An adjustment to benefit reserves for investment-oriented products is also recognized
to reflect the application of the benefit ratio to the accumulated assessments that would have been recorded if fixed maturity securities
available for sale and also, prior to 2018, equity securities at fair value had been sold at their stated aggregate fair value and the
proceeds reinvested at current yields (collectively referred to as “shadow Investment-Oriented Adjustments”).
For long-duration traditional products, significant unrealized appreciation of investments in a sustained low interest rate environment
may cause additional future policy benefit liabilities to be recorded (shadow loss reserves).
Deferred Gain on Retroactive Reinsurance Retroactive reinsurance is a reinsurance contract in which an assuming entity agrees
to reimburse a ceding entity for liabilities incurred as a result of past insurable events. If the amount of premium paid by the ceding
reinsurer is less than the related ceded loss reserves, the resulting gain is deferred and amortized over the settlement period of the
reserves. Any related development on the ceded loss reserves recoverable under the contract would increase the deferred gain if
unfavorable, or decrease the deferred gain if favorable.
Expense ratio Sum of acquisition expenses and general operating expenses, divided by net premiums earned.
General operating expense ratio General operating expenses divided by net premiums earned. General operating expenses are
those costs that are generally attributed to the support infrastructure of the organization and include but are not limited to personnel
costs, projects and bad debt expenses. General operating expenses exclude losses and loss adjustment expenses incurred,
acquisition expenses, and investment expenses.
GIC/GIA Guaranteed Investment Contract/Guaranteed Investment Agreement A contract whereby the seller provides a guaranteed
repayment of principal and a fixed or floating interest rate for a predetermined period of time.
IBNR Incurred But Not Reported Estimates of claims that have been incurred but not reported to us.
ISDA Master Agreement An agreement between two counterparties, which may have multiple derivative transactions with each
other governed by such agreement, that generally provides for the net settlement of all or a specified group of these derivative
transactions, as well as pledged collateral, through a single payment, in a single currency, in the event of a default on, or affecting
any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions.
LAE Loss Adjustment Expenses The expenses directly attributed to settling and paying claims of insureds and include, but are not
limited to, legal fees, adjuster’s fees and the portion of general expenses allocated to claim settlement costs.
Loss Ratio Losses and loss adjustment expenses incurred divided by net premiums earned.
Loss reserve development The increase or decrease in incurred losses and loss adjustment expenses related to prior years as a
result of the re-estimation of loss reserves at successive valuation dates for a given group of claims.
Loss reserves Liability for unpaid losses and loss adjustment expenses. The estimated ultimate cost of settling claims relating to
insured events that have occurred on or before the balance sheet date, whether or not reported to the insurer at that date.
Loan-to-Value Ratio Principal amount of loan amount divided by appraised value of collateral securing the loan.
Master netting agreement An agreement between two counterparties who have multiple derivative contracts with each other that
provides for the net settlement of all contracts covered by such agreement, as well as pledged collateral, through a single payment, in
a single currency, in the event of default on or upon termination of any one such contract.
Natural catastrophe and man-made losses are generally weather or seismic events having a net impact on AIG in excess of $10
million each and also include certain man-made events, such as terrorism and civil disorders that exceed the $10 million threshold.
Net premiums written represent the sales of an insurer, adjusted for reinsurance premiums assumed and ceded, during a given
period. Net premiums earned are the revenue of an insurer for covering risk during a given period. Net premiums written are a
measure of performance for a sales period, while Net premiums earned are a measure of performance for a coverage period.
166 AIG | 2018 Form 10-K
G l o s s a r y
Noncontrolling interest The portion of equity ownership in a consolidated subsidiary not attributable to the controlling parent
company.
Policy fees An amount added to a policy premium, or deducted from a policy cash value or contract holder account, to reflect the cost
of issuing a policy, establishing the required records, sending premium notices and other related expenses.
Pool A reinsurance arrangement whereby all of the underwriting results of the pool members are combined and then shared by each
member in accordance with its pool participation percentage.
Premiums and deposits – Life and Retirement include direct and assumed amounts received on traditional life insurance policies
and group benefit policies, and deposits on life-contingent payout annuities, as well as deposits received on universal life, investment-
type annuity contracts, FHLB funding agreements and mutual funds.
Prior year development See Loss reserve development.
RBC Risk-Based Capital A formula designed to measure the adequacy of an insurer’s statutory surplus compared to the risks
inherent in its business.
Reinstatement premiums Additional premiums payable to reinsurers or receivable from insurers to restore coverage limits that have
been reduced or exhausted as a result of reinsured losses under certain excess of loss reinsurance treaties.
Reinsurance The practice whereby one insurer, the reinsurer, in consideration of a premium paid to that insurer, agrees to indemnify
another insurer, the ceding company, for part or all of the liability of the ceding company under one or more policies or contracts of
insurance which it has issued.
Retroactive Reinsurance See Deferred Gain on Retroactive Reinsurance.
Return on equity – Adjusted after-tax income excluding AOCI and DTA (Adjusted Return on equity) is a non-GAAP measure
and is used to show the rate of return on shareholders’ equity. Adjusted Return on equity is derived by dividing actual or annualized
adjusted after-tax income attributable to AIG by average Adjusted Shareholders’ Equity.
Return premium represents amounts given back to the insured in the case of a cancellation, an adjustment to the rate or an
overpayment of an advance premium.
Salvage The amount that can be recovered by an insurer for the sale of damaged goods for which a policyholder has been
indemnified (and to which title was transferred).
Severe losses are defined as non-catastrophic individual first-party losses, surety and trade credit losses greater than $10 million,
net of related reinsurance and salvage and subrogation.
SIA Sales Inducement Asset Represents enhanced crediting rates or bonus payments to contract holders on certain annuity and
investment contract products that meet the criteria to be deferred and amortized over the life of the contract.
Solvency II Legislation in the European Union which reforms the insurance industry’s solvency framework, including minimum capital
and solvency requirements, governance requirements, risk management and public reporting standards. The Solvency II Directive
(2009/138/EEC) was adopted on November 25, 2009 and became effective on January 1, 2016.
Subrogation The amount of recovery for claims we have paid our policyholders, generally from a negligent third party or such party’s
insurer.
Surrender charge A charge levied against an investor for the early withdrawal of funds from a life insurance or annuity contract, or
for the cancellation of the agreement.
Surrender rate represents annualized surrenders and withdrawals as a percentage of average reserves and Group Retirement
mutual fund assets under administration.
Unearned premium reserve Liabilities established by insurers and reinsurers to reflect unearned premiums, which are usually
refundable to policyholders if an insurance or reinsurance contract is canceled prior to expiration of the contract term.
VOBA Value of Business Acquired Present value of projected future gross profits from in-force policies of acquired businesses.
AIG | 2018 Form 10-K 167
A c r o n y m s
Acronyms
A&H Accident and Health Insurance
ISDA International Swaps and Derivatives Association, Inc.
ABS Asset-Backed Securities
Moody's Moody's Investors’ Service Inc.
BCFP Bureau of Consumer Financial Protection
NAIC National Association of Insurance Commissioners
CDO Collateralized Debt Obligations
NM Not Meaningful
CDS Credit Default Swap
NYSE New York Stock Exchange
CMA Capital Maintenance Agreement
OTC Over-the-Counter
CMBS Commercial Mortgage-Backed Securities
OTTI Other-Than-Temporary Impairment
EGPs Estimated gross profits
PCAOB Public Company Accounting Oversight Board (United
States)
FASB Financial Accounting Standards Board
RMBS Residential Mortgage-Backed Securities
FRBNY Federal Reserve Bank of New York
S&P Standard & Poor’s Financial Services LLC
GAAP Accounting principles generally accepted in the United
States of America
SEC Securities and Exchange Commission
GLB Guaranteed Living Benefit
URR Unearned revenue reserve
GMDB Guaranteed Minimum Death Benefits
VIE Variable Interest Entity
GMWB Guaranteed Minimum Withdrawal Benefits
168 AIG | 2018 Form 10-K
ITEM 7A | Quantitative and Qualitative Disclosures about Market Risk
ITEM 7A | Quantitative and Qualitative Disclosures about Market
Risk
The information required by this item is set forth in the Enterprise Risk Management section of Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.
AIG | 2018 Form 10-K 169
Part II
ITEM 8 | Financial Statements and Supplementary Data
AMERICAN INTERNATIONAL GROUP, INC.
REFERENCE TO FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2018 and 2017
Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
NOTE 1.
NOTE 2.
NOTE 3.
NOTE 4.
NOTE 5.
NOTE 6.
NOTE 7.
NOTE 8.
NOTE 9.
NOTE 10.
NOTE 11.
NOTE 12.
NOTE 13.
NOTE 14.
NOTE 15.
NOTE 16.
NOTE 17.
NOTE 18.
NOTE 19.
NOTE 20.
NOTE 21.
NOTE 22.
NOTE 23.
NOTE 24.
NOTE 25.
NOTE 26
Schedules
SCHEDULE I
SCHEDULE II Condensed Financial Information of Registrant at December 31, 2018 and 2017 and for the years ended December 31,
Basis of Presentation
Summary of Significant Accounting Policies
Segment Information
Business Combination
Fair Value Measurements
Investments
Lending Activities
Reinsurance
Deferred Policy Acquisition Costs
Variable Interest Entities
Derivatives and Hedge Accounting
Goodwill and Other Intangible Assets
Insurance Liabilities
Variable Life and Annuity Contracts
Debt
Contingencies, Commitments and Guarantees
Equity
Earnings Per Share
Statutory Financial Data and Restrictions
Share-Based and Other Compensation Plans
Employee Benefits
Ownership
Income Taxes
Quarterly Financial Information (Unaudited)
Information Provided in Connection With Outstanding Debt
Subsequent Events
Summary of Investments — Other than Investments in Related Parties at December 31, 2018
2018, 2017 and 2016
SCHEDULE III Supplementary Insurance Information at December 31, 2018, 2017 and 2016 and for the years then ended
SCHEDULE IV Reinsurance at December 31, 2018, 2017 and 2016 and for the years then ended
SCHEDULE V Valuation and Qualifying Accounts at December 31, 2018, 2017 and 2016 and for the years then ended
170 AIG | 2018 Form 10-K
Page
171
172
173
174
175
176
178
181
187
191
193
214
227
230
232
235
237
242
244
283
285
287
289
294
295
297
300
308
308
317
318
325
335
336
340
341
342
ITEM 8 | Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of American International Group, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of American International Group, Inc. and its subsidiaries (the “Company”) as of
December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income (loss), equity, and cash flows for each of
the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the accompanying
index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting
as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as
of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control
over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and
on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded Validus Holdings, Ltd. and Glatfelter
Insurance Group (the “Acquired Businesses”) from its assessment of internal control over financial reporting as of December 31, 2018 because they
were acquired by the Company in purchase business combinations during 2018. We have also excluded the Acquired Businesses from our audit of
internal control over financial reporting. The Acquired Businesses are wholly-owned subsidiaries whose total assets and total revenues excluded from
management’s assessment and our audit of internal control over financial reporting collectively represent approximately 2 percent and 3 percent,
respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 15, 2019
We have served as the Company’s auditor since 1980.
AIG | 2018 Form 10-K 171
American International Group, Inc.
Consolidated Balance Sheets
(in millions, except for share data)
Assets:
Investments:
Fixed maturity securities:
December 31,
December 31,
2018
2017
Bonds available for sale, at fair value (amortized cost: 2018 - $225,780; 2017 - $225,461)
$
229,391
$
Other bond securities, at fair value (See Note 6)
Equity Securities:
Common and preferred stock available for sale, at fair value (cost: 2017 - $1,305)
Other common and preferred stock, at fair value (See Note 6)
Mortgage and other loans receivable, net of allowance (portion measured at fair value: 2018 - $0; 2017 - $5)
Other invested assets (portion measured at fair value: 2018 - $5,894; 2017 - $6,248)
Short-term investments, including restricted cash of $142 in 2018 and $58 in 2017
(portion measured at fair value: 2018 - $3,015; 2017 - $2,615)
Total investments
Cash
Accrued investment income
Premiums and other receivables, net of allowance
Reinsurance assets, net of allowance
Deferred income taxes
Deferred policy acquisition costs
Other assets, including restricted cash of $343 in 2018 and $317 in 2017
(portion measured at fair value: 2018 - $973; 2017 - $922)
Separate account assets, at fair value
Total assets
Liabilities:
Liability for unpaid losses and loss adjustment expenses
Unearned premiums
Future policy benefits for life and accident and health insurance contracts
Policyholder contract deposits (portion measured at fair value: 2018 - $4,116; 2017 - $4,150)
Other policyholder funds
Other liabilities (portion measured at fair value: 2018 - $1,265; 2017 - $1,124)
Long-term debt (portion measured at fair value: 2018 - $2,213; 2017 - $2,888)
Separate account liabilities
Total liabilities
Contingencies, commitments and guarantees (See Note 16)
AIG shareholders’ equity:
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2018 - 1,906,671,492 and
2017 - 1,906,671,492
Treasury stock, at cost; 2018 - 1,040,062,063 shares; 2017 - 1,007,626,835 shares of common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total AIG shareholders’ equity
Non-redeemable noncontrolling interests
Total equity
Total liabilities and equity
See accompanying Notes to Consolidated Financial Statements.
172 AIG | 2018 Form 10-K
11,415
-
1,253
43,135
19,341
9,674
314,209
2,873
2,389
11,011
38,172
15,221
12,694
13,568
81,847
238,992
12,772
1,708
589
37,023
20,822
10,386
322,292
2,362
2,356
10,248
33,024
14,033
10,994
10,194
92,798
$
$
491,984
$
498,301
83,639
$
19,248
44,935
142,262
3,568
24,636
34,540
81,847
78,393
19,030
45,432
135,602
3,648
26,050
31,640
92,798
434,675
432,593
4,766
(49,144)
81,268
20,884
(1,413)
56,361
948
57,309
$
491,984
$
4,766
(47,595)
81,078
21,457
5,465
65,171
537
65,708
498,301
American International Group, Inc.
Consolidated Statements of Income
(dollars in millions, except per share data)
Revenues:
Premiums
Policy fees
Net investment income
Net realized capital losses:
Total other-than-temporary impairments on available for sale securities
Portion of other-than-temporary impairments on available for sale
fixed maturity securities recognized in Other comprehensive income (loss)
Net other-than-temporary impairments on available for sale
securities recognized in net income (loss)
Other realized capital gains (losses)
Total net realized capital losses
Other income
Total revenues
Benefits, losses and expenses:
Policyholder benefits and losses incurred
Interest credited to policyholder account balances
Amortization of deferred policy acquisition costs
General operating and other expenses
Interest expense
(Gain) loss on extinguishment of debt
Net gain on sale of divested businesses
Total benefits, losses and expenses
Income (loss) from continuing operations before income tax expense
Income tax expense:
Current
Deferred
Income tax expense
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of income tax expense
Net income (loss)
Less:
Net income from continuing operations attributable to
noncontrolling interests
Net loss attributable to AIG
Income (loss) per common share attributable to AIG:
Basic:
Income (loss) from continuing operations
Loss from discontinued operations
Net loss attributable to AIG
Diluted:
Income (loss) from continuing operations
Loss from discontinued operations
Net loss attributable to AIG
Weighted average shares outstanding:
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
Years Ended December 31,
2018
2017
2016
$
$
$
$
$
$
$
$
30,614 $
2,791
12,476
(190)
(61)
(251)
121
(130)
1,638
47,389
27,412
3,754
5,386
9,302
1,309
7
(38)
47,132
257
336
(182)
154
103
(42)
61
31,374 $
2,935
14,179
(196)
(31)
(227)
(1,153)
(1,380)
2,412
49,520
29,972
3,592
4,288
9,107
1,168
(5)
(68)
48,054
1,466
636
6,890
7,526
(6,060)
4
(6,056)
67
(6) $
28
(6,084) $
0.04 $
(0.05) $
(0.01) $
0.04 $
(0.05) $
(0.01) $
(6.54) $
- $
(6.54) $
(6.54) $
- $
(6.54) $
34,393
2,732
14,065
(458)
(29)
(487)
(1,457)
(1,944)
3,121
52,367
32,437
3,705
4,521
10,989
1,260
74
(545)
52,441
(74)
576
(391)
185
(259)
(90)
(349)
500
(849)
(0.70)
(0.08)
(0.78)
(0.70)
(0.08)
(0.78)
898,405,537
910,141,242
930,561,286
1,091,085,131
930,561,286
1,091,085,131
AIG | 2018 Form 10-K 173
American International Group, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(in millions)
Net income (loss)
Other comprehensive income (loss), net of tax
Change in unrealized appreciation (depreciation) of fixed maturity securities on
which other-than-temporary credit impairments were taken
Change in unrealized appreciation (depreciation) of all other investments
Change in foreign currency translation adjustments
Change in retirement plan liabilities adjustment
Change in fair value of liabilities under fair value option attributable to changes in own credit risk
Other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive income attributable to noncontrolling interests
Comprehensive loss attributable to AIG
See accompanying Notes to Consolidated Financial Statements.
Years Ended December 31,
2018
$
61 $
2017
(6,056) $
2016
(349)
(1,000)
(4,975)
(349)
28
3
(6,293)
(6,232)
76
(6,308) $
367
1,288
539
41
-
2,235
(3,821)
28
(3,849) $
(270)
839
250
(126)
-
693
344
500
(156)
$
174 AIG | 2018 Form 10-K
American International Group, Inc.
Consolidated Statements of Equity
(in millions)
Balance, January 1, 2016
Common stock issued under stock plans
Purchase of common stock
Net income (loss) attributable to AIG or other
noncontrolling interests
Dividends
Other comprehensive income (loss)
Current and deferred income taxes
Net increase due to acquisitions and consolidations
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Other
Balance, December 31, 2016
Common stock issued under stock plans
Purchase of common stock
Net income (loss) attributable to AIG or other
noncontrolling interests
Dividends
Other comprehensive income (loss)
Current and deferred income taxes
Net increase due to acquisitions and consolidations
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Other
Balance, December 31, 2017
Cumulative effect of change in accounting
principle, net of tax
Common stock issued under stock plans
Purchase of common stock
Net income (loss) attributable to AIG or
noncontrolling interests
Dividends
Other comprehensive income (loss)
Current and deferred income taxes
Net increase due to acquisitions and consolidations
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Other
Accumulated
Total AIG
redeemable
Non-
Additional
Other
Share-
Non-
Common
Treasury
Paid-in
Retained Comprehensive
holders'
controlling
Stock
Stock
Capital
Earnings
Income (Loss)
Equity
Interests
Total
Equity
$
4,766 $ (30,098) $
81,510 $
30,943 $
2,537 $ 89,658 $
552 $
90,210
86
(175)
-
-
-
-
-
-
-
-
-
-
(11,460)
-
-
-
-
-
-
-
1
-
-
-
-
(208)
-
-
-
-
-
(849)
(1,372)
-
-
-
-
-
(63)
(11)
-
-
-
-
693
-
-
-
-
-
(89)
(11,460)
-
-
(89)
(11,460)
(849)
(1,372)
693
(208)
-
-
-
(73)
500
-
-
-
43
22
(570)
11
(349)
(1,372)
693
(208)
43
22
(570)
(62)
$
4,766 $ (41,471) $
81,064 $
28,711 $
3,230 $ 76,300 $
558 $
76,858
-
-
-
-
-
-
-
-
-
-
147
(325)
(6,275)
-
-
-
-
-
-
-
4
-
-
-
-
(4)
-
-
-
343
-
-
(6,084)
(1,172)
-
-
-
-
-
2
-
-
-
-
2,235
-
-
-
-
-
(178)
(6,275)
(6,084)
(1,172)
2,235
(4)
-
-
-
349
-
-
28
-
-
-
101
42
(193)
1
(178)
(6,275)
(6,056)
(1,172)
2,235
(4)
101
42
(193)
350
$
4,766 $ (47,595) $
81,078 $
21,457 $
5,465 $ 65,171 $
537 $
65,708
568
(576)
-
-
-
-
-
-
-
-
-
-
-
-
189
(1,739)
-
-
-
-
-
-
-
1
-
(344)
-
-
-
-
-
-
-
-
534
-
-
(6)
(1,138)
-
-
-
-
-
3
(8)
(155)
(1,739)
(6)
(1,138)
-
-
-
-
(6,302)
(6,302)
-
-
-
-
-
-
-
-
-
538
-
-
-
67
-
9
-
63
373
(96)
(5)
(8)
(155)
(1,739)
61
(1,138)
(6,293)
-
63
373
(96)
533
Balance, December 31, 2018
$
4,766 $ (49,144) $
81,268 $
20,884 $
(1,413) $ 56,361 $
948 $
57,309
See accompanying Notes to Consolidated Financial Statements.
AIG | 2018 Form 10-K 175
American International Group, Inc.
Consolidated Statements of Cash Flows
(in millions)
Cash flows from operating activities:
Net income (loss)
(Income) loss from discontinued operations
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
Noncash revenues, expenses, gains and losses included in income (loss):
Net (gains) losses on sales of securities available for sale and other assets
Net gain on sale of divested businesses
(Gains) losses on extinguishment of debt
Unrealized losses in earnings – net
Equity in loss from equity method investments, net of dividends or distributions
Depreciation and other amortization
Impairments of assets
Changes in operating assets and liabilities:
Insurance reserves
Premiums and other receivables and payables – net
Reinsurance assets and funds held under reinsurance treaties
Capitalization of deferred policy acquisition costs
Current and deferred income taxes – net
Other, net
Total adjustments
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Proceeds from (payments for)
Sales or distributions of:
Available for sale securities
Other securities
Other invested assets
Divested businesses, net
Maturities of fixed maturity securities available for sale
Principal payments received on and sales of mortgage and other loans receivable
Purchases of:
Available for sale securities
Other securities
Other invested assets
Mortgage and other loans receivable
Acquisition of businesses, net of cash and restricted cash acquired
Net change in short-term investments
Other, net
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from (payments for)
Policyholder contract deposits
Policyholder contract withdrawals
Issuance of long-term debt
Repayments of long-term debt
Purchase of common stock
Dividends paid
Other, net
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and restricted cash
Net increase (decrease) in cash and restricted cash
Cash and restricted cash at beginning of year
Change in cash of businesses held for sale
Cash and restricted cash at end of year
176 AIG | 2018 Form 10-K
Years Ended December 31,
2018
2017
2016
$
61 $
42
(6,056) $
(4)
(349)
90
98
(38)
7
443
363
5,362
425
1,065
887
(3,289)
(5,832)
-
467
(42)
61
25,143
3,755
4,365
10
24,777
4,272
(44,109)
(1,318)
(2,839)
(10,286)
(5,717)
1,524
200
(223)
(431)
(68)
(5)
79
350
3,874
685
2,637
410
(10,870)
(4,819)
6,981
(581)
(1,758)
(7,818)
31,082
3,792
6,913
792
29,011
5,742
(49,856)
(1,147)
(2,874)
(9,369)
-
2,098
(2,143)
14,041
24,178
(17,999)
4,734
(3,672)
(1,739)
(1,138)
(3,570)
794
(11)
621
2,737
-
3,358 $
17,908
(15,785)
3,356
(3,698)
(6,275)
(1,172)
(31)
(5,697)
(29)
497
2,107
133
2,737 $
$
(2,033)
(545)
74
1,465
1,053
4,090
1,116
5,325
536
(1,804)
(5,216)
(308)
8
3,761
3,502
30,103
4,164
8,447
2,809
25,749
6,074
(54,978)
(935)
(3,421)
(10,651)
-
(3,089)
(1,020)
3,252
18,100
(14,041)
5,954
(4,082)
(11,460)
(1,372)
68
(6,833)
55
(24)
2,238
(107)
2,107
American International Group, Inc.
Consolidated Statements of Cash Flows (continued)
Supplementary Disclosure of Consolidated Cash Flow Information
(in millions)
Cash
Restricted cash included in Short-term investments*
Restricted cash included in Other assets*
Total cash and restricted cash shown in the Consolidated Statements of Cash Flows
Cash paid during the period for:
Interest
Taxes
Non-cash investing/financing activities:
Interest credited to policyholder contract deposits included in financing activities
Non-cash consideration received from sale of United Guaranty
$
Years Ended December 31,
2018
2,873 $
142
343
2017
2016
2,362 $
1,868
58
317
46
193
$
3,358 $
2,737 $
2,107
$
$
$
$
1,312 $
154 $
1,282 $
544 $
3,392 $
- $
3,309 $
- $
1,331
493
3,430
1,101
*
Includes funds held for tax sharing payments to AIG Parent, security deposits, replacement reserve deposits related to our affordable housing investments, and security
deposits for certain leased aircraft and escrow funds related to our investment in Castle Holdings LLC’s aircraft assets, which was sold in 2018.
See accompanying Notes to Consolidated Financial Statements.
AIG | 2018 Form 10-K 177
ITEM 8 | Notes to Consolidated Financial Statements | 1. B as is o f P re se n t at io n
1. Basis of Presentation
American International Group, Inc. (AIG) is a leading global insurance organization serving customers in more than 80 countries and
jurisdictions. AIG companies serve commercial and individual customers through one of the most extensive worldwide
property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services
in the United States. AIG Common Stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange
(NYSE: AIG). On December 3, 2018, AIG’s Common Stock was voluntarily delisted from the Tokyo Stock Exchange. Unless the
context indicates otherwise, the terms “AIG,” “we,” “us” or “our” mean American International Group, Inc. and its consolidated
subsidiaries and the term “AIG Parent” means American International Group, Inc. and not any of its consolidated subsidiaries.
The consolidated financial statements include the accounts of AIG Parent, our controlled subsidiaries (generally through a greater
than 50 percent ownership of voting rights and voting interests), and variable interest entities (VIEs) of which we are the primary
beneficiary. Equity investments in entities that we do not consolidate, including corporate entities in which we have significant
influence and partnership and partnership-like entities in which we have more than minor influence over the operating and financial
policies, are accounted for under the equity method unless we have elected the fair value option.
Certain of our foreign subsidiaries included in the Consolidated Financial Statements report on fiscal-period ending November 30. The
effect on our consolidated financial condition and results of operations of all material events occurring at these subsidiaries through
the date of each of the periods presented in these Consolidated Financial Statements has been considered for adjustment and/or
disclosure.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (GAAP). All material intercompany accounts and transactions have been eliminated.
ACQUISITION OF BUSINESSES
Validus
On July 18, 2018, we completed the purchase of Validus Holdings, Ltd. (Validus), a leading provider of reinsurance, primary
insurance, and asset management services, for $5.5 billion in cash. The results of Validus following the date of the acquisition are
included in our General Insurance segment starting in the third quarter of 2018. Our North America results include the results of
Validus Reinsurance, Ltd. and Western World Insurance Group, Inc., while our International results include the results of Talbot
Holdings Ltd.
For additional information relating to the acquisition of Validus, see Note 4.
Glatfelter
On November 6, 2018 AIG completed the purchase of Glatfelter Insurance Group, a full-service broker and insurance company
providing services for specialty programs and retail operations.
Ellipse
On December 31, 2018, AIG Life Ltd., a U.K. AIG Life and Retirement company, completed the acquisition of Ellipse, a specialist
provider of group life risk protection in the U.K.
SALES OF BUSINESSES
Sale of Certain Insurance Subsidiary Operations to Fairfax
On October 18, 2016, we entered into an agreement to sell certain insurance operations to Fairfax Financial Holdings Limited
(Fairfax). The agreement included the sale of our subsidiary operations in Argentina, Chile, Colombia, Uruguay, Venezuela and
Turkey. Fairfax acquired renewal rights for the portfolios of local business written by our operations in Bulgaria, the Czech Republic,
Hungary, Poland, Romania and Slovakia, and assume certain of our operating assets and employees. Substantially all of the
operations and renewal rights that we agreed to sell to Fairfax were sold by December 31, 2017.
178 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 1. B as is o f P re se n t at io n
AIG Fuji Life Insurance
On November 14, 2016, we entered into an agreement to sell Fuji Life to FWD Group, the insurance arm of Pacific Century Group.
Total cash consideration to us was approximately $333 million. The transaction closed on April 30, 2017.
United Guaranty
On December 31, 2016, we sold our 100 percent interest in United Guaranty Corporation (United Guaranty) and certain related
affiliates to Arch Capital Group Ltd. (Arch) for total consideration of $3.3 billion, consisting of $2.2 billion of cash and approximately
$1.1 billion of newly issued Arch convertible non-voting common-equivalent preferred stock and reported a pre-tax gain of
approximately $697 million. We also received $261 million in pre-closing dividends from United Guaranty in the fourth quarter of 2016.
However, due to pending regulatory approvals, United Guaranty Asia was not included in the December 31, 2016 closing and $40
million of cash consideration was retained by Arch. The sale of United Guaranty Asia was completed on July 1, 2017 and we received
the $40 million cash proceeds. In the first quarter of 2018, we sold our remaining interest in Arch, which we received as part of the
consideration for selling United Guaranty to Arch in 2016.
Concurrent with the closing, we entered into reinsurance agreements with Arch, including an amended and restated 50 percent quota
share reinsurance agreement and an aggregate excess of loss reinsurance agreement, pursuant to which we will continue to be
exposed to certain United Guaranty policies written between 2009 and 2016.
Ascot
On September 16, 2016, we entered into an agreement to sell our 20 percent interest in Ascot Underwriting Holdings Ltd. and our 100
percent interest in the related syndicate-funding subsidiary Ascot Corporate Name Ltd. to Canada Pension Plan Investment Board
(CPPIB). Total consideration for the transaction was $1.1 billion resulting in a pre-tax gain of approximately $162 million attributable to
AIG’s controlling interest, inclusive of CPPIB’s recapitalization of Syndicate 1414’s Funds at Lloyd’s (FAL) capital requirements. The
transaction closed on November 18, 2016, and we received approximately $244 million in net cash proceeds.
Korea Fund
On November 17, 2016, an AIG sponsored Fund (the Korea Fund), completed the sale of mixed-use commercial complex in Seoul,
South Korea commonly known as the Seoul International Finance Center to Brookfield Properties for a total consideration of $2.5
billion, of which $1.2 billion was used to repay the fund’s debt. The sale resulted in a pre-tax gain of $1.1 billion included in Other
Income, of which $464 million was attributable to AIG’s controlling interest.
NSM
On August 31, 2016, we sold our controlling interest in NSM Insurance Group LLC (NSM), a managing general agent to ABRY
Partners, a private equity firm, for consideration of $201 million resulting in a pre-tax gain of approximately $105 million in the third
quarter of 2016. We retained an equity interest in a newly formed joint venture, which we subsequently sold on May 11, 2018 to White
Mountains Catskill Holdings, Inc. We will continue to provide underwriting capacity to NSM.
Non-controlling interest in Fortitude
On November 13, 2018, we completed the sale of a 19.9 percent ownership interest in Fortitude Holdings to TCG, an affiliate of The
Carlyle Group L.P. (Carlyle). Fortitude Holdings owns 100 percent of the outstanding common shares of Fortitude Re and AIG has an
80.1 percent ownership interest in Fortitude Holdings. We received $381 million in cash and will receive up to $95 million of deferred
compensation which is subject to certain purchase price adjustments. To the extent we do not receive all or a portion of the planned
distributions within 18 months of the Fortitude Re Closing, TCG will pay us up to an additional $100 million. In connection with the
sale, we agreed to certain investment commitment targets into various Carlyle strategies and to certain minimum investment
management fee payments within thirty-six months following the closing. We also will be required to pay a proportionate amount of an
agreed make-whole fee to the extent we fail to satisfy such investment commitment targets.
AIG | 2018 Form 10-K 179
ITEM 8 | Notes to Consolidated Financial Statements | 1. B as is o f P re se n t at io n
USE OF ESTIMATES
The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a
significant degree of judgment. Accounting policies that we believe are most dependent on the application of estimates and
assumptions are considered our critical accounting estimates and are related to the determination of:
•
•
liability for unpaid losses and loss adjustment expenses (loss reserves);
reinsurance assets;
• valuation of future policy benefit liabilities and timing and extent of loss recognition;
• valuation of liabilities for guaranteed benefit features of variable annuity products;
• valuation of embedded derivatives for fixed index annuity and life products;
• estimated gross profits to value deferred policy acquisition costs for investment-oriented products;
•
impairment charges, including other-than-temporary impairments on available for sale securities, impairments on other invested
assets, including investments in life settlements, and goodwill impairment;
• allowances for loan losses;
•
•
•
liability for legal contingencies;
fair value measurements of certain financial assets and liabilities; and
income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating
profitability of the character necessary to realize the net deferred tax asset and 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.
OUT OF PERIOD ADJUSTMENTS
For the year ended December 31, 2018, our results include out of period adjustments relating to prior periods that decreased net
income attributable to AIG by $77 million, and decreased Income from continuing operations before income taxes by $98 million. The
out of period adjustments are primarily related to decreases in deferred policy acquisition costs and increases in policyholder contract
deposits. We determined that these adjustments were not material to the current year or to any previously reported annual financial
statements. Had these adjustments been recorded in their appropriate periods, Net income attributable to AIG for the years ended
December 31, 2017, and December 31, 2016 would have increased by $95 million, and by $117 million, respectively.
For the year ended December 31, 2016, we recorded out of period adjustments relating to prior years that increased Net loss
attributable to AIG by $174 million and increased Loss from continuing operations before income taxes by $57 million. The out of
period adjustments are primarily related to income tax liabilities and ceded loss adjustment expenses.
180 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 2. S u m mar y o f S i g ni fi ca n t Ac c o u nt in g P oli ci es
2. Summary of Significant Accounting Policies
The following table identifies our significant accounting policies presented in other Notes to these Consolidated Financial Statements,
with a reference to the Note where a detailed description can be found:
Note 6. Investments
• Fixed maturity and equity securities
• Other invested assets
• Short-term investments
• Net investment income
• Net realized capital gains (losses)
• Other-than-temporary impairments
Note 7. Lending Activities
• Mortgage and other loans receivable – net of allowance
Note 8. Reinsurance
• Reinsurance assets – net of allowance
• Retroactive reinsurance
Note 9. Deferred Policy Acquisition Costs
• Deferred policy acquisition costs
• Amortization of deferred policy acquisition costs
Note 10. Variable Interest Entities
Note 11. Derivatives and Hedge Accounting
• Derivative assets and liabilities, at fair value
Note 12. Goodwill and Other Intangible Assets
Note 13. Insurance Liabilities
• Liability for unpaid losses and loss adjustment expenses
• Discounting of reserves
• Future policy benefits
• Policyholder contract deposits
• Other policyholder funds
Note 14. Variable Life and Annuity Contracts
Note 15. Debt
• Long-term debt
Note 16. Contingencies, Commitments and Guarantees
• Legal contingencies
Note 18. Earnings Per Share
Note 23. Income Taxes
OTHER SIGNIFICANT ACCOUNTING POLICIES
Premiums for short-duration contracts are recorded as written on the inception date of the policy. Premiums are earned primarily on a
pro rata basis over the term of the related coverage. Sales of extended services contracts are reflected as premiums written and
earned on a pro rata basis over the term of the related coverage. In addition, certain miscellaneous income is included as premiums
written and earned. The reserve for unearned premiums includes the portion of premiums written relating to the unexpired terms of
coverage. Reinsurance premiums are typically earned over the same period as the underlying policies or risks covered by the
contract. As a result, the earnings pattern of a reinsurance contract may extend up to 24 months, reflecting the inception dates of the
underlying policies throughout the year.
Reinsurance premiums ceded under prospective reinsurance agreements are recognized as a reduction in revenues over the period
the reinsurance coverage is provided in proportion to the risks to which the premiums relate.
Reinsurance premiums for assumed business are estimated based on information received from brokers, ceding companies and
reinsureds. Any subsequent differences that arise regarding such estimates are recorded in the periods in which they are determined.
Premiums for long-duration insurance products and life contingent annuities are recognized as revenues when due. Estimates for
premiums due but not yet collected are accrued.
Policy fees represent fees recognized from universal life and investment-type products consisting of policy charges for the cost of
insurance, policy administration charges, surrender charges and amortization of unearned revenue reserves. Policy fees are
recognized as revenues in the period in which they are assessed against policyholders, unless the fees are designed to compensate
AIG for services to be provided in the future. Fees deferred as unearned revenue are amortized in relation to the incidence of
expected gross profits to be realized over the estimated lives of the contracts, similar to DAC.
AIG | 2018 Form 10-K 181
ITEM 8 | Notes to Consolidated Financial Statements | 2. S u m mar y o f S i g ni fi ca n t Ac c o u nt in g P oli ci es
Other income includes advisory fee income from the Life and Retirement broker dealer business, as well as legal recoveries of $11
million, $27 million and $44 million from legacy crisis and other matters in 2018, 2017 and 2016, respectively.
Other income from our Other Operations category consists of the following:
Changes in fair value relating to financial assets and liabilities for which the fair value option has been elected.
Interest income and related expenses, including amortization of premiums and accretion of discounts on bonds with changes in the
timing and the amount of expected principal and interest cash flows reflected in the yield, as applicable.
Dividend income from common and preferred stock and earnings distributions from other investments.
Changes in the fair value of other securities sold but not yet purchased, futures, hybrid financial instruments, securities purchased
under agreements to resell, and securities sold under agreements to repurchase.
Income earned on real estate based investments and related realized gains and losses from sales, property level impairments and
financing costs.
Exchange gains and losses resulting from foreign currency transactions.
Earnings from private equity funds and hedge fund investments accounted for under the equity method.
Changes in the fair value of derivatives at AIG Financial Products Corp. and related subsidiaries (collectively AIGFP).
Cash represents cash on hand and non-interest-bearing demand deposits.
Short-term investments consist of interest-bearing cash equivalents, time deposits, securities purchased under agreements to
resell, and investments, such as commercial paper, with original maturities within one year from the date of purchase.
Premiums and other receivables – net of allowance include premium balances receivable, amounts due from agents and brokers
and policyholders, trade receivables for the Direct Investment book (DIB) and Global Capital Markets (GCM) and other receivables.
Trade receivables for GCM include cash collateral posted to derivative counterparties that is not eligible to be netted against
derivative liabilities. The allowance for doubtful accounts on premiums and other receivables was $216 million and $236 million at
December 31, 2018 and 2017, respectively.
Other assets consist of sales inducement assets, prepaid expenses, deposits, other deferred charges, real estate, other fixed assets,
capitalized software costs, goodwill, intangible assets other than goodwill, restricted cash and derivative assets.
We offer sales inducements which include enhanced crediting rates or bonus payments to contract holders (bonus interest) on certain
annuity and investment contract products. Sales inducements provided to the contract holder are recognized in Policyholder contract
deposits in the Consolidated Balance Sheets. Such amounts are deferred and amortized over the life of the contract using the same
methodology and assumptions used to amortize DAC (see Note 9 herein). To qualify for such accounting treatment, the bonus interest
must be explicitly identified in the contract at inception. We must also demonstrate that such amounts are incremental to amounts we
credit on similar contracts without bonus interest, and are higher than the contract’s expected ongoing crediting rates for periods after
the bonus period. The deferred bonus interest and other deferred sales inducement assets totaled $752 million and $738 million at
December 31, 2018 and 2017, respectively. The amortization expense associated with these assets is reported within Interest
credited to policyholder account balances in the Consolidated Statements of Income. Such amortization expense totaled $156 million,
$94 million and $77 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The cost of buildings and furniture and equipment is depreciated principally on the straight-line basis over their estimated useful lives
(maximum of 40 years for buildings and 10 years for furniture and equipment). Expenditures for maintenance and repairs are charged
to income as incurred and expenditures for improvements are capitalized and depreciated. We periodically assess the carrying
amount of our real estate for purposes of determining any asset impairment. Capitalized software costs, which represent costs directly
related to obtaining, developing or upgrading internal use software, are capitalized and amortized using the straight-line method over
a period generally not exceeding five years.
Separate accounts represent funds for which investment income and investment gains and losses accrue directly to the
policyholders who bear the investment risk. Each account has specific investment objectives and the assets are carried at fair value.
The assets of each account are legally segregated and are not subject to claims that arise from any of our other businesses. The
liabilities for these accounts are equal to the account assets. Separate accounts may also include deposits for funds held under stable
value wrap funding agreements, although the majority of stable value wrap sales are measured based on the notional amount
included in assets under management and do not include the receipt of funds. For a more detailed discussion of separate accounts
see Note 14 herein.
182 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 2. S u m mar y o f S i g ni fi ca n t Ac c o u nt in g P oli ci es
Other liabilities consist of other funds on deposit, other payables, securities sold under agreements to repurchase, securities sold
but not yet purchased, derivative liabilities and deferred gains on retroactive reinsurance agreements. We have entered into certain
insurance and reinsurance contracts, primarily in our General Insurance companies, that do not contain sufficient insurance risk to be
accounted for as insurance or reinsurance. Accordingly, the premiums received on such contracts, after deduction for certain related
expenses, are recorded as deposits within Other liabilities in the Consolidated Balance Sheets. Net proceeds of these deposits are
invested and generate Net investment income. As amounts are paid, consistent with the underlying contracts, the deposit liability is
reduced. Also included in Other liabilities are trade payables for the DIB and GCM, which include option premiums received and
payables to counterparties that relate to unrealized gains and losses on futures, forwards, and options and balances due to clearing
brokers and exchanges. Trade payables for GCM also include cash collateral received from derivative counterparties that
contractually cannot be netted against derivative assets.
Securities sold but not yet purchased represent sales of securities not owned at the time of sale. The obligations arising from such
transactions are recorded on a trade-date basis and carried at fair value. Fair values of securities sold but not yet purchased are
based on current market prices.
Foreign currency: Financial statement accounts expressed in foreign currencies are translated into U.S. dollars. Functional currency
assets and liabilities are translated into U.S. dollars generally using rates of exchange prevailing at the balance sheet date of each
respective subsidiary and the related translation adjustments are recorded as a separate component of Accumulated other
comprehensive income, net of any related taxes, in Total AIG shareholders’ equity. Income statement accounts expressed in
functional currencies are translated using average exchange rates during the period. Functional currencies are generally the
currencies of the local operating environment. Financial statement accounts expressed in currencies other than the functional
currency of a consolidated entity are remeasured into that entity’s functional currency resulting in exchange gains or losses recorded
in income. The adjustments resulting from translation of financial statements of foreign entities operating in highly inflationary
economies are recorded in income.
Non-redeemable noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to
a parent.
ACCOUNTING STANDARDS ADOPTED DURING 2018
Revenue Recognition
In May 2014, the FASB issued an accounting standard that supersedes most existing revenue recognition guidance. The standard
excludes from its scope the accounting for insurance contracts, leases, financial instruments, and certain other agreements that are
governed under other GAAP guidance, but could affect the revenue recognition for certain of our other activities.
We adopted the standard using the modified retrospective approach on its required effective date of January 1, 2018. Our analysis of
revenues indicated that substantially all of our revenues were from sources excluded from the scope of the standard. For those
revenue sources within the scope of the standard, there were no material changes in the timing or measurement of revenues based
upon the guidance. As substantially all of our revenue sources were excluded from the scope of the standard, the adoption of the
standard did not have a material impact on our reported consolidated financial condition, results of operations, cash flows or required
disclosures.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued an accounting standard that requires equity investments that do not follow the equity method of
accounting or are not subject to consolidation to be measured at fair value with changes in fair value recognized in earnings, while
financial liabilities for which fair value option accounting has been elected, changes in fair value due to instrument-specific credit risk
are presented separately in other comprehensive income. The standard allows the election to record equity investments without
readily determinable fair values at cost, less impairment, adjusted for subsequent observable price changes with changes in the
carrying value of the equity investments recorded in earnings. The standard also updates certain fair value disclosure requirements
for financial instruments carried at amortized cost.
We adopted the standard on its effective date of January 1, 2018 using the modified retrospective approach. The impact of the
adoption is primarily related to the reclassification of unrealized gains of equity securities resulting in a net decrease to beginning
Accumulated other comprehensive income and a corresponding net increase to beginning Retained earnings of $824 million.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued an accounting standard that addresses diversity in how certain cash receipts and cash payments
are presented and classified in the statement of cash flows. The amendments provide clarity on the treatment of eight specifically
defined types of cash inflows and outflows.
AIG | 2018 Form 10-K 183
ITEM 8 | Notes to Consolidated Financial Statements | 2. S u m mar y o f S i g ni fi ca n t Ac c o u nt in g P oli ci es
We adopted the standard retrospectively on its effective date of January 1, 2018. The standard addresses presentation in the
statement of cash flows only and did not have a material impact on our reported consolidated financial condition, results of operations
or required disclosures.
Intra-Entity Transfers of Assets Other than Inventory
In October 2016, the FASB issued an accounting standard that requires an entity to recognize the income tax consequences of an
intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset is sold to a third party.
We adopted the standard on its effective date of January 1, 2018 using a modified retrospective approach. The adoption of this
standard did not have a material impact on our reported consolidated financial condition, results of operations, cash flows or required
disclosures.
Restricted Cash
In November 2016, the FASB issued an accounting standard that provides guidance on the presentation of restricted cash in the
Statement of Cash Flows. Entities are required to explain the changes during a reporting period in the total of cash, cash equivalents,
and amounts generally described as restricted cash or restricted cash equivalents in the statement of cash flows.
We adopted the standard retrospectively on its effective date of January 1, 2018. The standard addresses presentation of restricted
cash in the Consolidated Statement of Cash Flows only and had no impact on our reported consolidated financial condition, results of
operations or required disclosures.
Gains and Losses from the Derecognition of Nonfinancial Assets
In February 2017, the FASB issued an accounting standard that clarifies the scope of the derecognition guidance for the sale, transfer
and derecognition of non-financial assets to noncustomers that aligns with the new revenue recognition principles. The standard also
adds new accounting for partial sales of nonfinancial assets (including real estate) that requires an entity to derecognize a
nonfinancial asset when it 1) ceases to have a controlling financial interest in the legal entity that holds the asset based on the
consolidation model and 2) transfers control of the asset based on the revenue recognition model.
We adopted this standard on its effective date of January 1, 2018 using the modified retrospective approach. Based on our
evaluation, the adoption of this standard did not have a material impact on our reported consolidated financial condition, results of
operations, cash flows or required disclosures.
Improving the Presentation of Net Periodic Pension and Postretirement Benefit Cost
In March 2017, the FASB issued an accounting standard that requires entities to report the service cost component of net periodic
pension and postretirement benefit costs in the same line item as other compensation costs arising from services rendered by the
pertinent employees during the period. The other components of net periodic benefit costs are required to be separately presented in
the income statement. The amendments also allow only the service cost component to be eligible for capitalization when applicable.
We adopted this standard on its effective date of January 1, 2018. The standard primarily addresses the presentation of the service
cost component of net periodic benefit costs in the income statement. AIG’s U.S. pension plans are frozen and no longer accrue
benefits, which are reflected as service costs. Therefore, the standard did not have a material impact on our reported consolidated
financial condition, results of operations, cash flows or required disclosures.
Modification of Share-Based Payment Awards
In May 2017, the FASB issued an accounting standard that provides guidance about which changes to the terms or conditions of a
share-based payment award require an entity to apply modification accounting.
We prospectively adopted this standard on its effective date of January 1, 2018 and the standard did not have a material impact on
our reported consolidated financial condition, results of operations, cash flows or required disclosures.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued an accounting standard that allows the optional reclassification of stranded tax effects within
accumulated other comprehensive income to retained earnings that arise due to the enactment of the Tax Cuts and Jobs Act of 2017
(Tax Act). The amount of the reclassification would reflect the impact of the change in the U.S. federal corporate income tax rate on
the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the Tax Act and other income tax
effects of the Tax Act on items remaining in accumulated other comprehensive income.
184 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 2. S u m mar y o f S i g ni fi ca n t Ac c o u nt in g P oli ci es
We adopted the standard effective January 1, 2018. The impact of the adoption of the standard resulted in an increase to beginning
Accumulated other comprehensive income and a corresponding decrease to beginning Retained earnings of $248 million. For more
information on the adoption of the Tax Act, see Note 23.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
Leases
In February 2016, the FASB issued an accounting standard that will require lessees with lease terms of more than 12 months to
recognize a right of use asset and a corresponding lease liability on their balance sheets. For income statement purposes, the FASB
retained a dual model, requiring leases to be classified as either operating leases or finance leases. Lessor accounting remained
largely the same, with the exception of certain specified changes. The standard is effective for annual periods beginning after
December 15, 2018, and interim periods within those years, using a modified retrospective approach, and provides for certain
practical expedients in transition. During 2018, the FASB issued several amendments and targeted improvements to ease with the
application of the standard, including the addition of a transition approach that gives the Company the option of applying the standard
at either the beginning of the earliest comparative period presented or the beginning of the period of adoption.
We plan to adopt the standard on its effective date of January 1, 2019, by recognizing a cumulative-effect adjustment to the opening
balance of retained earnings for leases existing at the date of adoption. We will also elect certain practical expedients that allow us
not to reassess existing leases under the new guidance. Based on our analysis, the vast majority of the Company’s lease obligation
pertained to real estate utilized in the operation of our businesses. Consequently, the primary impact of adoption will result in the
recognition of a right of use asset and a lease liability for operating leases pertaining to our real estate portfolio that are expected to
represent less than one percent of the Company’s Total Assets and Total Liabilities, respectively. We do not expect the standard to
have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures. See
Note 16, Contingencies, Commitments and Guarantees for additional information.
Financial Instruments - Credit Losses
In June 2016, the FASB issued an accounting standard that will change how entities account for credit losses for most financial
assets, trade receivables and reinsurance receivables. The standard will replace the existing incurred loss impairment model with a
new “current expected credit loss model” that generally will result in earlier recognition of credit losses. The standard will apply to
financial assets subject to credit losses, including loans measured at amortized cost, reinsurance receivables and certain off-balance
sheet credit exposures. Additionally, the impairment of available-for-sale debt securities, including purchased credit deteriorated
securities, are subject to the new guidance and will be measured in a similar manner, except that losses will be recognized as
allowances rather than reductions in the amortized cost of the securities. The standard will also require additional information to be
disclosed in the footnotes.
We plan to adopt the standard on its effective date of January 1, 2020. We are continuing to develop our implementation plan to
adopt the standard and are assessing the impact of the standard on our reported consolidated financial condition, results of
operations, cash flows and required disclosures. While we expect an increase in our allowances for credit losses for the financial
instruments within scope of the standard, given the objective of the new standard, the amount of any change will be dependent on our
portfolios’ composition and quality at the adoption date as well as economic conditions and forecasts at that time.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued an accounting standard that eliminates the requirement to calculate the implied fair value of
goodwill, through a hypothetical purchase price allocation, to measure a goodwill impairment charge. Instead, entities will record an
impairment charge based on the excess of a reporting unit’s carrying amount over its fair value not to exceed the total amount of
goodwill allocated to that reporting unit. An entity should also consider income tax effects from tax deductible goodwill on the carrying
amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
The standard is effective on January 1, 2020, with early adoption permitted. We are evaluating the timing of our adoption. Any impact
of the standard will be dependent on the market conditions of the reporting units at the time of adoption.
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued an accounting standard that shortens the amortization period for certain callable debt securities held
at a premium by requiring the premium to be amortized to the earliest call date. The standard does not require an accounting change
for securities held at a discount, which continue to be amortized to maturity.
We plan to adopt the standard retrospectively on its effective date of January 1, 2019. We do not expect the standard to have a
material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.
AIG | 2018 Form 10-K 185
ITEM 8 | Notes to Consolidated Financial Statements | 2. S u m mar y o f S i g ni fi ca n t Ac c o u nt in g P oli ci es
Derivatives and Hedging
In August 2017, the FASB issued an accounting standard that improves and expands hedge accounting for both financial and
commodity risks. The provisions of the amendment are intended to better align the accounting with an entity’s risk management
activities, enhance the transparency on how the economic results are presented in the financial statements and the footnote, and
simplify the application of hedge accounting treatment.
The standard is effective on January 1, 2019, with early adoption permitted. We will adopt the standard on its effective date. The
standard’s impact is not material to our reported consolidated financial condition, results of operations, cash flows and required
disclosures.
Targeted Improvements to the Accounting for Long-Duration Contracts
In August 2018, the FASB issued an accounting standard update with the objective of making targeted improvements to the existing
recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The
standard prescribes significant and comprehensive changes to recognition, measurement, presentation and disclosure as
summarized below:
• Requires the review and if necessary update of future policy benefit assumptions at least annually for traditional and limited pay
long duration contracts, with the recognition and separate presentation of any resulting re-measurement gain or loss (except for
discount rate changes as noted below) in the income statement.
• Requires the discount rate assumption to be updated at the end of each reporting period using an upper medium grade (low-credit
risk) fixed income instrument yield that maximizes the use of observable market inputs and recognizes the impact of changes to
discount rates in other comprehensive income.
• Simplifies the amortization of deferred acquisition costs (DAC) to a constant level basis over the expected term of the related
contracts with adjustments for unexpected terminations, but no longer requires an impairment test.
• Requires the measurement of all market risk benefits associated with deposit (or account balance) contracts at fair value through
the income statement with the exception of instrument-specific credit risk changes, which will be recognized in other
comprehensive income.
•
Increased disclosures of disaggregated roll-forwards of policy benefits, account balances, market risk benefits, separate account
liabilities and information about significant inputs, judgments and methods used in measurement and changes thereto and impact
of those changes.
We plan to adopt the standard on its effective date of January 1, 2021. We are evaluating the method of adoption and impact of the
standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures. The adoption of
this standard is expected to have a significant impact on our consolidated financial condition, results of operations, cash flows and
required disclosures, as well as systems, processes and controls.
186 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 3. Segment Information
3. Segment Information
We report our results of operations consistent with the manner in which our chief operating decision makers review the business to
assess performance and allocate resources, as follows:
GENERAL INSURANCE
General Insurance business is presented as two operating segments:
North America — consists of insurance businesses in the United States, Canada and Bermuda. This also includes the results of
Validus Reinsurance, Ltd. and Western World Insurance Group, Inc. as of the acquisition date.
International — consists of insurance businesses in Japan, the United Kingdom, Europe, Asia Pacific, Latin America, Puerto Rico,
Australia, the Middle East and Africa. This also includes the results of Talbot Holdings, Ltd. as of the acquisition date.
Results are presented before internal reinsurance transactions. North America and International operating segments consist of the
following products:
– Commercial Lines — consists of Liability, Financial Lines, Property and Special Risks.
– Personal Insurance — consists of Personal Lines and Accident and Health.
LIFE AND RETIREMENT
Life and Retirement business is presented as four operating segments:
Individual Retirement — consists of fixed annuities, fixed index annuities, variable annuities and retail mutual funds.
Group Retirement — consists of group mutual funds, group fixed annuities, group variable annuities, individual annuity and
investment products, financial planning and advisory services.
Life Insurance — primary products in the U.S. include term life and universal life insurance. International operations include
distribution of life and health products in the UK and Ireland.
Institutional Markets — consists of stable value wrap products, structured settlement and pension risk transfer annuities,
corporate- and bank-owned life insurance and guaranteed investment contracts (GICs).
OTHER OPERATIONS
Other Operations category consists of:
Income from assets held by AIG Parent and other corporate subsidiaries.
General operating expenses not attributable to specific reporting segments.
Interest expense.
Blackboard — a subsidiary focused on delivering commercial insurance solutions using digital technology, data analytics and
automation.
United Guaranty — Mortgage insurance protects mortgage lenders and investors against the increased risk of borrower default
related to high loan-to-value mortgages. The sale of this business was completed on December 31, 2016.
Fuji Life — consists of term insurance, life insurance, endowment policies and annuities. The sale of this business was completed
on April 30, 2017.
AIG | 2018 Form 10-K 187
ITEM 8 | Notes to Consolidated Financial Statements | 3. Segment Information
LEGACY PORTFOLIO
Legacy Portfolio represents exited or discontinued product lines, policy forms or distribution channels. Effective February 2018, our
Bermuda domiciled composite reinsurer, Fortitude Reinsurance Company Ltd. (Fortitude Re), formerly known as DSA Reinsurance
Company, Ltd., is included in our Legacy Portfolio.
Legacy Life and Retirement Run-Off Lines — Reserves consist of certain structured settlements, pension risk transfer annuities
and single premium immediate annuities written prior to April 2012. Also includes exposures to whole life, long-term care and
exited accident & health product lines.
Legacy General Insurance Run-Off Lines — Reserves consist of excess workers’ compensation, environmental exposures and
exposures to other products within General Insurance that are no longer actively marketed. Also includes the remaining reserves
in Eaglestone Reinsurance Company (Eaglestone).
Legacy Investments — Includes investment classes that we have placed into run-off including holdings in direct investments as
well as investments in global capital markets and global real estate.
On December 31, 2016, we completed the sale of United Guaranty to Arch. See Note 1 for a further discussion.
In the second quarter of 2015, a United Guaranty subsidiary and certain of our General Insurance companies entered into a 50
percent quota share reinsurance agreement whereby the United Guaranty subsidiary (1) ceded 50 percent of the risk relating to
policies written in 2014 that were current as of January 1, 2015 and (2) ceded 50 percent of the risk relating to all policies written in
2015 and 2016, each in exchange for a 30 percent ceding commission and reimbursements of 50 percent of the losses and loss
adjustment expenses incurred on covered policies. Beginning in the third quarter of 2016, the effect of this intercompany reinsurance
arrangements is included in the results of Property and Special Risks and Other Operations for all periods presented. Previously, this
arrangement was eliminated for purposes of segment reporting. Concurrent with the closing of the sale of United Guaranty, we
amended and restated this arrangement and expect the results of this arrangement to continue to be reported in Property and Special
Risks.
Investment income of the General Insurance companies is attributed to the North America and International operating segments
based on an internal investment income allocation model. The model estimates investable funds based primarily on loss reserves and
unearned premiums. Investment income of the Life and Retirement companies is attributed to the Individual Retirement, Group
Retirement, Life Insurance and Institutional Markets operating segments as well as the Legacy Life and Retirement Run-Off Lines
based on invested assets in segregated product line portfolios; income from invested assets in excess of liabilities is allocated to
product lines based on internal capital estimates.
We evaluate segment performance based on adjusted revenues and adjusted pre-tax income (loss). Adjusted revenues and adjusted
pre-tax income (loss) are derived by excluding certain items from total revenues and net income (loss) attributable to AIG,
respectively. For the items excluded from adjusted revenues and adjusted pre-tax income (loss) see the table below.
188 AIG | 2018 Form 10-K
The following table presents AIG’s continuing operations by operating segment:
ITEM 8 | Notes to Consolidated Financial Statements | 3. Segment Information
(in millions)
2018
General Insurance
North America
International
Total General Insurance
Life and Retirement
Individual Retirement
Group Retirement
Life Insurance
Institutional Markets
Total Life and Retirement
Other Operations
Legacy Portfolio
AIG Consolidation and elimination
Total AIG Consolidated adjusted revenues and adjusted
Total
Revenues
Net
Investment
Income
Interest Amortization
Expense
of DAC
Adjusted
Pre-Tax
Income (Loss)
$
14,619 $
15,554
30,173
2,305 $
363
2,668
- $
-
-
1,859 $
2,737
4,596
5,338
2,891
4,007
1,900
14,136
636
3,039
(171)
3,827
2,172
1,137
786
7,922
45
2,325
(232)
82
42
25
13
162
1,066
30
85
630
95
(50)
5
680
10
105
-
(8)
(461)
(469)
1,681
933
330
246
3,190
(1,584)
213
59
pre-tax income
$
47,813 $
12,728 $
1,343 $
5,391 $
1,409
Reconciling Items from adjusted pre-tax income to
pre-tax income (loss):
Changes in fair value of securities used to hedge guaranteed
living benefits
Changes in benefit reserves and DAC, VOBA and SIA related to
net realized capital gains
Other income (expense) - net
Loss on extinguishment of debt
Net realized capital losses*
Income from divested businesses
Non-operating litigation reserves and settlements
(Unfavorable) favorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements
Net loss reserve discount benefit (charge)
Pension expense related to a one-time lump sum payment to
former employees
Integration and transaction costs associated with acquired businesses
Restructuring and other costs
(128)
(128)
-
(53)
-
(254)
-
11
-
-
-
-
-
-
-
-
(124)
-
-
-
-
-
-
-
-
-
-
-
(34)
-
-
-
-
-
-
-
$
47,389 $
12,476 $
1,309 $
-
(5)
-
-
-
-
-
-
-
-
-
-
5,386 $
(154)
6
-
(7)
(193)
38
(19)
(675)
371
-
(124)
(395)
257
(232)
(581)
(813)
2,289
1,004
274
264
3,831
(1,405)
1,470
75
$
14,600 $
15,094
29,694
3,145 $
523
3,668
31 $
(9)
22
1,305 $
2,460
3,765
5,514
2,848
4,056
3,168
15,586
1,413
4,391
(308)
4,013
2,164
1,044
595
7,816
53
2,776
(280)
58
32
13
6
109
968
122
(53)
415
84
239
5
743
(9)
76
4
$
50,776 $
14,033 $
1,168 $
4,579 $
3,158
AIG | 2018 Form 10-K 189
Revenues and Pre-tax income (loss)
2017
General Insurance
North America
International
Total General Insurance
Life and Retirement
Individual Retirement
Group Retirement
Life Insurance
Institutional Markets
Total Life and Retirement
Other Operations
Legacy Portfolio
AIG Consolidation and elimination
Total AIG Consolidated adjusted revenues and adjusted
pre-tax income
ITEM 8 | Notes to Consolidated Financial Statements | 3. Segment Information
Reconciling Items from adjusted pre-tax income to
pre-tax income:
Changes in fair value of securities used to hedge guaranteed
living benefits
Changes in benefit reserves and DAC, VOBA and SIA related to
net realized capital gains
Other income (expense) - net
Gain on extinguishment of debt
Net realized capital losses
Income from divested businesses
Non-operating litigation reserves and settlements
(Unfavorable) favorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements
Net loss reserve discount benefit (charge)
Pension expense related to a one-time lump sum payment to
former employees
Restructuring and other costs
Revenues and Pre-tax income
2016
General Insurance
North America
International
Total General Insurance
Life and Retirement
Individual Retirement
Group Retirement
Life Insurance
Institutional Markets
Total Life and Retirement
Other Operations
Legacy Portfolio
AIG Consolidation and elimination
Total AIG Consolidated adjusted revenues and adjusted
pre-tax income
Reconciling Items from adjusted pre-tax income to
pre-tax income (loss):
Changes in fair value of securities used to hedge guaranteed
living benefits
-
146
146
146
-
(49)
-
(1,380)
-
27
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
49,520 $
14,179 $
1,168 $
(291)
-
-
-
-
-
-
-
-
-
4,288 $
$
17,005 $
16,135
33,140
3,041 $
513
3,554
28 $
-
28
1,444 $
2,677
4,121
5,758
2,769
3,818
1,433
13,778
2,517
5,250
(494)
3,878
2,146
1,035
563
7,622
207
2,913
(351)
50
26
12
4
92
978
282
(120)
298
129
182
4
613
72
108
(117)
303
-
5
(1,380)
68
129
(303)
(187)
(60)
(413)
1,466
(2,399)
348
(2,051)
2,269
931
(37)
265
3,428
(1,011)
1,007
42
$
54,191 $
13,945 $
1,260 $
4,797 $
1,415
Changes in benefit reserves and DAC, VOBA and SIA related to
net realized capital gains
Other income (expense) - net
Loss on extinguishment of debt
Net realized capital losses
Income from divested businesses
Non-operating litigation reserves and settlements
(Unfavorable) favorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements
Net loss reserve discount benefit (charge)
Pension expense related to a one-time lump sum payment to
former employees
Restructuring and other costs
Revenues and Pre-tax income (loss)
120
120
-
(44)
-
(1,944)
-
44
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
52,367 $
14,065 $
1,260 $
-
120
(276)
-
-
-
-
-
-
-
-
-
4,521 $
195
-
(74)
(1,944)
545
41
42
427
(147)
(694)
(74)
*
Includes all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for non-
qualifying (economic) hedging or for asset replication.
The following table presents AIG’s year-end identifiable assets and capital expenditures by legal entity category:
(in millions)
General Insurance companies
Life and Retirement companies
Other
AIG Consolidation and Elimination
Total Assets
190 AIG | 2018 Form 10-K
Year-End Identifiable Assets
Capital Expenditures
2018
110,007
247,219
140,428
(5,670)
491,984
$
$
2017
114,841
289,457
105,425
(11,422)
498,301
$
$
2018
171
94
103
-
368
$
$
2017
239
88
156
-
483
$
$
The following table presents AIG’s consolidated total revenues and real estate and other fixed assets, net of accumulated
depreciation, by major geographic area:
ITEM 8 | Notes to Consolidated Financial Statements | 3. Segment Information
(in millions)
North America
International
Consolidated
Total Revenues*
2017
34,149 $
15,371
49,520 $
2018
31,003 $
16,386
47,389 $
$
$
Real Estate and Other Fixed Assets,
Net of Accumulated Depreciation
2016
36,871
15,496
52,367
$
$
2018
1,479 $
693
2,172 $
2017
1,630 $
892
2,522 $
2016
1,326
1,334
2,660
* Revenues are generally reported according to the geographic location of the reporting unit. International revenues consists of revenues from our General Insurance
International operating segment.
4. Business Combination
On July 18, 2018, we completed the purchase of a 100 percent voting interest in Validus, a leading provider of reinsurance, primary
insurance, and asset management services, for $5.5 billion in cash. This transaction was made with the intent to strengthen our global
General Insurance business by expanding our current product portfolio through additional distribution channels and advancing the
tools available to enhance underwriting. The impact of the acquisition on Total revenues, Net income (loss), and Net income (loss)
attributable to AIG was $1.4 billion, $(206) million, and $(206) million, respectively, for 2018. Integration and transaction costs
associated with the acquisition of Validus were $101 million for 2018 and are included in General operating and other expenses in our
Consolidated Statement of Income.
As part of the purchase, we guaranteed 6,000 issued and outstanding 5.875% Non-Cumulative Preference Shares, Series A (the
Series A Preference Shares) and 10,000 issued and outstanding 5.800% Non-Cumulative Preference Shares, Series B (together with
the Series A Preference Shares, the Preference Shares). On October 30, 2018, Validus redeemed all of its outstanding Preference
Shares at a redemption price of $26,000 per Preference Share for approximately $416 million in the aggregate.
The purchase was accounted for under the acquisition method. Accordingly, the total purchase price was allocated to the estimated
fair values of assets acquired and liabilities assumed. This allocation resulted in the purchase price exceeding the fair value of net
assets acquired, which results in a difference recorded as goodwill. Goodwill generated from the acquisition is attributable to expected
synergies from future growth and potential future monetization opportunities. Goodwill related to the purchase of Validus assigned to
our General Insurance operating segments was $1.8 billion for North America and $157 million for International.
In addition, Validus participates in the market for insurance-linked securities (ILS) primarily through AlphaCat Managers, Ltd
(AlphaCat Manager). AlphaCat Manager is an asset manager primarily for third-party investors and in connection with the issuance of
ILS invests in AlphaCat funds which are considered variable interest entities (VIEs). ILS are financial instruments for which the values
are determined based on insurance losses caused primarily by natural catastrophes such as major earthquakes and hurricanes. We
report the investment in AlphaCat funds, which is approximately $116 million at December 31, 2018, in Other Invested Assets in the
Consolidated Balance Sheet.
AIG | 2018 Form 10-K 191
The following table summarizes the estimated provisional fair values of major classes of identifiable assets acquired and
liabilities assumed as of July 18, 2018:
ITEM 8 | Notes to Consolidated Financial Statements | 4. B u s in es s Co m bi na ti o n
(in millions)
Identifiable net assets:
Investments
Cash
Premiums and other receivables
Reinsurance assets
Value of business acquired*
Deferred income taxes
Other assets, including restricted cash of $93
Liability for unpaid claims and claims adjustment expense
Unearned premiums
Long-term debt
Other liabilities
Preference shares
Total identifiable net assets acquired
Cash consideration paid
Goodwill recognized from acquisition
* Reported in Deferred policy acquisition costs in the Consolidated Balance Sheet.
July 18, 2018
6,613
330
2,130
1,692
298
63
1,008
(4,138)
(2,083)
(1,106)
(913)
(416)
3,478
5,475
1,997
$
$
The following unaudited summarized pro forma consolidated income statement information assumes that the acquisition of
Validus occurred as of January 1, 2017. The pro forma amounts are for comparative purposes only, may not necessarily
reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the
applicable period and may not be indicative of the results that will be attained in the future.
Years Ended December 31,
(in millions)
Total revenues
Net income (loss)
Net income (loss) attributable to AIG
Income (loss) per common share attributable to AIG:
Basic:
Net income (loss) attributable to AIG
Diluted:
Net income (loss) attributable to AIG
$
2018*
48,588 $
16
(51)
2017*
52,009
(6,104)
(6,132)
(0.06)
(0.06)
(6.59)
(6.59)
* Pro forma adjustments were made to Validus external reporting results prior to the acquisition date for the deconsolidation of certain asset management entities consistent
with AIG’s post acquisition accounting, which had no impact on Net income attributable to Validus.
The following table presents details of the identified intangible assets acquired:
(in millions, except years)
Definite lived intangibles
Value of distribution network acquired(a)(b)
Value of business acquired(c)
Indefinite lived intangibles(a)
Syndicate capacity
Other
Total
Fair Value
Estimated Weighted
Average Useful Life
15 years
2 years
$
444
298
193
75
$
1,010
(a) Reported in Other assets in the Consolidated Balance Sheet.
(b) Amortization is reported in General operating and other expenses in the Consolidated Statement of Income (Loss).
(c) Reported in Deferred policy acquisition costs in the Consolidated Balance Sheet and Amortization of deferred policy acquisition costs in the Consolidated Statement of
Income (Loss).
192 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
5. Fair Value Measurements
FAIR VALUE MEASUREMENTS ON A RECURRING BASIS
We carry certain of our financial instruments at fair value. We define the fair value of a financial instrument as the amount that would
be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. We are responsible for the determination of the value of the investments carried at fair value and the supporting
methodologies and assumptions.
The degree of judgment used in measuring the fair value of financial instruments generally inversely correlates with the level of
observable valuation inputs. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is
used in measuring fair value. Conversely, financial instruments for which no quoted prices are available have less observability and
are measured at fair value using valuation models or other pricing techniques that require more judgment. Pricing observability is
affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and
not yet established, the characteristics specific to the transaction, liquidity and general market conditions.
Fair Value Hierarchy
Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are measured and classified in accordance with a fair
value hierarchy consisting of three “levels” based on the observability of valuation inputs:
• Level 1: Fair value measurements based on quoted prices (unadjusted) in active markets that we have the ability to access for
identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the
quoted price for such instruments.
• Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset
or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are
observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
• Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both
observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances
for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we
must make certain assumptions about the inputs a hypothetical market participant would use to value that asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level
in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input
that is significant to the fair value measurement in its entirety.
The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are
applied to assets and liabilities across the levels discussed above, and it is the observability of the inputs used that determines the
appropriate level in the fair value hierarchy for the respective asset or liability.
AIG | 2018 Form 10-K 193
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
VALUATION METHODOLOGIES OF FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE
Incorporation of Credit Risk in Fair Value Measurements
• Our Own Credit Risk. Fair value measurements for certain liabilities incorporate our own credit risk by determining the explicit
cost for each counterparty to protect against its net credit exposure to us at the balance sheet date by reference to observable AIG
CDS or cash bond spreads. We calculate the effect of credit spread changes using discounted cash flow techniques that
incorporate current market interest rates. A derivative counterparty’s net credit exposure to us is determined based on master
netting agreements, when applicable, which take into consideration all derivative positions with us, as well as collateral we post
with the counterparty at the balance sheet date. For a description of how we incorporate our own credit risk in the valuation of
embedded derivatives related to certain annuity and life insurance products see Embedded Derivatives within Policyholder
Contract Deposits below.
• Counterparty Credit Risk. Fair value measurements for freestanding derivatives incorporate counterparty credit by determining
the explicit cost for us to protect against our net credit exposure to each counterparty at the balance sheet date by reference to
observable counterparty CDS spreads, when available. When not available, other directly or indirectly observable credit spreads
will be used to derive the best estimates of the counterparty spreads. Our net credit exposure to a counterparty is determined
based on master netting agreements, which take into consideration all derivative positions with the counterparty, as well as
collateral posted by the counterparty at the balance sheet date.
Fair values for fixed maturity securities based on observable market prices for identical or similar instruments implicitly incorporate
counterparty credit risk. Fair values for fixed maturity securities based on internal models incorporate counterparty credit risk by using
discount rates that take into consideration cash issuance spreads for similar instruments or other observable information.
For fair values measured based on internal models, the cost of credit protection is determined under a discounted present value
approach considering the market levels for single name CDS spreads for each specific counterparty, the mid-market value of the net
exposure (reflecting the amount of protection required) and the weighted average life of the net exposure. CDS spreads are provided
to us by an independent third party. We utilize an interest rate based on the benchmark London Interbank Offered Rate (LIBOR) curve
to derive our discount rates.
While this approach does not explicitly consider all potential future behavior of the derivative transactions or potential future changes
in valuation inputs, we believe this approach provides a reasonable estimate of the fair value of the assets and liabilities, including
consideration of the impact of non-performance risk.
Fixed Maturity Securities
Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to measure fixed
maturity securities at fair value. Market price data is generally obtained from dealer markets.
We employ independent third-party valuation service providers to gather, analyze, and interpret market information to derive fair value
estimates for individual investments, based upon market-accepted methodologies and assumptions. The methodologies used by
these independent third-party valuation service providers are reviewed and understood by management, through periodic discussion
with and information provided by the independent third-party valuation service providers. In addition, as discussed further below,
control processes are applied to the fair values received from independent third-party valuation service providers to ensure the
accuracy of these values.
Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources
and, through the use of market-accepted valuation methodologies, which may utilize matrix pricing, financial models, accompanying
model inputs and various assumptions, provide a single fair value measurement for individual securities. The inputs used by the
valuation service providers include, but are not limited to, market prices from completed transactions for identical securities and
transactions for comparable securities, benchmark yields, interest rate yield curves, credit spreads, prepayment rates, default rates,
recovery assumptions, currency rates, quoted prices for similar securities and other market-observable information, as applicable. If
fair value is determined using financial models, these models generally take into account, among other things, market observable
information as of the measurement date as well as the specific attributes of the security being valued, including its term, interest rate,
credit rating, industry sector, and when applicable, collateral quality and other security or issuer-specific information. When market
transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly
increased.
194 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
We have control processes designed to ensure that the fair values received from independent third-party valuation service providers
are accurately recorded, that their data inputs and valuation techniques are appropriate and consistently applied and that the
assumptions used appear reasonable and consistent with the objective of determining fair value. We assess the reasonableness of
individual security values received from independent third-party valuation service providers through various analytical techniques, and
have procedures to escalate related questions internally and to the independent third-party valuation service providers for resolution.
To assess the degree of pricing consensus among various valuation service providers for specific asset types, we conduct
comparisons of prices received from available sources. We use these comparisons to establish a hierarchy for the fair values
received from independent third-party valuation service providers to be used for particular security classes. We also validate prices for
selected securities through reviews by members of management who have relevant expertise and who are independent of those
charged with executing investing transactions.
When our independent third-party valuation service providers are unable to obtain sufficient market observable information upon
which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable
about these securities to provide a price quote, which is generally non-binding, or by employing market accepted valuation models.
Broker prices may be based on an income approach, which converts expected future cash flows to a single present value amount,
with specific consideration of inputs relevant to particular security types. For structured securities, such inputs may include ratings,
collateral types, geographic concentrations, underlying loan vintages, loan delinquencies and defaults, loss severity assumptions,
prepayments, and weighted average coupons and maturities. When the volume or level of market activity for a security is limited,
certain inputs used to determine fair value may not be observable in the market. Broker prices may also be based on a market
approach that considers recent transactions involving identical or similar securities. Fair values provided by brokers are subject to
similar control processes to those noted above for fair values from independent third-party valuation service providers, including
management reviews. For those corporate debt instruments (for example, private placements) that are not traded in active markets or
that are subject to transfer restrictions, valuations reflect illiquidity and non-transferability, based on available market evidence. When
observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates
based on credit spreads, yields or price levels of comparable securities, adjusted for illiquidity and structure. Fair values determined
internally are also subject to management review to ensure that valuation models and related inputs are reasonable.
The methodology above is relevant for all fixed maturity securities including residential mortgage backed securities (RMBS),
commercial mortgage backed securities (CMBS), collateralized debt obligations (CDO), other asset-backed securities (ABS) and fixed
maturity securities issued by government sponsored entities and corporate entities.
Equity Securities Traded in Active Markets
Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to measure equity
securities at fair value. Market price data is generally obtained from exchange or dealer markets.
Mortgage and Other Loans Receivable
We estimate the fair value of mortgage and other loans receivable that are measured at fair value by using dealer quotations,
discounted cash flow analyses and/or internal valuation models. The determination of fair value considers inputs such as interest rate,
maturity, the borrower’s creditworthiness, collateral, subordination, guarantees, past-due status, yield curves, credit curves,
prepayment rates, market pricing for comparable loans and other relevant factors.
Other Invested Assets
We initially estimate the fair value of investments in certain hedge funds, private equity funds and other investment partnerships by
reference to the transaction price. Subsequently, we generally obtain the fair value of these investments from net asset value
information provided by the general partner or manager of the investments, the financial statements of which are generally audited
annually. We consider observable market data and perform certain control procedures to validate the appropriateness of using the net
asset value as a fair value measurement. The fair values of other investments carried at fair value, such as direct private equity
holdings, are initially determined based on transaction price and are subsequently estimated based on available evidence such as
market transactions in similar instruments, other financing transactions of the issuer and other available financial information for the
issuer, with adjustments made to reflect illiquidity as appropriate.
AIG | 2018 Form 10-K 195
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
Short-term Investments
For short-term investments that are measured at amortized cost, the carrying amounts of these assets approximate fair values
because of the relatively short period of time between origination and expected realization, and their limited exposure to credit risk.
Securities purchased under agreements to resell (reverse repurchase agreements) are generally treated as collateralized receivables.
We report certain receivables arising from securities purchased under agreements to resell as Short-term investments in the
Consolidated Balance Sheets. When these receivables are measured at fair value, we use market-observable interest rates to
determine fair value.
Separate Account Assets
Separate account assets are composed primarily of registered and unregistered open-end mutual funds that generally trade daily and
are measured at fair value in the manner discussed above for equity securities traded in active markets.
Freestanding Derivatives
Derivative assets and liabilities can be exchange-traded or traded over-the-counter (OTC). We generally value exchange-traded
derivatives such as futures and options using quoted prices in active markets for identical derivatives at the balance sheet date.
OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs
to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable
levels of price transparency. When models are used, the selection of a particular model to value an OTC derivative depends on the
contractual terms of, and specific risks inherent in the instrument, as well as the availability of pricing information in the market. We
generally use similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms,
market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC
derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be corroborated by
observable market data by correlation or other means, and model selection does not involve significant management judgment.
For certain OTC derivatives that trade in less liquid markets, where we generally do not have corroborating market evidence to
support significant model inputs and cannot verify the model to market transactions, the transaction price may provide the best
estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so the model
value at inception equals the transaction price. We will update valuation inputs in these models only when corroborated by evidence
such as similar market transactions, independent third-party valuation service providers and/or broker or dealer quotations, or other
empirical market data. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit
considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence,
management’s best estimate is used.
We value our super senior credit default swap portfolio using prices obtained from vendors and/or counterparties. The valuation of
the super senior credit derivatives is complex because of the limited availability of market observable information due to the lack of
trading and price transparency in certain structured finance markets. Our valuation methodologies for the super senior CDS portfolio
have evolved over time in response to market conditions and the availability of market observable information. We have sought to
calibrate the methodologies to available market information and to review the assumptions of the methodologies on a regular basis.
Embedded Derivatives within Policyholder Contract Deposits
Certain variable annuity and equity-indexed annuity and life contracts contain embedded derivatives that we bifurcate from the host
contracts and account for separately at fair value, with changes in fair value recognized in earnings. These embedded derivatives are
classified within Policyholder contract deposits. We have concluded these contracts contain either (i) a written option that guarantees
a minimum accumulation value at maturity, (ii) a written option that guarantees annual withdrawals regardless of underlying market
performance for a specific period or for life, or (iii) equity-indexed written options that meet the criteria of derivatives and must be
bifurcated.
196 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
The fair value of embedded derivatives contained in certain variable annuity and equity-indexed annuity and life contracts is
measured based on policyholder behavior and capital market assumptions related to projected cash flows over the expected lives of
the contracts. These discounted cash flow projections primarily include benefits and related fees assessed, when applicable. In some
instances, the projected cash flows from fees may exceed projected cash flows related to benefit payments and therefore, at a point
in time, the carrying value of the embedded derivative may be in a net asset position. The projected cash flows incorporate best
estimate assumptions for policyholder behavior (including mortality, lapses, withdrawals and benefit utilization), along with an explicit
risk margin to reflect a market participant’s estimates of projected cash flows and policyholder behavior. Estimates of future
policyholder behavior assumptions are subjective and based primarily on our historical experience.
Because of the dynamic and complex nature of the projected cash flows with respect to embedded derivatives in our variable annuity
contracts, risk neutral valuations are used, which are calibrated to observable interest rate and equity option prices. Estimating the
underlying cash flows for these products involves judgments regarding expected market rates of return, market volatility, credit
spreads, correlations of certain market variables, fund performance, discount rates and policyholder behavior. The portion of fees
attributable to the fair value of expected benefit payments are included within the fair value measurement of these embedded
derivatives, and related fees are classified in net realized gain/loss as earned, consistent with other changes in the fair value of these
embedded policy derivatives. Any portion of the fees not attributed to the embedded derivatives are excluded from the fair value
measurement and classified in policy fees as earned.
With respect to embedded derivatives in our equity-indexed annuity and life contracts, option pricing models are used to estimate fair
value, taking into account assumptions for future equity index growth rates, volatility of the equity index, future interest rates, and our
ability to adjust the participation rate and the cap on equity-indexed credited rates in light of market conditions and policyholder
behavior assumptions.
Projected cash flows are discounted using the interest rate swap curve (swap curve), which is commonly viewed as being consistent
with the credit spreads for highly-rated financial institutions (S&P AA-rated or above). A swap curve shows the fixed-rate leg of a non-
complex swap against the floating rate (for example, LIBOR) leg of a related tenor. We also incorporate our own risk of non-
performance in the valuation of the embedded derivatives associated with variable annuity and equity-indexed annuity and life
contracts. The non-performance risk adjustment reflects a market participant’s view of our claims-paying ability by incorporating an
additional spread to the swap curve used to discount projected benefit cash flows in the valuation of these embedded derivatives. The
non-performance risk adjustment is calculated by constructing forward rates based on a weighted average of observable corporate
credit indices to approximate the claims-paying ability rating of our Life and Retirement companies.
Long-Term Debt
The fair value of non-structured liabilities is generally determined by using market prices from exchange or dealer markets, when
available, or discounting expected cash flows using the appropriate discount rate for the applicable maturity. We determine the fair
value of structured liabilities and hybrid financial instruments (where performance is linked to structured interest rates, inflation or
currency risks) using the appropriate derivative valuation methodology (described above) given the nature of the embedded risk
profile. In addition, adjustments are made to the valuations of both non-structured and structured liabilities to reflect our own
creditworthiness based on the methodology described under the caption “Incorporation of Credit Risk in Fair Value Measurements –
Our Own Credit Risk” above.
Borrowings under obligations of guaranteed investment agreements (GIAs), which are guaranteed by us, are recorded at fair value
using discounted cash flow calculations based on interest rates currently being offered for similar contracts and our current market
observable implicit credit spread rates with maturities consistent with those remaining for the contracts being valued. Obligations may
be called at various times prior to maturity at the option of the counterparty. Interest rates on these borrowings are primarily fixed, vary
by maturity and range up to 7.62 percent.
Other Liabilities
Other liabilities measured at fair value include certain securities sold under agreements to repurchase and certain securities sold but
not yet purchased. Liabilities arising from securities sold under agreements to repurchase are generally treated as collateralized
borrowings. We estimate the fair value of liabilities arising under these agreements by using market-observable interest rates. This
methodology considers such factors as the coupon rate, yield curves and other relevant factors. Fair values for securities sold but not
yet purchased are based on current market prices.
AIG | 2018 Form 10-K 197
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS
The following table presents information about assets and liabilities measured at fair value on a recurring basis and
indicates the level of the fair value measurement based on the observability of the inputs used:
Level 1
Level 2
Counterparty
Netting(a)
Level 3
Cash
Collateral
Total
$
53 $
-
69
-
-
-
-
122
3,207 $
14,001
14,445
129,836
20,178
11,784
8,725
202,176
11
-
-
-
-
-
11
1,213
-
-
2,654
45
1,671
424
311
454
5,559
13
-
341
$
-
2,000
11
864
14,199
917
9,102
27,093
-
-
-
1,290
77
4,478
5,845
27
-
587
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
3,260
16,001
14,525
130,700
34,377
12,701
17,827
229,391
-
-
-
-
-
-
-
-
-
-
2,665
45
1,671
1,714
388
4,932
11,415
1,253
-
928
2
-
133
-
-
-
135
2,416
77,202
-
-
5
75
1
15
-
96
-
-
58
$ 81,099 $ 217,570 $ 33,706
2,888
1,159
190
-
-
-
4,237
599
4,645
-
-
-
-
-
-
(1,713)
(1,713)
-
-
-
(1,713) $
-
-
-
-
-
(1,840)
(1,840)
-
-
-
2,890
1,164
398
1
15
(3,553)
915
3,015
81,847
58
(1,840) $ 328,822
$
$
- $
- $
4,116
$
- $
- $
4,116
4
-
12
-
-
-
16
-
16
32 $
2,004
858
3
8
-
-
2,873
2,213
11
5,097 $
15
-
-
228
6
-
249
-
-
4,365
$
-
-
-
-
-
(1,713)
(1,713)
-
-
(1,713) $
-
-
-
-
-
(187)
(187)
-
-
(187) $
2,023
858
15
236
6
(1,900)
1,238
2,213
27
7,594
$
December 31, 2018
(in millions)
Assets:
Bonds available for sale:
U.S. government and government sponsored entities
Obligations of states, municipalities and political subdivisions
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
Total bonds available for sale
Other bond securities:
U.S. government and government sponsored entities
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
Total other bond securities
Equity securities (b)
Mortgage and other loans receivable
Other invested assets(c)
Derivative assets:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Credit contracts
Other contracts
Counterparty netting and cash collateral
Total derivative assets
Short-term investments
Separate account assets
Other assets
Total
Liabilities:
Policyholder contract deposits
Derivative liabilities:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Credit contracts
Other contracts
Counterparty netting and cash collateral
Total derivative liabilities
Long-term debt
Other liabilities
Total
198 AIG | 2018 Form 10-K
December 31, 2017
(in millions)
Assets:
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
Level 1
Level 2
Counterparty
Netting(a)
Level 3
Cash
Collateral
Total
Bonds available for sale:
U.S. government and government sponsored entities
Obligations of states, municipalities and political subdivisions
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
Total bonds available for sale
Other bond securities:
U.S. government and government sponsored entities
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
Total other bond securities
Equity securities available for sale:
Common stock
Preferred stock
Mutual funds
Total equity securities available for sale
Other equity securities
Mortgage and other loans receivable
Other invested assets(c)
Derivative assets:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Credit contracts
Other contracts
Counterparty netting and cash collateral
Total derivative assets
Short-term investments
Separate account assets
Total
Liabilities:
Policyholder contract deposits
Derivative liabilities:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Credit contracts
Other contracts
Counterparty netting and cash collateral
Total derivative liabilities
Long-term debt
Other liabilities
Total
$
201 $
2,455 $
-
$
- $
- $
2,656
-
20
-
-
-
-
16,240
15,631
133,003
21,098
13,217
8,131
221
209,775
238
-
-
-
-
-
2,564
57
1,891
421
485
604
238
6,022
1,061
18
110
1,189
589
-
-
1
-
188
-
-
-
189
2,078
87,141
-
515
4
519
-
-
1
2,170
827
252
-
-
-
3,249
537
5,657
2,404
8
1,173
16,136
624
8,651
28,996
-
-
18
1,464
74
4,956
6,512
-
-
-
-
-
5
250
-
4
82
1
20
-
107
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
18,644
15,659
134,176
37,234
13,841
16,782
238,992
2,802
57
1,909
1,885
559
5,560
12,772
1,061
533
114
1,708
589
5
251
2,171
831
522
1
20
(1,464)
(1,464)
(1,159)
(1,159)
-
-
-
-
(2,623)
922
2,615
92,798
$ 91,645 $ 225,760 $ 35,870
$
(1,464) $
(1,159) $ 350,652
$
- $
14 $
4,136
$
- $
- $
4,150
2
-
2
-
-
-
4
-
46
2,176
1,241
19
14
-
-
3,450
2,888
43
22
4
-
263
5
-
294
-
-
-
-
-
-
-
-
-
-
-
-
(1,464)
(1,464)
(1,249)
(1,249)
-
-
-
-
2,200
1,245
21
277
5
(2,713)
1,035
2,888
89
$
50 $
6,395 $
4,430
$
(1,464) $
(1,249) $
8,162
(a) Represents netting of derivative exposures covered by qualifying master netting agreements.
(b) As a result of the adoption of the Recognition and Measurement of Financial Assets and Financial Liabilities standard on January 1, 2018 (Financial Instruments
Recognition and Measurement Standard), equity securities are no longer classified and accounted for as available for sale securities.
(c) Excludes investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent), which totaled $5.0 billion and $6.0 billion as of
December 31, 2018 and December 31, 2017, respectively.
AIG | 2018 Form 10-K 199
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
TRANSFERS OF LEVEL 1 AND LEVEL 2 ASSETS AND LIABILITIES
Our policy is to record transfers of assets and liabilities between Level 1 and Level 2 at their fair values as of the end of each reporting
period, consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer
transacted with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when
transaction volume and frequency are indicative of an active market.
During the year ended December 31, 2017, we transferred $392 million of securities issued by non-U.S. government entities from
Level 1 to Level 2, because they are no longer considered actively traded. We had no material transfers of securities issued by non-
U.S. government entities from Level 1 to Level 2 during the year ended December 31, 2018. For similar reasons, during the years
ended December 31, 2018 and 2017, we transferred $806 million and $113 million, respectively, of securities issued by the U.S.
government and government-sponsored entities from Level 1 to Level 2. Additionally, we transferred $126 million of preferred stock
from Level 1 to Level 2 during the year ended December 31, 2017. We had no material transfers of preferred stock from Level 1 to
Level 2 during the year ended December 31, 2018. There were no material transfers from Level 2 to Level 1 during the years ended
December 31, 2018 and 2017.
200 AIG | 2018 Form 10-K
CHANGES IN LEVEL 3 RECURRING FAIR VALUE MEASUREMENTS
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
The following tables present changes during the years ended December 31, 2018 and 2017 in Level 3 assets and liabilities
measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and
liabilities in the Consolidated Balance Sheets at December 31, 2018 and 2017:
Net
Realized and
Unrealized
Purchases,
Changes in
Unrealized Gains
(Losses) Included
Fair Value
Gains (Losses)
Other
Sales,
Gross
Gross
Fair Value
in Income on
Beginning
Included
Comprehensive
Issuances and
Transfers
Transfers
End
Instruments Held
of Year
in Income
Income (Loss)
Settlements, Net
In
Out
Acquisitions
of Year
at End of Year
(in millions)
December 31, 2018
Assets:
Bonds available for sale:
Obligations of states,
municipalities and
political subdivisions
$
2,404 $
- $
(152) $
(66) $
54 $
(240) $
- $
2,000 $
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
Total bonds available
8
1,173
16,136
624
8,651
(9)
(74)
838
23
40
5
(2)
(300)
(29)
(42)
(1)
(207)
(2,424)
207
13
780
8
111
(5)
(806)
(66)
(20)
-
-
7
1
(371)
1,783
(1,123)
164
11
864
14,199
917
9,102
for sale
28,996
818
(520)
(2,862)
2,749
(2,260)
172
27,093
Other bond securities:
Corporate debt
RMBS
CMBS
CDO/ABS
Total other bond securities
Equity securities(a)
Mortgage and other loans
receivable
Other invested assets
Other assets
Total
(in millions)
Liabilities:
18
1,464
74
4,956
6,512
-
5
250
-
-
56
(2)
428
482
(2)
-
47
-
-
-
-
-
-
-
-
2
-
(18)
(280)
(5)
(905)
(1,208)
24
(5)
288
58
-
50
10
-
60
5
-
-
-
-
-
-
(9)
(9)
-
-
-
-
-
-
-
8
8
-
-
-
-
-
1,290
77
4,478
5,845
27
-
587
58
$
35,763 $
1,345 $
(518) $
(3,705) $
2,814 $
(2,269) $
180 $
33,610 $
Net
Realized and
Unrealized
Purchases,
Changes in
Unrealized Gains
(Losses) Included
Fair Value
(Gains) Losses
Other
Sales,
Gross
Gross
Fair Value
in Income on
Beginning
Included
Comprehensive
Issuances and
Transfers
Transfers
End
Instruments Held
of Year
in Income
Income (Loss)
Settlements, Net
In
Out
Acquisitions
of Year
at End of Year
Policyholder contract deposits $
4,136 $
(334) $
- $
314 $
- $
- $
- $
4,116 $
495
Derivative liabilities, net:
Interest rate contracts
Foreign exchange
contracts
Equity contracts
Credit contracts
Other contracts
Total derivative
liabilities, net(b)
Long-term debt(c)
22
-
(82)
262
(15)
187
-
(1)
(10)
(22)
(31)
(64)
(128)
-
-
-
-
-
-
-
-
(6)
5
27
(4)
70
92
-
-
-
-
-
-
-
-
-
-
2
-
-
2
-
-
-
-
-
-
-
-
15
(5)
(75)
227
(9)
153
-
Total
$
4,323 $
(462) $
- $
406 $
- $
2 $
- $
4,269 $
1
3
(35)
31
62
62
-
557
AIG | 2018 Form 10-K 201
-
-
-
-
-
-
-
-
(10)
(5)
208
193
-
-
71
-
264
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
Net
Realized and
Unrealized
Purchases,
Changes in
Unrealized Gains
(Losses) Included
Fair Value
Gains (Losses)
Other
Sales,
Gross
Gross
Fair Value
in Income on
Beginning
Included
Comprehensive
Issuances and
Transfers
Transfers
End
Instruments Held
of Year
in Income
Income (Loss)
Settlements, Net
In
Out
of Year
at End of Year
(in millions)
December 31, 2017
Assets:
Bonds available for sale:
Obligations of states,
municipalities and
political subdivisions
$
2,040 $
5 $
167 $
216 $
8 $
(32) $
2,404
$
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
Total bonds available
for sale
Other bond securities:
Corporate debt
RMBS
CMBS
CDO/ABS
Total other bond securities
Equity securities available
for sale:
Common stock
Total equity securities
available for sale
Other equity securities
Mortgage and other loans
receivable
Other invested assets
17
1,133
16,906
2,040
7,835
(9)
(3)
1,071
35
(19)
9
20
942
11
155
(9)
(259)
(2,763)
(748)
743
-
886
19
20
-
-
(604)
(39)
(734)
(63)
8
1,173
16,136
624
8,651
29,971
1,080
1,304
(2,820)
933
(1,472)
28,996
17
1,605
155
5,703
7,480
-
-
-
11
204
3
191
4
841
1,039
-
-
-
-
-
-
-
-
-
-
-
-
-
14
(6)
10
(313)
24
(1,582)
(1,861)
1
1
-
(6)
39
-
14
9
-
23
-
-
-
-
-
(12)
(33)
(118)
(6)
(169)
(1)
(1)
-
-
(1)
18
1,464
74
4,956
6,512
-
-
-
5
250
-
-
-
-
-
-
-
1
113
5
362
481
-
-
-
-
6
Total
$
37,666 $
2,133 $
1,298 $
(4,647) $
956 $
(1,643) $
35,763
$
487
Net
Realized and
Unrealized
Purchases,
Changes in
Unrealized Gains
(Losses) Included
Fair Value
(Gains) Losses
Other
Sales,
Gross
Gross
Fair Value
in Income on
Beginning
Included
Comprehensive
Issuances and
Transfers
Transfers
End
Instruments Held
of Year
in Income
Income (Loss)
Settlements, Net
In
Out
of Year
at End of Year
(in millions)
Liabilities:
Policyholder contract
deposits
$
3,033 $
807 $
- $
296 $
- $
- $
4,136
$
(499)
Derivative liabilities, net:
Interest rate contracts
Foreign exchange
contracts
Equity contracts
Credit contracts
Other contracts
Total derivatives
liabilities, net(b)
Long-term debt(c)
Total
38
11
(58)
329
(11)
309
71
(5)
(2)
(41)
(62)
(74)
(184)
16
-
-
-
-
-
-
-
(11)
(9)
17
(5)
73
65
(87)
-
-
-
-
(3)
(3)
-
-
-
-
-
-
-
-
22
-
(82)
262
(15)
187
-
$
3,413 $
639 $
- $
274 $
(3) $
- $
4,323
$
5
3
35
61
77
181
-
(318)
(a) As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and
accounted for as available for sale securities.
202 AIG | 2018 Form 10-K
(b) Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.
(c) Includes guaranteed investment agreements (GIAs), notes, bonds, loans and mortgages payable.
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
Net realized and unrealized gains and losses included in income related to Level 3 assets and liabilities shown above are
reported in the Consolidated Statements of Income as follows:
(in millions)
December 31, 2018
Assets:
Bonds available for sale
Other bond securities
Equity securities
Other invested assets
December 31, 2017
Assets:
Bonds available for sale
Other bond securities
Other invested assets
(in millions)
December 31, 2018
Liabilities:
Policyholder contract deposits
Derivative liabilities, net
Long-term debt
December 31, 2017
Liabilities:
Policyholder contract deposits
Derivative liabilities, net
Long-term debt
$
$
Net
Investment
Income
Net Realized
Capital
Gains (Losses)
Other
Income
987 $
92
(2)
57
(165) $
(3)
-
-
(4) $
393
-
(10)
Total
818
482
(2)
47
1,127 $
308
9
Net
Investment
Income
(49) $
-
6
Net Realized
Capital
(Gains) Losses
-
-
-
-
-
-
(334)
5
-
807
(17)
-
2 $
731
(1)
1,080
1,039
14
Other
Income
-
(133)
-
-
(167)
16
Total
(334)
(128)
-
807
(184)
16
AIG | 2018 Form 10-K 203
The following table presents the gross components of purchases, sales, issuances and settlements, net, shown above for
years ended December 31, 2018 and 2017 related to Level 3 assets and liabilities in the Consolidated Balance Sheet:
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
(in millions)
December 31, 2018
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
Total bonds available for sale
Other bond securities:
Corporate debt
RMBS
CMBS
CDO/ABS
Total other bond securities
Equity securities
Mortgage and other loans receivable
Other invested assets
Other assets
Total assets
Liabilities:
Policyholder contract deposits
Derivative liabilities, net
Long-term debt(b)
Total liabilities
December 31, 2017
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
Total bonds available for sale
Other bond securities:
Corporate debt
RMBS
CMBS
CDO/ABS
Total other bond securities
Equity securities available for sale
Other equity securities
Mortgage and other loans receivable
Other invested assets
Total assets
Liabilities:
Policyholder contract deposits
Derivative liabilities, net
Long-term debt(b)
Total liabilities
(a) There were no issuances during the years ended December 31, 2018 and 2017.
(b) Includes GIAs, notes, bonds, loans and mortgages payable.
204 AIG | 2018 Form 10-K
Purchases
Sales
Issuances and
Settlements(a)
Purchases, Sales,
Issuances and
Settlements, Net(a)
$
$
$
$
$
$
$
$
105 $
5
280
715
277
1,865
3,247
-
1
-
90
91
49
-
350
-
3,737 $
- $
(52)
-
(52) $
286 $
9
36
1,199
75
2,099
3,704
11
167
42
9
229
13
-
-
107
4,053 $
- $
(4)
-
(4) $
(8) $
-
(216)
(20)
(2)
(1,073)
(1,319)
-
(34)
-
(4)
(38)
-
(5)
(29)
-
(1,391) $
533 $
80
-
613 $
(16) $
(1)
(59)
(260)
(146)
(243)
(725)
-
(218)
(11)
(65)
(294)
-
-
(6)
(46)
(1,071) $
344 $
-
-
344 $
(163) $
(6)
(271)
(3,119)
(68)
(1,163)
(4,790)
(18)
(247)
(5)
(991)
(1,261)
(25)
-
(33)
58
(6,051) $
(219) $
64
-
(155) $
(54) $
(17)
(236)
(3,702)
(677)
(1,113)
(5,799)
(1)
(262)
(7)
(1,526)
(1,796)
(12)
-
-
(22)
(7,629) $
(48) $
69
(87)
(66) $
(66)
(1)
(207)
(2,424)
207
(371)
(2,862)
(18)
(280)
(5)
(905)
(1,208)
24
(5)
288
58
(3,705)
314
92
-
406
216
(9)
(259)
(2,763)
(748)
743
(2,820)
10
(313)
24
(1,582)
(1,861)
1
-
(6)
39
(4,647)
296
65
(87)
274
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables
above. As a result, the unrealized gains (losses) on instruments held at December 31, 2018 and 2017 may include changes in fair
value that were attributable to both observable (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in
unobservable long-dated volatilities).
Transfers of Level 3 Assets and Liabilities
We record transfers of assets and liabilities into or out of Level 3 classification at their fair values as of the end of each reporting
period, consistent with the date of the determination of fair value. The Net realized and unrealized gains (losses) included in income
(loss) or Other comprehensive income (loss) as shown in the table above excludes $33 million of net gains and $64 million of net
losses related to assets and liabilities transferred into Level 3 during 2018 and 2017, respectively, and includes $18 million and $36
million of net losses related to assets and liabilities transferred out of Level 3 during 2018 and 2017, respectively.
Transfers of Level 3 Assets
During the years ended December 31, 2018 and 2017, transfers into Level 3 assets primarily included certain investments in private
placement corporate debt, RMBS, CMBS and CDO/ABS. Transfers of private placement corporate debt and certain ABS into Level 3
assets were primarily the result of limited market pricing information that required us to determine fair value for these securities based
on inputs that are adjusted to better reflect our own assumptions regarding the characteristics of a specific security or associated
market liquidity. The transfers of investments in RMBS, CMBS and CDO and certain ABS into Level 3 assets were due to decreases
in market transparency and liquidity for individual security types.
During the years ended December 31, 2018 and 2017, transfers out of Level 3 assets primarily included private placement and other
corporate debt, CMBS, RMBS, CDO/ABS and certain investments in municipal securities. Transfers of certain investments in
municipal securities, corporate debt, RMBS, CMBS and CDO/ABS out of Level 3 assets were based on consideration of market
liquidity as well as related transparency of pricing and associated observable inputs for these investments. Transfers of certain
investments in private placement corporate debt and certain ABS out of Level 3 assets were primarily the result of using observable
pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions
regarding the characteristics of a specific security or the current liquidity in the market.
Transfers of Level 3 Liabilities
There were no significant transfers of derivative or other liabilities into or out of Level 3 for the years ended December 31, 2018 and
2017.
AIG | 2018 Form 10-K 205
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
QUANTITATIVE INFORMATION ABOUT LEVEL 3 FAIR VALUE MEASUREMENTS
The table below presents information about the significant unobservable inputs used for recurring fair value measurements
for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably
available to us, such as data from independent third-party valuation service providers and from internal valuation models.
Because input information from third-parties with respect to certain Level 3 instruments (primarily CDO/ABS) may not be
reasonably available to us, balances shown below may not equal total amounts reported for such Level 3 assets and
liabilities:
(in millions)
Assets:
Obligations of states,
municipalities and
political subdivisions
Fair Value at
December 31,
2018
Valuation
Technique
Unobservable Input(b)
Range
(Weighted Average)
$
1,473 Discounted cash flow
Yield
3.91% - 5.00% (4.46%)
Corporate debt
445 Discounted cash flow
Yield
4.35% - 5.99% (5.17%)
RMBS(a)
13,608 Discounted cash flow
Constant prepayment rate
4.58% - 14.00% (9.29%)
Loss severity 39.66% - 74.40% (57.03%)
2.46% - 7.39% (4.92%)
3.31% - 5.50% (4.40%)
Constant default rate
Yield
5,461 Discounted cash flow
Yield
3.65% - 5.10% (4.37%)
447 Discounted cash flow
Yield
3.29% - 6.07% (4.68%)
CDO/ABS(a)
CMBS
Liabilities:
Embedded derivatives
within Policyholder
contract deposits:
Guaranteed minimum
withdrawal benefits
(GMWB)
1,943 Discounted cash flow
Equity volatility
Base lapse rate
Dynamic lapse multiplier
Mortality multiplier(c)
Utilization
Equity / interest rate correlation
Lapse rate
Mortality multiplier(c)
Option Budget
6.05% - 47.65%
0.16% - 12.60%
20.00% - 180.00%
40.00% - 153.00%
90.00% - 100.00%
20.00% - 40.00%
0.50% - 40.00%
42.00% - 162.00%
1.00% - 3.00%
Base lapse rate
Mortality rate
0.00% - 13.00%
0.00% - 100.00%
Index Annuities
1,778 Discounted cash flow
Indexed Life
374 Discounted cash flow
206 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
Fair Value at
December 31,
2017
Valuation
Technique
Unobservable Input(b)
Range
(Weighted Average)
$
1,620 Discounted cash flow
Yield
3.55% - 4.32% (3.94%)
(in millions)
Assets:
Obligations of states,
municipalities and
political subdivisions
Corporate debt
1,086 Discounted cash flow
Yield
3.26% - 12.22% (7.74%)
RMBS(a)
16,156 Discounted cash flow
Constant prepayment rate
3.97% - 13.42% (8.69%)
Loss severity 43.15% - 77.15% (60.15%)
3.31% - 8.30% (5.80%)
2.73% - 5.19% (3.96%)
Constant default rate
Yield
5,254 Discounted cash flow
Yield
3.38% - 4.78% (4.08%)
487 Discounted cash flow
Yield
2.22% - 7.77% (4.99%)
CDO/ABS(a)
CMBS
Liabilities:
Embedded derivatives
within Policyholder
contract deposits:
GMWB
1,994 Discounted cash flow
Index Annuities
1,603 Discounted cash flow
Indexed Life
515 Discounted cash flow
Equity volatility
Base lapse rate
Dynamic lapse multiplier
Mortality multiplier(c)
Utilization
Equity / interest rate correlation
Lapse rate
Mortality multiplier(c)
Option Budget
6.45% - 51.25%
0.35% - 14.00%
30.00% - 170.00%
40.00% - 153.00%
90.00% - 100.00%
20.00% - 40.00%
0.50% - 40.00%
42.00% - 162.00%
1.00% - 4.00%
Base lapse rate
Mortality rate
2.00% - 19.00%
0.00% - 40.00%
(a) Information received from third-party valuation service providers. The ranges of the unobservable inputs for constant prepayment rate, loss severity and constant
default rate relate to each of the individual underlying mortgage loans that comprise the entire portfolio of securities in the RMBS and CDO securitization vehicles and
not necessarily to the securitization vehicle bonds (tranches) purchased by us. The ranges of these inputs do not directly correlate to changes in the fair values of the
tranches purchased by us, because there are other factors relevant to the fair values of specific tranches owned by us including, but not limited to, purchase price,
position in the waterfall, senior versus subordinated position and attachment points.
(b) Represents discount rates, estimates and assumptions that we believe would be used by market participants when valuing these assets and liabilities.
(c) Mortality inputs are shown as multipliers of the 2012 Individual Annuity Mortality Basic table.
AIG | 2018 Form 10-K 207
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
The ranges of reported inputs for Obligations of states, municipalities and political subdivisions, Corporate debt, RMBS, CDO/ABS,
and CMBS valued using a discounted cash flow technique consist of one standard deviation in either direction from the
value-weighted average. The preceding table does not give effect to our risk management practices that might offset risks inherent in
these Level 3 assets and liabilities.
Sensitivity to Changes in Unobservable Inputs
We consider unobservable inputs to be those for which market data is not available and that are developed using the best information
available to us about the assumptions that market participants would use when pricing the asset or liability. Relevant inputs vary
depending on the nature of the instrument being measured at fair value. The following paragraphs provide a general description of
sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs
and their impact on the fair value measurements. The effect of a change in a particular assumption in the sensitivity analysis below is
considered independently of changes in any other assumptions. In practice, simultaneous changes in assumptions may not always
have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs.
Such relationships have not been included in the discussion below. For each of the individual relationships described below, the
inverse relationship would also generally apply.
Obligations of States, Municipalities and Political Subdivisions
The significant unobservable input used in the fair value measurement of certain investments in obligations of states, municipalities
and political subdivisions is yield. In general, increases in the yield would decrease the fair value of investments in obligations of
states, municipalities and political subdivisions.
Corporate Debt
Corporate debt securities included in Level 3 are primarily private placement issuances that are not traded in active markets or that
are subject to transfer restrictions. Fair value measurements consider illiquidity and non-transferability. When observable price
quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit
spreads, yields or price levels of publicly-traded debt of the issuer or other comparable securities, considering illiquidity and structure.
The significant unobservable input used in the fair value measurement of corporate debt is the yield. The yield is affected by the
market movements in credit spreads and U.S. Treasury yields. In addition, the migration in credit quality of a given security generally
has a corresponding effect on the fair value measurement of the security. For example, a downward migration of credit quality would
increase spreads. Holding U.S. Treasury rates constant, an increase in corporate credit spreads would decrease the fair value of
corporate debt.
RMBS and CDO/ABS
The significant unobservable inputs used in fair value measurements of RMBS and certain CDO/ABS valued by third-party valuation
service providers are constant prepayment rates (CPR), loss severity, constant default rates (CDR) and yield. A change in the
assumptions used for the probability of default will generally be accompanied by a corresponding change in the assumption used for
the loss severity and an inverse change in the assumption used for prepayment rates. In general, increases in CPR, loss severity,
CDR and yield, in isolation, would result in a decrease in the fair value measurement. Changes in fair value based on variations in
assumptions generally cannot be extrapolated because the relationship between the directional change of each input is not usually
linear.
CMBS
The significant unobservable input used in fair value measurements for CMBS is the yield. Prepayment assumptions for each
mortgage pool are factored into the yield. CMBS generally feature a lower degree of prepayment risk than RMBS because
commercial mortgages generally contain a penalty for prepayment. In general, increases in the yield would decrease the fair value of
CMBS.
208 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
Embedded derivatives within Policyholder contract deposits
Embedded derivatives reported within Policyholder contract deposits include GMWB within variable annuity products and interest
crediting rates based on market indices within index annuities, indexed life and guaranteed investment contracts (GICs). For any
given contract, assumptions for unobservable inputs vary throughout the period over which cash flows are projected for purposes of
valuing the embedded derivative. The following unobservable inputs are used for valuing embedded derivatives measured at fair
value:
• Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available.
Increases in assumed volatility will generally increase the fair value of both the projected cash flows from rider fees as well as the
projected cash flows related to benefit payments. Therefore, the net change in the fair value of the liability may be either a
decrease or an increase, depending on the relative changes in projected rider fees and projected benefit payments.
• Equity / interest rate correlation estimates the relationship between changes in equity returns and interest rates in the economic
scenario generator used to value our GMWB embedded derivatives. In general, a higher positive correlation assumes that equity
markets and interest rates move in a more correlated fashion, which generally increases the fair value of the liability.
• Base lapse rate assumptions are determined by company experience and are adjusted at the contract level using a dynamic lapse
function, which reduces the base lapse rate when the contract is in-the-money (when the contract holder’s guaranteed value, as
estimated by the company, is worth more than their underlying account value). Lapse rates are also generally assumed to be lower
in periods when a surrender charge applies. Increases in assumed lapse rates will generally decrease the fair value of the liability,
as fewer policyholders would persist to collect guaranteed withdrawal amounts.
• Mortality rate assumptions, which vary by age and gender, are based on company experience and include a mortality improvement
assumption. Increases in assumed mortality rates will decrease the fair value of the liability, while lower mortality rate assumptions
will generally increase the fair value of the liability, because guaranteed payments will be made for a longer period of time.
• Utilization assumptions estimate the timing when policyholders with a GMWB will elect to utilize their benefit and begin taking
withdrawals. The assumptions may vary by the type of guarantee, tax-qualified status, the contract’s withdrawal history and the
age of the policyholder. Utilization assumptions are based on company experience, which includes partial withdrawal behavior.
Increases in assumed utilization rates will generally increase the fair value of the liability.
• Option budget estimates the expected long-term cost of options used to hedge exposures associated with equity price changes.
The level of option budgets determines future costs of the options, which impacts the growth in account value and the valuation of
embedded derivatives.
AIG | 2018 Form 10-K 209
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
INVESTMENTS IN CERTAIN ENTITIES CARRIED AT FAIR VALUE USING NET ASSET VALUE PER
SHARE
The following table includes information related to our investments in certain other invested assets, including private equity
funds, hedge funds and other alternative investments that calculate net asset value per share (or its equivalent). For these
investments, which are measured at fair value on a recurring basis, we use the net asset value per share to measure fair
value.
December 31, 2018
December 31, 2017
Fair Value
Using NAV
Fair Value
Using NAV
Per Share (or
Unfunded
Per Share (or
Unfunded
(in millions)
Investment Category*
Private equity funds:
Leveraged buyout
Investment Category Includes
its equivalent) Commitments
its equivalent) Commitments
Debt and/or equity investments made as part of a
transaction in which assets of mature companies are
acquired from the current shareholders, typically with the
use of financial leverage
$
847 $
1,327
$
1,243 $
706
Real Estate /
Infrastructure
Investments in real estate properties and infrastructure
positions, including power plants and other energy
generating facilities
Venture capital
Early-stage, high-potential, growth companies expected to
generate a return through an eventual realization event,
such as an initial public offering or sale of the company
Growth Equity
Funds that make investments in established companies
for the purpose of growing their businesses
Mezzanine
Other
Funds that make investments in the junior debt and equity
securities of leveraged companies
Includes distressed funds that invest in securities of
companies that are in default or under bankruptcy
protection, as well as funds that have multi-strategy, and
other strategies
Total private equity funds
Hedge funds:
Event-driven
Long-short
Macro
Distressed
Other
Total hedge funds
Total
Securities of companies undergoing material structural
changes, including mergers, acquisitions and other
reorganizations
Securities that the manager believes are undervalued,
with corresponding short positions to hedge market risk
Investments that take long and short positions in financial
instruments based on a top-down view of certain
economic and capital market conditions
Securities of companies that are in default, under
bankruptcy protection or troubled
Includes investments held in funds that are less liquid, as
well as other strategies which allow for broader allocation
between public and private investments
190
83
210
187
126
362
211
127
28
75
514
2,250
307
1,947
787
863
887
21
158
2,716
-
-
-
8
1
9
134
215
171
155
2,128
1,128
1,233
1,011
266
231
3,869
73
73
135
53
1,227
-
-
-
8
4
12
$
4,966 $
1,956
$
5,997 $
1,239
* Beginning in the third quarter of 2018, Growth Equity and Mezzanine private equity fund categories are shown separately. Prior periods were revised to conform to the
current period presentation.
210 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
Private equity fund investments included above are not redeemable, because distributions from the funds will be received when
underlying investments of the funds are liquidated. Private equity funds are generally expected to have 10-year lives at their inception,
but these lives may be extended at the fund manager’s discretion, typically in one or two-year increments. At December 31, 2018,
assuming average original expected lives of 10 years for the funds, 14 percent of the total fair value using net asset value per share
(or its equivalent) presented above would have expected remaining lives of three years or less, 43 percent between four and six years
and 43 percent between seven and 10 years.
The hedge fund investments included above, which are carried at fair value, are generally redeemable monthly (35 percent), quarterly
(32 percent), semi-annually (9 percent) and annually (24 percent), with redemption notices ranging from one day to 180 days. At
December 31, 2018, investments representing approximately 51 percent of the total fair value of these hedge fund investments had
partial contractual redemption restrictions. These partial redemption restrictions are generally related to one or more investments held
in the hedge funds that the fund manager deemed to be illiquid. The majority of these contractual restrictions, which may have been
put in place at the fund’s inception or thereafter, have pre-defined end dates. The majority of these restrictions are generally expected
to be lifted by the end of 2019.
FAIR VALUE OPTION
Under the fair value option, we may elect to measure at fair value financial assets and financial liabilities that are not otherwise
required to be carried at fair value. Subsequent changes in fair value for designated items are reported in earnings. We elect the fair
value option for certain hybrid securities given the complexity of bifurcating the economic components associated with the embedded
derivatives.
For additional information related to embedded derivatives refer to Note 11 herein.
Additionally, we elect the fair value option for certain alternative investments when such investments are eligible for this election. We
believe this measurement basis is consistent with the applicable accounting guidance used by the respective investment company
funds themselves.
For additional information on securities and other invested assets for which we have elected the fair value option refer to Note 6
herein.
The following table presents the gains or losses recorded related to the eligible instruments for which we elected the fair
value option:
Years Ended December 31,
(in millions)
Assets:
Bond and equity securities
Alternative investments(a)
Other, including Short-term investments
Liabilities:
Long-term debt(b)
Other liabilities
Total gain
Gain (Loss)
2018
2017
2016
$
$
343 $
213
-
(1)
-
555 $
1,646 $
509
1
(49)
(2)
2,105 $
447
28
-
(9)
-
466
(a) Includes certain hedge funds, private equity funds and other investment partnerships.
(b) Includes GIAs, notes, bonds and mortgages payable.
Interest income and dividend income on assets measured under the fair value option are recognized and included in Net investment
income in the Consolidated Statements of Income with the exception of activity within AIG’s Other Operations category, which is
included in Other income. Interest expense on liabilities measured under the fair value option is reported in Other Income in the
Consolidated Statements of Income.
For additional information about our policies for recognition, measurement, and disclosure of interest and dividend income see Note 6
herein.
AIG | 2018 Form 10-K 211
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
During 2017 and 2016, we recognized gains of $4 million and $22 million, respectively, attributable to the observable effect of
changes in credit spreads on our own liabilities for which the fair value option was elected. We calculate the effect of these credit
spread changes using discounted cash flow techniques that incorporate current market interest rates, our observable credit spreads
on these liabilities and other factors that mitigate the risk of nonperformance such as cash collateral posted.
As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, we are required
to record unrealized gains and losses attributable to the observable effect of changes in credit spreads on our liabilities for which the
fair value option was elected in Other Comprehensive Income. An unrealized gain of $4 million was recognized in Other
Comprehensive Income for year ended December 31, 2018.
The following table presents the difference between fair values and the aggregate contractual principal amounts of
mortgage and other loans receivable and long-term debt for which the fair value option was elected:
(in millions)
Assets:
Mortgage and other loans receivable
Liabilities:
Long-term debt*
December 31, 2018
Outstanding
December 31, 2017
Outstanding
Fair Value
Principal Amount Difference
Fair Value Principal Amount Difference
$
-
$
2,213
$
$
- $
-
$
5
1,653 $
560
$ 2,888
$
$
5 $
-
2,280 $
608
*
Includes GIAs, notes, bonds, loans and mortgages payable.
There were no mortgage or other loans receivable for which the fair value option was elected that were 90 days or more past due or
in non-accrual status at December 31, 2018 or 2017.
FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS
We measure the fair value of certain assets on a non-recurring basis, generally quarterly, annually or when events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include cost and equity-method
investments, commercial mortgage loans, investments in life settlements, investments in real estate and other fixed assets, goodwill
and other intangible assets.
For additional information about how we test various asset classes for impairment see Notes 6 and 7 herein.
Information regarding the estimation of fair value for financial instruments measured at fair value on a non-recurring basis is
discussed below:
•
Impairments for Other investments for the period ended December 31, 2016 primarily relate to certain investments in aircraft, the
fair values of which are determined based on third-party independent appraisals that use industry specific appraisal standards and
methodologies. Impairments for Other investments for the period ended December 31, 2017 primarily relate to commercial
mortgage loans, the fair values of which are determined based on independent broker quotations or valuation models using
unobservable inputs, as well as the estimated fair value of the underlying collateral or the present value of the expected future
cash flows. The rest of the impairments relate to real estate investments, the fair values of which are determined based on third-
party independent appraisals or discounted cash-flow models, as well as certain investments in aircraft, the fair values of which are
determined based on third-party independent appraisals that use industry-specific appraisal standards and methodologies.
Impairments for Other investments for the period ended December 31, 2018 primarily relate to real estate investments as well as
commercial mortgage loans, the fair value determination for which is discussed above under the heading Valuation Methodologies
of Financial Instruments Measured at Fair Value.
•
Impairments of Investments in Life Settlements were measured using their fair values as determined using a discounted cash flow
methodology that incorporates the best available market assumptions for mortality as well as market yields based on reported
transactions or the anticipated sale price, as appropriate. We sold the remaining portion of our life settlements portfolio in 2017.
212 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
The following table presents assets measured at fair value on a non-recurring basis at the time of impairment and the
related impairment charges recorded during the periods presented:
(in millions)
December 31, 2018
Other investments
Investments in life settlements
Other assets
Total
December 31, 2017
Other investments
Investments in life settlements
Other assets
Total
$
$
$
$
Assets at Fair Value
Non-Recurring Basis
Impairment Charges(a)
December 31,
Level 1
Level 2
Level 3
Total
2018
2017
2016
- $
- $
315 $
315
$
-
-
-
-
-
11
-
11
- $
- $
326 $
326
$
97 $
-
64
161 $
77 $
360
157
594 $
76
397
19
492
- $
- $
55 $
-
-
-
-
-
-
- $
- $
55 $
55
-
-
55
(a) Impairments in 2017 included $35 million related to Other assets of $179 million that were sold during the three-month period ended June 30, 2017.
FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE
Information regarding the estimation of fair value for financial instruments not carried at fair value (excluding insurance contracts and
lease contracts) is discussed below:
• Mortgage and other loans receivable: Fair values of loans on commercial real estate and other loans receivable are estimated
for disclosure purposes using discounted cash flow calculations based on discount rates that we believe market participants would
use in determining the price that they would pay for such assets. For certain loans, our current incremental lending rates for similar
types of loans are used as the discount rates, because we believe this rate approximates the rates market participants would use.
Fair values of residential mortgage loans are generally determined based on market prices, using market based adjustments for
credit and servicing as appropriate. The fair values of policy loans are generally estimated based on unpaid principal amount as of
each reporting date. No consideration is given to credit risk because policy loans are effectively collateralized by the cash
surrender value of the policies.
• Other invested assets: The majority of Other invested assets that are not measured at fair value in 2016 represent investments in
life settlements. The fair value of investments in life settlements is determined using a discounted cash flow methodology that
incorporates the best available market assumptions for longevity as well as market yields based on reported transactions. Due to
the individual life nature of each investment in life settlements and the illiquidity of the existing market, significant inputs to the fair
value are unobservable. The majority of the Other invested assets that are not measured at fair value in 2017 and 2018 represent
time deposits with the original maturity at purchase greater than one year. The fair value of long-term time deposits is determined
using the expected discounted future cash flow.
• Cash and short-term investments: The carrying amounts of these assets approximate fair values because of the relatively short
period of time between origination and expected realization, and their limited exposure to credit risk.
• Policyholder contract deposits associated with investment-type contracts: Fair values for policyholder contract deposits
associated with investment-type contracts not accounted for at fair value are estimated using discounted cash flow calculations
based on interest rates currently being offered for similar contracts with maturities consistent with those of the contracts being
valued. When no similar contracts are being offered, the discount rate is the appropriate swap rate (if available) or current risk-free
interest rate consistent with the currency in which the cash flows are denominated. To determine fair value, other factors include
current policyholder account values and related surrender charges and other assumptions include expectations about policyholder
behavior and an appropriate risk margin.
• Other liabilities: The majority of Other liabilities that are financial instruments not measured at fair value represent secured
financing arrangements, including repurchase agreements. The carrying amounts of these liabilities approximate fair value,
because the financing arrangements are short-term and are secured by cash or other liquid collateral.
• Long-term debt: Fair values of these obligations were determined by reference to quoted market prices, when available and
appropriate, or discounted cash flow calculations based upon our current market-observable implicit-credit-spread rates for similar
types of borrowings with maturities consistent with those remaining for the debt being valued.
AIG | 2018 Form 10-K 213
ITEM 8 | Notes to Consolidated Financial Statements | 5. F ai r Val u e Me as u re me n ts
The following table presents the carrying amounts and estimated fair values of our financial instruments not measured at
fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the
observability of the inputs used:
(in millions)
December 31, 2018
Assets:
Mortgage and other loans receivable
Other invested assets
Short-term investments
Cash
Other assets
Liabilities:
Policyholder contract deposits associated
with investment-type contracts
Other liabilities
Long-term debt
December 31, 2017
Assets:
Mortgage and other loans receivable
Other invested assets
Short-term investments
Cash
Liabilities:
Policyholder contract deposits associated
with investment-type contracts
Other liabilities
Long-term debt
6. Investments
Estimated Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Value
$
- $
-
-
2,873
308
105 $
731
6,659
-
35
43,522 $
6
-
-
-
43,627 $
737
6,659
2,873
343
43,135
737
6,659
2,873
343
-
-
-
339
1,154
22,822
121,035
-
8,775
121,374
1,154
31,597
120,602
1,154
32,327
$
- $
-
-
2,362
117 $
590
7,771
-
37,644 $
6
-
-
37,761 $
596
7,771
2,362
37,018
593
7,771
2,362
-
-
-
387
4,494
23,930
121,809
-
4,313
122,196
4,494
28,243
114,326
4,494
28,752
FIXED MATURITY AND EQUITY SECURITIES
Bonds held to maturity are carried at amortized cost when we have the ability and positive intent to hold these securities until maturity.
When we do not have the ability or positive intent to hold bonds until maturity, these securities are classified as available for sale or
are measured at fair value at our election. None of our fixed maturity securities met the criteria for held to maturity classification at
December 31, 2018 or 2017.
On January 1, 2018, AIG adopted ASU 2016-01, the Financial Instruments Recognition and Measurement standard for equity
securities which eliminates the available for sale classification and treatment for equity securities. As a result, equity securities that do
not follow the equity method of accounting, are measured at fair value with changes in fair value recognized in earnings.
Prior to the adoption of this standard, unrealized gains and losses from available for sale investments in fixed maturity and equity
securities carried at fair value were reported as a separate component of Accumulated other comprehensive income, net of deferred
policy acquisition costs and deferred income taxes, in shareholders’ equity. Realized and unrealized gains and losses from fixed
maturity and equity securities measured at fair value at our election are reflected in Net investment income (for insurance
subsidiaries) or Other income (for Other Operations). Investments in fixed maturity and equity securities are recorded on a trade-date
basis.
Premiums and discounts arising from the purchase of bonds classified as available for sale are treated as yield adjustments over their
estimated holding periods, until maturity, or call date, if applicable. For investments in certain RMBS, CMBS and CDO/ABS,
(collectively, structured securities), recognized yields are updated based on current information regarding the timing and amount of
expected undiscounted future cash flows. For high credit quality structured securities, effective yields are recalculated based on
actual payments received and updated prepayment expectations, and the amortized cost is adjusted to the amount that would have
existed had the new effective yield been applied since acquisition with a corresponding charge or credit to net investment income. For
structured securities that are not high credit quality, effective yields are recalculated and adjusted prospectively based on changes in
expected undiscounted future cash flows. For purchased credit impaired (PCI) securities, at acquisition, the difference between the
214 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
undiscounted expected future cash flows and the recorded investment in the securities represents the initial accretable yield, which is
to be accreted into net investment income over the securities’ remaining lives on an effective level-yield basis. Subsequently, effective
yields recognized on PCI securities are recalculated and adjusted prospectively to reflect changes in the contractual benchmark
interest rates on variable rate securities and any significant increases in undiscounted expected future cash flows arising due to
reasons other than interest rate changes.
SECURITIES AVAILABLE FOR SALE
The following table presents the amortized cost or cost and fair value of our available for sale securities(a):
(in millions)
December 31, 2018
Bonds available for sale:
U.S. government and government sponsored entities
Obligations of states, municipalities and political subdivisions
Non-U.S. governments
Corporate debt
Mortgage-backed, asset-backed and collateralized:
RMBS
CMBS
CDO/ABS
Total mortgage-backed, asset-backed and collateralized
Total bonds available for sale(c)
December 31, 2017
Bonds available for sale:
U.S. government and government sponsored entities
Obligations of states, municipalities and political subdivisions
Non-U.S. governments
Corporate debt
Mortgage-backed, asset-backed and collateralized:
RMBS
CMBS
CDO/ABS
Total mortgage-backed, asset-backed and collateralized
Total bonds available for sale(c)
Equity securities available for sale:
Common stock
Preferred stock
Mutual funds
Total equity securities available for sale
Total
Amortized
Gross
Gross
Cost or
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
Other-Than-
Temporary
Impairments
in AOCI(b)
$
3,170 $
132 $
(42) $
3,260 $
15,421
14,376
130,436
31,940
12,673
17,764
62,377
701
451
3,911
2,754
242
228
3,224
(121)
(302)
16,001
14,525
(3,647)
130,700
(317)
(214)
(165)
(696)
34,377
12,701
17,827
64,905
$
225,780 $
8,419 $
(4,808) $
229,391 $
$
2,532 $
160 $
(36) $
2,656 $
17,377
15,059
126,310
34,181
13,538
16,464
64,183
225,461
703
504
98
1,305
1,297
717
8,666
3,273
408
370
4,051
14,891
379
29
16
424
(30)
(117)
(800)
(220)
(105)
(52)
(377)
18,644
15,659
134,176
37,234
13,841
16,782
67,857
(1,360)
238,992
(21)
-
-
(21)
1,061
533
114
1,708
-
4
-
4
1,155
31
17
1,203
1,211
-
-
-
17
1,568
42
29
1,639
1,656
-
-
-
-
$
226,766 $
15,315 $
(1,381) $
240,700 $
1,656
(a) As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and
accounted for as available for sale securities.
(b) Represents the amount of other-than-temporary impairments recognized in Accumulated other comprehensive income (loss). Amount includes unrealized gains and
losses on impaired securities relating to changes in the fair value of such securities subsequent to the impairment measurement date.
(c) At December 31, 2018 and 2017, bonds available for sale held by us that were below investment grade or not rated totaled $28.8 billion and $31.5 billion, respectively.
AIG | 2018 Form 10-K 215
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
Securities Available for Sale in a Loss Position
The following table summarizes the fair value and gross unrealized losses on our available for sale securities, aggregated
by major investment category and length of time that individual securities have been in a continuous unrealized loss
position(a):
(in millions)
December 31, 2018
Bonds available for sale:
U.S. government and government sponsored entities $
Obligations of states, municipalities and political
subdivisions
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
Total bonds available for sale
December 31, 2017
Bonds available for sale:
U.S. government and government sponsored entities $
Obligations of states, municipalities and political
subdivisions
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
Total bonds available for sale
Equity securities available for sale:
Common stock
Mutual funds
Total equity securities available for sale
Total
Less than 12 Months
12 Months or More
Total
Gross
Fair Unrealized
Losses
Value
Gross
Fair Unrealized
Losses
Value
Fair
Value
Gross
Unrealized
Losses
574 $
13
$
873 $
29
$
1,447 $
42
1,965
3,851
47,364
5,231
2,646
9,169
$ 70,800 $
51
149
2,181
94
47
144
2,679
1,530
2,422
20,056
5,641
4,264
1,324
$ 36,110 $
70
153
1,466
223
167
21
2,129
3,495
6,273
67,420
10,872
6,910
10,493
$ 106,910 $
121
302
3,647
317
214
165
4,808
770 $
23
$
332 $
13
$
1,102 $
36
586
3,511
15,578
6,212
3,408
1,455
31,520
136
1
137
$ 31,657 $
6
54
453
99
46
24
705
21
-
21
726
646
857
7,291
3,790
1,389
822
15,127
-
-
-
$ 15,127 $
24
63
347
121
59
28
655
-
-
-
655
1,232
4,368
22,869
10,002
4,797
2,277
46,647
136
1
137
$ 46,784 $
30
117
800
220
105
52
1,360
21
-
21
1,381
(a) As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and
accounted for as available for sale securities.
At December 31, 2018, we held 16,876 individual fixed maturity securities that were in an unrealized loss position, of which 5,127
individual fixed maturity securities were in a continuous unrealized loss position for 12 months or more. We did not recognize the
unrealized losses in earnings on these fixed maturity securities at December 31, 2018 because we neither intend to sell the securities
nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost
basis. For fixed maturity securities with significant declines, we performed fundamental credit analyses on a security-by-security
basis, which included consideration of credit enhancements, expected defaults on underlying collateral, review of relevant industry
analyst reports and forecasts and other available market data.
216 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
Contractual Maturities of Fixed Maturity Securities Available for Sale
The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual
maturity:
(in millions)
December 31, 2018
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed, asset-backed and collateralized
Total
December 31, 2017
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed, asset-backed and collateralized
Total
Total Fixed Maturity Securities
Available for Sale
Amortized Cost
Fair Value
Fixed Maturity Securities in a Loss
Position Available for Sale
Amortized Cost
Fair Value
$
$
$
$
9,539 $
47,400
42,363
64,101
62,377
225,780 $
7,932 $
47,179
42,617
63,550
64,183
225,461 $
9,674
47,905
42,045
64,862
64,905
229,391
8,071
49,093
43,944
70,027
67,857
238,992
$
$
$
$
2,322 $
17,382
27,724
35,319
28,971
111,718 $
1,526 $
7,764
11,559
9,705
17,453
48,007 $
2,294
16,844
26,517
32,980
28,275
106,910
1,515
7,571
11,143
9,342
17,076
46,647
Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations
with or without call or prepayment penalties.
The following table presents the gross realized gains and gross realized losses from sales or maturities of our available for
sale securities:
(in millions)
Fixed maturity securities
Equity securities
Total
2018
Years Ended December 31,
2017
2016
Gross
Realized
Gains
Gross
Realized
Losses
Gross
Realized
Gains
Gross
Realized
Losses
Gross
Realized
Gains
$
$
331 $
16
347 $
476 $
-
476 $
725 $
107
832 $
300 $
19
319 $
801 $
1,072
1,873 $
Gross
Realized
Losses
800
15
815
For the years ended December 31, 2018, 2017 and 2016, the aggregate fair value of available for sale securities sold was $25.1
billion, $31.3 billion and $30.2 billion, which resulted in net realized capital gains (losses) of $(129) million, $0.5 billion and $1.1
billion, respectively.
AIG | 2018 Form 10-K 217
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
OTHER SECURITIES MEASURED AT FAIR VALUE
The following table presents the fair value of other securities measured at fair value based on our election of the fair value
option:
(in millions)
Fixed maturity securities:
U.S. government and government sponsored entities
Non-U.S. governments
Corporate debt
Mortgage-backed, asset-backed and collateralized:
RMBS
CMBS
CDO/ABS and other collateralized*
Total mortgage-backed, asset-backed and collateralized
Total fixed maturity securities
Equity securities
Total
December 31, 2018
Fair
Value
Percent
of Total
December 31, 2017
Fair
Value
Percent
of Total
$
$
2,665
45
1,671
1,714
388
4,932
7,034
11,415
1,253
12,668
$
21 %
-
13
14
3
39
56
90
10
100 %
$
2,802
57
1,909
1,885
559
5,560
8,004
12,772
589
13,361
21 %
1
14
14
4
42
60
96
4
100 %
*
Includes $178 million and $251 million of U.S. government agency backed ABS at December 31, 2018 and 2017, respectively.
OTHER INVESTED ASSETS
The following table summarizes the carrying amounts of other invested assets:
December 31,
(in millions)
Alternative investments(a) (b)
Investment real estate(c)
All other investments
Total
2018
8,966
8,935
1,440
19,341
$
$
2017
11,308
8,258
1,256
20,822
$
$
(a) At December 31, 2018, included hedge funds of $4.2 billion, private equity funds of $4.3 billion, and affordable housing partnerships of $438 million. At December 31,
2017, included hedge funds of $5.8 billion, private equity funds of $5.0 billion, and affordable housing partnerships of $543 million.
(b) At December 31, 2018, approximately 74 percent of our hedge fund portfolio is available for redemption in 2019. The remaining 26 percent will be available for
redemption between 2020 and 2027.
(c) Net of accumulated depreciation of $598 million and $515 million in 2018 and 2017, respectively.
Other Invested Assets Carried at Fair Value
Certain hedge funds, private equity funds, and other investment partnerships for which we have elected the fair value option are
reported at fair value with changes in fair value recognized in Net investment income with the exception of investments of AIG’s Other
Operations, for which such changes are reported in Other income.
Prior to January 1, 2018, other investments in hedge funds, private equity funds and other investment partnerships in which our
insurance operations do not hold aggregate interests sufficient to exercise more than minor influence over the respective partnerships
were reported at fair value with changes in fair value recognized as a component of Accumulated other comprehensive income.
These investments were subject to other-than-temporary impairment evaluations. The gross unrealized loss recorded in Accumulated
other comprehensive income on such investments was $45 million at December 31, 2017, the majority of which pertained to
investments in private equity funds and hedge funds that have been in continuous unrealized loss positions for less than 12 months.
Effective January 1, 2018, upon the adoption of the Financial Instruments Recognition and Measurement standard, these investments
are no longer accounted for as available for sale securities. The new standard requires these investments to be measured at fair
value with the change in fair value recognized in earnings. As a result, beginning in 2018, these investments are no longer subject to
the other-than-temporary impairment evaluation.
218 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
Other Invested Assets – Equity Method Investments
We account for hedge funds, private equity funds, affordable housing partnerships and other investment partnerships using the equity
method of accounting unless our interest is so minor that we may have virtually no influence over partnership operating and financial
policies, or we have elected the fair value option. Under the equity method of accounting, our carrying amount generally is our share
of the net asset value of the funds or the partnerships, and changes in our share of the net asset values are recorded in Net
investment income with the exception of investments of AIG’s Other Operations, for which such changes are reported in Other
income. In applying the equity method of accounting, we consistently use the most recently available financial information provided by
the general partner or manager of each of these investments, which is one to three months prior to the end of our reporting period.
The financial statements of these investees are generally audited annually.
Summarized Financial Information of Equity Method Investees
The following is the aggregated summarized financial information of our equity method investees, including those for which
the fair value option has been elected:
Years Ended December 31,
(in millions)
Operating results:
Total revenues
Total expenses
Net income
At December 31,
(in millions)
Balance sheet:
Total assets
Total liabilities
2018
2017
2016
$
$
15,310
(3,200)
12,110
$
$
$
$
13,066
(6,835)
6,231
$
$
9,512
(7,361)
2,151
2018
2017
96,915
(21,063)
$
$
132,708
(35,585)
The following table presents the carrying amount and ownership percentage of equity method investments at December 31,
2018 and 2017:
(in millions, except percentages)
Equity method investments
2018
2017
Carrying
Value
6,520
Ownership
Percentage
Various
$
Carrying
Value
9,050
Ownership
Percentage
Various
$
Summarized financial information for these equity method investees may be presented on a lag, due to the unavailability of
information for the investees at our respective balance sheet dates, and is included for the periods in which we held an equity method
ownership interest.
OTHER INVESTMENTS
Also included in Other invested assets are real estate held for investment. These investments are reported at cost, less depreciation
and are subject to impairment review, as discussed below.
Investments in Life Settlements
Investments in life settlements were accounted for under the investment method. Under the investment method, we recognized our
initial investment in life settlements at the transaction price plus all initial direct external costs. Continuing costs to keep the policy in
force, primarily life insurance premiums, increased the carrying amount of the investment. We recognized income on individual
investments in life settlements upon the death of the insured, at an amount equal to the excess of the investment proceeds over the
carrying amount of the investment at that time. These investments were subject to impairment review, as discussed below.
During 2017 and 2016, income recognized on investments in life settlements was $266 million and $453 million, respectively, and is
included in Net investment income in the Consolidated Statements of Income. We sold the remaining portion of our life settlements
portfolio in 2017.
AIG | 2018 Form 10-K 219
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
NET INVESTMENT INCOME
Net investment income represents income primarily from the following sources:
•
Interest income and related expenses, including amortization of premiums and accretion of discounts with changes in the timing
and the amount of expected principal and interest cash flows reflected in yield, as applicable.
• Dividend income from common and preferred stocks.
• Realized and unrealized gains and losses from investments in other securities and investments for which we elected the fair value
option.
• Earnings from alternative investments.
• The difference between the carrying amount of an investment in life settlements and the life insurance proceeds of the underlying
life insurance policy recorded in income upon the death of the insured.
The following table presents the components of Net investment income:
Years Ended December 31,
(in millions)
Available for sale fixed maturity securities, including short-term investments
Other fixed maturity securities
Equity securities(a)
Interest on mortgage and other loans
Alternative investments(b)
Real estate
Other investments
Total investment income
Investment expenses
Net investment income
2018
10,323 $
7
(162)
1,874
655
257
15
12,969
493
12,476 $
2017
10,435 $
660
34
1,661
1,475
144
290
14,699
520
14,179 $
2016
11,314
331
(5)
1,526
693
150
509
14,518
453
14,065
$
$
(a) Upon the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, the change in fair value of all equity securities is included
in Net investment income.
(b) Includes income from hedge funds, private equity funds and affordable housing partnerships. Hedge funds for which we elected the fair value option are recorded as of
the balance sheet date. Other hedge funds are generally reported on a one-month lag. Private equity funds are generally reported on a one-quarter lag.
NET REALIZED CAPITAL GAINS AND LOSSES
Net realized capital gains and losses are determined by specific identification. The net realized capital gains and losses are generated
primarily from the following sources:
• Sales or full redemptions of available for sale fixed maturity securities, available for sale equity securities, real estate and other
alternative investments.
• Reductions to the amortized cost basis of available for sale fixed maturity securities, available for sale equity securities and certain
other invested assets for other-than-temporary impairments.
•
Impairments on investments in life settlements.
• Changes in fair value of derivatives except for (1) those derivatives at AIGFP and (2) those instruments that are designated as
hedging instruments when the change in the fair value of the hedged item is not reported in Net realized capital gains (losses).
• Exchange gains and losses resulting from foreign currency transactions.
220 AIG | 2018 Form 10-K
The following table presents the components of Net realized capital losses:
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
Years Ended December 31,
(in millions)
Sales of fixed maturity securities
Sales of equity securities(a)
Other-than-temporary impairments:
Severity
Change in intent
Foreign currency declines
Issuer-specific credit events
Adverse projected cash flows
Provision for loan losses
Foreign exchange transactions
Variable annuity embedded derivatives, net of related hedges
All other derivatives and hedge accounting
Impairments on investments in life settlements
Loss on sale of private equity funds
Other(b)
Net realized capital losses
2018
(145) $
16
-
(87)
(15)
(147)
(2)
(92)
(182)
304
338
-
(321)
203
(130) $
2017
425 $
88
2016
1
1,057
(2)
(9)
(11)
(234)
(4)
(50)
489
(1,374)
(368)
(360)
-
30
(1,380) $
(15)
(46)
(18)
(433)
(47)
10
(1,226)
(1,243)
299
(397)
-
114
(1,944)
$
$
(a) In 2016, includes realized gains on the sale of a portion of our holdings in People’s Insurance Company (Group) of China Limited and PICC Property & Casualty
Company Limited (collectively, our PICC Investment).
(b) In 2018, primarily includes $96 million and $49 million of realized gains on the sale of shares of OneMain Holdings, Inc. and an investment in Castle Holdings LLC’s
aircraft assets, respectively. In 2016, primarily includes $107 million of realized gains due to a purchase price adjustment on the sale of Class B shares of Prudential
Financial, Inc. and losses of $253 million from the sale of a portion of our Life Settlements portfolio.
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS
The following table presents the increase (decrease) in unrealized appreciation (depreciation) of our available for sale
securities and other investments:
(in millions)
Increase (decrease) in unrealized appreciation (depreciation) of investments:
Fixed maturity securities
Equity securities(a)
Other investments
Total increase (decrease) in unrealized appreciation (depreciation) of investments(b)
Years Ended
December 31,
2018
2017
$
(9,920) $
-
(88)
$
(10,008) $
4,235
22
(195)
4,062
(a) As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and
accounted for as available for sale securities.
(b) Excludes net unrealized losses attributable to businesses held for sale.
The following table summarizes the unrealized gains and losses recognized during the reporting period on equity securities
still held at the reporting date:
Year Ended December 31, 2018
(in millions)
Net gains and losses recognized during the period on equity securities
Less: Net gains and losses recognized during the year on equity securities
sold during the year
Equities
Other
Invested
Assets
$
(184) $
342 $
56
23
Unrealized gains and losses recognized during the reporting period on equity
securities still held at the reporting date
$
(240) $
319 $
Total
158
79
79
AIG | 2018 Form 10-K 221
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
EVALUATING INVESTMENTS FOR OTHER-THAN-TEMPORARY IMPAIRMENTS
Fixed Maturity 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 other-than-temporary impairment has
occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized capital losses. 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 credit impairment has occurred, the amortized cost is written down to the estimated
recoverable value with a corresponding charge to realized capital losses. 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
related to a credit impairment is presented in unrealized appreciation (depreciation) of fixed maturity securities on which other-than-
temporary credit impairments were recognized (a separate component of accumulated other comprehensive income).
When estimating future cash flows for structured fixed maturity securities (e.g., RMBS, CMBS, CDO, ABS) management considers
historical performance of underlying assets and available market information as well as bond-specific structural considerations, such
as credit enhancement and priority of payment structure of the security. In addition, the process of estimating future cash flows
includes, but is not limited to, the following critical inputs, which vary by asset class:
• Current delinquency rates;
• Expected default rates and the timing of such defaults;
• Loss severity and the timing of any recovery; and
• Expected prepayment speeds.
For corporate, municipal and sovereign fixed maturity securities determined to be credit impaired, management considers the fair
value as the recoverable value when available information does not indicate that another value is more relevant or reliable. When
management identifies information that supports a recoverable value other than the fair value, the determination of a recoverable
value considers scenarios specific to the issuer and the security, and may be based upon estimates of outcomes of corporate
restructurings, political and macroeconomic factors, stability and financial strength of the issuer, the value of any secondary sources
of repayment and the disposition of assets.
We consider severe price declines in our assessment of potential credit impairments. We may also modify our model inputs when we
determine that price movements in certain sectors are indicative of factors not captured by the cash flow models.
In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities
that is not foreign exchange related, we prospectively accrete into earnings the difference between the new amortized cost and the
expected undiscounted recoverable value over the remaining expected holding period of the security.
222 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
Credit Impairments
The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized
in earnings for available for sale fixed maturity securities:
Years Ended December 31,
(in millions)
Balance, beginning of year
Increases due to:
Credit impairments on new securities subject to impairment losses
Additional credit impairments on previously impaired securities
Reductions due to:
Credit impaired securities fully disposed for which there was no
prior intent or requirement to sell
Accretion on securities previously impaired due to credit*
Divested businesses
Balance, end of year
2018
526 $
2017
1,098 $
2016
1,747
$
59
90
122
74
204
212
(145)
(530)
-
- $
(99)
(669)
-
526 $
(296)
(767)
(2)
1,098
$
* Represents both accretion recognized due to changes in cash flows expected to be collected over the remaining expected term of the credit impaired securities and the
accretion due to the passage of time.
Equity Securities
On January 1, 2018, AIG adopted the Financial Instruments Recognition and Measurement standard for equity securities. The new
standard requires equity securities to be measured at fair value with changes in fair value recognized in earnings each reporting
period. As a result of the new standard, equity securities with readily determinable fair values are no longer required to be evaluated
for other-than-temporary-impairment.
Prior to the adoption of the Recognition and Measurement standard on January 1, 2018, we evaluated our available for sale equity
securities for impairment by considering such securities as candidates for other-than-temporary impairment if they meet any of the
following criteria:
• The security has traded at a significant (25 percent or more) discount to cost for an extended period of time (nine consecutive
months or longer);
• A discrete credit event has occurred resulting in (i) the issuer defaulting on a material outstanding obligation; (ii) the issuer seeking
protection from creditors under the bankruptcy laws or any similar laws intended for court-supervised reorganization of insolvent
enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims
for cash or securities having a fair value substantially lower than the par value of their claims; or
• We have concluded that we may not realize a full recovery on our investment, regardless of the occurrence of one of the foregoing
events.
The determination that an equity security was other-than-temporarily impaired required the judgment of management and
consideration of the fundamental condition of the issuer, its near-term prospects and all the relevant facts and circumstances. In
addition to the above criteria, all equity securities that have been in a continuous decline in value below cost over 12 months are
impaired. We also considered circumstances of a rapid and severe market valuation decline (50 percent or more) discount to cost, in
which we could not reasonably assert that the impairment period would be temporary (severity losses).
Other Invested Assets
Our equity method investments in private equity funds, hedge funds and other entities are evaluated for impairment each reporting
period. Such evaluation considers market conditions, events and volatility that may impact the recoverability of the underlying
investments within these private equity funds and hedge funds and is based on the nature of the underlying investments and specific
inherent risks. Such risks may evolve based on the nature of the underlying investments.
Our investments in life settlements were monitored for impairment on a contract-by-contract basis quarterly. An investment in life
settlements was considered impaired if the undiscounted cash flows resulting from the expected proceeds would not be sufficient to
recover our estimated future carrying amount, which was the current carrying amount for the investment in life settlements plus
anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life settlements were
written down to their estimated fair value which was determined on a discounted cash flow basis, incorporating current market
mortality assumptions and market yields or by repricing to the anticipated sale price as appropriate.
AIG | 2018 Form 10-K 223
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
In general, fair value estimates for the investments in life settlements were calculated using cash flows based on medical underwriting
ratings of the policies from a third-party underwriter, applied to an industry mortality table. Our mortality assumptions were based on
an industry table as supplemented with proprietary data on the older age mortality of U.S. insured lives. Mortality improvement factors
were applied to these assumptions based on our view of future mortality improvements likely to apply to the U.S. insured lives
population. Our mortality assumptions coupled with the mortality improvement rates were used in our estimate of future net cash flows
from the investments in life settlements. We sold the remaining portion of our life settlements portfolio in 2017.
Our investments in aircraft assets and real estate are periodically evaluated for recoverability whenever changes in circumstances
indicate the carrying amount of an asset may be impaired. When impairment indicators are present, we compare expected investment
cash flows to carrying amount. When the expected cash flows are less than the carrying amount, the investments are written down to
fair value with a corresponding charge to earnings. We sold the remaining portion of our aircraft assets in 2018.
Purchased Credit Impaired (PCI) Securities
We purchase certain RMBS securities that have experienced deterioration in credit quality since their issuance. We determine
whether it is probable at acquisition that we will not collect all contractually required payments for these PCI securities, including both
principal and interest. At acquisition, the timing and amount of the undiscounted future cash flows expected to be received on each
PCI security is determined based on our best estimate using key assumptions, such as interest rates, default rates and prepayment
speeds. At acquisition, the difference between the undiscounted expected future cash flows of the PCI securities and the recorded
investment in the securities represents the initial accretable yield, which is accreted into Net investment income over their remaining
lives on an effective yield basis. Additionally, the difference between the contractually required payments on the PCI securities and the
undiscounted expected future cash flows represents the non-accretable difference at acquisition. The accretable yield and the non-
accretable difference will change over time, based on actual payments received and changes in estimates of undiscounted expected
future cash flows, which are discussed further below.
On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluated based on updates
to key assumptions. Declines in undiscounted expected future cash flows due to further credit deterioration as well as changes in the
expected timing of the cash flows can result in the recognition of an other-than-temporary impairment charge, as PCI securities are
subject to our policy for evaluating investments for other-than-temporary impairment. Changes to undiscounted expected future cash
flows due solely to the changes in the contractual benchmark interest rates on variable rate PCI securities will change the accretable
yield prospectively. Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes are
recognized prospectively as adjustments to the accretable yield.
The following tables present information on our PCI securities, which are included in bonds available for sale:
(in millions)
Contractually required payments (principal and interest)
Cash flows expected to be collected*
Recorded investment in acquired securities
* Represents undiscounted expected cash flows, including both principal and interest.
(in millions)
Outstanding principal balance
Amortized cost
Fair value
The following table presents activity for the accretable yield on PCI securities:
Years Ended December 31,
(in millions)
Balance, beginning of year
Newly purchased PCI securities
Disposals
Accretion
Effect of changes in interest rate indices
Net reclassification from (to) non-accretable difference, including effects of prepayments
Balance, end of year
224 AIG | 2018 Form 10-K
At Date of Acquisition
36,519
$
29,980
20,229
$
December 31,
2018
12,495 $
8,646
10,280
December 31,
2017
14,718
10,492
12,293
2018
7,501 $
33
(21)
(722)
207
212
7,210 $
2017
7,498
190
(18)
(797)
(34)
662
7,501
$
$
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
PLEDGED INVESTMENTS
Secured Financing and Similar Arrangements
We enter into secured financing transactions whereby certain securities are sold under agreements to repurchase (repurchase
agreements), in which we transfer securities in exchange for cash, with an agreement by us to repurchase the same or substantially
similar securities. Our secured financing transactions also include those that involve the transfer of securities to financial institutions in
exchange for cash (securities lending agreements). In all of these secured financing transactions, the securities transferred by us
(pledged collateral) may be sold or repledged by the counterparties. These agreements are recorded at their contracted amounts plus
accrued interest, other than those that are accounted for at fair value.
Pledged collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the
amounts borrowed during the life of the transactions. In the event of a decline in the fair value of the pledged collateral under these
secured financing transactions, we may be required to transfer cash or additional securities as pledged collateral under these
agreements. At the termination of the transactions, we and our counterparties are obligated to return the amounts borrowed and the
securities transferred, respectively.
The following table presents the fair value of securities pledged to counterparties under secured financing transactions,
including repurchase and securities lending agreements:
(in millions)
Fixed maturity securities available for sale
Other bond securities, at fair value
December 31, 2018
$
$
1,050 $
122 $
December 31, 2017
2,911
1,585
At December 31, 2018 and 2017, amounts borrowed under repurchase and securities lending agreements totaled $1.2 billion and
$4.5 billion, respectively.
The following table presents the fair value of securities pledged under our repurchase agreements by collateral type and by
remaining contractual maturity:
(in millions)
December 31, 2018
Bonds available for sale:
Non-U.S. governments
Corporate debt
Other bond securities:
U.S. government and government sponsored entities
Non-U.S. governments
Corporate debt
Total
December 31, 2017
Bonds available for sale:
Non-U.S. governments
Corporate debt
Other bond securities:
U.S. government and government sponsored entities
Non-U.S. governments
Corporate debt
Total
Remaining Contractual Maturity of the Agreements
Overnight
and
Continuous
up to 30
days
31 - 90
days
91 - 364
days
365 days
or greater
Total
$
$
$
$
25 $
51
35 $
55
11
-
17
104 $
-
3
38
131 $
- $
-
-
-
53
53 $
- $
-
7 $
13
19 $
35
44
-
-
44 $
-
11
1,065
-
-
387
407 $ 1,130 $
- $
-
-
-
-
- $
- $
-
-
-
-
- $
- $
-
-
-
-
- $
- $
-
-
-
-
- $
60
106
11
3
108
288
26
48
44
11
1,452
1,581
AIG | 2018 Form 10-K 225
The following table presents the fair value of securities pledged under our securities lending agreements by collateral type
and by remaining contractual maturity:
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
(in millions)
December 31, 2018
Bonds available for sale:
Obligations of states, municipalities and political
subdivisions
Non-U.S. governments
Corporate debt
Other bond securities:
Non-U.S. governments
Corporate debt
Total
December 31, 2017
Bonds available for sale:
Obligations of states, municipalities and political
subdivisions
Non-U.S. governments
Corporate debt
Other bond securities:
Non-U.S. governments
Corporate debt
Total
Remaining Contractual Maturity of the Agreements
Overnight
and
Continuous
up to 30
days
31 - 90
days
91 - 364
days
365 days
or greater
Total
$
$
$
- $
-
-
-
-
- $
- $
-
-
-
-
50 $
21
330
130 $
8
345
-
-
401 $
-
-
483 $
- $
-
-
-
-
- $
- $
-
-
-
-
- $
- $
- $
- $
- $
-
18
588
2,231
-
-
22
56
-
-
-
-
-
-
-
-
180
29
675
-
-
884
-
18
2,819
22
56
$
- $
588 $ 2,327 $
- $
- $
2,915
We also enter into agreements in which securities are purchased by us under agreements to resell (reverse repurchase agreements),
which are accounted for as secured financing transactions and reported as short-term investments or other assets, depending on their
terms. These agreements are recorded at their contracted resale amounts plus accrued interest, other than those that are accounted
for at fair value. In all reverse repurchase transactions, we take possession of or obtain a security interest in the related securities,
and we have the right to sell or repledge this collateral received.
The following table presents information on the fair value of securities pledged to us under reverse repurchase agreements:
(in millions)
Securities collateral pledged to us
Amount sold or repledged by us
December 31, 2018
$
426 $
106
December 31, 2017
2,227
46
At December 31, 2018 and December 31, 2017, amounts loaned under reverse repurchase agreements totaled $426 million and $2.2
billion, respectively.
We do not currently offset any secured financing transactions. All such transactions are collateralized and margined daily consistent
with market standards and subject to enforceable master netting arrangements with rights of set off.
Insurance – Statutory and Other Deposits
The total carrying value of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities or
other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance treaties, was $7.9 billion
and $4.9 billion at December 31, 2018 and 2017, respectively.
226 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 6. I n ves t me n ts
Other Pledges and Restrictions
Certain of our subsidiaries are members of Federal Home Loan Banks (FHLBs) and such membership requires the members to own
stock in these FHLBs. We owned an aggregate of $202 million and $93 million of stock in FHLBs at December 31, 2018 and 2017,
respectively. In addition, our subsidiaries have pledged securities available for sale and residential loans associated with borrowings
and funding agreements from FHLBs, with a fair value of $4.2 billion and $2.1 billion, respectively, at December 31, 2018 and
$2.7 billion and $471 million, respectively, at December 31, 2017.
Certain GIAs have provisions that require collateral to be posted or payments to be made by us upon a downgrade of our long-term
debt ratings. The actual amount of collateral required to be posted to the counterparties in the event of such downgrades, and the
aggregate amount of payments that we could be required to make, depend on market conditions, the fair value of outstanding
affected transactions and other factors prevailing at and after the time of the downgrade. The fair value of securities pledged as
collateral with respect to these obligations was approximately $1.6 billion and $2.0 billion at December 31, 2018 and 2017,
respectively. This collateral primarily consists of securities of the U.S. government and government- sponsored entities and generally
cannot be repledged or resold by the counterparties.
Investments held in escrow accounts or otherwise subject to restriction as to their use were $273 million and $255 million, comprised
of bonds available for sale and short term investments at December 31, 2018 and 2017, respectively.
7. Lending Activities
Mortgage and other loans receivable include commercial mortgages, residential mortgages, life insurance policy loans, commercial
loans, and other loans and notes receivable. Commercial mortgages, residential mortgages, commercial loans, and other loans and
notes receivable are carried at unpaid principal balances less allowance for credit losses and plus or minus adjustments for the
accretion or amortization of discount or premium. Interest income on such loans is accrued as earned.
Direct costs of originating commercial mortgages, commercial loans, and other loans and notes receivable, net of nonrefundable
points and fees, are deferred and included in the carrying amount of the related receivables. The amount deferred is amortized to
income as an adjustment to earnings using the interest method. Premiums and discounts on purchased residential mortgages are
also amortized to income as an adjustment to earnings using the interest method.
Life insurance policy loans are carried at unpaid principal balances. There is no allowance for policy loans because these loans serve
to reduce the death benefit paid when the death claim is made and the balances are effectively collateralized by the cash surrender
value of the policy.
The following table presents the composition of Mortgage and other loans receivable, net:
(in millions)
Commercial mortgages*
Residential mortgages
Life insurance policy loans
Commercial loans, other loans and notes receivable
Total mortgage and other loans receivable
Allowance for credit losses
Mortgage and other loans receivable, net
December 31, December 31,
2017
28,596
5,398
2,295
1,056
37,345
(322)
37,023
2018
32,882 $
6,532
2,147
1,971
43,532
(397)
43,135 $
$
$
* Commercial mortgages primarily represent loans for apartments, offices and retail properties, with exposures in New York and California representing the largest
geographic concentrations (aggregating approximately 22 percent and 11 percent, respectively, at December 31, 2018, and 23 percent and 12 percent, respectively, at
December 31, 2017).
Nonperforming loans are generally those loans where payment of contractual principal or interest is more than 90 days past due.
Nonperforming mortgages were not significant for all periods presented.
AIG | 2018 Form 10-K 227
CREDIT QUALITY OF COMMERCIAL MORTGAGES
The following table presents debt service coverage ratios and loan-to-value ratios for commercial mortgages:
ITEM 8 | Notes to Consolidated Financial Statements | 7. L e n di n g Ac t i vi t i es
(in millions)
December 31, 2018
Loan-to-Value Ratios(b)
Less than 65%
65% to 75%
76% to 80%
Greater than 80%
Debt Service Coverage Ratios(a)
<1.00X
1.00X - 1.20X
>1.20X
$
19,204 $
2,543 $
250 $
9,060
476
596
300
20
103
203
15
112
Total
21,997
9,563
511
811
Total commercial mortgages
$
29,336 $
2,966 $
580 $
32,882
December 31, 2017
Loan-to-Value Ratios(b)
Less than 65%
65% to 75%
76% to 80%
Greater than 80%
$
18,000 $
1,525 $
351 $
19,876
6,038
569
1,416
193
40
206
184
-
74
6,415
609
1,696
Total commercial mortgages
$
26,023 $
1,964 $
609 $
28,596
(a) The debt service coverage ratio compares a property’s net operating income to its debt service payments, including principal and interest. Our weighted average debt
service coverage ratio was 1.9X and 2.1X at December 31, 2018 and 2017, respectively.
(b) The loan-to-value ratio compares the current unpaid principal balance of the loan to the estimated fair value of the underlying property collateralizing the loan. Our
weighted average loan-to-value ratio was 58 percent and 57 percent at December 31, 2018, and 2017, respectively.
The following table presents the credit quality performance indicators for commercial mortgages:
Number
of
Class
Loans Apartments Offices
Retail
Industrial
Hotel Others
Percent
of
Total(c) Total $
762
$ 11,190 $ 9,774 $ 5,645 $
3,074 $
2,507 $
580 $ 32,770
100 %
2
-
-
-
-
-
96
-
-
-
-
-
-
-
-
16
-
-
-
-
-
112
-
-
-
-
-
764
$ 11,190 $ 9,870 $ 5,645 $
3,074 $
2,523 $
580 $ 32,882
100 %
(dollars in millions)
December 31, 2018
Credit Quality Performance
Indicator:
In good standing
Restructured(a)
90 days or less delinquent
>90 days delinquent or in
process of foreclosure
Total(b)
Allowance for credit losses:
Specific
General
Total allowance for credit losses
$
122 $
106 $
51 $
13 $
20 $
6 $
-
122
2
104
-
51
-
13
1
19
-
6
3
315
318
- %
1
1 %
December 31, 2017
Credit Quality Performance
Indicator:
In good standing
Restructured(a)
90 days or less delinquent
>90 days delinquent or in
process of foreclosure
Total(b)
Allowance for credit losses:
Specific
General
Total allowance for credit losses
228 AIG | 2018 Form 10-K
778
$
8,163 $ 8,585 $ 5,338 $
2,023 $
2,373 $ 1,960 $ 28,442
99 %
5
-
-
-
-
-
115
-
-
23
-
-
-
-
-
16
-
-
-
-
-
154
-
-
1
-
-
783
$
8,163 $ 8,700 $ 5,361 $
2,023 $
2,389 $ 1,960 $ 28,596
100 %
$
$
- $
3 $
1 $
72
94
37
- $
6
1 $
- $
15
18
72 $
97 $
38 $
6 $
16 $
18 $
5
242
247
- %
1
1 %
ITEM 8 | Notes to Consolidated Financial Statements | 7. L e n di n g Ac t i vi t i es
(a) Loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. For additional discussion of troubled debt
restructurings see below.
(b) Does not reflect allowance for credit losses.
(c) Our commercial mortgage loan portfolio is current as to payments of principal and interest, for both periods presented. There were no significant amounts of
nonperforming commercial mortgages (defined as those loans where payment of contractual principal or interest is more than 90 days past due) during any of the
periods presented.
METHODOLOGY USED TO ESTIMATE THE ALLOWANCE FOR CREDIT LOSSES
Mortgage and other loans receivable are considered impaired when collection of all amounts due under contractual terms is not
probable. Impairment is measured using either i) the present value of expected future cash flows discounted at the loan’s effective
interest rate, ii) the loan’s observable market price, if available, or iii) the fair value of the collateral if the loan is collateral dependent.
Impairment of commercial mortgages is typically determined using the fair value of collateral while impairment of other loans is
typically determined using the present value of cash flows or the loan’s observable market price. An allowance is typically established
for the difference between the impaired value of the loan and its current carrying amount. Additional allowance amounts are
established for incurred but not specifically identified impairments, based on statistical models primarily driven by past due status,
debt service coverage, loan-to-value ratio, property type and location, loan term, profile of the borrower and of the major property
tenants, and loan seasoning. When all or a portion of a loan is deemed uncollectible, the uncollectible portion of the carrying amount
of the loan is charged off against the allowance.
Interest income is not accrued when payment of contractual principal and interest is not expected. Any cash received on impaired
loans is generally recorded as a reduction of the current carrying amount of the loan. Accrual of interest income is generally resumed
when delinquent contractual principal and interest is repaid or when a portion of the delinquent contractual payments are made and
the ongoing required contractual payments have been made for an appropriate period.
A significant majority of commercial mortgages in the portfolio are non-recourse loans and, accordingly, the only guarantees are for
specific items that are exceptions to the non-recourse provisions. It is therefore extremely rare for us to have cause to enforce the
provisions of a guarantee on a commercial real estate or mortgage loan.
The following table presents a rollforward of the changes in the allowance for losses on Mortgage and other loans
receivable:
2018
2017
2016
Commercial
Other
Mortgages
Loans
$
247 $
75 $
Commercial
Mortgages
Other
Loans
Commercial
Mortgages
Total
Other
Loans
Total
194 $
103
$
297 $
171 $
137 $
308
(22)
(3)
(25)
(13)
(2)
(15)
Total
322 $
(19)
(17)
-
(17)
88
-
*
318
(2)
1
(1)
5
-
1
(18)
93
-
(22)
75
-
397 $
-
*
247
1
(2)
(26)
-
1
(24)
49
-
11
(2)
25
-
*
194
-
(2)
(32)
-
11
(4)
(7)
-
Allowance, end of year
$
$
79 $
$
75
$
322 $
$
103 $
297
* Of the total allowance at the end of the year, $3 million, $5 million and $11 million relates to individually assessed credit losses on $54 million, $82 million and
$280 million of commercial mortgages as of December 31, 2018, 2017 and 2016, respectively.
TROUBLED DEBT RESTRUCTURINGS
We modify loans to optimize their returns and improve their collectability, among other things. When we undertake such a modification
with a borrower that is experiencing financial difficulty and the modification involves us granting a concession to the troubled debtor,
the modification is a troubled debt restructuring (TDR). We assess whether a borrower is experiencing financial difficulty based on a
variety of factors, including the borrower’s current default on any of its outstanding debt, the probability of a default on any of its debt
in the foreseeable future without the modification, the insufficiency of the borrower’s forecasted cash flows to service any of its
outstanding debt (including both principal and interest), and the borrower’s inability to access alternative third-party financing at an
interest rate that would be reflective of current market conditions for a non-troubled debtor. Concessions granted may include
extended maturity dates, interest rate changes, principal or interest forgiveness, payment deferrals and easing of loan covenants.
Loans that had been modified in TDRs during the year ended December 31, 2018 have been fully paid off. During the year ended
December 31, 2017, loans with a carrying value of $237 million were modified in troubled debt restructurings.
AIG | 2018 Form 10-K 229
Years Ended December 31,
(in millions)
Allowance, beginning of year
Loans charged off
Recoveries of loans previously
charged off
Net charge-offs
Provision for loan losses
Other
ITEM 8 | Notes to Consolidated Financial Statements | 8. R ei ns ur a nce
8. Reinsurance
In the ordinary course of business, our insurance companies may use both treaty and facultative reinsurance to minimize their net
loss exposure to any single catastrophic loss event or to an accumulation of losses from a number of smaller events or to provide
greater diversification of our businesses. In addition, our general insurance subsidiaries assume reinsurance from other insurance
companies. We determine the portion of the incurred but not reported (IBNR) loss that will be recoverable under our reinsurance
contracts by reference to the terms of the reinsurance protection purchased. This determination is necessarily based on the estimate
of IBNR and accordingly, is subject to the same uncertainties as the estimate of IBNR. Reinsurance assets include the balances due
from reinsurance and insurance companies under the terms of our reinsurance agreements for paid and unpaid losses and loss
adjustment expenses incurred, ceded unearned premiums and ceded future policy benefits for life and accident and health insurance
contracts and benefits paid and unpaid. Amounts related to paid and unpaid losses and benefits and loss expenses with respect to
these reinsurance agreements are substantially collateralized. We remain liable to the extent that our reinsurers do not meet their
obligation under the reinsurance contracts, and as such, we regularly evaluate the financial condition of our reinsurers and monitor
concentration of our credit risk. The estimation of the allowance for doubtful accounts requires judgment for which key inputs typically
include historical trends regarding uncollectible balances, disputes and credit events as well as specific reviews of balances in dispute
or subject to credit impairment. The allowance for doubtful accounts on reinsurance assets was $140 million and $187 million at
December 31, 2018 and 2017, respectively. Changes in the allowance for doubtful accounts on reinsurance assets are reflected in
Policyholder benefits and losses incurred within the Consolidated Statements of Income.
The following table provides supplemental information for loss and benefit reserves, gross and net of ceded reinsurance:
At December 31,
(in millions)
Liability for unpaid losses and loss adjustment expenses
Future policy benefits for life and accident and health insurance contracts
Reserve for unearned premiums
Reinsurance assets(a)
2018
2017
$
As
Net of
Reported Reinsurance
(51,949)
(83,639) $
(43,936)
(44,935)
(19,248)
(16,300)
35,637
$
As
Net of
Reported Reinsurance
(51,685)
(78,393) $
(44,457)
(45,432)
(19,030)
(15,890)
30,823
(a) Represents gross reinsurance assets, excluding allowances and reinsurance recoverable on paid losses.
SHORT-DURATION REINSURANCE
Short-duration reinsurance is effected under reinsurance treaties and by negotiation on individual risks. Certain of these reinsurance
arrangements consist of excess of loss contracts that protect us against losses above stipulated amounts. Ceded premiums are
considered prepaid reinsurance premiums and are recognized as a reduction of premiums earned over the contract period in
proportion to the protection received. Amounts recoverable from reinsurers on short-duration contracts are estimated in a manner
consistent with the claims liabilities associated with the reinsurance and presented as a component of Reinsurance assets.
Reinsurance premiums for assumed business are estimated based on information received from brokers, ceding companies and
reinsurers. Any subsequent differences arising on such estimates are recorded in the periods in which they are determined. Assumed
reinsurance premiums are earned primarily on a pro-rata basis over the terms of the reinsurance contracts and the portion of
premiums relating to the unexpired terms of coverage is included in the reserve for unearned premiums. Reinsurance premiums for
assumed business are estimated based on information received from brokers, ceding companies and reinsureds. Any subsequent
differences arising on such estimates are recorded in the periods in which they are determined. For both ceded and assumed
reinsurance, risk transfer requirements must be met for reinsurance accounting to apply. If risk transfer requirements are not met, the
contract is accounted for as a deposit, resulting in the recognition of cash flows under the contract through a deposit asset or liability
and not as revenue or expense. To meet risk transfer requirements, a reinsurance contract must include both insurance risk,
consisting of both underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. Similar risk
transfer criteria are used to determine whether directly written insurance contracts should be accounted for as insurance or as a
deposit.
230 AIG | 2018 Form 10-K
The following table presents short-duration insurance premiums written and earned:
ITEM 8 | Notes to Consolidated Financial Statements | 8. R ei ns ur a nce
(in millions)
Premiums written:
Direct
Assumed
Ceded
Net
Premiums earned:
Direct
Assumed
Ceded
Net
Years Ended December 31,
2018
2017
2016
$
30,335 $
4,026
(7,755)
26,606 $
31,415 $
4,593
(8,163)
27,845 $
$
$
$
30,205 $
3,084
(7,533)
25,756 $
30,904 $
3,373
(7,902)
26,375 $
33,970
2,824
(7,561)
29,233
34,869
2,962
(7,284)
30,547
For the years ended December 31, 2018, 2017 and 2016, reinsurance recoveries, which reduced losses and loss adjustment
expenses incurred, amounted to $9.8 billion, $1.5 billion and $2.1 billion, respectively.
Retroactive reinsurance agreements are reinsurance agreements under which our reinsurer agrees to reimburse us as a result of past
insurable events. For these agreements, the excess of the amounts ultimately collectible under the agreement over the consideration
paid is recognized as a deferred gain liability and amortized into income over the settlement period of the ceded reserves. The
amount of the deferral is recalculated each period based on loss payments and updated estimates. If the consideration paid exceeds
the ultimate losses collectible under the agreement, the net loss on the agreement is recognized in income immediately. Ceded loss
reserves under retroactive agreements were $13.8 billion and $13.4 billion, and the deferred gain liability was $1.8 billion and
$1.6 billion, as of December 31, 2018 and 2017, respectively. The effect on income from amortization of the deferred gain was
$394 million, $316 million and $30 million for the years ended December 31, 2018, 2017, and 2016, respectively.
In the first quarter of 2017, we entered into an adverse development reinsurance agreement with NICO, under which we transferred to
NICO 80 percent of the reserve risk on substantially all of our U.S. Commercial long-tail exposures for accident years 2015 and prior.
Under this agreement, we ceded to NICO 80 percent of the losses on subject business paid on or after January 1, 2016 in excess of
$25 billion of net paid losses, up to an aggregate limit of $25 billion. We account for this transaction as retroactive reinsurance. This
transaction resulted in a gain, which under U.S. GAAP retroactive reinsurance accounting is deferred and amortized into income over
the settlement period. NICO created a collateral trust account as security for their claim payment obligations to us, into which they
deposited the consideration paid under the agreement, and Berkshire Hathaway Inc. has provided a parental guarantee to secure
NICO’s obligations under the agreement.
LONG-DURATION REINSURANCE
Long-duration reinsurance is effected principally under yearly renewable term treaties. The premiums with respect to these treaties
are earned over the contract period in proportion to the protection provided. Amounts recoverable from reinsurers on long-duration
contracts are estimated in a manner consistent with the assumptions used for the underlying policy benefits and are presented as a
component of Reinsurance assets.
The following table presents premiums for our long-duration life insurance and annuity operations:
Years Ended December 31,
(in millions)
Gross premiums
Ceded premiums
Net
2018
3,893 $
(850)
3,043 $
2017
5,338 $
(809)
4,529 $
2016
4,732
(789)
3,943
$
$
Long-duration reinsurance recoveries, which reduced Policyholder benefits and losses incurred, was $778 million for the year ended
December 31, 2018 and approximately $1.0 billion for both the years ended December 31, 2017 and 2016.
The following table presents long-duration insurance in-force ceded to other insurance companies:
At December 31,
(in millions)
Long-duration insurance in force ceded
2018
228,846 $
2017
202,402 $
2016
174,363
$
AIG | 2018 Form 10-K 231
ITEM 8 | Notes to Consolidated Financial Statements | 8. R ei ns ur a nce
Long-duration insurance in-force assumed as a percentage of gross long-duration insurance in-force was 0.03 percent at December
31, 2018, 2017 and 2016; and premiums assumed represented 10 percent, 5 percent and 3 percent of gross premiums for the years
ended December 31, 2018, 2017 and 2016, respectively.
The U.S. Life and Retirement companies manage the capital impact of their statutory reserve requirements, including those resulting
from the NAIC Model Regulation “Valuation of Life Insurance Policies” (Regulation XXX) and NAIC Actuarial Guideline 38 (Guideline
AXXX), through unaffiliated and affiliated reinsurance transactions. Effective July 1, 2016, one of the U.S. Life and Retirement
companies entered into an agreement to cede approximately $5 billion of statutory reserves for certain whole life and universal life
policies to an unaffiliated reinsurer. Effective December 31, 2016, the same life insurance subsidiary recaptured term and universal
life reserves subject to Regulation XXX and Guideline AXXX, previously ceded to an affiliate, and ceded approximately $14 billion of
such statutory reserves to an unaffiliated reinsurer under an amendment to the July 1, 2016 agreement. Under GAAP, these
unaffiliated reinsurance transactions use deposit accounting with a reinsurance risk charge recorded in income, whereas such
affiliated transactions are eliminated in consolidation. Under one affiliated reinsurance arrangement, one of the U.S. Life and
Retirement companies obtains letters of credit to support statutory recognition of the ceded reinsurance. As of December 31, 2018,
this subsidiary had two bilateral letters of credit totaling $450 million, which were issued on February 7, 2014 and expire on February
7, 2022. The letters of credit are subject to reimbursement by AIG Parent in the event of a drawdown.
For additional information on the use of affiliated reinsurance for Regulation XXX and Guideline AXXX reserves see Note 19.
REINSURANCE SECURITY
Our third-party reinsurance arrangements do not relieve us from our direct obligations to our beneficiaries. Thus, a credit exposure
exists with respect to both short-duration and long-duration reinsurance ceded to the extent that any reinsurer fails to meet the
obligations assumed under any reinsurance agreement. We hold substantial collateral as security under related reinsurance
agreements in the form of funds, securities, and/or letters of credit. A provision has been recorded for estimated unrecoverable
reinsurance. We believe that no exposure to a single reinsurer represents an inappropriate concentration of credit risk to AIG. Gross
reinsurance assets due from reinsurers exceeding 5 percent of our total reinsurance assets were approximately $18.9 billion and
$18.0 billion at December 31, 2018 and 2017, respectively, of which approximately $3.7 billion and $7.6 billion at December 31, 2018
and 2017, respectively, was not secured by collateral.
9. Deferred Policy Acquisition Costs
Deferred policy acquisition costs (DAC) represent those costs that are incremental and directly related to the successful acquisition of
new or renewal of existing insurance contracts. We defer incremental costs that result directly from, and are essential to, the
acquisition or renewal of an insurance contract. Such deferred policy acquisition costs generally include agent or broker commissions
and bonuses, premium taxes, and medical and inspection fees that would not have been incurred if the insurance contract had not
been acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable. We partially defer costs, including certain
commissions, when we do not believe that the entire cost is directly related to the acquisition or renewal of insurance contracts.
We also defer a portion of employee total compensation and payroll-related fringe benefits directly related to time spent performing
specific acquisition or renewal activities, including costs associated with the time spent on underwriting, policy issuance and
processing, and sales force contract selling. The amounts deferred are derived based on successful efforts for each distribution
channel and/or cost center from which the cost originates.
Short-duration insurance contracts: Policy acquisition costs are deferred and amortized over the period in which the related
premiums written are earned, generally 12 months. DAC is grouped consistent with the manner in which the insurance contracts are
acquired, serviced and measured for profitability and is reviewed for recoverability based on the profitability of the underlying
insurance contracts. Investment income is anticipated in assessing the recoverability of DAC. We assess the recoverability of DAC on
an annual basis or more frequently if circumstances indicate an impairment may have occurred. This assessment is performed by
comparing recorded net unearned premiums and anticipated investment income on in-force business to the sum of expected losses
and loss adjustment expenses incurred, unamortized DAC and maintenance costs. If the sum of these costs exceeds the amount of
recorded net unearned premiums and anticipated investment income, the excess is recognized as an offset against the asset
established for DAC. This offset is referred to as a premium deficiency charge. Increases in expected losses and loss adjustment
expenses incurred can have a significant impact on the likelihood and amount of a premium deficiency charge.
232 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 9. D ef er r e d P oli c y Ac q u i si ti o n Co s ts
Long-duration insurance contracts: Policy acquisition costs for participating life, traditional life and accident and health insurance
products are generally deferred and amortized, with interest, over the premium paying period. The assumptions used to calculate the
benefit liabilities and DAC for these traditional products are set when a policy is issued and do not change with changes in actual
experience, unless a loss recognition event occurs. These “locked-in” assumptions include mortality, morbidity, persistency,
maintenance expenses and investment returns, and include margins for adverse deviation to reflect uncertainty given that actual
experience might deviate from these assumptions. A loss recognition event occurs when there is a shortfall between the carrying
amount of future policy benefit liabilities, net of DAC, and what the future policy benefit liabilities, net of DAC, would be when applying
updated current assumptions. When we determine a loss recognition event has occurred, we first reduce any DAC related to that
block of business through amortization of acquisition expense, and after DAC is depleted, we record additional liabilities through a
charge to Policyholder benefits and losses incurred. Groupings for loss recognition testing are consistent with our manner of
acquiring, servicing and measuring the profitability of the business and applied by product groupings. We perform separate loss
recognition tests for traditional life products, payout annuities and long-term care products. Once loss recognition has been recorded
for a block of business, the old assumption set is replaced and the assumption set used for the loss recognition would then be subject
to the lock-in principle.
Investment-oriented contracts: Certain policy acquisition costs and policy issuance costs related to universal life and investment-
type products (collectively, investment-oriented products) are deferred and amortized, with interest, in relation to the incidence of
estimated gross profits to be realized over the estimated lives of the contracts. Estimated gross profits include net investment income
and spreads, net realized capital gains and losses, fees, surrender charges, expenses, and mortality gains and losses. In each
reporting period, current period amortization expense is adjusted to reflect actual gross profits. If estimated gross profits change
significantly, DAC is recalculated using the new assumptions, and any resulting adjustment is included in income. If the new
assumptions indicate that future estimated gross profits are higher than previously estimated, DAC will be increased resulting in a
decrease in amortization expense and increase in income in the current period; if future estimated gross profits are lower than
previously estimated, DAC will be decreased resulting in an increase in amortization expense and decrease in income in the current
period. Updating such assumptions may result in acceleration of amortization in some products and deceleration of amortization in
other products. DAC is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for
profitability and is reviewed for recoverability based on the current and projected future profitability of the underlying insurance
contracts.
To estimate future estimated gross profits for variable annuity products, a long-term annual asset growth assumption is applied to
determine the future growth in assets and related asset-based fees. In determining the asset growth rate, the effect of short-term
fluctuations in the equity markets is partially mitigated through the use of a “reversion to the mean” methodology whereby short-term
asset growth above or below long-term annual rate assumptions impacts the growth assumption applied to the five-year period
subsequent to the current balance sheet date. The reversion to the mean methodology allows us to maintain our long-term growth
assumptions, while also giving consideration to the effect of actual investment performance. When actual performance significantly
deviates from the annual long-term growth assumption, as evidenced by growth assumptions in the five-year reversion to the mean
period falling below a certain rate (floor) or above a certain rate (cap) for a sustained period, judgment may be applied to revise or
“unlock” the growth rate assumptions to be used for both the five-year reversion to the mean period as well as the long-term annual
growth assumption applied to subsequent periods.
Shadow DAC and Shadow Loss Recognition: DAC related to investment-oriented products is also adjusted to reflect the effect of
unrealized gains or losses on fixed maturity securities available for sale and prior to 2018, equity securities at fair value on estimated
gross profits, with related changes recognized through Other comprehensive income (shadow DAC). The adjustment is made at each
balance sheet date, as if the securities had been sold at their stated aggregate fair value and the proceeds reinvested at current
yields. Similarly, for long-duration traditional insurance contracts, if the assets supporting the liabilities are in a net unrealized gain
position at the balance sheet date, loss recognition testing assumptions are updated to exclude such gains from future cash flows by
reflecting the impact of reinvestment rates on future yields. If a future loss is anticipated under this basis, any additional shortfall
indicated by loss recognition tests is recognized as a reduction in accumulated other comprehensive income (shadow loss
recognition). Similar to other loss recognition on long-duration insurance contracts, such shortfall is first reflected as a reduction in
DAC and secondly as an increase in liabilities for future policy benefits. The change in these adjustments, net of tax, is included with
the change in net unrealized appreciation of investments that is credited or charged directly to Other comprehensive income.
AIG | 2018 Form 10-K 233
ITEM 8 | Notes to Consolidated Financial Statements | 9. D ef er r e d P oli c y Ac q u i si ti o n Co s ts
Internal Replacements of Long-duration and Investment-oriented Products: For some products, policyholders can elect to
modify product benefits, features, rights or coverages by exchanging a contract for a new contract or by amendment, endorsement, or
rider to a contract, or by the election of a feature or coverage within a contract. These transactions are known as internal
replacements. If the modification does not substantially change the contract, we do not change the accounting and amortization of
existing DAC and related actuarial balances. If an internal replacement represents a substantial change, the original contract is
considered to be extinguished and any related DAC or other policy balances are charged or credited to income, and any new
deferrable costs associated with the replacement contract are deferred.
Value of Business Acquired (VOBA) is determined at the time of acquisition and is reported in the Consolidated Balance Sheets with
DAC. This value is based on the present value of future pre-tax profits discounted at yields applicable at the time of purchase. For
participating life, traditional life and accident and health insurance products, VOBA is amortized over the life of the business in a
manner similar to that for DAC based on the assumptions at purchase. For investment-oriented products, VOBA is amortized in
relation to estimated gross profits and adjusted for the effect of unrealized gains or losses on fixed maturity securities available for
sale and prior to 2018, equity securities at fair value in a manner similar to DAC.
The following table presents a rollforward of DAC and VOBA:
Years Ended December 31,
(in millions)
Balance, beginning of year
Acquisitions
Dispositions
Acquisition costs deferred
Amortization expense
Change related to unrealized appreciation (depreciation) of investments
Other, including foreign exchange
Reclassified to Assets held for sale
Balance, end of year(a)
Supplemental Information:
VOBA amortization expense included in DAC amortization
VOBA, end of year included in DAC balance(b)
$
$
$
2018
10,994 $
298
-
5,832
(5,386)
1,063
(107)
-
12,694 $
2017
11,042 $
-
(35)
4,820
(4,288)
(505)
(40)
-
10,994 $
2016
11,115
-
(110)
5,216
(4,521)
(259)
72
(471)
11,042
243 $
438
20 $
381
40
393
(a) Net of reductions in DAC of $1.0 billion, $1.3 billion, and $842 million at December 31, 2018, 2017 and 2016, respectively, related to the effect of net unrealized gains
and losses on available for sale securities (shadow DAC).
(b) Includes $101 million of VOBA from the acquisition of Validus, the majority of which will be amortized within the next 12 to 18 months.
The percentage of the unamortized balance of VOBA at December 31, 2018 expected to be amortized in 2019 through 2023 by year
is: 8.6 percent, 7.7 percent, 6.7 percent, 6.3 percent and 6.0 percent, respectively, with 64.8 percent being amortized after five years.
These projections are based on current estimates for investment income and spreads, persistency, mortality and morbidity
assumptions.
DAC, VOBA and SIA for insurance-oriented and investment-oriented products are reviewed for recoverability, which involves
estimating the future profitability of current business. This review involves significant management judgment. If actual profitability is
substantially lower than estimated, AIG’s DAC, VOBA and SIA may be subject to an impairment charge and AIG’s results of
operations could be significantly affected in future periods.
234 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 10 . V a ria bl e I n te re s t E n ti ti es
10. Variable Interest Entities
A variable interest entity (VIE) is a legal entity that does not have sufficient equity at risk to finance its activities without additional
subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the
entity’s operations through voting rights or do not substantively participate in the gains and losses of the entity. Consolidation of a VIE
by its primary beneficiary is not based on majority voting interest, but is based on other criteria discussed below.
We enter into various arrangements with VIEs in the normal course of business and consolidate the VIEs when we determine we are
the primary beneficiary. This analysis includes a review of the VIE’s capital structure, related contractual relationships and terms,
nature of the VIE’s operations and purpose, nature of the VIE’s interests issued and our involvement with the entity. When assessing
the need to consolidate a VIE, we evaluate the design of the VIE as well as the related risks the entity was designed to expose the
variable interest holders to.
The primary beneficiary is the entity that has both (1) the power to direct the activities of the VIE that most significantly affect the
entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits that could be potentially
significant to the VIE. While also considering these factors, the consolidation conclusion depends on the breadth of our decision-
making ability and our ability to influence activities that significantly affect the economic performance of the VIE.
BALANCE SHEET CLASSIFICATION AND EXPOSURE TO LOSS
The following table presents the total assets and total liabilities associated with our variable interests in consolidated VIEs,
as classified in the Consolidated Balance Sheets:
(in millions)
December 31, 2018
Assets:
Bonds available for sale
Other bond securities
Mortgage and other loans receivable
Other invested assets
Other(a)
Total assets(b)
Liabilities:
Long-term debt
Other(c)
Total liabilities
December 31, 2017
Assets:
Bonds available for sale
Other bond securities
Mortgage and other loans receivable
Other invested assets
Other(a)
Total assets(b)
Liabilities:
Long-term debt
Other(c)
Total liabilities
Real Estate and
Investment
Entities(d)
Securitization
Vehicles(e)
Affordable
Housing
Partnerships
Other
Total
$
$
$
$
$
$
$
$
- $
-
-
5,212
580
5,792 $
2,577 $
227
2,804 $
- $
-
-
1,365
302
1,667 $
680 $
144
824 $
7,662 $
3,923
3,693
-
1,581
- $
-
-
3,142
394
- $
2
-
24
70
7,662
3,925
3,693
8,378
2,625
16,859 $
3,536 $
96 $
26,283
3,154 $
165
3,319 $
9,632 $
4,518
2,290
206
1,481
1,834 $
159
1,993 $
- $
-
-
3,087
350
4 $
24
28 $
- $
3
-
25
85
7,569
575
8,144
9,632
4,521
2,290
4,683
2,218
18,127 $
3,437 $
113 $
23,344
1,624 $
244
1,868 $
1,825 $
181
2,006 $
5 $
26
31 $
4,134
595
4,729
(a) Comprised primarily of Short-term investments and Other assets at December 31, 2018 and 2017.
(b) The assets of each VIE can be used only to settle specific obligations of that VIE.
(c) Comprised primarily of Other liabilities at December 31, 2018 and 2017.
(d) At December 31, 2018 and 2017, off-balance sheet exposure primarily consisting of commitments to real estate and investment entities was $1.4 billion and $86 million,
respectively.
AIG | 2018 Form 10-K 235
ITEM 8 | Notes to Consolidated Financial Statements | 10 . V a ria bl e I n te re s t E n ti ti es
(e) At December 31, 2018 and 2017, $16.0 billion and $17.6 billion, respectively, of the total assets of consolidated securitization vehicles were owed to AIG Parent or its
subsidiaries.
We calculate our maximum exposure to loss to be (i) the amount invested in the debt or equity of the VIE, (ii) the notional amount of
VIE assets or liabilities where we have also provided credit protection to the VIE with the VIE as the referenced obligation, and
(iii) other commitments and guarantees to the VIE. Interest holders in VIEs sponsored by us generally have recourse only to the
assets and cash flows of the VIEs and do not have recourse to us, except in limited circumstances when we have provided a
guarantee to the VIE’s interest holders.
The following table presents total assets of unconsolidated VIEs in which we hold a variable interest, as well as our
maximum exposure to loss associated with these VIEs:
(in millions)
December 31, 2018
Real estate and investment entities(a)
Affordable housing partnerships
Other
Total
December 31, 2017
Real estate and investment entities(a)
Affordable housing partnerships
Other
Total
Maximum Exposure to Loss
Total VIE
Assets
On-Balance
Sheet(b)
Off-Balance
Sheet
$ 309,598
4,116
2,813
$ 316,527
$ 380,030
4,468
2,703
$ 387,201
$
$
$
$
6,820
607
284
7,711
9,253
725
254
10,232
$
$
$
$
2,501
-
1,222 (c)
3,723
2,043
-
1,205 (c)
3,248
$
$
$
$
Total
9,321
607
1,506
11,434
11,296
725
1,459
13,480
(a) Comprised primarily of hedge funds and private equity funds.
(b) At December 31, 2018 and 2017, $7.4 billion and $9.8 billion, respectively, of our total unconsolidated VIE assets were recorded as Other invested assets.
(c) These amounts represent our estimate of the maximum exposure to loss under certain insurance policies issued to VIEs if a hypothetical loss occurred to the extent of
the full amount of the insured value. Our insurance policies cover defined risks and our estimate of liability is included in our insurance reserves on the balance sheet.
REAL ESTATE AND INVESTMENT ENTITIES
Through our insurance operations and AIG Global Real Estate, we are an investor in various real estate investment entities, some of
which are VIEs. These investments are typically with unaffiliated third-party developers via a partnership or limited liability company
structure. The VIEs’ activities consist of the development or redevelopment of commercial, industrial and residential real estate. Our
involvement varies from being a passive equity investor or finance provider to actively managing the activities of the VIEs.
Our insurance operations participate as passive investors in the equity issued by certain third-party-managed hedge and private
equity funds that are VIEs. Our insurance operations typically are not involved in the design or establishment of these VIEs, nor do
they actively participate in the management of the VIEs.
SECURITIZATION VEHICLES
We created certain VIEs that hold investments, primarily in investment-grade debt securities and loans, and issued beneficial interests
in these investments. The majority of these beneficial interests are owned by our insurance operations and we maintain the power to
direct the activities of the VIEs that most significantly impact their economic performance and bear the obligation to absorb losses or
receive benefits from the entities that could potentially be significant to the entities. Accordingly, we consolidate these entities and
those beneficial interests issued to third-parties are reported as Long-term debt. Total assets of consolidated securitization vehicles
are $16.9 billion, of which $16.0 billion represents amounts owed to Parent or its subsidiaries.
236 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 10 . V a ria bl e I n te re s t E n ti ti es
AFFORDABLE HOUSING PARTNERSHIPS
SunAmerica Affordable Housing Partners, Inc. (SAAHP) organized and invested in limited partnerships that develop and operate
affordable housing qualifying for federal, state, and historic tax credits, in addition to a few market rate properties across the United
States. The operating partnerships are VIEs, whose debt is generally non-recourse in nature, and the general partners of which are
mostly unaffiliated third-party developers. We account for our investments in operating partnerships using the equity method of
accounting, unless they are required to be consolidated. We consolidate an operating partnership if the general partner is an affiliated
entity or we otherwise have the power to direct activities that most significantly impact the entities’ economic performance. The pre-tax
income of SAAHP is reported as a component of the Life and Retirement segment.
RMBS, CMBS, OTHER ABS AND CDOS
Primarily through our insurance operations, we are a passive investor in RMBS, CMBS, other ABS and CDOs, the majority of which
are issued by domestic special purpose entities. We generally do not sponsor or transfer assets to, or act as the servicer to these
asset-backed structures, and were not involved in the design of these entities.
Our maximum exposure in these types of structures is limited to our investment in securities issued by these entities. Based on the
nature of our investments and our passive involvement in these types of structures, we have determined that we are not the primary
beneficiary of these entities. We have not included these entities in the above tables; however, the fair values of our investments in
these structures are reported in Notes 5 and 6 herein.
11. Derivatives and Hedge Accounting
We use derivatives and other financial instruments as part of our financial risk management programs and as part of our investment
operations. Interest rate derivatives (such as interest rate swaps) are used to manage interest rate risk associated with embedded
derivatives contained in insurance contract liabilities, fixed maturity securities, outstanding medium- and long-term notes as well as
other interest rate sensitive assets and liabilities. Foreign exchange derivatives (principally foreign exchange forwards and options)
are used to economically mitigate risk associated with non-U.S. dollar denominated debt, net capital exposures, and foreign currency
transactions. Equity derivatives are used to mitigate financial risk embedded in certain insurance liabilities. We use credit derivatives
to manage our credit exposures. The derivatives are effective economic hedges of the exposures that they are meant to offset. In
addition to hedging activities, we also enter into derivative instruments with respect to investment operations, which may include,
among other things, CDSs and purchases of investments with embedded derivatives, such as equity-linked notes and convertible
bonds.
Interest rate, currency, equity and commodity swaps, credit contracts, swaptions, options and forward transactions are accounted for
as derivatives, recorded on a trade-date basis and carried at fair value. Unrealized gains and losses are reflected in income, when
appropriate. Aggregate asset or liability positions are netted on the Consolidated Balance Sheets only to the extent permitted by
qualifying master netting arrangements in place with each respective counterparty. Cash collateral posted with counterparties in
conjunction with transactions supported by qualifying master netting arrangements is reported as a reduction of the corresponding net
derivative liability, while cash collateral received in conjunction with transactions supported by qualifying master netting arrangements
is reported as a reduction of the corresponding net derivative asset.
Derivatives, with the exception of embedded derivatives, are reported at fair value in the Consolidated Balance Sheets in Other
assets and Other liabilities. Embedded derivatives are generally presented with the host contract in the Consolidated Balance Sheets.
A bifurcated embedded derivative is measured at fair value and accounted for in the same manner as a free standing derivative
contract. The corresponding host contract is accounted for according to the accounting guidance applicable for that instrument.
For additional information on embedded derivatives see Notes 5 and 14 herein.
AIG | 2018 Form 10-K 237
ITEM 8 | Notes to Consolidated Financial Statements | 1 1. D er i vat i ve s a nd H ed g e Ac c o u n ti n g
The following table presents the notional amounts of our derivatives and the fair value of derivative assets and liabilities in
the Consolidated Balance Sheets:
December 31, 2018
December 31, 2017
Gross Derivative Assets Gross Derivative Liabilities Gross Derivative Assets
Gross Derivative Liabilities
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
$
10 $
-
$
866 $
6,357
-
363
-
2,536
-
19
147
-
$
- $
-
$
838 $
2,823
-
173
-
4,783
159
42,821
11,134
17,807
8
39,070
2,890
27,329
2,004
801
398
1
15
5,434
2,399
1,406
58
711
15
236
6
37,751
6,305
19,975
4
39,829
2,171
658
522
1
20
26,461
11,093
1,130
1,365
59
15
350
19
2,185
895
2
277
5
$ 117,207 $
4,468
$
40,028 $
3,138
$ 106,687 $
3,545
$
45,888 $
3,748
(1,713)
(1,840)
(1,713)
(187)
(1,464)
(1,159)
(1,464)
(1,249)
(in millions)
Derivatives designated as
hedging instruments:(a)
Interest rate contracts
Foreign exchange contracts
Equity contracts
Derivatives not designated
as hedging instruments:(a)
Interest rate contracts
Foreign exchange contracts
Equity contracts
Credit contracts(b)
Other contracts(c)
Total derivatives, gross
Counterparty netting(d)
Cash collateral(e)
Total derivatives on
consolidated balance sheets(f)
$
915
$
1,238
$
922
$
1,035
(a) Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.
(b) As of December 31, 2018 and 2017, included CDSs on super senior multi-sector CDOs with a net notional amount of $592 million and $685 million (fair value liability of
$224 million and $254 million), respectively. The net notional amount represents the maximum exposure to loss on the portfolio. As of December 31, 2018 and 2017,
there were no super senior corporate debt/CLOs remaining.
(c) Consists primarily of stable value wraps and contracts with multiple underlying exposures.
(d) Represents netting of derivative exposures covered by a qualifying master netting agreement.
(e) Represents cash collateral posted and received that is eligible for netting.
(f) Freestanding derivatives only, excludes embedded derivatives. Derivative instrument assets and liabilities are recorded in Other Assets and Liabilities, respectively. Fair
value of assets related to bifurcated embedded derivatives was zero at both December 31, 2018 and December 31, 2017. Fair value of liabilities related to bifurcated
embedded derivatives was $4.1 billion and $4.1 billion, respectively, at December 31, 2018 and December 31, 2017. A bifurcated embedded derivative is generally
presented with the host contract in the Consolidated Balance Sheets. Embedded derivatives are primarily related to guarantee features in variable annuity products,
which include equity and interest rate components.
COLLATERAL
We engage in derivative transactions that are not subject to a clearing requirement directly with unaffiliated third parties, in most
cases, under International Swaps and Derivatives Association, Inc. (ISDA) Master Agreements. Many of the ISDA Master Agreements
also include Credit Support Annex (CSA) provisions, which provide for collateral postings that may vary at various ratings and
threshold levels. We attempt to reduce our risk with certain counterparties by entering into agreements that enable collateral to be
obtained from a counterparty on an upfront or contingent basis. We minimize the risk that counterparties might be unable to fulfill their
contractual obligations by monitoring counterparty credit exposure and collateral value and generally requiring additional collateral to
be posted upon the occurrence of certain events or circumstances. In addition, certain derivative transactions have provisions that
require collateral to be posted upon a downgrade of our long-term debt ratings or give the counterparty the right to terminate the
transaction. In the case of some of the derivative transactions, upon a downgrade of our long-term debt ratings, as an alternative to
posting collateral and subject to certain conditions, we may assign the transaction to an obligor with higher debt ratings or arrange for
a substitute guarantee of our obligations by an obligor with higher debt ratings or take other similar action. The actual amount of
collateral required to be posted to counterparties in the event of such downgrades, or the aggregate amount of payments that we
could be required to make, depends on market conditions, the fair value of outstanding affected transactions and other factors
prevailing at and after the time of the downgrade.
238 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 1 1. D er i vat i ve s a nd H ed g e Ac c o u n ti n g
Collateral posted by us to third parties for derivative transactions was $1.7 billion and $2.9 billion at December 31, 2018 and 2017,
respectively. In the case of collateral posted under derivative transactions that are not subject to clearing, this collateral can generally
be repledged or resold by the counterparties. Collateral provided to us from third parties for derivative transactions was $2.1 billion
and $1.3 billion at December 31, 2018 and 2017, respectively. In the case of collateral provided to us under derivative transactions
that are not subject to clearing, we generally can repledge or resell collateral.
OFFSETTING
We have elected to present all derivative receivables and derivative payables, and the related cash collateral received and paid, on a
net basis on our Consolidated Balance Sheets when a legally enforceable ISDA Master Agreement exists between us and our
derivative counterparty. An ISDA Master Agreement is an agreement governing multiple derivative transactions between two
counterparties. The ISDA Master Agreement generally provides for the net settlement of all, or a specified group, of these derivative
transactions, as well as transferred collateral, through a single payment, and in a single currency, as applicable. The net settlement
provisions apply in the event of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a
specified group of, derivative transactions governed by the ISDA Master Agreement.
HEDGE ACCOUNTING
We designated certain derivatives entered into with third parties as fair value hedges of available for sale investment securities held
by our insurance subsidiaries. The fair value hedges include foreign currency forwards and cross currency swaps designated as
hedges of the change in fair value of foreign currency denominated available for sale securities attributable to changes in foreign
exchange rates. We also designated certain interest rate swaps entered into with third parties as fair value hedges of fixed rate GICs
attributable to changes in benchmark interest rates.
We use foreign currency denominated debt and cross-currency swaps as hedging instruments in net investment hedge relationships
to mitigate the foreign exchange risk associated with our non-U.S. dollar functional currency foreign subsidiaries. For net investment
hedge relationships where issued debt is used as a hedging instrument, we assess the hedge effectiveness and measure the amount
of ineffectiveness based on changes in spot rates. For net investment hedge relationships that use derivatives as hedging
instruments, we assess hedge effectiveness and measure hedge ineffectiveness using changes in forward rates. For the years ended
December 31, 2018, 2017, and 2016 we recognized gains (losses) of $34 million, $(106) million and $123 million, respectively,
included in Change in foreign currency translation adjustment in Other comprehensive income related to the net investment hedge
relationships.
A qualitative methodology is utilized to assess hedge effectiveness for net investment hedges, while regression analysis is employed
for all other hedges.
AIG | 2018 Form 10-K 239
ITEM 8 | Notes to Consolidated Financial Statements | 1 1. D er i vat i ve s a nd H ed g e Ac c o u n ti n g
The following table presents the gain (loss) recognized in earnings on our derivative instruments in fair value hedging
relationships in the Consolidated Statements of Income:
(in millions)
Year ended December 31, 2018
Interest rate contracts:
Realized capital gains/(losses)
Other income
Foreign exchange contracts:
Realized capital gains/(losses)
Other income
Equity contracts:
Realized capital gains/(losses)
Year ended December 31, 2017
Interest rate contracts:
Realized capital gains/(losses)
Other income
Foreign exchange contracts:
Realized capital gains/(losses)
Other income
Equity contracts:
Realized capital gains/(losses)
Year ended December 31, 2016
Interest rate contracts:
Realized capital gains/(losses)
Other income
Foreign exchange contracts:
Realized capital gains/(losses)
Other income
Equity contracts:
Realized capital gains/(losses)
Gains/(Losses) Recognized in
Earnings for:
Hedging
Derivatives(a)
Hedged
Items
Including Gains/(Losses) Attributable to:
Excluded
Hedge
Components
Ineffectiveness
Other(b)
$
$
$
(2) $
-
471
-
-
(4) $
-
(420)
-
(47)
2 $
-
(365)
-
-
4 $
-
393
4
42
(7) $
-
1 $
10
294
-
10
(335)
24
(11)
- $
-
-
-
-
- $
-
-
-
-
1 $
-
-
-
-
- $
-
106
-
-
- $
-
(26)
-
(5)
- $
-
(41)
-
(1)
-
-
-
-
-
-
-
-
4
-
(7)
10
-
24
-
(a) The amounts presented do not include the periodic net coupon settlements of the derivative contract or the coupon income (expense) related to the hedged item.
(b) Represents accretion/amortization of opening fair value of the hedged item at inception of hedge relationship, amortization of basis adjustment on hedged item following
the discontinuation of hedge accounting, and the release of debt basis adjustment following the repurchase of issued debt that was part of previously-discontinued fair
value hedge relationship.
240 AIG | 2018 Form 10-K
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
ITEM 8 | Notes to Consolidated Financial Statements | 1 1. D er i vat i ve s a nd H ed g e Ac c o u n ti n g
The following table presents the effect of derivative instruments not designated as hedging instruments in the Consolidated
Statements of Income:
Years Ended December 31,
(in millions)
By Derivative Type:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Commodity contracts
Credit contracts
Other contracts
Embedded derivatives
Total
By Classification:
Policy fees
Net investment income
Net realized capital gains (losses)
Other income
Policyholder benefits and claims incurred
Total
Gains (Losses) Recognized in Earnings
2018
2017
$
$
$
$
(509) $
543
(56)
-
32
65
629
704 $
67 $
(3)
561
81
(2)
704 $
56 $
(277)
(964)
-
58
75
(449)
(1,501) $
77 $
(11)
(1,709)
139
3
(1,501) $
2016
(229)
293
(902)
-
81
80
(48)
(725)
80
26
(895)
63
1
(725)
CREDIT RISK-RELATED CONTINGENT FEATURES
We estimate that at December 31, 2018, based on our outstanding financial derivative transactions, a downgrade of our long-term
senior debt ratings to BBB or BBB– by Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc., and/or a
downgrade to Baa2 or Baa3 by Moody’s Investors’ Service, Inc. would permit counterparties to make additional collateral calls and
permit certain counterparties to elect early termination of contracts, resulting in corresponding collateral postings and termination
payments in the total amount of up to approximately $61 million. The aggregate fair value of our derivatives that were in a net liability
position and that contain such credit risk-related contingencies which can be triggered below our long-term senior debt ratings of
BBB+ or Baa1 was approximately $423 million and $572 million at December 31, 2018 and 2017, respectively. The aggregate fair
value of assets posted as collateral under these contracts at December 31, 2018 and 2017, was approximately $453 million and $676
million, respectively.
HYBRID SECURITIES WITH EMBEDDED CREDIT DERIVATIVES
We invest in hybrid securities (such as credit-linked notes) with the intent of generating income, and not specifically to acquire
exposure to embedded derivative risk. As is the case with our other investments in RMBS, CMBS, CDOs and ABS, our investments in
these hybrid securities are exposed to losses only up to the amount of our initial investment in the hybrid security. Other than our
initial investment in the hybrid securities, we have no further obligation to make payments on the embedded credit derivatives in the
related hybrid securities.
We elect to account for our investments in these hybrid securities with embedded written credit derivatives at fair value, with changes
in fair value recognized in Net investment income and Other income. Our investments in these hybrid securities are reported as Other
bond securities in the Consolidated Balance Sheets. The fair values of these hybrid securities were $3.9 billion and $4.4 billion at
December 31, 2018 and 2017, respectively. These securities have par amounts of $8.5 billion and $9.1 billion at December 31, 2018
and 2017, respectively, and have remaining stated maturity dates that extend to 2052.
AIG | 2018 Form 10-K 241
ITEM 8 | Notes to Consolidated Financial Statements | 1 2 . G o o dw i l l a n d Ot her I n ta n gi bl e As s e ts
12. Goodwill and Other Intangible Assets
Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually
identified and separately recognized. Goodwill is tested for impairment annually or more frequently if circumstances indicate an
impairment may have occurred. At December 31, 2018, 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 and our
Other Operations and Legacy Portfolio operating segments. When a business is transferred from one reporting unit to another, as
occurred as part of the 2017 segment changes, goodwill from the original operating segment is allocated among reporting units based
on the fair value of business transferred, relative to business retained by a reporting unit.
The impairment assessment involves an option to first assess qualitative factors to determine whether events or circumstances exist
that lead to a determination that it is more likely than not that the fair value of an operating segment is less than its carrying amount. If
the qualitative assessment is not performed, or after assessing the totality of the events or circumstances, we determine it is more
likely than not that the fair value of an operating segment is less than its carrying amount, the impairment assessment involves a two-
step process in which a quantitative assessment for potential impairment is performed.
If the qualitative test is not performed or if the test indicates a potential impairment is present, we estimate the fair value of each
operating segment and compare the estimated fair value with the carrying amount of the operating segment, including allocated
goodwill. The estimate of an operating segment’s fair value involves management judgment and is based on one or a combination of
approaches including discounted expected future cash flows, market-based earnings multiples of the unit’s peer companies, external
appraisals or, in the case of reporting units being considered for sale, third-party indications of fair value, if available. We consider one
or more of these estimates when determining the fair value of an operating segment to be used in the impairment test.
If the estimated fair value of an operating segment exceeds its carrying amount, goodwill is not impaired. If the carrying value of an
operating segment exceeds its estimated fair value, goodwill associated with that operating segment potentially is impaired. The
amount of impairment, if any, is measured as the excess of the carrying value of the goodwill over the implied fair value of the
goodwill. The implied fair value of the goodwill is measured as the excess of the fair value of the operating segment over the amounts
that would be assigned to the operating segment’s assets and liabilities in a hypothetical business combination. An impairment
charge is recognized in earnings to the extent of the excess of carrying value over fair value.
Goodwill was not impaired at December 31, 2018 based on the results of the goodwill impairment test.
242 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 1 2 . G o o dw i l l a n d Ot her I n ta n gi bl e As s e ts
The following table presents the changes in goodwill by operating segment:
(in millions)
Balance at January 1, 2016:
Goodwill - gross
Accumulated impairments
Net goodwill
Increase (decrease) due to:
Dispositions
Other
Balance at December 31, 2016:
Goodwill - gross
Accumulated impairments
Net goodwill
Increase (decrease) due to:
Acquisitions
Dispositions
Other
Balance at December 31, 2017:
Goodwill - gross
Accumulated impairments
Net goodwill
Increase (decrease) due to:
Acquisitions*
Other
Balance at December 31, 2018:
Goodwill - gross
Accumulated impairments
Net goodwill
General Insurance
North
America
International
Life
Insurance
Other
Operations
Legacy
Portfolio
Total
$
1,884 $
(1,264)
620
2,883 $
(2,136)
747
77 $
-
77
27 $
-
27
219 $
(77)
142
5,090
(3,477)
1,613
(6)
-
1,878
(1,264)
614
-
(10)
-
1,868
(1,264)
604
2,332
(12)
(6)
(70)
2,807
(2,136)
671
-
(7)
74
2,874
(2,136)
738
157
(48)
-
-
77
-
77
-
(6)
13
84
-
84
46
(5)
-
-
27
-
27
4
-
-
31
-
31
9
9
-
(3)
216
(77)
139
-
(2)
-
214
(77)
137
-
-
(12)
(73)
5,005
(3,477)
1,528
4
(25)
87
5,071
(3,477)
1,594
2,544
(56)
4,188
(1,264)
2,924 $
2,983
(2,136)
847 $
125
-
125 $
$
49
-
49 $
214
(77)
137 $
7,559
(3,477)
4,082
*
Includes goodwill of $2.0 billion, $492 million and $46 million relating to the acquisitions of Validus, Glatfelter and Ellipse, respectively.
The following table presents the changes in other intangible assets and the value of distribution network acquired by
operating segment:
Year Ended December 31, 2018
(in millions)
Other intangible assets, beginning of year
Increase (decrease) due to:
Acquisitions
Amortization
Other
Other intangible assets, end of year
Value of distribution network acquired, beginning of year
Increase (decrease) due to:
Acquisitions
Amortization
Other
Value of distribution network acquired, end of year
General Insurance
North
America
International
Life
Other
Insurance Operations
Legacy
Portfolio
$
27 $
8 $
34 $
37 $
- $
61
(2)
-
86 $
- $
-
-
-
- $
207
(3)
-
212 $
- $
-
-
-
- $
16
(4)
-
46 $
- $
-
-
-
- $
-
(2)
(19)
16 $
- $
582
(15)
2
569 $
-
-
-
- $
- $
-
-
-
- $
$
$
$
Total
106
284
(11)
(19)
360
-
582
(15)
2
569
AIG | 2018 Form 10-K 243
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
13. Insurance Liabilities
LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (LOSS RESERVES)
Loss reserves represent the accumulation of estimates of unpaid claims, including estimates for claims incurred but not reported and
loss adjustment expenses (IBNR), less applicable discount. We regularly review and update the methods used to determine loss
reserve estimates. Any adjustments resulting from this review are reflected currently in pre-tax income. Because these estimates are
subject to the outcome of future events, changes in estimates are common given that loss trends vary and time is often required for
changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to
as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost
are referred to as favorable development.
Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from
policyholders of approximately $12.3 billion and $12.6 billion at December 31, 2018 and 2017, respectively. These recoverable
amounts are related to certain policies with high deductibles (in excess of high dollar amounts retained by the insured through self-
insured retentions, deductibles, retrospective programs, or captive arrangements, each referred to generically as “deductibles”),
primarily for U.S. commercial casualty business. With respect to the deductible portion of the claim, we manage and pay the entire
claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. Thus, these recoverable
amounts represent a credit exposure to us. At December 31, 2018 and 2017, we held collateral of approximately $9.2 billion and
$9.5 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and funded trust
agreements.
The following table presents the roll-forward of activity in Loss Reserves:
Years Ended December 31,
(in millions)
Liability for unpaid loss and loss adjustment expenses, beginning of year
Reinsurance recoverable
Net Liability for unpaid loss and loss adjustment expenses, beginning of year
Losses and loss adjustment expenses incurred:
Current year
Prior years, excluding discount and amortization of deferred gain
Prior years, discount charge (benefit)
Prior years, amortization of deferred gain on retroactive reinsurance(a)
Total losses and loss adjustment expenses incurred
Losses and loss adjustment expenses paid:
Current year
Prior years
Total losses and loss adjustment expenses paid
Other changes:
Foreign exchange effect
Acquisitions(b)
Dispositions(c)
Retroactive reinsurance adjustment (net of discount)(d)
Reclassified to liabilities held for sale(e)
Total other changes
Liability for unpaid loss and loss adjustment expenses, end of year:
Net liability for unpaid losses and loss adjustment expenses
Reinsurance recoverable
Total
$
2018
78,393 $
(26,708)
51,685
2017
77,077 $
(15,532)
61,545
2016
74,942
(14,339)
60,603
22,501
1,429
(252)
(395)
23,283
(6,235)
(19,254)
(25,489)
(677)
3,284
-
(137)
-
2,470
21,079
1,565
187
(284)
22,547
(5,323)
(16,241)
(21,564)
788
23
(360)
(11,294)
-
(10,843)
20,232
5,788
(422)
-
25,598
(5,825)
(16,908)
(22,733)
(463)
-
(1,058)
-
(402)
(1,923)
51,949
31,690
83,639 $
51,685
26,708
78,393 $
61,545
15,532
77,077
$
(a) Includes $51 million and $25 million for the retroactive reinsurance agreement with NICO covering U.S. asbestos exposures for the year ended December 31, 2018 and
2017, respectively.
(b) Includes amounts related to the acquisition of Glatfelter in October 2018, Validus in July 2018 and Blackboard U.S. Holdings Inc. in 2017.
(c) Includes amounts related to dispositions through the date of disposition. Includes sale of insurance operations to Fairfax, United Guaranty and Ascot Underwriting
Holdings Limited, and Ascot Employees Corporate Member Limited (Ascot).
(d) Includes discount on retroactive insurance in the amount of $180 million and $1.5 billion for the periods ended December 31, 2018 and 2017, respectively.
244 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
(e) Represents change in loss reserves included in our sale of certain of our insurance operations and certain assets to Fairfax for the period ended December 31, 2016.
Upon consummation of the sale, we retained a portion of these reserves through reinsurance arrangements.
Prior Year Development
During 2018, we recognized adverse prior year loss reserve development of $1.4 billion before impact of the Adverse Development
Cover and the asbestos cession to NICO. The key components of this development were as follows:
• Unfavorable development in US Excess Casualty, driven by the combination of construction defect and construction wrap claims
from accident year 2015 and prior where we reacted to significant increases in severity and longer claim reporting patterns, as well
as higher than expected loss severity in accident years 2016 and 2017, which led to an increase in estimates for these accident
years;
• Unfavorable development in U.S. Financial Lines, primarily from Directors & Officers (D&O) and Employment Practices Liability
(EPLI) policies covering Corporate and National Insureds as well as Private and Not-for-Profit insureds. This development was
predominantly in accident years 2014-2017 and resulted largely from increases in severity associated with an increase in
frequency of class action lawsuits from those years.
• Favorable development in US Commercial Property and Specialty Lines due to reductions in our estimates for 2017 Catastrophes ,
favorable attritional losses in Commercial Property and favorable Specialty emergence.
• Unfavorable development in US Personal Lines reflecting the adverse development on the 2017 California Wildfires and Hurricane
Irma in 2017.
• Unfavorable development in International Financial Lines driven by increased large loss activity in recent accident years,
particularly related to directors and officers class action suits against insureds with global exposure.
Our analyses and conclusions about prior year reserves also help inform our judgments about the current accident year loss and loss
adjustment expense ratios we selected.
During 2017, we recognized unfavorable prior year loss reserve development of $1.6 billion. This unfavorable development was
primarily a result of the following:
• Unfavorable development in U.S. Casualty lines, driven primarily by increases in underlying severity and greater than expected
emerging loss experience in accident year 2016 as well as increased development from claims related to construction defects and
construction wrap business (largely from accident years 2006 and prior).
• Unfavorable development in U.S. Financial Lines, primarily from Directors & Officers (D&O) policies covering privately owned and
not-for-profit insureds. This development was predominantly in accident year 2016 and resulted largely from increases in
bankruptcy-related claims and fiduciary liability claims for large educational institutions.
• Higher than expected losses for UK/Europe Casualty and Financial Lines. We observed a significant increase in large claims
activity in our UK/Europe long-tail business, with a large proportion emanating from accident year 2016. In addition, we increased
our loss reserves as a result of the decision made by the U.K. Ministry of Justice to reduce the discount rate applied to lump-sum
bodily injury payouts, known as the Ogden rate.
•
In addition we also observed higher than expected losses in UK/Europe property and special risks business driven by unexpected
development on various large claims across the property, aviation, marine, and trade credit segments.
During 2016, we recognized adverse prior year loss reserve development of $5.8 billion. This unfavorable development was primarily
a result of the following:
• Higher than expected losses emerging across several casualty product lines, especially in the recent accident years (generally,
2011 to 2015) driven by increased frequency and severity of claims. This recent accident year loss emergence caused us to
increase loss development factors applied across many accident years.
• Loss development factors including workers’ compensation tail factors, also increased due to an observed lengthening of loss
reporting patterns relative to prior expectations.
•
Increases in loss trend assumptions to reflect the latest observed increases in frequency and severity and the impact of these
increased loss trends on expected loss ratios.
• Changes in weights we apply to the various actuarial methods to better align with updated trends.
The loss development tables below include loss development data by major lines of business for the last ten accident years. The
drivers of prior year development are discussed following each of the loss development tables.
AIG | 2018 Form 10-K 245
The table below presents the reconciliation of the net liability for unpaid losses and loss adjustment expenses in the
following tables to Loss Reserves in the Consolidated Balance Sheets for the year ended December 31, 2018:
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
$
Net liability for
unpaid losses and
loss adjustment
expenses
as presented in the
disaggregated tables
below
5,834
4,715
4,288
5,315
6,534
1,706
7,022
2,988
2,264
$
Reinsurance recoverable
on unpaid losses and loss
adjustment expenses
included in the
disaggregated tables
below
7,038
4,576
4,661
1,960
2,748
1,001
1,789
1,251
553
4,835
45,501
$
3,689
29,266
$
$
Gross liability for
unpaid losses and loss
adjustment expenses
12,872
9,291
8,949
7,275
9,282
2,707
8,811
4,239
2,817
8,524
74,767
(3,755)
8,974
3,653
83,639
$
$
(in millions)
U.S. Workers' Compensation (before discount)
U.S. Excess Casualty
U.S. Other Casualty
U.S. Financial Lines
U.S. Property and Special risks
U.S. Personal Insurance
UK/Europe Casualty and Financial lines
UK/Europe Property and Special risks
UK/Europe and Japan Personal Insurance
U.S. Run-Off Long Tail Insurance Lines (before
discount)
Total
Reconciling Items
Discount on workers' compensation lines
Other product lines
Unallocated loss adjustment expenses
Total Loss Reserves
Loss Development Information
The following is information about incurred and paid loss developments as of December 31, 2018, net of reinsurance. The cumulative
number of reported claims, the total of IBNR liabilities and expected development on reported loss included within the net incurred
loss amounts are presented in the following section.
Reserving Methodology
We use a combination of methods to project ultimate losses for both long-tail and short-tail exposures, which include:
Paid Development method: The Paid Development method estimates ultimate losses by reviewing paid loss patterns and
selecting paid ultimate loss development factors. These factors are then applied to paid losses by applying them to accident years,
with further expected changes in paid loss. Since the method does not rely on case reserves, it is not directly influenced by
changes in the adequacy of case reserves.
Incurred Development method: The Incurred Development method is similar to the Paid Development method, but it uses case
incurred losses instead of paid losses. Since this method uses more data (case reserves in addition to paid losses) than the Paid
Development method, the incurred development patterns may be less variable than paid development patterns.
Expected Loss Ratio method: The Expected Loss Ratio method multiplies premiums by an expected loss ratio to produce
ultimate loss estimates for each accident year. This method may be useful if loss development patterns are inconsistent, losses
emerge very slowly, or there is relatively little loss history from which to estimate future losses.
Bornhuetter-Ferguson method: The Bornhuetter-Ferguson method using premiums and paid losses is a combination of the Paid
Development method and the Expected Loss Ratio method where the weight given to each method is the reciprocal of the loss
development factor. This method normally determines expected loss ratios similar to the method used for the Expected Loss Ratio
method. The Bornhuetter-Ferguson method using premiums and incurred losses is similar to the Bornhuetter-Ferguson method
using premiums and paid losses except that it uses case-incurred losses.
Cape Cod method: The Cape Cod method is mechanically similar to the Bornhuetter-Ferguson method with the difference being
that the Expected Loss Ratio estimates are determined based on a weighting of the loss estimates that come from the
Paid/Incurred Development Methods. This method may be more responsive to recent loss trends than the Bornhuetter-Ferguson
method.
246 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Average Loss method: The Average Loss method multiplies a projected number of ultimate claims by an estimated ultimate
severity average loss for each accident year to produce ultimate loss estimates. Since projections of the ultimate number of claims
are often less variable than projections of ultimate loss, this method can provide more reliable results for reserve categories where
loss development patterns are inconsistent or too variable to be relied on exclusively.
In updating our loss reserve estimates, we consider and evaluate inputs from many sources, including actual claims data, the
performance of prior reserve estimates, observed industry trends, our internal peer review processes, including challenges and
recommendations from our Enterprise Risk Management group, as well as the views of third-party actuarial firms. We use these
inputs to improve our evaluation techniques, and to analyze and assess the change in estimated ultimate loss for each accident year
by product line. Our analyses produce a range of indications from various methods, from which we select our best estimate.
In determining the actual carried loss reserves, we consider both the internal actuarial best estimate and numerous other internal and
external factors, including:
an assessment of economic conditions, including real GDP growth, inflation, employment rates or unemployment duration, stock
market volatility and changes in corporate bond spreads;
changes in the legal, regulatory, judicial and social environment, including changes in road safety, public health and cleanup
standards;
changes in medical cost trends (inflation, intensity and utilization of medical services) and wage inflation trends;
underlying policy pricing, terms and conditions including attachment points and policy limits;
change in claims handling philosophy, operating model, processes, and related ongoing enhancements;
third-party claims reviews that are periodically performed for key classes of claims such as toxic tort, environmental and other
complex casualty claims;
third-party actuarial reviews that are periodically performed for key classes of business;
input from underwriters on pricing, terms, and conditions and market trends; and
changes in our reinsurance program, pricing and commutations.
The following factors are relevant to the loss development information Included in the tables below:
Table organization: The tables are organized by accident year and include policies written on an occurrence and claims- made
basis. We note that for certain categories of claims (e.g., construction defect claims and environmental claims) and for
reinsurance recoverable, losses may sometimes be reclassified to an earlier or later accident year as more information about the
date of occurrence becomes available to us. These reclassifications are shown as development in the respective years in the
tables below. Financial Lines business is primarily written on a claims-made basis, while the majority of the workers’
compensation, excess casualty, other casualty, and run-off property and casualty lines of business are written on an occurrence
basis. Primarily, all short-tail lines in Property and Special Risks and Personal Insurance are written on an occurrence basis.
Groupings: We believe our groupings have homogenous risk characteristics with similar development patterns and would
generally be subject to similar trends and reflect our reportable segments. The incurred losses and loss adjustment expenses and
paid losses in the following tables for the current reporting year are allocated to the line of business and accident years based on
an initial allocation methodology and updated for the final allocation in the subsequent reporting year. The difference between the
initial and the final allocation does not have a material impact on the loss tables.
Reinsurance: Our reinsurance program varies by exposure type. Historically we have leveraged facultative and treaty
reinsurance, both on a pro-rata and excess of loss basis. Our reinsurance program may change from year to year, which may
affect the comparability of the data presented in our tables.
AIG | 2018 Form 10-K 247
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Adverse Development Reinsurance Agreement: We have provided the impact of the Adverse Development Reinsurance
Agreement (ADC) in an additional table below our Incurred Losses and Allocated Loss Adjustment Expenses (ALAE) tables. The
impact of the ADC is shown beginning in 2016 given the retroactive date of the contract and coincides with the effective date of
the contract. For the lines of business covered by the agreement (U.S. Workers' Compensation, U.S. Excess Casualty, U.S.
Other Casualty, U.S. Financial Lines, U.S. Property and Special Risks and U.S. Personal Insurance or collectively, the "Covered
Lines"), an attribution of the loss recoveries to the line of business by calendar year and accident year is performed based on the
underlying distribution of the losses subject to the agreement. Specifically, the future claim payments for all subject incurred
losses were projected into future years based on the same actuarial assumptions underlying the related reserves. Also, refer to
the additional table presented after discussion of prior year development by line of business, which reconciles the changes in net
ultimates to our overall prior year development and provides the reattribution of loss recoveries for the Covered Lines. The
reinsurance terms of the ADC were then used to identify the future claims payments for which 80% will be reimbursed by NICO.
At each reporting period, the attribution of the ADC recoveries is performed. The factors that could cause the attribution to lines of
business and accident year to change include changes in underlying actuarial assumptions as to timing and amount of future
claim payments.
Incurred but not reported liabilities (IBNR): We include development from past reported losses in IBNR.
Data excluded from tables: Information with respect to accident years older than ten years is excluded from the development
tables. Unallocated loss adjustment expenses are also excluded.
Foreign exchange: The loss development for operations outside of the U.S. is presented for all accident years using the current
exchange rate at December 31, 2018. Although this approach requires restating all prior accident year information, the changes in
exchange rates do not impact incurred and paid loss development trends.
Acquisitions: We include acquisitions from all accident years presented in the tables. For purposes of this disclosure, we have
applied the retrospective method for the acquired reserves, including incurred and paid claim development histories throughout the
relevant tables. It should be noted that historical reserves for the acquired businesses were established by the acquired companies
using methods, assumptions and procedures then in effect which may differ from our current reserving bases. Accordingly, it may
not be appropriate to extrapolate future redundancies or deficiencies based on the aggregated historical results shown in the
triangles.
Dispositions: We exclude dispositions from all accident years presented in the tables.
Claim counts: We consider a reported claim to be one claim for each claimant or feature for each loss occurrence. Claims relating
to losses that are 100 percent reinsured are excluded from the reported claims in the tables below. Reported claims for losses
from assumed reinsurance contracts are not available and hence not included in the reported claims.
There are limitations that should be considered on the reported claim count data in the tables below, including:
- Claim counts are presented only on a reported (not an ultimate) basis;
-
The tables below include lines of business and geographies at a certain aggregated level which may indicate different
frequency and severity trends and characteristics, and may not be as meaningful as the claim count information related to the
individual products within those lines of business and geographies;
- Certain lines of business are more likely to be subject to occurrences involving multiple claimants and features, which can
distort measures based on the reported claim counts in the table below; and
- Reported claim counts are not adjusted for ceded reinsurance, which may distort the measure of frequency or severity.
Supplemental Information: The information about incurred and paid loss development for all periods preceding year ended
December 31, 2018 and the related historical claims payout percentage disclosure is unaudited and is presented as supplementary
information.
248 AIG | 2018 Form 10-K
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
The following tables present undiscounted, incurred and paid losses and allocated loss adjustment expenses by accident
year, on a net basis after reinsurance, with a separate presentation of the Adverse Development Reinsurance Agreement
excluding the related amortization of the deferred gain:
U.S. Workers' Compensation
During 2018, we recognized $51 million of unfavorable prior year development, net of external reinsurance but before ADC
cessions.
During 2017, we recognized $31 million of favorable prior year development, net of external reinsurance but before ADC
cessions.
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)
December 31, 2018
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Unaudited
2018 Prior
Year
Development
Excluding
the Impact of
Adverse
Development
Reinsurance
Agreement
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Incurred
Impact of
Adverse
Development
Reinsurance
Agreement
2018 (Net of
Impact of
Adverse
Development
Reinsurance
Agreement)
Cumulative
Number of
Reported
Claims
Total of IBNR
Liabilities
Net of Impact
of Adverse
Development
Reinsurance
Agreement
2009
$ 3,466 $ 3,633 $ 3,608 $ 3,666 $ 3,639 $ 3,616 $ 3,606 $ 3,708 $ 3,714
$
3,697 $
(17) $
2,706
3,049
3,125
3,148
3,211
3,214
3,286
2,901
2,953
3,091
3,158
3,113
3,152
2,382
2,194
2,286
2,260
2,334
1,932
1,880
1,950
2,060
1,729
1,764
1,866
1,708
1,864
3,267
3,156
2,308
2,032
1,862
1,866
1,299
1,346
789
3,278
3,177
2,259
1,974
1,794
1,814
1,318
850
998
11
21
(49)
(58)
(68)
(52)
(28)
61
421
446
490
418
452
531
712
625
504
802
147,504 $
(439) $
3,258 $
133,374
124,855
70,874
46,768
39,742
35,439
29,669
26,005
18,367
(467)
(495)
(466)
(493)
(485)
(496)
-
-
-
2,811
2,682
1,793
1,481
1,309
1,318
1,318
850
998
(18)
(21)
(5)
(48)
(41)
46
216
625
504
802
$ 21,159 $
(179)
$
(3,341) $
17,818
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
(13,739)
-
-
(13,739)
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2009, net of reinsurance
4,443
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
153
77
(2,688)
1,755
development, net of reinsurance
$ 11,863 $
51
$
(6,029) $
5,834
AIG | 2018 Form 10-K 249
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
Unaudited
$
3,297 $
3,298 $
3,258 $
2,821
2,676
1,819
1,499
1,311
1,278
1,299
-
-
2,818
2,677
1,814
1,494
1,310
1,279
1,346
789
-
2,811
2,682
1,793
1,481
1,309
1,318
1,318
850
998
$
16,000 $
16,825 $
17,818 $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2009, net of reinsurance
Unallocated loss adjustment expense prior year development
-
(13,739)
2,258
1,755
-
-
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
5,834 $
Change in
Incurred
Loss and
ALAE
(40)
(7)
5
(21)
(13)
(1)
39
(28)
61
-
(5)
-
(503)
10
(498)
The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
Unaudited
$
(411) $
(416) $
(439) $
(465)
(476)
(515)
(561)
(555)
(586)
-
-
-
(449)
(479)
(494)
(538)
(552)
(587)
-
-
-
(467)
(495)
(466)
(493)
(485)
(496)
-
-
-
$
(3,569) $
(3,515) $
(3,341) $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
-
Liabilities for losses and allocated loss adjustment expenses before 2009, net of reinsurance
(2,032)
(2,688)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
(6,029) $
Change in
Incurred
Loss and
ALAE
(23)
(18)
(16)
28
45
67
91
-
-
-
174
-
(656)
(482)
250 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
630
$
1,328
$
1,756
$
2,120
$
2,390
$
2,621
$
2,780
$
2,887
$
2,968
$
3,058 $
Unaudited
550
1,093
519
1,537
1,129
415
1,855
1,561
804
282
2,126
1,884
1,089
619
231
2,288
2,129
1,272
879
558
234
2,426
2,285
1,440
1,067
786
524
147
2,532
2,388
1,563
1,214
930
725
378
93
2,597
2,451
1,632
1,287
1,030
854
521
224
85
$
13,739 $
Paid Impact
of Adverse
Development
Reinsurance
Agreement
-
-
-
-
-
-
-
-
-
-
-
Reserving Process and Methodology
U.S. Workers’ Compensation is an extremely long-tail line of business, with loss emergence extending for decades. We generally
use a combination of loss development, frequency/severity and expected loss ratio methods for workers’ compensation.
Many of our primary casualty policies contain risk-sharing features, including high deductibles, self-insured retentions or retrospective
rating features, in addition to a traditional insurance component. These risk-sharing programs generally are large and complex,
comprising multiple products, years and structures, and are subject to amendment over time. We group guaranteed cost and excess
of deductible business separately and then further by state and industry subset to the extent that meaningful differences are
determined to exist. We also separately analyze certain subsets of the portfolio that have unique characteristics (e.g., U.S.
government sub-contractor accounts and construction wrap-up business). For excess of deductible business, we also segment by
size of deductible and whether the claim is handled by AIG or an outside third-party administrator (TPA). The proportion of large
deductible business has increased over time, which has slowed the reporting pattern of claims.
For guaranteed cost business, expected loss ratio methods generally are given significant weight only in the most recent accident
year. Workers’ compensation claims are generally characterized by high frequency, low severity, and relatively consistent loss
development from one accident year to the next. We historically have been a leading writer of workers’ compensation, and thus have
sufficient volume of claims experience to use development methods. We generally segregate California (CA) and New York (NY)
businesses from the other states to reflect their different development patterns and changing percentage of the mix by state. The
claims development tables above are impacted by two other significant initiatives, which offset each other. In recent years, we
instituted claims strategy changes and loss mitigation efforts to accelerate settlements, which we believe results in an overall
reduction in claim costs. This strategy resulted in an increase in paid losses along the latest diagonals relative to prior years. In
addition, we have been reducing premium volume in recent years and shifting a greater proportion of business to insured risk
retention structures such as high deductible policies. These mix and volume changes slowed paid and incurred development since
excess of deductible claims will typically take longer to emerge and settle.
Expected loss ratio methods for business written in excess of a deductible may be given significant weight in the most recent five
accident years. In the 2016 analysis, we increased our tail factor estimates for states other than NY and CA for guaranteed cost
business in recognition of longer medical development patterns that we have been seeing in recent years. We reflected increases in
legal costs we have seen across the portfolio, particularly in California.
Additionally, over the years we have written a number of very large accounts which include workers’ compensation coverage. These
accounts are generally individually priced by our actuaries, and to the extent appropriate, the indicated losses based on the pricing
analysis may be used to record the initial estimated loss reserves for these accounts.
AIG | 2018 Form 10-K 251
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Prior Year Development
During 2018, we recognized $51 million of adverse prior year development in US Workers Compensation business with higher claim
development factors at older ages (tail factors) for non-California, non-New York and loss sensitive business in older accident years
being offset by favorable emergence in recent years. Accident year 2017 was adversely impacted by a change in ceded reinsurance
estimates. For our Defense Base Act (DBA) business, adverse development in recent years was offset by an expansion of the
definition of reimbursable War Hazard claims by the US Government.
During 2017, we recognized $31 million of favorable prior year development in U.S. workers’ compensation business, particularly
guaranteed cost business in the states of California and New York. Actual loss emergence during the year, particularly for guaranteed
cost business in these two states, was significantly less than expected on a reported loss basis. We did recognize some offsetting
unfavorable development in our Defense Based Act (DBA) business that covers government contractors in U.S. and non-U.S. military
installations, as well as from a Pennsylvania Supreme Court decision that overturned a ruling that provided limitations on payments
for certain permanent injuries (the Protz decision).
During 2016, we recognized $1.9 billion of unfavorable prior year development in primary workers’ compensation coverages primarily
driven by the risk-sharing programs where we provide coverage in excess of large deductibles. For this excess of large deductible
business, in 2016, we observed actual loss emergence and development at significantly greater levels than expected based on our
previous experience in particular from losses in excess of $1 million. Since these policies respond to larger claims, the loss reporting
pattern is much longer than observed in guaranteed cost workers’ compensation and it takes several years to discern credible
changes in the pattern. Furthermore, implementation of claims settlement and loss mitigation strategies over the past several years
has made the recent evaluation of data more challenging as historical development patterns may not yet fully reflect these claim and
mitigation activities. During 2016, we refined our actuarial methodology by combining data across previously segregated underwriting
portfolios to improve our ability to analyze the loss development trends and patterns that had been altered by the mix, claims handling
and loss mitigation changes we have made during the last five years. We also developed further segmentations by deductible size
and other key parameters, such as claims handled by TPA staff and not our claims department. As a result, we determined that the
loss emergence patterns had changed and lengthened significantly from our prior expectation and therefore, we increased our loss
development factors.
In addition, for workers’ compensation policies with no deductibles (guaranteed cost), we increased our tail factors for the all other
states grouping to reflect the latest unfavorable experience in more mature accident years. This change increased the ultimate losses
by approximately $440 million in 2016. We also reflected the increasing cost trends for legal and cost containment services, especially
in California, as recent trends in this sector have been unfavorable.
Furthermore, in 2016, the Florida Supreme Court issued two separate rulings that have increased the potential liability for workers’
compensation claims in that state by undoing certain aspects of regulations in place since 2003. The Castellanos ruling eliminated
statutory caps on claimant attorney fees in certain cases, and the Westphal ruling eliminated the 104-week limitation on temporary
total disability benefits. Also in the second quarter, the Florida Court of Appeals issued the Miles decision, declaring unconstitutional
certain restrictions on claimant-paid attorney fees. In in the second quarter 2016, we increased our workers’ compensation reserves
by $100 million to reflect our estimate of the costs of these rulings on prior years’ claims.
U.S. Excess Casualty
During 2018, we recognized $1,274 million of unfavorable prior year development in Excess Casualty, net of external
reinsurance but before ADC cessions, driven by higher than expected loss emergence for construction defect and
construction wrap claims and increasing loss severity in more recent accident years.
During 2017, we recognized $254 million of unfavorable prior year development in Excess Casualty, net of external
reinsurance but before ADC cessions, driven by higher than expected loss emergence.
252 AIG | 2018 Form 10-K
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)
December 31, 2018
Accident
Year
2009
2010
2011 2012
2013
2014 2015
2016
2017
2018
Unaudited
2018 Prior
Year
Development
Excluding the
Impact of
Adverse
Development
Reinsurance
Agreement
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Incurred
Impact of
Adverse
Development
Reinsurance
Agreement
2018 (Net of
Impact of
Adverse
Development
Reinsurance
Agreement)
Total of IBNR
Liabilities
Net of Impact
of Adverse
Development
Reinsurance
Agreement
Cumulative
Number of
Reported
Claims
2009
$ 1,831 $ 1,897 $ 1,797 $ 1,638 $ 1,457 $ 1,321 $ 1,407 $ 1,518 $ 1,522
$
1,599 $
77 $
1,863
2,076
2,076
1,771
1,640
1,723
1,719
1,766
1,807
1,581
1,416
1,521
1,606
1,588
1,382
1,226
1,477
1,530
1,073
973
1,113
1,258
849
968
1,157
892
1,334
790
1,706
1,623
1,481
1,178
1,135
1,320
1,029
758
1,681
1,726
1,558
1,226
1,219
1,478
1,055
905
555
(25)
103
77
48
84
158
26
147
254
331
370
395
397
541
580
703
555
512
3,935 $
(191) $
1,408 $
3,687
3,651
3,549
2,908
2,381
2,185
1,550
759
301
(255)
(290)
(304)
(301)
(424)
(464)
-
-
-
1,426
1,436
1,254
925
795
1,014
1,055
905
555
63
76
80
91
96
117
116
703
555
512
$ 13,002 $
695
$
(2,229) $
10,773
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
(6,877)
-
-
(6,877)
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2009, net of reinsurance
2,205
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
537
42
(1,386)
819
development, net of reinsurance
$
8,330 $
1,274
$
(3,615) $
4,715
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
Unaudited
$
1,352 $
1,353 $
1,408 $
1,448
1,364
1,168
885
784
898
790
-
-
1,446
1,367
1,158
869
780
895
1,029
758
-
1,426
1,436
1,254
925
795
1,014
1,055
905
555
$
8,689 $
9,655 $
10,773 $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2009, net of reinsurance
628
Unallocated loss adjustment expense prior year development
(6,877)
819
-
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
4,715 $
Change in
Incurred
Loss and
ALAE
55
(20)
69
96
56
15
119
26
147
-
563
-
191
8
762
AIG | 2018 Form 10-K 253
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
Unaudited
$
(166) $
(169) $
(191) $
(271)
(242)
(362)
(373)
(373)
(436)
-
-
-
(260)
(256)
(323)
(309)
(355)
(425)
-
-
-
(255)
(290)
(304)
(301)
(424)
(464)
-
-
-
Change in
Incurred
Loss and
ALAE
(22)
5
(34)
19
8
(69)
(39)
-
-
-
$
(2,223) $
(2,097) $
(2,229) $
(132)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
-
Liabilities for losses and allocated loss adjustment expenses before 2009, net of reinsurance
(1,040)
(1,386)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
(3,615) $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
8
$
69
10
$
249
$
449
$
624
$
788
$
965
$
1,174
$
1,212
$
1,309 $
Unaudited
197
5
475
63
3
654
225
106
15
795
386
288
104
3
946
716
495
204
68
9
1,052
921
649
382
202
192
14
1,217
1,069
887
546
397
361
66
1
1,265
1,214
1,022
661
531
668
178
29
-
$
6,877 $
-
(346)
(478)
Paid Impact
of Adverse
Development
Reinsurance
Agreement
-
-
-
-
-
-
-
-
-
-
-
Reserving Process and Methodology
U.S. Excess Casualty policies tend to attach at a high layer above underlying policies, which causes the loss development pattern to
be lagged significantly. Many of the claims notified to the excess layers are closed without payment because the claims never reach
our layer as a result of high deductibles and other underlying coverages, while the claims that reach our layer and close with payment
can be large and highly variable in terms of reported timing and amount. For a portion of this business, the underlying primary policies
are issued by other insurance companies, which can limit our access to relevant information to help inform our judgments as the loss
events evolve and mature.
254 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
We generally use a combination of loss development methods and expected loss ratio methods for excess casualty product lines. We
segment our analysis between automobile-related claims and non-automobile claims, due to the shorter-tail nature of the automobile
claims. We then further segment the non-automobile claims for certain latent exposures such as construction defects and mass torts
where losses have unique emergence patterns. Mass tort claims in particular may develop over an extended period of time and
impact multiple accident years when they emerge. The more standard types of claims are then separately analyzed based on
attachment point bands, to recognize that the impact of the level of the attachment point can significantly impact the delay in loss
reporting and development. In our analyses, losses capped at $10 million were first analyzed using traditional loss development and
expected loss ratio methods and then this estimate was used to derive the expected loss estimate for losses above $10 million
reflecting the expected relationships between the layers, reflecting the attachment point and limit.
Expected loss ratio methods are generally used for at least the three latest accident years, due to the relatively low credibility of the
reported losses. The loss experience is generally reviewed separately by attachment point. The expected loss ratios used for recent
accident years are based on the projected ultimate loss ratios for older years adjusted for rate changes and loss trend.
Prior Year Development
During 2018, we recognized $1,274 million of adverse development driven largely by construction defect and construction wrap
claims where actual emergence was significantly worse than expected and our updated analysis significantly increased the severity
assumptions and lengthened the claim reporting pattern to recognize the significant deterioration seen in recent calendar periods. We
also increased the expected loss ratio assumptions in recent accident years to reflect the high initial reported loss ratios for those
years and the incidence of several unusually large claims.
During 2017, we recognized $254 million of unfavorable prior year development driven in large part by emerging loss experience in
accident year 2016 where frequency and severity to date has exceeded initial expectations and is coinciding with increased loss
severity in the underlying primary auto and general liability segments. In addition, we experienced increased development from claims
related to construction defects and construction wrap business. The majority of this experience came from accident years 2006 and
prior.
During 2016, we recognized $1.1 billion of unfavorable prior year development driven by continued higher than expected loss
emergence due to increased frequency and severity in recent accident years for both automobile and general liability claims.
Approximately $250 million of the unfavorable development is attributable to a cohort of commercial automobile claims identified in
2015 which continued to increase in severity in 2016 beyond what was observed or reasonably expected in 2015. The most
significant increases in incurred losses were for accident years 2011 and subsequent. In particular, the frequency and severity of loss
events for accident years 2011 and subsequent showed a significant step change from accident years 2010 and prior. We therefore
gave limited credibility to accident year 2010 and prior in selecting our expected loss ratios for 2011 and subsequent accident years
due to this shift in loss patterns that is now more evident and credible after examining 2016 data. As a result of the continued adverse
emergence, we have increased our loss trend assumptions for general liability and automobile and increased our expected loss ratios
for the most recent four accident years.
U.S. Other Casualty
U.S Other Casualty includes general liability, commercial auto, medical malpractice, and various other casualty lines of
business.
In 2018, we recognized $127 million of favorable prior year development in Other Casualty, net of external reinsurance but
before ADC cessions, primarily as a result of favorable loss emergence in accident years 2011-2016.
In 2017, we recognized $216 million of unfavorable prior year development in Other Casualty, net of external reinsurance but
before ADC cessions, primarily as a result of increased loss severity in recent accident years.
AIG | 2018 Form 10-K 255
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Years Ended December 31, (dollars in millions)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Unaudited
2009
$ 2,416 $ 2,517 $ 2,586 $ 2,582 $ 2,697 $ 2,818 $ 2,880 $ 2,863 $ 2,855
$
2,884 $
2,132
2,109
2,243
2,192
2,341
2,384
2,503
2,052
2,222
2,321
2,458
2,601
2,639
2,012
2,162
2,218
2,229
2,371
1,662
1,739
1,918
2,152
1,756
1,729
1,973
1,340
1,778
1,348
2,494
2,596
2,430
2,183
2,017
1,847
1,352
616
2,504
2,533
2,363
2,159
1,920
1,749
1,330
649
813
December 31, 2018
2018 Prior
Year
Development
Excluding
the Impact of
Adverse
Development
Reinsurance
Agreement
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Incurred
Impact of
Adverse
Development
Reinsurance
Agreement
2018 (Net of
Impact of
Adverse
Development
Reinsurance
Agreement)
Cumulative
Number of
Reported
Claims
Total of IBNR
Liabilities
Net of Impact
of Adverse
Development
Reinsurance
Agreement
29 $
10
(63)
(67)
(24)
(97)
(98)
(22)
33
166
248
161
243
316
351
388
627
423
703
90,390 $
(111) $
2,773 $
96,333
75,432
42,226
37,105
35,222
32,422
25,409
18,223
11,372
(155)
(103)
(168)
(235)
(276)
(313)
-
-
-
2,349
2,430
2,195
1,924
1,644
1,436
1,330
649
813
55
93
58
75
81
75
75
627
423
703
$ 18,904 $
(299)
$
(1,361) $
17,543
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
(14,044)
-
-
(14,044)
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2009, net of reinsurance
1,556
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
129
43
(767)
789
development, net of reinsurance
$
6,416 $
(127)
$
(2,128) $
4,288
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
Unaudited
$
2,714 $
2,712 $
2,773 $
2,363
2,417
2,208
1,952
1,677
1,377
1,348
-
-
2,361
2,409
2,220
1,958
1,686
1,391
1,352
616
-
2,349
2,430
2,195
1,924
1,644
1,436
1,330
649
813
$
16,056 $
16,705 $
17,543 $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2009, net of reinsurance
812
Unallocated loss adjustment expense prior year development
(14,044)
789
-
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
4,288 $
Change in
Incurred
Loss and
ALAE
61
(12)
21
(25)
(34)
(42)
45
(22)
33
-
25
-
(23)
56
58
256 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
Unaudited
$
(149) $
(143) $
(111) $
(140)
(222)
(163)
(200)
(296)
(401)
-
-
-
(133)
(187)
(210)
(225)
(331)
(456)
-
-
-
(155)
(103)
(168)
(235)
(276)
(313)
-
-
-
$
(1,571) $
(1,685) $
(1,361) $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2009, net of reinsurance
(616)
-
(767)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
(2,128) $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Change in
Incurred
Loss and
ALAE
32
(22)
84
42
(10)
55
143
-
-
-
324
-
(151)
173
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
393
$
842
$
1,253
$
1,650
$
2,002
$
2,241
$
2,386
$
2,607
$
2,664
$
2,687 $
Unaudited
295
661
235
985
726
413
1,358
1,109
743
169
1,640
1,488
1,048
592
210
1,824
1,822
1,395
956
621
111
1,972
2,048
1,690
1,243
871
321
77
2,087
2,220
1,882
1,483
1,157
783
299
51
2,196
2,303
2,023
1,687
1,398
1,103
491
113
43
$
14,044 $
Paid Impact
of Adverse
Development
Reinsurance
Agreement
-
-
-
-
-
-
-
-
-
-
-
AIG | 2018 Form 10-K 257
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Reserving Process and Methodology
U.S. Other Casualty includes general liability, automobile liability, environmental, medical malpractice, and other casualty lines of
business. These lines of business are all long-tail in nature and while somewhat diverse in terms of exposures, these lines are often
subject to similar trends. These lines are often significantly impacted by the underwriting cycle and external judicial trends. Many of
our policies contain risk-sharing features, including high deductibles, self-insured retentions or retrospective rating features, in
addition to a traditional insurance component. These risk-sharing programs generally are large and complex, comprising multiple
products, years and structures, and are subject to amendment over time.
We generally use a combination of loss development methods, frequency/severity and expected loss ratio methods for primary
general liability or products liability product lines. We also supplement the standard actuarial techniques by using evaluations of the
ultimate losses on unusual claims or claim accumulations by external specialists on those subsets of claims. The segmentation of the
data reflects state differences, industry groups, deductible/non-deductible programs and type of claim.
We segment our analysis by line of business and key coverage structures (claims-made vs. occurrence, large deductible policies,
retrospective-rated policies, captives, etc.). Additionally, certain subsets, such as construction defect for general liability, auto liability
policies for trucking business, hospital policies for medical malpractice and underground storage tanks for environmental are generally
reviewed separately from business in other subsets. We continually refine our loss reserving techniques for the domestic primary
casualty product lines and adopt further segmentations based on our analysis of the differing emerging loss patterns for certain
subsets of insureds. Due to the long-tail nature of general liability business, and the many subsets that are reviewed individually, there
is less credibility given to the reported losses and increased reliance on expected loss ratio methods for recent accident years.
For certain product lines with sufficient loss volume, loss development methods may be given significant weight for all but the most
recent one or two accident years. For smaller or more volatile subsets of business and excess of a large deductible business, loss
development methods may be given limited weight for the five or more recent accident years. Expected loss ratio methods are used
for the more recent accident years for these subsets. The loss experience for primary general liability business is generally reviewed
at a level that is believed to provide the most appropriate data for reserve analysis. For other subsets, such as environmental, we
utilize a combination of claim analysts’ loss projections and actuarial methods to estimate ultimate losses.
Expected loss ratio methods are generally given significant weight only in the most recent accident year, except for excess of large
deductible business, in which expected loss ratio methods may receive weight for several of the most recent accident years. In recent
years, the impact of the increase in the frequency of severe claims was projected in the accident years where it was most prevalent.
The resulting increase in ultimate loss projections and loss ratios for those years impacted subsequent years through loss
development factors and prior expected loss ratio assumptions.
258 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Prior Year Development
Primary General Liability
In 2018, we increased our ultimate loss estimates for prior accident years by $214 million mainly due to Construction Casualty
business, particularly construction defect (CD) claims. Our updated analyses for the construction casualty business reacted to
increased severity of claims for both CD and non-CD claims and lengthened the claim reporting pattern for CD claims.
In 2017, we increased our ultimate loss estimates for prior accident years by $330 million. This was driven by reported loss
development being greater than expected as a result of increased loss severity. We revised our loss trend assumptions which also
contributed to increased estimates for the more recent accident years. For older accident years, we experienced increased loss
development from construction defect claims and construction wrap business.
In 2016, we increased our ultimate loss estimates for prior accident years by $754 million. We increased our assumptions about loss
development and expected loss ratios based on the adverse actual versus expected loss emergence driven by increases in severity,
especially in the risk-sharing excess of deductible programs. In addition, our segmentation separately evaluated key structural drivers
recently identified in the data. As a result, we noted the unfavorable development that was driven by construction defect claims which
continue to increase in severity and which exhibit continued higher development at later ages than previously observed. We also
identified and separately analyzed in 2016 certain mass tort claims and increased reserves for such claims due to their much longer
claim emergence and loss development patterns than previously observed.
Primary Commercial Auto Liability
In 2018, we reduced our ultimate loss estimates for prior accident years by $142 million mainly due to favorable emergence in recent
accident years. Our updated analyses for the auto business reacted to this experience in older years as loss trends have stabilized in
the more recent years.
In 2017, we increased our ultimate loss estimates for prior accident years by $42 million. A majority of this development related to
accident year 2016 where reported loss experience has been emerging greater than expected, driven by an increase in the frequency
of large claims. We have experienced severity trends in recent accident years that have been at much higher levels than what has
been reflected in the historic data, although we did see some signs of abatement during the second half of the year.
In 2016, we continued to observe increases in both the frequency and severity of claims occurring in accident years since the recent
U.S. economic downturn. These claims have significantly outpaced both our accident year loss ratio assumptions made in 2015 and
the pricing rate increases implemented during the same period. As a result, we recognized $352 million of unfavorable development
during 2016 as we increased the expected loss ratios for recent accident years to reflect continued market deterioration in the trends
observed in 2016 and the higher reported losses in very recent accident years.
Medical Malpractice
During 2018, we recognized favorable loss development of approximately $158 million as loss emergence was less than expected in
older years due to several large cases settling for less than we expected. Severity in recent years continues to be higher than
historical norms.
During 2017, we recognized favorable loss development of $23 million. Reported loss development was less than expected in
aggregate; although we did continue to see higher loss severity in the more recent accident years. Premium volume has declined
significantly over the last several years and certain segments such as physicians and surgeons, medical products, and nursing homes
business (in certain jurisdictions) have been exited entirely.
During 2016, we recognized $428 million of unfavorable development in U.S. Other Casualty medical malpractice comprising primary
and excess hospitals and nursing homes coverages. This was in reaction to a continued increase in the frequency of unusually large
claims in these classes that drove the adverse actual versus expected loss emergence observed in 2016. Based on the observed
adverse emergence and its sustained levels over the last several years, we increased our expected incurred losses and loss ratios for
accident years 2011 and subsequent to reflect the distinct step change in the loss ratios from accident years 2010 and prior.
Other Lines
During 2018, we recognized favorable loss development of approximately $41 million largely due to our environmental impairment
liability business where loss activity was better than expected.
During 2017, we recognized favorable loss development of $133 million. The key drivers of this activity were favorable development
on loss-sensitive casualty business, environmental impairment liability business, extra-contractual obligations, and business internally
reinsured from other business units.
U.S. Financial Lines
During 2018, we recognized $298 million of unfavorable prior year development in U.S. Financial Lines, net of external
reinsurance but before ADC cessions, due to adverse experience in the Directors and Officers (D&O) subset of business
AIG | 2018 Form 10-K 259
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
During 2017, we recognized $345 million of unfavorable prior year development in U.S. Financial Lines, net of external
reinsurance but before ADC cessions, primarily due to adverse experience in the Directors and Officers (D&O) subset of
business.
The mix of business has been changing in recent years as we write more cyber and mergers and acquisitions business,
which generally report claims faster.
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)
December 31, 2018
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Unaudited
2018 Prior
Year
Development
Excluding
the Impact of
Adverse
Development
Reinsurance
Agreement
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Incurred
Impact of
Adverse
Development
Reinsurance
Agreement
2018 (Net of
Impact of
Adverse
Development
Reinsurance
Agreement)
Cumulative
Number of
Reported
Claims
Total of IBNR
Liabilities
Net of Impact
of Adverse
Development
Reinsurance
Agreement
2009
$ 1,693 $ 1,780 $ 1,845 $ 1,904 $ 2,097 $ 2,189 $ 2,183 $ 2,273 $ 2,310
$
2,322 $
12 $
1,552
1,509
1,406
1,366
1,370
1,472
1,514
1,816
1,734
1,902
1,902
1,935
1,965
1,572
1,739
1,777
1,892
1,986
1,767
1,691
1,643
1,597
1,767
1,736
1,849
1,705
1,744
1,593
1,541
1,997
1,987
1,541
1,898
1,719
1,841
1,560
1,540
1,991
2,011
1,488
1,932
1,759
1,967
1,662
1,637
(1)
(6)
24
(53)
34
40
126
102
62
49
36
150
133
309
433
688
1,017
1,402
22,621 $
(32) $
2,290 $
20,182
20,078
20,122
19,042
17,330
15,873
15,734
14,702
12,936
(37)
(26)
(90)
(89)
(207)
(326)
-
-
-
1,503
1,965
1,921
1,399
1,725
1,433
1,967
1,662
1,637
30
12
10
60
44
102
107
688
1,017
1,402
$ 18,309 $
278
$
(807) $
17,502
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2009, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
(12,253)
79
-
(1)
21
-
(12,253)
(13)
66
development, net of reinsurance
$
6,135 $
298
$
(820) $
5,315
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
Unaudited
$
2,277 $
2,284 $
2,290 $
1,505
1,941
1,904
1,426
1,690
1,411
1,593
-
-
1,510
1,947
1,904
1,415
1,700
1,406
1,841
1,560
-
1,503
1,965
1,921
1,399
1,725
1,433
1,967
1,662
1,637
$
13,747 $
15,567 $
17,502 $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2009, net of reinsurance
36
Unallocated loss adjustment expense prior year development
(12,253)
66
-
Change in
Incurred
Loss and
ALAE
6
(7)
18
17
(16)
25
27
126
102
-
298
-
30
27
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
5,315 $
355
260 AIG | 2018 Form 10-K
The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
Unaudited
$
4 $
(26) $
(32) $
(9)
(24)
(82)
(171)
(159)
(333)
-
-
-
(31)
(50)
(83)
(126)
(198)
(313)
-
-
-
(37)
(26)
(90)
(89)
(207)
(326)
-
-
-
$
(774) $
(827) $
(807) $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2009, net of reinsurance
(42)
-
(13)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
(820) $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
129
$
499
31
$
887
$
1,273
$
1,614
$
1,838
$
1,964
$
2,056
$
2,092
$
2,129 $
Unaudited
285
165
566
494
76
800
886
406
43
1,017
1,210
815
333
66
1,180
1,528
1,252
686
371
66
1,280
1,732
1,497
945
853
393
76
1,361
1,862
1,625
1,142
1,159
792
500
66
1,401
1,888
1,689
1,238
1,386
1,051
986
397
88
$
12,253 $
Change in
Incurred
Loss and
ALAE
(6)
(6)
24
(7)
37
(9)
(13)
-
-
-
20
-
29
49
Paid Impact
of Adverse
Development
Reinsurance
Agreement
-
-
-
-
-
-
-
-
-
-
-
Reserving Process and Methodology
U.S. Financial Lines business includes D&O, Errors and Omissions (E&O), Employment Practices Liability Insurance (EPLI) and
various professional liability subsets of business, as well as the fidelity book of business. This includes cyber coverage and mergers
and acquisitions coverage, which have been a growing and evolving portion of this portfolio. These product lines are predominantly
claims-made in nature, losses are characterized by low frequency and high severity, and results are often significantly impacted by
external economic conditions.
Our analysis is segmented by major coverages, such as D&O, E&O, etc. and then further segmented by major industry groups (e.g.
corporate accounts, national accounts, financial institutions, private/not-for-profit, etc.). We also separately review primary business
from excess business for certain product lines.
AIG | 2018 Form 10-K 261
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
We generally use a combination of loss development methods and expected loss ratio methods for D&O, E&O, EPLI, and
professional liability. These product lines generally are offered on a claims-made basis, and losses are characterized by low frequency
and high severity. In general, expected loss ratio methods are given more weight in the more recent accident years, and loss
development methods are given more weight in more mature accident years. The loss development factors for the different segments
differ significantly in some cases, based on specific coverage characteristics and other factors such as industry group, attachment
points, and limits offered. Individual claims projections for accident years ended over eighteen months prior are also used in the
analysis.
Frequency/severity methods are generally not used in isolation for these product lines as the overall losses are driven by large losses
more than by claim frequency. Severity trends have varied significantly from accident year to accident year and care is required in
analyzing these trends by claim type. We also give weight to claim department ground-up projections of ultimate loss on a claim-by-
claim basis as these may be more predictive of ultimate loss values, especially for older accident years.
We generally use loss development methods for fidelity exposures for all but the latest accident year. We also use claim department
projections of the ultimate value of each reported claim to supplement and inform the standard actuarial approaches and some weight
is given to this method in the more recent accident years. For surety exposures, we generally use the same method as for short-tail
classes whereby frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination
to set reserves.
Expected loss ratio methods are also given weight for the more recent accident years. IBNR factor methods are used, when the
nature of losses is low frequency/high severity. The IBNR factors, when applied to earned premium, generate the ultimate expected
losses (or other exposure measure) yet to be reported. The factors are determined based on prior accident quarters’ loss costs
adjusted to reflect current cost levels and the historical emergence of those loss costs. The factors are continually reevaluated to
reflect emerging claim experience, rate changes or other factors that could affect the adequacy of the IBNR factor being employed.
Prior Year Development
During 2018, we recognized $298 million of unfavorable prior year development particularly across accident years 2014-2017. The
largest share of the unfavorable development came from D&O and EPLI for Corporate and National accounts and resulted largely
from increases in severity as the costs of security class actions increased. Excess D&O also contributed adverse development due to
similar causes.
During 2017, we recognized $345 million of unfavorable prior year development particularly in accident year 2016. The largest share
of the unfavorable development came from D&O for privately owned and not-for -profit insureds and resulted largely from increases in
bankruptcy-related claims and fiduciary liability claims for large educational institutions. Other segments of the portfolio contributed
largely offsetting favorable and unfavorable development; notably, development was unfavorable for excess D&O and employment
practices liability while development was favorable for fidelity and D&O for corporate and national accounts.
During 2016, we recognized $306 million of unfavorable prior year development as we reacted to the unfavorable actual versus
expected in 2016 driven by higher than expected settlements on several large claims from the financial crisis for accident years 2006
to 2010, as well as unfavorable emergence of errors and omissions losses relative to historical expectations. In addition to the
unfavorable emergence, we also updated our loss development factor assumptions, expected loss ratio assumptions and the weights
given to the various methods in recent accident years.
U.S. Property and Special Risks
During 2018, we recognized $497 million of favorable prior year development in U.S. Property and Special Risks, net of
external reinsurance but before ADC cessions, mainly due to favorable development from the 2017 Catastrophes.
During 2017, we recognized $115 million of unfavorable prior year development in U.S. Property and Special Risks, net of
external reinsurance but before ADC cessions, mainly due to unfavorable development from the commercial auto portion of
the Program business unit, which offers multiline policies to small and mid-sized insureds.
262 AIG | 2018 Form 10-K
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)
December 31, 2018
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Unaudited
2018 Prior
Year
Development
Excluding the
Impact of
Adverse
Development
Reinsurance
Agreement
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Incurred
Impact of
Adverse
Development
Reinsurance
Agreement
2018 (Net of
Impact of
Adverse
Development
Reinsurance
Agreement)
Total of IBNR
Liabilities
Net of Impact
of Adverse
Development
Reinsurance
Agreement
Cumulative
Number of
Reported
Claims
2009
$ 2,239 $ 1,986 $ 1,959 $ 1,961 $ 1,920 $ 1,900 $ 1,887 $ 1,894 $ 1,896
$
1,896 $
- $
2,786
2,533
2,489
2,561
2,578
2,558
2,567
3,855
3,713
3,638
3,628
3,612
3,652
4,191
4,302
4,278
4,234
4,346
2,526
2,545
2,402
2,449
2,931
2,684
2,746
3,116
2,970
3,168
2,579
3,651
4,343
2,463
2,738
2,916
3,193
5,246
2,569
3,645
4,325
2,465
2,756
2,894
3,117
4,796
3,712
(10)
(6)
(18)
2
18
(22)
(76)
(450)
22
68
56
95
73
140
221
366
866
1,609
47,707 $
(11) $
1,885 $
47,645
49,597
48,782
50,165
60,612
58,936
53,727
77,335
56,580
(18)
(15)
(19)
(27)
(64)
(87)
-
-
-
2,551
3,630
4,306
2,438
2,692
2,807
3,117
4,796
3,712
11
50
41
76
46
76
134
366
866
1,609
$ 32,175 $
(562)
$
(241)
31,934
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2009, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
(25,689)
362
-
39
26
-
(25,689)
(73)
289
development, net of reinsurance
$
6,848 $
(497)
$
(314)
6,534
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
Unaudited
$
1,882 $
1,883 $
1,885 $
2,558
3,632
4,319
2,422
2,679
2,829
3,168
-
-
2,561
3,632
4,318
2,425
2,677
2,818
3,193
5,246
-
2,551
3,630
4,306
2,438
2,692
2,807
3,117
4,796
3,712
Change in
Incurred
Loss and
ALAE
2
(10)
(2)
(12)
13
15
(11)
(76)
(450)
-
$
23,489 $
28,753 $
31,934 $
(531)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2009, net of reinsurance
244
Unallocated loss adjustment expense prior year development
(25,689)
289
-
-
45
58
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
6,534 $
(428)
AIG | 2018 Form 10-K 263
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
Unaudited
$
(12) $
(13) $
(11) $
(9)
(20)
(27)
(27)
(67)
(141)
-
-
-
(18)
(19)
(25)
(38)
(61)
(98)
-
-
-
(18)
(15)
(19)
(27)
(64)
(87)
-
-
-
$
(303) $
(272) $
(241) $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2009, net of reinsurance
(79)
-
(73)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
(314) $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Change in
Incurred
Loss and
ALAE
2
-
4
6
11
(3)
11
-
-
-
31
-
6
37
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
551
$
1,160
$
1,442
$
1,626
$
1,731
$
1,793
$
1,816
$
1,838
$
1,853
$
1,857 $
Unaudited
757
1,574
1,021
1,911
2,336
842
2,113
2,920
2,716
736
2,247
3,183
3,420
1,578
901
2,371
3,384
3,785
1,855
1,748
1,045
2,440
3,481
4,001
2,056
2,083
1,866
1,018
2,476
3,529
4,137
2,203
2,296
2,228
2,039
1,356
2,492
3,560
4,170
2,317
2,434
2,484
2,367
2,941
1,067
$
25,689 $
Paid Impact
of Adverse
Development
Reinsurance
Agreement
-
-
-
-
-
-
-
-
-
-
-
264 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Reserving Process and Methodology
U.S. Property products include commercial, industrial and energy-related property insurance products and services that cover
exposures to manmade and natural disasters, including business interruption. U.S. Special Risk products include aerospace,
environmental, political risk, trade credit, surety and marine insurance, and program business for various small and medium sized
enterprises insurance lines. The program segments include both property and casualty exposures.
We primarily segment our analysis by line of business. Additionally, we separately review various subsets, including hull, cargo, and
liability for marine business, aviation and satellite for aerospace business, and various other specific programs and product lines.
Frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves
for short-tail classes such as U.S. Property.
IBNR factor methods are used when the nature of losses is low frequency/high severity. The IBNR factors, when applied to earned
premium, generate the ultimate expected losses (or other exposure measure) yet to be reported. The factors are determined based
on prior accident quarters’ loss costs adjusted to reflect current cost levels and the historical emergence of those loss costs. The
factors are continually reevaluated to reflect emerging claim experience, rate changes or other factors that could affect the adequacy
of the IBNR factor being employed.
We generally use a combination of loss development methods and expected loss ratio methods for aviation exposures. Aviation
claims are not very long-tail in nature; however, they are driven by claim severity. Thus a combination of both development and
expected loss ratio methods is used for all but the latest accident year to determine the loss reserves. Frequency/severity methods
are not employed due to the high severity nature of the claims and different mix of claims from year to year.
We generally use loss development methods for fidelity exposures for all but the latest accident year. We also use claim department
projections of the ultimate value of each reported claim to supplement and inform the standard actuarial approaches and some weight
is given to this method in the more recent accident years. The claims staff also provides specific estimates to assist in the setting of
reserves for natural catastrophe losses.
For program business, we use methods which vary by line of business. For property classes, we use methods similar to those noted
above. For liability classes, we use methods similar to those described in the casualty sections detailed above.
Expected loss ratio methods are used to determine the loss reserves for the latest accident year. We also use ground-up claim
projections provided by our claims staff to assist in developing the appropriate reserve.
Prior Year Development
During 2018, we recognized $497 million of favorable prior year development in U.S. Property and Special Risks driven largely by
favorable development on the 2017 Catastrophes as well as favorable emergence on non-Catastrophe Commercial Property, and
Program and Specialty classes.
During 2017, we recognized $115 million of unfavorable prior year development primarily driven by commercial auto business in the
program business unit. A significant portion of this development came from accident year 2016 with much of it related to programs
that have been terminated over the past year. We also experienced some individual severe loss experience, also mostly related to
accident year 2016 in other lines of business including aviation, surety, and marine; however, this was largely offset by favorable
development in commercial property.
During 2016, we recognized $396 million of unfavorable prior year development driven by our U.S. program business where we
recognized $350 million of unfavorable prior year development due to higher than expected claim emergence in certain automobile,
habitational and professional liability programs that resulted in our increasing expected loss ratios and loss development factors for
several program subsets.
U.S. Personal Insurance
During 2018, we recognized $255 million of unfavorable prior year development in U.S. Personal Insurance, net of external
reinsurance but before ADC cessions, mainly due to catastrophe development from accident year 2017.
During 2017, we recognized $16 million of unfavorable prior year development in U.S. Personal Insurance, net of external
reinsurance but before ADC cessions, mainly due to homeowners business in accident year 2016. This was partially offset
by favorable development in accident and health business.
AIG | 2018 Form 10-K 265
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (dollars in millions)
December 31, 2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Agreement
Losses
2018 Prior
Year
Development
Excluding
the Impact of
Adverse
Development
Reinsurance
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Accident
Year
Incurred
Impact of
Adverse
Development
Reinsurance
Agreement
2018 (Net of
Impact of
Adverse
Development
Reinsurance
Agreement)
Cumulative
Number of
Reported
Claims
Total of IBNR
Liabilities
Net of Impact
of Adverse
Development
Reinsurance
Agreement
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
2009
$ 1,763 $ 1,697 $ 1,649 $ 1,663 $ 1,664 $ 1,664 $ 1,668 $ 1,667 $ 1,671
$
1,672 $
Unaudited
1,843
1,809
1,819
1,819
1,820
1,819
1,817
1,886
1,908
1,896
1,891
1,890
1,886
2,208
2,128
2,109
2,083
2,077
1,887
1,816
1,803
1,782
1,552
1,562
1,572
1,511
1,498
1,536
1,817
1,881
2,094
1,780
1,572
1,494
1,533
2,028
1,815
1,879
2,095
1,776
1,583
1,483
1,533
2,287
2,188
1 $
(2)
(2)
1
(4)
11
(11)
-
259
3
1
1
2
3
20
13
38
359
723
376,026 $
(1) $
1,671 $
422,639
412,893
403,738
334,879
274,205
259,543
244,935
213,741
73,321
(1)
(1)
(2)
(2)
(12)
(11)
-
-
-
1,814
1,878
2,093
1,774
1,571
1,472
1,533
2,287
2,188
2
-
-
-
1
8
2
38
359
723
$ 18,311 $
253
$
(30)
18,281
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2009, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
(16,500)
(73)
-
2
-
-
(16,500)
(2)
(75)
development, net of reinsurance
$
1,738 $
255
$
(32)
1,706
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
Unaudited
$
1,670 $
1,671 $
1,671 $
1,816
1,881
2,088
1,774
1,564
1,476
1,536
-
-
1,816
1,880
2,091
1,774
1,564
1,475
1,533
2,028
-
1,814
1,878
2,093
1,774
1,571
1,472
1,533
2,287
2,188
$
13,805 $
15,832 $
18,281 $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2009, net of reinsurance
(77)
Unallocated loss adjustment expense prior year development
(16,500)
(75)
-
Change in
Incurred
Loss and
ALAE
-
(2)
(2)
2
-
7
(3)
-
259
-
261
-
2
1
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
1,706 $
264
266 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
Unaudited
Change in
Incurred
Loss and
ALAE
$
3 $
- $
(1) $
(1)
(1)
(5)
11
(8)
(8)
(22)
-
-
-
(1)
(1)
(3)
(6)
(8)
(19)
-
-
-
(1)
(1)
(2)
(2)
(12)
(11)
-
-
-
$
(30) $
(38) $
(30) $
-
-
1
4
(4)
8
-
-
-
8
-
-
8
Paid Impact
of Adverse
Development
Reinsurance
Agreement
-
-
-
-
-
-
-
-
-
-
-
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2009, net of reinsurance
(2)
-
(2)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
(32) $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (dollars in millions)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
1,129
$
1,563
$
1,567
$
1,618
$
1,639
$
1,650
$
1,658
$
1,663
$
1,664
$
1,667 $
Unaudited
1,205
1,669
1,204
1,736
1,752
1,238
1,772
1,814
1,936
1,109
1,794
1,840
1,996
1,634
959
1,803
1,860
2,035
1,705
1,380
931
1,808
1,869
2,065
1,744
1,463
1,320
857
1,810
1,873
2,079
1,759
1,507
1,411
1,344
941
1,812
1,874
2,085
1,766
1,536
1,439
1,422
1,672
1,227
$
16,500 $
AIG | 2018 Form 10-K 267
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Reserving Process and Methodology
U.S. Personal Insurance consists of accident and health and personal lines. Accident and health products include voluntary and
sponsor-paid personal accident and supplemental health products for individuals, employees, associations and other organizations as
well as a broad range of travel insurance products and services for leisure and business travelers. Personal lines include automobile
and homeowners’ insurance, extended warranty, and consumer specialty products, such as identity theft and credit card protection.
Personal lines also provides insurance for high net worth individuals offered through AIG Private Client Group, including auto,
homeowners, umbrella, yacht, fine art and collections insurance. Personal lines are generally short-tail in nature.
We primarily segment our analysis by line of business and may separately review various sub-segments, such as specific accident
and health products and property damage versus liability for personal lines products.
Frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves
for short-tail product lines such as personal property.
Frequency/severity and loss development methods are utilized for domestic personal auto product lines.
For these classes of business, reliance is placed on frequency/severity methods as claim counts emerge quickly for personal auto.
Frequency/severity methods allow for more immediate analysis of resulting loss trends and comparisons to industry and other
diagnostic metrics.
In general, development for U.S. Personal Insurance classes has been very stable, with only modest changes in the initial selected
loss ratios for this business.
Prior Year Development
During 2018, we recognized $255 million of adverse prior year development in US Personal Insurance driven largely by development
on the California Wildfires and Hurricane Irma in 2017.
During 2017, we recognized $16 million of unfavorable prior year development in U.S. Personal Insurance mainly due to homeowners
business in accident year 2016, particularly from catastrophe activity. This was partially offset by favorable development in accident
and health business.
During 2016, we recognized $32 million of favorable development mainly driven by accident and health business.
UK/Europe Casualty and Financial Lines
During 2018, we recognized $58 million of unfavorable prior year development in Europe Casualty and Financial Lines
driven by greater frequency of large losses than expected.
During 2017, we recognized $507 million of unfavorable prior year development in UK/Europe Casualty and Financial Lines,
net of external reinsurance, driven by continued higher than expected loss emergence.
268 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance*
Years Ended December 31, (dollars in millions)
December 31, 2018
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Cumulative
Number of
Reported
Claims
2018 Prior
Year
Development
$ 1,825
$ 1,741
$ 1,721
$ 1,786
$ 1,822
$ 1,833
$ 1,841
$ 1,923
$ 1,957
$
1,952 $
(5) $
Unaudited
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
1,421
1,376
1,361
1,383
1,403
1,307
1,375
1,183
1,153
1,190
1,330
1,409
1,108
1,241
1,262
1,365
1,493
1,172
1,211
1,247
1,321
1,330
1,494
1,209
1,182
1,279
1,484
1,538
1,399
1,540
1,185
1,237
1,289
1,514
1,686
1,558
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2009, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
86
66
71
78
116
252
453
565
871
237,608
275,528
265,751
219,045
186,848
177,454
191,382
227,036
241,031
1,118
212,169
1,404
1,557
1,245
1,223
1,242
1,514
1,754
1,530
1,518
5
17
60
(14)
(47)
-
68
(28)
$ 14,939 $
56
(8,529)
612
-
1
1
development, net of reinsurance
$
7,022 $
58
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance*
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Years Ended December 31, (dollars in millions)
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
180
$
430
$
689
$
924
$
1,088
$
1,220
$
1,383
$
1,519
$
1,621
$
Unaudited
139
395
133
606
362
115
775
543
320
100
909
779
464
363
83
1,003
923
642
525
290
83
1,069
1,063
774
676
480
285
145
1,124
1,177
864
823
620
501
427
108
1,680
1,148
1,242
969
954
747
671
671
322
125
$
8,529
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
AIG | 2018 Form 10-K 269
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Reserving Process and Methodology
UK/Europe is our largest non-U.S. region for Liability and Financial Lines. UK/Europe Casualty and Financial Lines is composed of
third-party coverages including general liability, auto liability, D&O, professional liability and various other lines of business throughout
both the UK and Continental Europe. These lines of business are all long-tail in nature and while somewhat diverse in terms of
exposures, these lines are often subject to similar trends. These lines are impacted by the underwriting cycle and external judicial
trends. The largest share of business is in the UK, but significant business is also written in other European countries such as
Germany, France, and Italy.
We primarily segment our analysis by country and line of business. Additionally, we separately review various product lines, including
excess versus primary casualty, commercial versus financial institutions management liability, and other specific programs and
subsets of business. We maintain a database of detailed historical premium and loss transactions in original currency for business
written outside of the U.S. which allows our actuaries to determine loss reserves without foreign exchange distorting development.
We generally use a combination of loss development methods and expected loss ratio methods. For countries and lines of business
with sufficient loss volume, loss development methods may be given significant weight for all but the most recent accident years. For
smaller countries and more volatile product lines, loss development methods are typically given limited weight for recent accident
years. Further, we may rely on larger data subsets in determining the loss development factors and a priori loss ratio assumptions.
In general, the loss development for long-tail lines in UK/Europe has been more stable than the development in U.S. long-tail lines,
although some underlying drivers have affected the results in a similar manner (e.g. the impact of the financial crisis in accident years
2008 and 2009).
Prior Year Development
During 2018, we recognized $58 million of unfavorable prior year development in UK/Europe Casualty and Financial Lines driven by
increased large loss activity in recent accident years, particularly related to directors and officers class action suits against insureds
with global exposure; and increased severity in excess casualty.
During 2017 we recognized $507 million of unfavorable prior year development in UK/Europe casualty and Financial Lines. We
observed a significant increase in large claims activity across multiple segments, notably excess casualty business and D&O and
professional liability coverages for financial institutions. This experience was spread across multiple accident years but had the largest
impact on accident year 2016 and accident years 2008 and prior. We increased loss development assumptions for Financial Lines
business in consideration of the increased loss activity experienced in older accident years and increased expected loss ratios for
more recent accident years. For Casualty lines, we increased loadings for large losses, particularly in the more recent accident years.
In addition, we increased our loss reserves as a result of the decision made by the U.K. Ministry of Justice to reduce the discount rate
applied to lump-sum bodily injury payouts, known as the Ogden rate.
During 2016, we recognized $320 million of unfavorable prior year development. Within UK/Europe Financial Lines, we recognized
$232 million of unfavorable development primarily from the D&O line in UK and Continental Europe as result of the unfavorable actual
versus expected loss emergence in 2016 due to increased frequency and severity resulting from increasing litigation. In UK/Europe
Casualty we recognized $123 million of unfavorable development primarily from the unexpected emergence of several large excess
casualty claims. The actual versus expected loss emergence for UK/Europe Casualty and Financial Lines was more than expected.
UK/Europe Property and Special Risks
During 2018, we recognized $22 million of favorable prior year development in the UK/Europe Property and Special Risks
segment, net of external reinsurance.
During 2017, we recognized $157 million of unfavorable prior year development in the UK/Europe Property and Special
Risks segment, net of external reinsurance, driven primarily by unexpected development on large claims, primarily from
accident years 2015 and 2016.
270 AIG | 2018 Form 10-K
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance*
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Years Ended December 31, (dollars in millions)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
December 31, 2018
Total of IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Cumulative
Number of
Reported
Claims
2018 Prior
Year
Development
$ 1,244
$ 1,090
$ 1,060
$ 1,009
$
992
$
986
$
971
$
973
$
Unaudited
1,679
1,544
1,416
1,388
1,339
1,323
1,327
1,225
1,226
1,460
1,304
1,191
1,161
1,450
1,564
1,283
1,161
1,137
1,340
1,578
1,729
1,280
1,150
1,118
1,320
1,566
1,685
1,644
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2009, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
development, net of reinsurance
4
1
8
3
(3)
27
40
58
148
570
46,280
50,111
50,560
45,379
44,711
53,009
58,471
59,513
54,052
34,370
970
1,281
1,151
1,128
1,310
1,553
1,698
1,698
1,923
$
950 $
(20) $
1,282
1,145
1,117
1,304
1,564
1,676
1,738
1,913
1,564
1
(6)
(11)
(6)
11
(22)
40
(10)
$ 14,253 $
(23)
(11,305)
40
-
3
(2)
$ 2,988 $
(22)
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance*
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Years Ended December 31, (dollars in millions)
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
272
$
624
$
780
$
854
$
896
$
910
$
927
$
931
$
933
$
Unaudited
413
900
339
1,077
778
280
1,168
969
725
334
1,207
1,045
917
839
336
1,236
1,068
985
1,079
972
402
1,245
1,085
1,031
1,158
1,270
1,035
475
1,252
1,094
1,057
1,209
1,345
1,335
1,178
396
935
1,258
1,101
1,066
1,229
1,385
1,449
1,442
1,098
342
$
11,305
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
AIG | 2018 Form 10-K 271
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Reserving Process and Methodology
UK/Europe Property products include commercial, industrial and energy-related property insurance products and services that cover
exposures to manmade and natural disasters, including business interruption. UK/Europe Special Risk products include aerospace,
environmental, political risk, trade credit, surety and marine insurance, and various small and medium sized enterprises insurance
lines.
We primarily segment our analysis by line of business. Additionally, we separately review various subsets, including hull, cargo, and
liability for marine business, aviation and satellite for aerospace business, and various other specific programs and product lines.
Frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves
for short-tail classes such as UK/Europe Property.
IBNR factor methods are used when the nature of losses is low frequency/high severity. The IBNR factors, when applied to earned
premium, generate the ultimate expected losses (or other exposure measure) yet to be reported. The factors are determined based
on prior accident quarters’ loss costs adjusted to reflect current cost levels and the historical emergence of those loss costs. The
factors are continually reevaluated to reflect emerging claim experience, rate changes or other factors that could affect the adequacy
of the IBNR factor being employed.
We generally use a combination of loss development methods and expected loss ratio methods for aviation exposures. Aviation
claims are not very long-tail in nature; however, they are driven by claim severity. Thus a combination of both development and
expected loss ratio methods is used for all but the latest accident year to determine the loss reserves. Frequency/severity methods
are not employed due to the high severity nature of the claims and different mix of claims from year to year.
We generally use loss development methods for fidelity exposures for all but the latest accident year. We also use claim department
projections of the ultimate value of each reported claim to supplement and inform the standard actuarial approaches and some weight
is given to this method in the more recent accident years. The claims staff also provides specific estimates to assist in the setting of
reserves for natural catastrophe losses.
Expected loss ratio methods are used to determine the loss reserves for the latest accident year. We also use ground-up claim
projections provided by our claims staff to assist in developing the appropriate reserve.
Prior Year Development
During 2018, we recognized $22 million of favorable prior year development in the Europe Property and Special Risks segment driven
by favorable development across most accident years with some adverse development in accident years 2014 and 2016.
During 2017, we recognized $157 million of unfavorable prior year development, primarily from accident years 2015 and 2016. This
was largely driven by large individual claim development in the property, aviation, marine, and trade credit lines of business.
During 2016, we recognized $11 million of unfavorable prior year development, primarily from the property segment.
UK/Europe and Japan Personal Insurance
During 2018, we recognized $116 million of favorable prior year development in UK/Europe and Japan Personal Insurance,
net of external reinsurance.
During 2017, we recognized $58 million of favorable prior year development in UK/Europe and Japan Personal Insurance,
net of external reinsurance, mainly due to accident and health business.
272 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance*
Years Ended December 31, (dollars in millions)
December 31, 2018
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
2018 Prior
Year
Development
$ 3,037
$ 2,979
$ 2,973
$ 2,992
$ 2,980
$ 2,976
$ 2,971
$ 2,972
$ 2,973
$
2,971 $
(2) $
Unaudited
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
2,945
2,993
3,241
2,994
3,301
2,856
2,982
3,267
2,838
2,705
2,983
3,269
2,819
2,706
2,668
2,977
3,258
2,804
2,671
2,677
2,738
3,005
3,262
2,813
2,672
2,660
2,714
2,690
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2009, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
development, net of reinsurance
Cumulative
Number of
Reported
Claims
1,606,155
1,819,899
1,777,851
1,730,053
1,736,129
1,792,742
1,771,419
1,791,483
1,691,824
1,636,511
2
5
5
8
12
19
38
83
170
641
3,009
3,261
2,814
2,669
2,651
2,702
2,656
2,631
3,007
3,261
2,811
2,663
2,643
2,694
2,643
2,548
3,089
(2)
-
(3)
(6)
(8)
(8)
(13)
(83)
$ 28,330 $
(125)
(26,111)
45
-
9
-
$
2,264 $
(116)
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance*
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Years Ended December 31, (dollars in millions)
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
1,714
$
2,491
$
2,732
$
2,840
$
2,894
$
2,923
$
2,939
$
2,951
$
2,957
$
Unaudited
1,690
2,480
1,971
2,723
2,766
1,596
2,833
2,999
2,335
1,483
2,889
3,111
2,562
2,217
1,457
2,924
3,174
2,668
2,432
2,194
1,478
2,943
3,203
2,724
2,537
2,413
2,235
1,478
2,954
3,219
2,754
2,593
2,523
2,456
2,199
1,446
2,959
2,961
3,228
2,770
2,623
2,579
2,574
2,416
2,156
1,845
$
26,111
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
AIG | 2018 Form 10-K 273
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Reserving Process and Methodology
UK/Europe and Japan Personal Insurance lines consist of accident and health and personal lines. Accident and health products
include voluntary and sponsor-paid personal accident and supplemental health products for individuals, employees, associations and
other organizations as well as a broad range of travel insurance products and services for leisure and business travelers. Personal
lines include automobile and homeowners’ insurance, extended warranty, and consumer specialty products, such as identity theft and
credit card protection. Personal lines are generally short-tail in nature.
We primarily segment our analysis by line of business (and by country for UK/Europe and Japan business) and may separately
review various sub-segments, such as specific accident and health products and property damage versus liability for other personal
lines products.
Frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves
for short-tail product lines such as personal property.
Frequency/severity and loss development methods are utilized for domestic personal auto product lines.
For these classes of business, reliance is placed on frequency/severity methods as claim counts emerge quickly for personal auto.
Frequency/severity methods allow for more immediate analysis of resulting loss trends and comparisons to industry and other
diagnostic metrics.
In general, development for UK/Europe and Japan Personal Insurance classes has been very stable, with only modest changes in the
initial selected loss ratios for this business.
Prior Year Development
During 2018, we recognized $116 million of favorable prior year development in UK/Europe and Japan Personal Insurance due to
favorable emergence on catastrophes, accident and health business, and personal auto business.
During 2017 and 2016, we recognized $58 million and $82 million of favorable development, respectively, mainly driven by the
accident and health business.
U.S. Run-Off Long Tail Insurance Lines
During 2018, the U.S. Run-Off Long Tail Insurance Lines experienced favorable prior year development of $4 million, net of
external reinsurance.
During 2017, the U.S. Run-Off Long Tail Insurance Lines experienced favorable prior year development of $30 million, net of
external reinsurance, driven primarily by favorable asbestos development.
274 AIG | 2018 Form 10-K
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance*
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Years Ended December 31, (dollars in millions)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
December 31, 2018
Total of IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Cumulative
Number of
Reported
Claims
2018 Prior
Year
Development
$
553
$
$
532
640
$
544
528
534
Unaudited
$
579
534
542
629
$
635
557
576
678
482
$
$
602
585
641
741
533
379
599
582
676
786
589
475
439
$
580
611
685
751
570
453
523
294
576
565
700
752
528
459
550
285
197
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2009, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
development, net of reinsurance
76
52
83
49
51
76
85
53
147
35
16,251
8,530
7,816
4,070
2,547
2,346
2,357
1,646
640
282
$
584 $
8 $
559
687
702
511
383
503
274
238
76
(6)
(13)
(50)
(17)
(76)
(47)
(11)
41
$ 4,517 $
(171)
(3,256)
-
3,574
154
13
$ 4,835 $
(4)
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance*
Accident Year
2009
2010
2011
2012
2013
Unaudited
2014
2015
2016
2017
2018
Years Ended December 31, (dollars in millions)
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$
42
$
$
134
57
$
231
149
21
$
286
243
140
86
$
368
321
259
194
87
$
409
404
385
286
154
21
$
429
435
449
414
261
96
35
$
447
455
532
481
321
185
132
53
461
464
549
498
368
233
238
140
13
$
$
472
473
559
525
390
262
320
163
59
33
3,256
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
AIG | 2018 Form 10-K 275
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Reserving Process and Methodology
U.S. Run-Off Long Tail Insurance lines include run-off lines for asbestos and environmental (1986 and prior), excess workers’
compensation, and other casualty coverages consisting of environmental impairment liability and related coverages, medical
malpractice, workers’ compensation, and general liability. In some cases, the exposures in the more recent years have declined since
the portfolio is in run-off.
Asbestos and Environmental (1986 and prior)
Asbestos coverage has been excluded from AIG policies commencing in 1985. Most of AIG’s asbestos claims exposures are ceded to
National Indemnity Company (NICO) under a retroactive reinsurance arrangement entered into in 2011. Many of other asbestos-
related exposures are very long-tailed in nature and with exposures dating back 30 years or more. We consider a number of factors
and recent experience in addition to the results of both external and internal analyses, to estimate asbestos and pre-1986
environmental loss reserves. We primarily base our determination of these loss reserves on a combination of ground-up and top-
down analyses of historical claims and available insurance coverages. Nonetheless, we believe that significant uncertainty remains
as to our ultimate liability for asbestos and environmental claims, which is due to several factors, including:
•
the long latency period between asbestos exposure and disease manifestation, and pollution events occurring undetected over
many years, leading to the potential for involvement of multiple policy periods for individual claims;
• claims filed under the non-aggregate premises or operations section of general liability policies;
•
the number of insureds seeking bankruptcy protection and the effect of prepackaged bankruptcies;
• diverging legal interpretations; and
•
the difficulty in estimating the allocation of remediation cost among various parties with respect to environmental claims.
Loss reserves for asbestos and environmental claims cannot be estimated using conventional reserving techniques such as those
that rely on historical accident year loss development factors. The methods used to determine asbestos and environmental loss
estimates and to establish the resulting reserves are continually reviewed and updated by management.
Excess Workers’ Compensation
Excess workers’ compensation has an extremely long tail and is one of the most challenging lines of business from a reserving
perspective, particularly when the excess coverage is provided above a self-insured retention layer. The class is highly sensitive to
small changes in assumptions (for example — in the rate of medical inflation or the longevity of injured workers) which can have a
significant effect on the ultimate reserve cost estimate.
Excess Workers’ Compensation business was written over qualified self-insurance by various divisions beginning in the 1980’s. In
1992, this business was consolidated into one division where it continued writing business up until 2011, when it was effectively put
into runoff. In this book of business, the claims are not handled (or administered) by AIG General Insurance claims personnel, but are
administered by the client’s designated TPA. However, AIG General Insurance claims personnel maintain an oversight role over these
TPAs and claims.
Loss and loss adjustment expense liability estimates for excess workers’ compensation exposures are subject to additional
uncertainties, due to the following:
• claim settlement time is longer than most other casualty lines, due to the lifetime benefits that can be expected to payout on certain
claims;
• coverage statutes that vary by state; and
•
future medical inflation costs are difficult to estimate
For this business, a combination of traditional methods (paid and incurred loss development) and non-traditional methods (individual
claim annuity model, report yea incurred loss development, and pure IBNR count/severity methods) are used to estimate loss and
loss expense liability estimates. Loss data is segmented so as to reflect the anomalies in the historical data due to the various loss
mitigation initiatives employed over the last several years.
276 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Other Casualty Run-Off
As noted above, other legacy exposures include environmental impairment liability and related coverages, medical malpractice,
workers’ compensation, and general liability. Depending on the individual class or lines of business reviewed, either traditional
methods (i.e. paid loss development, incurred loss development), non-traditional methods (such as paid survival ratio or IBNR-to-case
ratio methods) or a combination of the two are used. In addition, for some of the environmental impairment liability related coverage,
approaches based on individual claim department estimates for large remediation sites are extensively included as part of the overall
actuarial estimates for environmental impairment liability related exposures.
Prior Year Development
During 2018, the U.S. Run-Off Long Tail Insurance Lines recognized $4 million of favorable prior year development with adverse
development on pre-1986 pollution business offset by favorable development in Excess Auto Liability, Environmental, and Healthcare
Lines.
During 2017, the U.S. Run-Off long tail insurance lines recognized $30 million of favorable prior year development.
During 2016, the U.S. Run-Off long tail insurance lines recognized $390 million of unfavorable prior year development.
Asbestos and Environmental (1986 and prior)
In 2018, we recognized no change on the retained portion of asbestos claims. The development on the portion of the asbestos
business ceded to NICO was unfavorable by $96 million on a gross basis, but had no net impact. For environmental, we recognized
$150 million in unfavorable prior year development as a result of adverse claim emergence and top-down actuarial analyses
performed during the year.
In 2017, we recognized favorable net prior year development of $37 million on the retained portion of asbestos claims. This was
primarily due to additional reinsurance recoveries identified for this portfolio. The development on the portion of the asbestos business
ceded to NICO was unfavorable by $50 million on a gross basis, but had no net impact. For environmental, we recognized $22 million
in unfavorable prior year development in consideration of activity related to several large clean-up sites and related accounts as well
as a result of top-down actuarial analyses performed during the year. As part of this analysis, we increased our estimates of
unallocated loss adjustment expense reserves for such claims, which were partially offset by a decrease in indemnity reserves.
In 2016, we increased gross undiscounted asbestos incurred losses by $106 million and decreased net undiscounted asbestos
incurred losses by $20 million. The gross undiscounted change reflects an increase in estimates related to our accounts retroceded to
NICO. The favorable development of the net incurred losses was largely a result of higher estimated external reinsurance recoveries
on our retained asbestos exposures. For environmental, we increased incurred losses by $211 million primarily due to unfavorable
development on several large clean-up sites and related accounts as well as a result of top down actuarial analyses performed during
the year.
Excess Workers’ Compensation
We did not recognize any material development in this segment during 2018, 2017 or 2016. The proactive management of settlement
negotiations and other claims mitigation strategies minimized the volatility observed during this period.
AIG | 2018 Form 10-K 277
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Other Casualty Run-Off
During 2018, prior year development was favorable by $154 million driven by favorable emergence on runoff excess trucking,
Environmental and Healthcare segments and other runoff lines.
In 2017, the net prior year development for the remaining legacy was favorable by $15 million. We experienced favorable
development on runoff medical malpractice and environmental impairment liability business, which was partially offset by net
unfavorable development on other casualty segments.
We increased the reserves for these coverages by $190 million during 2016 to reflect updated assumptions about future loss
development. The increase was driven by runoff public entity business where we reacted to the adverse emergence over the last year
by increasing our loss development factors to reflect the portfolio’s experience especially in the loss tail instead of relying on the
overall excess casualty loss development factors.
The table below presents the reconciliation of change in net ultimates from tables above to prior year development for the
year ended December 31, 2018:
Amortization of
Deferred Gain at
Inception
Prior Year
Development
(in millions)
U.S. Workers' Compensation
U.S. Excess Casualty
U.S. Other Casualty
U.S. Financial Lines
U.S. Property and Special risks
U.S. Personal Insurance
UK/Europe Casualty and Financial lines
UK/Europe Property and Special risks
UK/Europe and Japan Personal Insurance
U.S. Run-Off Long Tail Insurance Lines
Other product lines
Change in Loss
and Loss
Adjustment
Expenses Net
Ultimate(a)
(498)
$
Re-Attribution of
ADC Recovery(b)
589
$
762
58
355
(401)
264
63
(24)
(116)
(4)
136
(370)
(26)
(109)
(69)
(14)
-
-
-
-
(1)
$
$
(73)
(56)
(51)
(37)
(13)
(2)
-
-
-
-
(1)
Subtotal, adjusted pre-tax basis
$
595
$
-
$
(233)
$
Remove benefit of Retroactive Reinsurance
Amortization of deferred gain at inception
Prior year development ceded under the Asbestos LPT
Prior year development ceded under the ADC
18
336
(19)
209
(483)
248
63
(24)
(116)
(4)
134
362
233
96
738
Total, prior years, excluding discount and amortization of deferred gain
$
1,429
(a) Change in net ultimate loss and LAE excludes the portion of prior year development for which we have ceded to the Asbestos Loss Portfolio Transfer (LPT) and the
Adverse Development Cover (ADC), both of which are provided by NICO and are considered retroactive reinsurance under US GAAP. Amounts shown exclude $30
million of pre-acquisition prior year development from Validus. Validus' pre-acquisition development is included in the 10-year triangles shown above but is not included
in AIG's financial results.
(b) Reattribution of the ADC recovery takes place annually as we model the future payments on the subject reserves covered by the ADC to determine when the aggregate
payments will exceed the attachment. ADC recoverables are then reallocated by line based on payments expected to be made after attachment point is exceeded.
278 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
Prior Year Development before 2009
The previous development tables include only accident years 2009 to 2018. The following table summarizes (favorable)
unfavorable development, of incurred losses and loss adjustment expenses for accident year 2008 and prior by operating
segment and major class of business:
Years Ended December 31,
(in millions)
2008 and prior accident year development, excluding the impact of
Adverse Development Reinsurance Agreement, by major class of
of business and driver of development:
U.S. Workers' compensation (before discount)
U.S. Excess casualty
U.S. Other casualty
U.S. Financial lines
U.S. Property and Special risks
U.S. Personal Insurance
UK/Europe Casualty and Financial lines
UK/Europe Property and Special risks
UK/Europe and Japan Personal Insurance
U.S. Run-Off Long Tail Insurance lines (before discount)
All Other including unallocated loss adjustment expenses
Total prior year unfavorable development
Claims Payout Patterns
2018
2017
2016
$
$
153 $
537
129
(1)
39
2
1
3
9
154
137
1,163 $
(7) $
164
(8)
(34)
11
9
169
(6)
3
(44)
178
435 $
1,164
72
398
54
6
(16)
(9)
(1)
(4)
372
(7)
2,029
The following table presents the historical average annual percentage claims payout on an accident year basis at the same
level of disaggregation as presented in the claims development table.
Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance (Unaudited)
Year
1
2
3
4
5
6
7
8
9
10
U.S. Workers' compensation
13.9 % 17.3 % 12.4 %
8.9 %
7.3 %
5.0 %
3.7 %
2.7 %
2.1 %
2.4 %
U.S. Excess casualty
U.S. Other casualty
U.S. Financial lines
U.S. Property and Special risks
U.S. Personal Insurance
UK/Europe Casualty and Financial lines
UK/Europe Property and Special risks
UK/Europe and Japan Personal Insurance
U.S. Run-Off Long Tail Insurance lines
0.5
9.6
4.3
29.5
58.6
8.1
25.7
56.9
13.0
6.4
15.8
17.8
33.6
28.9
16.0
38.6
26.9
18.7
11.3
15.7
21.4
13.3
3.8
13.5
16.8
8.0
17.2
13.9
15.0
16.8
8.3
2.1
12.1
12.1
13.6
5.4
1.3
12.6
10.0
6.5
3.9
3.3
2.0
14.3
10.8
11.2
8.4
8.7
3.7
0.5
8.1
1.8
1.0
6.3
8.7
5.9
5.4
1.5
0.3
7.2
1.0
0.6
3.4
10.5
5.8
3.5
1.1
0.2
5.0
0.5
0.3
2.0
2.6
2.2
2.1
0.7
0.1
3.5
0.3
0.2
2.0
6.1
0.8
1.6
0.2
0.1
3.0
0.2
0.1
1.9
AIG | 2018 Form 10-K 279
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
DISCOUNTING OF LOSS RESERVES
At December 31, 2018, the loss reserves reflect a net loss reserve discount of $2.0 billion, including tabular and non-tabular
calculations based upon the following assumptions:
Certain asbestos claims are discounted when allowed by the regulator and when payments are fixed and determinable, based on the
investment yields of the companies and the payout pattern for the claims. At December 31, 2016, the discount for asbestos reserves
was amortized.
The tabular workers’ compensation discount is calculated based on a 3.5 percent interest rate and the mortality rate used in the 2007
U.S. Life Table.
The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York and Pennsylvania,
and follows the statutory regulations (prescribed or permitted) for each state. For New York companies, the discount is based on a 5
percent interest rate and the companies’ own payout patterns. In 2012, for Pennsylvania companies, the statute has specified
discount factors for accident years 2001 and prior, which are based on a 6 percent interest rate and an industry payout pattern. For
accident years 2002 and subsequent, the discount is based on the payout patterns and investment yields of the companies.
In 2013, our Pennsylvania regulator approved use of a consistent discount rate (U.S. Treasury rate plus a liquidity premium) to all of
our workers’ compensation reserves in our Pennsylvania-domiciled companies, as well as our use of updated payout patterns specific
to our primary and excess workers compensation portfolios.
The discount consists of $603 million of tabular discount and $1.4 billion of non-tabular discount for workers’ compensation for 2018.
During the years ended December 31, 2018, 2017, and 2016 the benefit/(charge) from changes in discount of $371 million, ($187)
million and $422 million, respectively, were recorded as part of the policyholder benefits and losses incurred in the Condensed
Consolidated Statement of Income.
The following table presents the components of the loss reserve discount discussed above:
(in millions)
U.S. workers' compensation
Retroactive reinsurance
Total reserve discount*
$
$
December 31, 2018
December 31, 2017
North America
Commercial
Insurance
2,782 $
(1,720)
1,062 $
Legacy
Portfolio
973 $
-
973 $
Total
3,755
(1,720)
2,035
$
$
North America
Commercial
Insurance
2,465 $
(1,539)
926 $
Legacy
Portfolio
918 $
-
918 $
Total
3,383
(1,539)
1,844
* Excludes $163 million and $173 million of discount related to certain long tail liabilities in the United Kingdom at December 31, 2018 and 2017, respectively.
The following table presents the net loss reserve discount benefit (charge):
Years Ended December 31,
2018
2017
2016
(in millions)
Current accident year
Accretion and other
adjustments to prior
year discount
Effect of interest rate
changes
Net reserve discount
benefit (charge)
Change in discount on loss
reserves ceded under
retroactive reinsurance
Net change in total
*
reserve discount
North
America
Commercial
Insurance
Legacy
Portfolio
$
119 $
- $
North
America
Commercial
Insurance
Legacy
Portfolio
$
114 $
- $
North
America
Commercial
Insurance
Legacy
Portfolio
$
177 $
- $
Total
114
Total
119
Total
177
(108)
(58)
(166)
(186)
(44)
(230)
287
64
351
305
316
(180)
136
113
55
-
55
418
371
(180)
191
(46)
(25)
(71)
(58)
(48)
(106)
(118)
(69)
(187)
406
16
422
(1,539)
-
(1,539)
(1,657)
(69)
(1,726)
-
406
-
16
-
422
* Excludes $(9) million and $8 million of discount related to certain long tail liabilities in the United Kingdom at December 31, 2018 and 2017, respectively.
280 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
During 2018, effective interest rates increased due to an increase in the forward yield curve component of the discount rates reflecting
an incline in U.S. Treasury rates along with the changes in payout pattern assumptions. This resulted in an increase in the loss
reserve discount by $418 million in 2018.
During 2017 and 2016, effective interest rates declined due to a decrease in the forward yield curve component of the discount rates
reflecting a decline in U.S. Treasury rates along with the changes in payout pattern assumptions. This resulted in a decrease in the
loss reserve discount by $71 million in 2017 and $106 million in 2016.
FUTURE POLICY BENEFITS
Future policy benefits primarily include reserves for traditional life and annuity payout contracts, which represent an estimate of the
present value of future benefits less the present value of future net premiums. Included in Future policy benefits are liabilities for
annuities issued in structured settlement arrangements whereby a claimant has agreed to settle a general insurance claim in
exchange for fixed payments over a fixed determinable period of time with a life contingency feature. In addition, reserves for
contracts in loss recognition are adjusted to reflect the effect of unrealized gains on fixed maturity securities available for sale and
prior to 2018, equity securities at fair value, with related changes recognized through Other comprehensive income.
Future policy benefits also include certain guaranteed benefits of variable annuity products that are not considered embedded
derivatives, primarily guaranteed minimum death benefits.
For additional information on guaranteed minimum death benefits see Note 14.
The liability for long-duration future policy benefits has been established including assumptions for interest rates which vary by year of
issuance and product, and range from approximately 0.1 percent to 14.6 percent. Mortality and surrender rate assumptions are
generally based on actual experience when the liability is established.
POLICYHOLDER CONTRACT DEPOSITS
The liability for Policyholder contract deposits is primarily recorded at accumulated value (deposits received and net transfers from
separate accounts, plus accrued interest credited at rates ranging from 0.3 percent to 10.0 percent at December 31, 2018, less
withdrawals and assessed fees). Deposits collected on investment-oriented products are not reflected as revenues, because they are
recorded directly to Policyholder contract deposits upon receipt. Amounts assessed against the contract holders for mortality,
administrative, and other services are included in revenues.
In addition to liabilities for universal life, fixed annuities, fixed options within variable annuities, annuities without life contingencies,
funding agreements and GICs, policyholder contract deposits also include our liability for (a) certain guaranteed benefits and indexed
features accounted for as embedded derivatives at fair value, (b) annuities issued in a structured settlement arrangement with no life
contingency and (c) certain contracts we have elected to account for at fair value.
For additional information on guaranteed benefits accounted for as embedded derivatives see Note 14 herein.
For universal life policies with secondary guarantees, we recognize certain liabilities in addition to policyholder account balances. For
universal life policies with secondary guarantees, as well as other universal life policies for which profits followed by losses are
expected at contract inception, a liability is recognized based on a benefit ratio of (a) the present value of total expected payments, in
excess of the account value, over the life of the contract, divided by (b) the present value of total expected assessments over the life
of the contract. For universal life policies without secondary guarantees, for which profits followed by losses are first expected after
contract inception, we establish a liability, in addition to policyholder account balances, so that expected future losses are recognized
in proportion to the emergence of profits in the earlier (profitable) years. Universal life account balances as well as these additional
liabilities related to universal life products are reported within Policyholder contract deposits in the Consolidated Balance Sheet.
These additional liabilities are also adjusted to reflect the effect of unrealized gains or losses on fixed maturity securities available for
sale and prior to 2018, equity securities at fair value on accumulated assessments, with related changes recognized through Other
comprehensive income.
Under a funding agreement-backed notes issuance program, an unaffiliated, non-consolidated statutory trust issues medium-term
notes to investors, which are secured by GICs issued to the trust by one of our Life and Retirement companies through our
Institutional Markets business.
AIG | 2018 Form 10-K 281
The following table presents Policyholder contract deposits by product line:
ITEM 8 | Notes to Consolidated Financial Statements | 13 . In sur a nc e Li ab ili ti es
At December 31,
(in millions)
Policyholder contract deposits:
Fixed Annuities
Group Retirement
Life Insurance
Variable and Index Annuities
Institutional Markets
Legacy Portfolio
Total Policyholder contract deposits
OTHER POLICYHOLDER FUNDS
2018
2017
$
$
49,695 $
41,212
12,829
24,378
9,497
4,651
142,262 $
49,979
40,422
12,448
19,690
8,077
4,986
135,602
Other policyholder funds include unearned revenue reserves (URR). URR consist of front-end loads on investment-oriented contracts,
representing those policy loads that are non-level and typically higher in initial policy years than in later policy years. URR for
investment-oriented contracts are generally deferred and amortized, with interest, in relation to the incidence of estimated gross
profits (EGPs) to be realized over the estimated lives of the contracts and are subject to the same adjustments due to changes in the
assumptions underlying EGPs as DAC. Amortization of URR is recorded in Policy fees. Similar to Shadow DAC, URR related to
investment-oriented products is also adjusted to reflect the effect of unrealized gains or losses on fixed maturity securities available
for sale and also, prior to 2018, equity securities at fair value on estimated gross profits, with related changes recognized through
Other comprehensive income (shadow URR).
Other policyholder funds also include provisions for future dividends to participating policyholders, accrued in accordance with all
applicable regulatory or contractual provisions. Participating life business represented approximately 1.7 percent of gross insurance in
force at December 31, 2018 and 2.4 percent of gross domestic premiums and other considerations in 2018. The amount of annual
dividends to be paid is approved locally by the boards of directors of the Life and Retirement companies. Provisions for future
dividend payments are computed by jurisdiction, reflecting local regulations. The portions of current and prior net income and of
current unrealized appreciation of investments that can inure to our benefit are restricted in some cases by the insurance contracts
and by the local insurance regulations of the jurisdictions in which the policies are in force.
Certain products are subject to experience adjustments. These include group life and group medical products, credit life contracts,
accident and health insurance contracts/riders attached to life policies and, to a limited extent, reinsurance agreements with other
direct insurers. Ultimate premiums from these contracts are estimated and recognized as revenue with the unearned portions of the
premiums recorded as liabilities in Other policyholder funds. Experience adjustments vary according to the type of contract and the
territory in which the policy is in force and are subject to local regulatory guidance.
282 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . V a ria bl e Li fe a n d An n ui t y C o n tra ct s
14. Variable Life and Annuity Contracts
We report variable contracts within the separate accounts when investment income and investment gains and losses accrue directly
to, and investment risk is borne by, the contract holder and the separate account meets additional accounting criteria to qualify for
separate account treatment. The assets supporting the variable portion of variable annuity and variable universal life contracts that
qualify for separate account treatment are carried at fair value and reported as Separate account assets, with an equivalent summary
total reported as Separate account liabilities.
Policy values for variable products and investment contracts are expressed in terms of investment units. Each unit is linked to an
asset portfolio. The value of a unit increases or decreases based on the value of the linked asset portfolio. The current liability at any
time is the sum of the current unit value of all investment units in the separate accounts, plus any liabilities for guaranteed minimum
death benefits (GMDB) or guaranteed minimum withdrawal benefits (GMWB) included in Future policy benefits or Policyholder
contract deposits, respectively.
Amounts assessed against the contract holders for mortality, administrative and other services are included in revenue. Net
investment income, net investment gains and losses, changes in fair value of assets, and policyholder account deposits and
withdrawals related to separate accounts are excluded from the Consolidated Statements of Income, Comprehensive Income (Loss)
and Cash Flows.
Variable annuity contracts may include certain contractually guaranteed benefits to the contract holder. These guaranteed features
include GMDB that are payable in the event of death, and living benefits that are payable in the event of annuitization, or, in other
instances, at specified dates during the accumulation period. Living benefits primarily include GMWB. A variable annuity contract may
include more than one type of guaranteed benefit feature; for example, it may have both a GMDB and a GMWB. However, a
policyholder can only receive payout from one guaranteed feature on a contract containing a death benefit and a living benefit, i.e. the
features are mutually exclusive (except a surviving spouse who has a rider to potentially collect both a GMDB upon their spouse’s
death and a GMWB during their lifetime). A policyholder cannot purchase more than one living benefit on one contract. The net
amount at risk for each feature is calculated irrespective of the existence of other features; as a result, the net amount at risk for each
feature is not additive to that of other features.
Account balances of variable annuity contracts with guarantees were invested in separate account investment options as
follows:
At December 31,
(in millions)
Equity funds
Bond funds
Balanced funds
Money market funds
Total
GMDB
2018
$ 43,059
7,231
24,100
787
$ 75,177
2017
$ 48,594
7,793
27,656
730
$ 84,773
Depending on the contract, the GMDB feature may provide a death benefit of either (a) total deposits made to the contract less any
partial withdrawals plus a minimum return (and in rare instances, no minimum return) or (b) the highest contract value attained,
typically on any anniversary date minus any subsequent withdrawals following the contract anniversary. GMDB is our most widely
offered benefit.
The liability for GMDB, which is recorded in Future policy benefits, represents the expected value of benefits in excess of the
projected account value, with the excess recognized ratably over the accumulation period based on total expected assessments,
through Policyholder benefits and losses incurred. The net amount at risk for GMDB represents the amount of benefits in excess of
account value if death claims were filed on all contracts on the balance sheet date.
AIG | 2018 Form 10-K 283
ITEM 8 | Notes to Consolidated Financial Statements | 14 . V a ria bl e Li fe a n d An n ui t y C o n tra ct s
The following table presents details concerning our GMDB exposures, by benefit type:
At December 31,
(dollars in billions)
Account value
Net amount at risk
Average attained age of contract holders by product
Range of guaranteed minimum return rates
$
2018
Net Deposits
Plus a Minimum
Return
89 $
1
63
0-4.5%
Highest Contract
Value Attained
15
1
68
$
2017
Net Deposits
Plus a Minimum
Return
99 $
1
63
0%-4.5%
Highest Contract
Value Attained
17
-
68
The following summarizes GMDB liability related to variable annuity contracts, excluding assumed reinsurance:
Years Ended December 31,
(in millions)
Balance, beginning of year
Reserve increase (decrease)
Benefits paid
Changes in reserves related to unrealized appreciation of investments
Balance, end of year
2018
352
93
(43)
(5)
397
$
$
2017
402
(14)
(42)
6
352
$
$
2016
491
(32)
(57)
-
402
$
$
Assumptions used to determine the GMDB liability include interest rates, which vary by year of issuance and products; mortality rates,
which are based upon actual experience modified to allow for variations in policy form; lapse rates, which are based upon actual
experience modified to allow for variations in policy form; investment returns, using assumptions from a randomly generated model;
and asset growth assumptions, which include a reversion to the mean methodology, similar to that applied for DAC.
We regularly evaluate estimates used to determine the GMDB liability and adjust the additional liability balance, with a related charge
or credit to Policyholder benefits and losses incurred, if actual experience or other evidence suggests that earlier assumptions should
be revised.
GMWB
Certain of our variable annuity contracts contain optional GMWB benefits and, to a lesser extent, guaranteed minimum accumulation
benefits, which are not currently offered. With a GMWB, the contract holder can monetize the excess of the guaranteed amount over
the account value of the contract only through a series of withdrawals that do not exceed a specific percentage per year of the
guaranteed amount. If, after the series of withdrawals, the account value is exhausted, the contract holder will receive a series of
annuity payments equal to the remaining guaranteed amount, and, for lifetime GMWB products, the annuity payments continue as
long as the covered person(s) is living.
The liabilities for GMWB, which are recorded in Policyholder contract deposits, are accounted for as embedded derivatives measured
at fair value, with changes in the fair value of the liabilities recorded in Other net realized capital gains (losses). The fair value of these
embedded derivatives was a net liability of $1.9 billion and $2.0 billion at December 31, 2018 and 2017, respectively.
For a discussion of the fair value measurement of guaranteed benefits that are accounted for as embedded derivatives see Note 5.
We had account values subject to GMWB that totaled $41 billion and $45 billion at December 31, 2018 and 2017, respectively. The
net amount at risk for GMWB represents the present value of minimum guaranteed withdrawal payments, in accordance with contract
terms, in excess of account value, assuming no lapses. The net amount at risk related to the GMWB guarantees was $215 million and
$450 million at December 31, 2018 and 2017, respectively. We use derivative instruments and other financial instruments to mitigate
a portion of our exposure that arises from GMWB benefits.
284 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 15 . De b t
15. Debt
Our long-term debt is denominated in various currencies, with both fixed and variable interest rates. Long-term debt is carried at the
principal amount borrowed, including unamortized discounts, hedge accounting valuation adjustments and fair value adjustments,
when applicable.
The following table lists our total debt outstanding at December 31, 2018 and 2017. The interest rates presented in the
following table are the range of contractual rates in effect at December 31, 2018, including fixed and variable-rates:
At December 31, 2018
(in millions)
Debt issued or guaranteed by AIG:
AIG general borrowings:
Notes and bonds payable
Junior subordinated debt
AIG Japan Holdings Kabushiki Kaisha
Validus notes and bonds payable
AIGLH notes and bonds payable
AIGLH junior subordinated debt
Total AIG general borrowings
AIG borrowings supported by assets:(a)
MIP notes payable
Series AIGFP matched notes and bonds payable
GIAs, at fair value
Notes and bonds payable, at fair value
Total AIG borrowings supported by assets
Total debt issued or guaranteed by AIG
Debt not guaranteed by AIG:
Other subsidiaries notes, bonds, loans and
mortgages payable
Debt of consolidated investments(b)
Total debt not guaranteed by AIG
Total long term debt
Range of
Interest Rate(s)
Maturity
Date(s)
Balance at
Balance at
December 31,
December 31,
2018
2017
0% - 8.13%
2019 - 2097
$
4.88% - 8.63%
0.28% - 0.44%
8.88%
6.63% - 7.50%
7.57% - 8.50%
2037 - 2058
2020 - 2021
2040
2025 - 2029
2030 - 2046
2.69% - 2.75%
0.5% - 7.62%
0.5% - 9.97%
2046 - 2047
2019 - 2053
2030 - 2040
2.68% - 4.73%
0% - 10.3%
2019 - 2024
2019 - 2067
20,853
1,548
331
359
282
361
23,734
-
21
2,164
49
2,234
25,968
168
8,404
8,572
$
20,339
841
334
-
281
361
22,156
356
21
2,707
181
3,265
25,421
190
6,029
6,219
$
34,540
$
31,640
(a) AIG Parent guarantees all such debt, except for MIP notes payable and Series AIGFP matched notes and bonds payable, which are direct obligations of AIG
Parent. Collateral posted to third parties was $1.5 billion and $2.0 billion at December 31, 2018 and December 31, 2017, respectively. This collateral primarily consists
of securities of the U.S. government and government sponsored entities and generally cannot be repledged or resold by the counterparties.
(b) At December 31, 2018, includes debt of consolidated investment vehicles related to real estate investments of $3.7 billion, affordable housing partnership investments
of $1.8 billion and other securitization vehicles of $2.9 billion. At December 31, 2017, includes debt of consolidated investment vehicles related to real estate
investments of $2.5 billion, affordable housing partnership investments of $1.8 billion and other securitization vehicles of $1.7 billion.
AIG | 2018 Form 10-K 285
The following table presents maturities of long-term debt (including unamortized original issue discount, hedge accounting
valuation adjustments and fair value adjustments, when applicable), excluding $8.4 billion of debt of consolidated
investments:
ITEM 8 | Notes to Consolidated Financial Statements | 15 . De b t
21
1,541
49
1,611
18,066
6
18,072
December 31, 2018
(in millions)
Debt issued or guaranteed by AIG:
AIG general borrowings:
Notes and bonds payable
Junior subordinated debt
AIG Japan Holdings Kabushiki Kaisha
Validus notes and bonds payable
AIGLH notes and bonds payable
AIGLH junior subordinated debt
Total AIG general borrowings
AIG borrowings supported by assets:
MIP notes payable
Series AIGFP matched notes and
bonds payable
GIAs, at fair value
Notes and bonds payable, at fair value
Total AIG borrowings supported by assets
Total debt issued or guaranteed by AIG
Other subsidiaries notes, bonds, loans
Total
2019
2020
2021
2022
2023
Thereafter
Year Ending
$
20,853 $
1,548
331
359
282
361
23,734
999 $ 1,344 $ 1,497 $ 1,509 $ 1,599 $
-
217
-
-
-
1,714
-
114
-
-
-
1,458
-
-
-
-
-
1,599
-
-
-
-
-
1,509
-
-
-
-
-
999
13,905
1,548
-
359
282
361
16,455
-
-
-
-
-
-
-
21
2,164
49
2,234
25,968
-
272
-
272
1,271
-
31
-
31
1,489
-
157
-
157
1,871
-
48
-
48
1,557
-
115
-
115
1,714
and mortgages payable
168
117
1
42
1
1
Total
$
26,136 $ 1,388 $ 1,490 $ 1,913 $ 1,558 $ 1,715 $
Uncollateralized and collateralized notes, bonds, loans and mortgages payable consisted of the following:
At December 31, 2018
(in millions)
AIG general borrowings
Other subsidiaries notes, bonds, loans and mortgages payable*
Total
$
$
* AIG does not guarantee any of these borrowings.
AIGLH JUNIOR SUBORDINATED DEBENTURES
Uncollateralized
Notes/Bonds/Loans
Payable
Collateralized
Loans and
Mortgages Payable
331 $
2
333 $
- $
166
166 $
Total
331
168
499
In connection with our acquisition of AIG Life Holdings, Inc. (AIGLH) in 2001, we entered into arrangements with AIGLH with respect
to outstanding AIGLH capital securities. In 1996, AIGLH issued capital securities through a trust to institutional investors and funded
the trust with AIGLH junior subordinated debentures issued to the trust with the same terms as the capital securities.
On July 11, 2013, the AIGLH junior subordinated debentures were distributed to holders of the capital securities, the capital securities
were cancelled and the trusts were dissolved. At December 31, 2018, the junior subordinated debentures outstanding consisted of
$113 million of 8.5 percent junior subordinated debentures due July 2030, $211 million of 8.125 percent junior subordinated
debentures due March 2046 and $37 million of 7.57 percent junior subordinated debentures due December 2045, each guaranteed
by AIG Parent.
CREDIT FACILITIES
We maintain a committed, revolving syndicated credit facility (the Facility) as a potential source of liquidity for general corporate
purposes. The Facility provides for aggregate commitments by the bank syndicate to provide unsecured revolving loans and/or
standby letters of credit of up to $4.5 billion without any limits on the type of borrowings and is scheduled to expire in June 2022.
At December 31, 2018
(in millions)
Syndicated Credit Facility
286 AIG | 2018 Form 10-K
Size
4,500
$
$
Available
Amount
4,500
Expiration
June 2022
Effective
Date
6/27/2017
ITEM 8 | Notes to Consolidated Financial Statements | 16 . C o n ti ng e nc ie s, Co m m it m en t s a n d Gu ara n te es
16. Contingencies, Commitments and Guarantees
In the normal course of business, various contingent liabilities and commitments are entered into by AIG and our subsidiaries. In
addition, AIG Parent guarantees various obligations of certain subsidiaries.
Although AIG cannot currently quantify its ultimate liability for unresolved litigation and investigation matters, including those referred
to below, it is possible that such liability could have a material adverse effect on AIG’s consolidated financial condition or its
consolidated results of operations or consolidated cash flows for an individual reporting period.
LEGAL CONTINGENCIES
Overview. In the normal course of business, AIG and our subsidiaries are, like others in the insurance and financial services
industries in general, subject to regulatory and government investigations and actions, and litigation and other forms of dispute
resolution in a large number of proceedings pending in various domestic and foreign jurisdictions. Certain of these matters involve
potentially significant risk of loss due to potential for significant jury awards and settlements, punitive damages or other penalties.
Many of these matters are also highly complex and seek recovery on behalf of a class or similarly large number of plaintiffs. It is
therefore inherently difficult to predict the size or scope of potential future losses arising from these matters. In our insurance and
reinsurance operations, litigation and arbitration concerning the scope of coverage under insurance and reinsurance contracts, and
litigation and arbitration in which our subsidiaries defend or indemnify their insureds under insurance contracts, are generally
considered in the establishment of our loss reserves. Separate and apart from the foregoing matters involving insurance and
reinsurance coverage, AIG, our subsidiaries and their respective officers and directors are subject to a variety of additional types of
legal proceedings brought by holders of AIG securities, customers, employees and others, alleging, among other things, breach of
contractual or fiduciary duties, bad faith and violations of federal and state statutes and regulations. With respect to these other
categories of matters not arising out of claims for insurance or reinsurance coverage, we establish reserves for loss contingencies
when it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated. In many instances, we are
unable to determine whether a loss is probable or to reasonably estimate the amount of such a loss and, therefore, the potential
future losses arising from legal proceedings may exceed the amount of liabilities that we have recorded in our financial statements
covering these matters. While such potential future charges could be material, based on information currently known to management,
management does not believe, other than may be discussed below, that any such charges are likely to have a material adverse effect
on our financial position or results of operation.
Additionally, from time to time, various regulatory and governmental agencies review the transactions and practices of AIG and our
subsidiaries in connection with industry-wide and other inquiries into, among other matters, the business practices of current and
former operating insurance subsidiaries. We have cooperated, and will continue to cooperate, in producing documents and other
information in response to such requests.
Tax Litigation.
We are party to pending tax litigation before the Southern District of New York. For additional information see Note 23 to the
Consolidated Financial Statements.
COMMITMENTS
We lease office space and equipment in various locations across jurisdictions in which the Company operates. Rent expense was
$283 million, $269 million and $331 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The following table presents the future minimum lease payments under operating leases at December 31, 2018:
(in millions)
2019
2020
2021
2022
2023
Remaining years after 2023
Total
$
$
249
185
121
87
63
182
887
AIG | 2018 Form 10-K 287
ITEM 8 | Notes to Consolidated Financial Statements | 16 . C o n ti ng e nc ie s, Co m m it m en t s a n d Gu ara n te es
OTHER COMMITMENTS
In the normal course of business, we enter into commitments to invest in limited partnerships, private equity funds and hedge funds
and to purchase and develop real estate in the U.S. and abroad. These commitments totaled $6.0 billion at December 31, 2018.
GUARANTEES
Subsidiaries
We have issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment
obligations and liabilities of AIGFP and of AIG Markets arising from transactions entered into by AIG Markets.
In connection with AIGFP’s business activities, AIGFP has issued, in a limited number of transactions, standby letters of credit or
similar facilities to equity investors of structured leasing transactions in an amount equal to the termination value owing to the equity
investor by the lessee in the event of a lessee default (the equity termination value). The total amount outstanding at December 31,
2018 was $85 million. In those transactions, AIGFP has agreed to pay such amount if the lessee fails to pay. The amount payable by
AIGFP is, in certain cases, partially offset by amounts payable under other instruments typically equal to the present value of
scheduled payments to be made by AIGFP. In the event that AIGFP is required to make a payment to the equity investor, the lessee is
unconditionally obligated to reimburse AIGFP. To the extent that the equity investor is paid the equity termination value from the
standby letter of credit and/or other sources, including payments by the lessee, AIGFP takes an assignment of the equity investor’s
rights under the lease of the underlying property. Because the obligations of the lessee under the lease transactions are generally
economically defeased, lessee bankruptcy is the most likely circumstance in which AIGFP would be required to pay without
reimbursement.
AIG Parent files a consolidated federal income tax return with certain subsidiaries and acts as an agent for the consolidated tax group
when making payments to the Internal Revenue Service (IRS). AIG Parent and its subsidiaries have adopted, pursuant to a written
agreement, a method of allocating consolidated federal income taxes. Under an Amended and Restated Tax Payment Allocation
Agreement dated June 6, 2011 between AIG Parent and one of its Bermuda-domiciled insurance subsidiaries, AIG Life of Bermuda,
Ltd. (AIGB), AIG Parent has agreed to indemnify AIGB for any tax liability (including interest and penalties) resulting from adjustments
made by the IRS or other appropriate authorities to taxable income, special deductions or credits in connection with investments
made by AIGB in certain affiliated entities.
Asset Dispositions
We are subject to financial guarantees and indemnity arrangements in connection with the completed sales of businesses pursuant to
our asset disposition plan. The various arrangements may be triggered by, among other things, declines in asset values, the
occurrence of specified business contingencies, the realization of contingent liabilities, developments in litigation or breaches of
representations, warranties or covenants provided by us. These arrangements are typically subject to various time limitations, defined
by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to
contractual limitations, while in other cases such limitations are not specified or are not applicable.
We are unable to develop a reasonable estimate of the maximum potential payout under certain of these arrangements. Overall, we
believe that it is unlikely we will have to make any material payments related to completed sales under these arrangements, and no
material liabilities related to these arrangements have been recorded in the Consolidated Balance Sheets.
Other
• For additional discussion on commitments and guarantees associated with VIEs see Note 10 to the Consolidated Financial
Statements.
• For additional disclosures about derivatives see Note 11 to the Consolidated Financial Statements.
• For additional disclosures about guarantees of outstanding debt of AIG Life Holdings, Inc. (AIGLH), see Note 25 to the
Consolidated Financial Statements.
288 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 17 . E q ui t y
17. Equity
SHARES OUTSTANDING
The following table presents a rollforward of outstanding shares:
Year Ended December 31, 2016
Shares, beginning of year
Shares issued
Shares repurchased
Shares, end of year
Year Ended December 31, 2017
Shares, beginning of year
Shares issued
Shares repurchased
Shares, end of year
Year Ended December 31, 2018
Shares, beginning of year
Shares issued
Shares repurchased
Shares, end of year
Common
Stock Issued
Treasury
Common Stock
Stock
Outstanding
1,906,671,492
(712,754,875)
1,193,916,617
-
-
2,069,110
2,069,110
(200,649,886)
(200,649,886)
1,906,671,492
(911,335,651)
995,335,841
1,906,671,492
(911,335,651)
995,335,841
-
-
3,386,462
3,386,462
(99,677,646)
(99,677,646)
1,906,671,492
(1,007,626,835)
899,044,657
1,906,671,492
(1,007,626,835)
899,044,657
-
-
4,091,922
4,091,922
(36,527,150)
(36,527,150)
1,906,671,492
(1,040,062,063)
866,609,429
AIG | 2018 Form 10-K 289
ITEM 8 | Notes to Consolidated Financial Statements | 17 . E q ui t y
DIVIDENDS
Dividends are payable on AIG Common Stock only when, as and if declared by our Board of Directors in its discretion, from funds
legally available for this purpose. In considering whether to pay a dividend on or purchase shares of AIG Common Stock, our Board of
Directors considers a number of factors, including, but not limited to: the capital resources available to support our insurance
operations and business strategies, AIG’s funding capacity and capital resources in comparison to internal benchmarks, expectations
for capital generation, rating agency expectations for capital, regulatory standards for capital and capital distributions, and such other
factors as our Board of Directors may deem relevant.
The following table presents declaration date, record date, payment date and dividends paid per share on AIG Common
Stock:
Declaration Date
October 31, 2018
August 2, 2018
May 2, 2018
February 8, 2018
November 2, 2017
August 2, 2017
May 3, 2017
February 14, 2017
November 2, 2016
August 2, 2016
May 2, 2016
February 11, 2016
Record Date
December 12, 2018
September 17, 2018
June 14, 2018
March 15, 2018
December 8, 2017
September 15, 2017
June 14, 2017
March 15, 2017
December 8, 2016
September 15, 2016
June 13, 2016
March 14, 2016
Payment Date
December 26, 2018
September 28, 2018
June 28, 2018
March 29, 2018
December 22, 2017
September 29, 2017
June 28, 2017
March 29, 2017
December 22, 2016
September 29, 2016
June 27, 2016
March 28, 2016
REPURCHASE OF AIG COMMON STOCK
$
Dividends Paid
Per Share
0.32
0.32
0.32
0.32
0.32
0.32
0.32
0.32
0.32
0.32
0.32
0.32
The following table presents repurchases of AIG Common Stock and warrants to purchase shares of AIG Common Stock:
Years Ended December 31,
(in millions)
Aggregate repurchases of common stock
Total number of common shares repurchased
Aggregate repurchases of warrants
Total number of warrants repurchased*
$
$
2018
1,739 $
37
11 $
1
2017
6,275 $
100
3 $
-
2016
11,460
201
309
17
*
In 2017, we repurchased 185,000 warrants to purchase shares of AIG Common Stock.
Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG
Common Stock through a series of actions. On May 3, 2017, our Board of Directors authorized an increase of $2.5 billion to its
previous share repurchase authorization. As of December 31, 2018, approximately $512 million remained under our share
repurchase authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward,
derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants).
Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase
plans.
The timing of any future repurchases will depend on market conditions, our business and strategic plans, financial condition, results of
operations, liquidity and other factors.
290 AIG | 2018 Form 10-K
ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents a rollforward of Accumulated other comprehensive income:
ITEM 8 | Notes to Consolidated Financial Statements | 17 . E q ui t y
Unrealized Appreciation
(Depreciation) of Fixed
Unrealized
Fair Value of
Liabilities Under
Maturity Securities on
Appreciation
Foreign
Retirement
Fair Value Option
Which Other-Than-
(Depreciation)
Currency
Plan
Attributable to
Temporary Credit
of All Other
Translation
Liabilities
Changes in
(in millions)
Impairments Were Taken
Investments
Adjustments
Adjustment
Own Credit Risk
Total
Balance, January 1, 2016, net of tax
$
696 $
5,566 $
(2,879) $
(846) $
- $
2,537
Change in unrealized appreciation (depreciation)
of investments
Change in deferred policy acquisition costs
adjustment and other
Change in future policy benefits
Change in foreign currency translation adjustments
Change in net actuarial loss
Change in prior service credit
Change in deferred tax asset
Total other comprehensive income (loss)
Noncontrolling interests
(326)
931
(19)
-
-
-
-
75
(270)
-
286
(676)
-
-
-
298
839
-
-
-
-
93
-
-
157
250
-
-
-
-
-
(151)
(22)
47
(126)
-
-
-
-
-
-
-
-
-
-
605
267
(676)
93
(151)
(22)
577
693
-
Balance, December 31, 2016, net of tax
$
426 $
6,405 $
(2,629) $
(972) $
- $
3,230
Change in unrealized appreciation
of investments
Change in deferred policy acquisition costs
*
adjustment and other
Change in future policy benefits
Change in foreign currency translation adjustments
Change in net actuarial gain
Change in prior service cost
Change in deferred tax asset (liability)
Total other comprehensive income
Noncontrolling interests
394
3,668
23
-
-
-
-
(50)
367
-
(1,282)
(1,102)
-
-
-
4
1,288
-
-
-
-
547
-
-
(8)
539
-
-
-
-
-
110
9
(78)
41
-
-
-
-
-
-
-
-
-
-
4,062
(1,259)
(1,102)
547
110
9
(132)
2,235
-
Balance, December 31, 2017, net of tax
$
793 $
7,693 $
(2,090) $
(931) $
- $
5,465
Cumulative effect of change in
accounting principles
Change in unrealized depreciation
of investments
Change in deferred policy acquisition costs
adjustment and other
Change in future policy benefits
Change in foreign currency translation adjustments
Change in net actuarial loss
Change in prior service credit
Change in deferred tax asset (liability)
Change in fair value of liabilities under fair value
option attributable to changes in own credit risk
Total other comprehensive income (loss)
Noncontrolling interests
169
(285)
(284)
(183)
7
(576)
(1,320)
(8,688)
(57)
-
-
-
-
1,300
1,711
-
-
-
377
702
-
-
(1,000)
(4,975)
-
7
-
-
-
(314)
-
-
(35)
-
(349)
2
-
-
-
-
(23)
(4)
55
-
28
-
-
-
-
-
-
-
-
3
3
-
(10,008)
1,243
1,711
(314)
(23)
(4)
1,099
3
(6,293)
9
Balance, December 31, 2018, net of tax
$
(38) $
2,426 $
(2,725) $
(1,086) $
10 $
(1,413)
*
Includes net unrealized gains attributable to businesses held for sale.
AIG | 2018 Form 10-K 291
The following table presents the other comprehensive income (loss) reclassification adjustments for the years ended
December 31, 2018, 2017 and 2016:
ITEM 8 | Notes to Consolidated Financial Statements | 17 . E q ui t y
Unrealized Appreciation
(Depreciation) of Fixed
Unrealized
Fair Value of
Liabilities Under
Maturity Securities on
Appreciation
Foreign
Retirement
Fair Value Option
Which Other-Than-
(Depreciation)
Currency
Plan
Attributable to
Temporary Credit
of All Other
Translation
Liabilities
Changes in
Impairments Were Taken
Investments
Adjustments
Adjustment
Own Credit Risk
Total
(in millions)
December 31, 2016
Unrealized change arising during period
$
(222) $
1,769 $
93 $
(344) $
- $
1,296
Less: Reclassification adjustments
included in net income
Total other comprehensive income (loss),
before income tax benefit
Less: Income tax benefit
Total other comprehensive income (loss),
net of income tax benefit
December 31, 2017
Unrealized change arising during period
Less: Reclassification adjustments
included in net income
Total other comprehensive income,
before income tax expense
Less: Income tax expense (benefit)
Total other comprehensive income,
net of income tax expense (benefit)
December 31, 2018
Unrealized change arising during period
Less: Reclassification adjustments
included in net income
Total other comprehensive income (loss),
before income tax benefit
Less: Income tax expense (benefit)
Total other comprehensive income (loss),
$
$
$
$
123
1,228
-
(171)
(345)
(75)
541
(298)
93
(157)
(173)
(47)
-
-
-
1,180
116
(577)
(270) $
839 $
250 $
(126) $
- $
693
467 $
2,052 $
547 $
24 $
- $
3,090
50
768
-
(95)
417
50
1,284
(4)
547
8
119
78
-
-
-
723
2,367
132
367 $
1,288 $
539 $
41 $
- $
2,235
(1,372) $
(5,811) $
(314) $
(61) $
3 $
(7,555)
5
(134)
-
(1,377)
(377)
(5,677)
(702)
(314)
35
(34)
(27)
(55)
-
3
-
(163)
(7,392)
(1,099)
net of income tax expense (benefit)
$
(1,000) $
(4,975) $
(349) $
28 $
3 $
(6,293)
292 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 17 . E q ui t y
The following table presents the effect of the reclassification of significant items out of Accumulated other comprehensive
income on the respective line items in the Consolidated Statements of Income:
Years Ended December 31,
(in millions)
Unrealized appreciation (depreciation) of fixed
maturity securities on which other-than-temporary
credit impairments were taken
Investments
Total
Unrealized appreciation (depreciation) of all other
investments
Investments
Deferred acquisition costs adjustment
Future policy benefits
Total
Change in retirement plan liabilities adjustment
Prior-service credit
Actuarial losses
Total
Total reclassifications for the year
Amount Reclassified
from Accumulated Other
Comprehensive Income
2018
2017
2016
Affected Line Item in the
Consolidated Statements of Income
$
5 $
5
50 $
50
123 Other realized capital gains
123
(134)
-
-
(134)
463
305
-
768
935 Other realized capital gains
293
-
1,228
Amortization of deferred policy acquisition costs
Policyholder benefits and losses incurred
1
(35)
(34)
(163) $
15
5
(186)
(100)
(95)
(171)
723 $ 1,180
*
*
$
* These Accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 21 to the Consolidated Financial
Statements.
AIG | 2018 Form 10-K 293
ITEM 8 | Notes to Consolidated Financial Statements | 18 . E a rni n gs P er S har e
18. Earnings Per Share (EPS)
The basic EPS computation is based on the weighted average number of common shares outstanding, adjusted to reflect all stock
dividends and stock splits. The diluted EPS computation is based on those shares used in the basic EPS computation plus shares
that would have been outstanding assuming issuance of common shares for all dilutive potential common shares outstanding and
adjusted to reflect all stock dividends and stock splits.
The following table presents the computation of basic and diluted EPS:
Years Ended December 31,
(dollars in millions, except per share data)
Numerator for EPS:
Income (loss) from continuing operations
Less: Net income from continuing operations attributable to noncontrolling interests
Income (loss) attributable to AIG common shareholders from continuing operations
Income (loss) from discontinued operations, net of income tax expense
Net loss attributable to AIG common shareholders
Denominator for EPS:
Weighted average shares outstanding — basic
Dilutive shares
Weighted average shares outstanding — diluted(a)(b)
Income (loss) per common share attributable to AIG:
Basic:
Income (loss) from continuing operations
Loss from discontinued operations
Loss attributable to AIG
Diluted:
Income (loss) from continuing operations
Loss from discontinued operations
Loss attributable to AIG
2018
2017
103 $
67
36
(42)
(6) $
(6,060) $
28
(6,088)
4
(6,084) $
2016
(259)
500
(759)
(90)
(849)
898,405,537
11,735,705
910,141,242
930,561,286
1,091,085,131
-
-
930,561,286
1,091,085,131
0.04 $
(0.05) $
(0.01) $
0.04 $
(0.05) $
(0.01) $
(6.54) $
- $
(6.54) $
(6.54) $
- $
(6.54) $
(0.70)
(0.08)
(0.78)
(0.70)
(0.08)
(0.78)
$
$
$
$
$
$
$
$
(a) Shares in the diluted EPS calculation represent basic shares for 2017 and 2016 due to the net losses in those periods. The shares excluded from the calculation were
22,412,682 shares and 30,326,772 shares for the years ended December 31, 2017 and 2016, respectively.
(b) Dilutive shares included our share-based employee compensation plans and a weighted average portion of the warrants issued to AIG shareholders as part of AIG’s
recapitalization in January 2011. The number of shares excluded from diluted shares outstanding were 19.6 million, 1.7 million and 0.2 million for the years ended
December 31, 2018, 2017 and 2016, respectively, because the effect of including those shares in the calculation would have been anti-dilutive.
294 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 19 . S t at u t or y F i na n cia l Da ta a n d Re s tr i c ti on s
19. Statutory Financial Data and Restrictions
The following table presents statutory net income (loss) and capital and surplus for our General Insurance companies and
our Life and Retirement companies in accordance with statutory accounting practices:
(in millions)
Years Ended December 31,
Statutory net income (loss)(a)(b):
General Insurance companies:
Domestic
Foreign
Total General Insurance companies
Life and Retirement companies:
Domestic
Foreign
Total Life and Retirement companies
At December 31,
Statutory capital and surplus(a)(b):
General Insurance companies:
Domestic
Foreign
Total General Insurance companies
Life and Retirement companies:
Domestic
Foreign
Total Life and Retirement companies
Aggregate minimum required statutory capital and surplus:
General Insurance companies:
Domestic
Foreign
Total General Insurance companies
Life and Retirement companies:
Domestic
Foreign
Total Life and Retirement companies
2018
2017
2016
$
$
$
$
$
$
$
$
$
$
$
$
(1,138) $
(348)
(1,486) $
673 $
(596)
77 $
18,172 $
16,447
34,619 $
9,477 $
1,744
11,221 $
4,307 $
9,065
13,372 $
3,197 $
1,338
4,535 $
(978) $
(318)
(1,296) $
1,066 $
21
1,087 $
260
(1,326)
(1,066)
2,252
47
2,299
20,938
11,721
32,659
12,149
446
12,595
5,134
6,301
11,435
3,146
121
3,267
(a) Excludes discontinued operations and other divested businesses. Statutory capital and surplus and net income (loss) with respect to foreign operations are as of
November 30.
(b) In aggregate, the 2017 General Insurance companies and Life and Retirement companies statutory net income increased by $207 million and the 2017 General
Insurance companies and Life and Retirement companies statutory capital and surplus decreased by $273 million, compared to the amounts previously reported in our
Annual Report on Form 10-K for the year ended December 31, 2017, due to finalization of statutory filings.
Our insurance subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or
permitted by domestic and foreign insurance regulatory authorities. The principal differences between statutory financial statements
and financial statements prepared in accordance with U.S. GAAP for domestic companies are that statutory financial statements do
not reflect DAC, some bond portfolios may be carried at amortized cost, investment impairments are determined in accordance with
statutory accounting practices, assets and liabilities are presented net of reinsurance, policyholder liabilities are generally valued
using more conservative assumptions and certain assets are non-admitted.
For domestic insurance subsidiaries, aggregate minimum required statutory capital and surplus is based on the greater of the RBC
level that would trigger regulatory action or minimum requirements per state insurance regulation. Capital and surplus requirements of
our foreign subsidiaries differ from those prescribed in the U.S., and can vary significantly by jurisdiction. At both December 31, 2018
and 2017, all domestic and foreign insurance subsidiaries individually exceeded the minimum required statutory capital and surplus
requirements and all domestic insurance subsidiaries individually exceeded RBC minimum required levels.
AIG | 2018 Form 10-K 295
ITEM 8 | Notes to Consolidated Financial Statements | 19 . S t at u t or y F i na n cia l Da ta a n d Re s tr i c ti on s
At December 31, 2018 and 2017, our domestic insurance subsidiaries used the following permitted practices that resulted in reported
statutory surplus or risk-based capital that is significantly different from the statutory surplus or risk based capital that would have
been reported had NAIC statutory accounting practices or the prescribed regulatory accounting practices of their respective state
regulator been followed in all respects:
•
In 2015, a domestic life insurance subsidiary domiciled in Texas adopted a permitted statutory accounting practice to report
derivatives used to hedge interest rate risk on product-related embedded derivatives at amortized cost instead of fair value. In
2018, the permitted practice was expanded to include additional derivative instruments utilized for the same purpose and to also
include an additional domestic life insurance subsidiary domiciled in Texas. This permitted practice resulted in an increase in the
statutory surplus of our subsidiaries of $438 million and $407 million at December 31, 2018 and 2017, respectively.
• As described in Note 13, our domestic property and casualty insurance subsidiaries domiciled in New York, Pennsylvania and
Delaware discount non-tabular workers’ compensation reserves based on applicable prescribed or approved regulations, or in the
case of our Delaware subsidiary, based on a permitted practice. This practice did not have a material impact on our statutory
surplus, statutory net income (loss) or risk-based capital.
The NAIC Model Regulation “Valuation of Life Insurance Policies” (Regulation XXX) requires U.S. life insurers to establish additional
statutory reserves for term life insurance policies with long-term premium guarantees and universal life policies with secondary
guarantees (ULSGs). In addition, NAIC Actuarial Guideline 38 (Guideline AXXX) clarifies the application of Regulation XXX as to
these guarantees, including certain ULSGs.
Domestic life insurance subsidiaries manage the capital impact of statutory reserve requirements under Regulation XXX and
Guideline AXXX through unaffiliated and affiliated reinsurance transactions. The affiliated life insurers providing reinsurance capacity
for such transactions are fully licensed insurance companies and are not formed under captive insurance laws. One of these affiliated
reinsurance arrangements, under which certain Regulation XXX and Guideline AXXX reserves related to new and in-force business
were ceded to an affiliated U.S. life insurer, was recaptured effective December 31, 2016 and these reserves were ceded to an
unaffiliated reinsurer.
Under the other intercompany reinsurance arrangement, certain Regulation XXX and Guideline AXXX reserves related to a closed
block of in-force business are ceded to an affiliated off-shore life insurer, which is licensed as a class E insurer under Bermuda law.
Bermuda law permits the off-shore life insurer to record an asset that effectively reduces the statutory reserves for the assumed
reinsurance to the level that would be required under U.S. GAAP. Letters of credit are used to support the credit for reinsurance
provided by the affiliated off-shore life insurer.
For additional information regarding these letters of credit see Note 8.
SUBSIDIARY DIVIDEND RESTRICTIONS
Payments of dividends to us by our insurance subsidiaries are subject to certain restrictions imposed by regulatory authorities. With
respect to our domestic insurance subsidiaries, the payment of any dividend requires formal notice to the insurance department in
which the particular insurance subsidiary is domiciled. For example, unless permitted by the Superintendent of Financial Services,
property casualty companies domiciled in New York generally may not pay dividends to shareholders that, in any 12-month period,
exceed the lesser of 10 percent of such company’s statutory policyholders’ surplus or 100 percent of its “adjusted net investment
income,” for the previous year, as defined. Generally, less severe restrictions applicable to both property casualty and life insurance
companies exist in most of the other states in which our insurance subsidiaries are domiciled. Under the laws of many states, an
insurer may pay a dividend without prior approval of the insurance regulator when the amount of the dividend is below certain
regulatory thresholds. Other foreign jurisdictions may restrict the ability of our foreign insurance subsidiaries to pay dividends. Various
other regulatory restrictions also limit cash loans and advances to us by our subsidiaries.
Largely as a result of these restrictions, approximately $41.6 billion of the statutory capital and surplus of our consolidated insurance
subsidiaries were restricted from transfer to AIG Parent without prior approval of state insurance regulators at December 31, 2018.
To our knowledge, no AIG insurance company is currently on any regulatory or similar “watch list” with regard to solvency.
296 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 19 . S t at u t or y F i na n cia l Da ta a n d Re s tr i c ti on s
PARENT COMPANY DIVIDEND RESTRICTIONS
At December 31, 2018, our ability to pay dividends is not subject to any significant contractual restrictions, but remains subject to
regulatory restrictions.
For additional information about our ability to pay dividends to our shareholders see Note 17 herein.
20. Share-Based Compensation Plans
The following table presents our total share-based compensation expense:
Years Ended December 31,
(in millions)
Share-based compensation expense - pre-tax(a)
Share-based compensation expense - after tax(b)
$
2018
337 $
266
2017
353 $
229
2016
237
154
(a) We recognized $48 million, $141 million and $105 million for immediately vested stock-settled awards issued to retirement eligible employees in 2018, 2017 and 2016,
on their respective grant dates. It is our policy to reverse compensation expense for forfeited awards when they occur.
(b) We also recognized $9 million of excess tax benefits due to share settlements occurring in 2018.
EMPLOYEE PLANS
The Company sponsors several stock compensation programs under the AIG Long Term Incentive Plan and its predecessor plan, the
AIG 2013 Long Term Incentive Plan (each as applicable, the LTIP), which are governed by the AIG 2013 Omnibus Incentive Plan
(Omnibus Plan). Our share-settled awards are settled with previously acquired shares held in AIG’s treasury.
AIG 2013 Omnibus Incentive Plan
The Omnibus Plan, which replaced the AIG 2010 Stock Incentive Plan (2010 Plan), was adopted at the 2013 Annual Meeting of
Shareholders and provides for the grants of share-based awards to our employees and non-employee directors. The total number of
shares that may be granted under the Omnibus Plan (the reserve) is the sum of 1) 45 million shares of AIG Common Stock, plus 2)
the number of authorized shares that remained available for issuance under the 2010 Plan when the Omnibus Plan became effective,
plus 3) the number of shares of AIG Common Stock relating to outstanding awards under the 2010 Plan at the time the Omnibus Plan
became effective that subsequently are forfeited, expired, terminated or otherwise lapse or are settled in cash. Each share-based unit
granted under the Omnibus Plan reduces the number of shares available for future grants by one share. However, shares with
respect to awards that are forfeited, expired or settled for cash, and shares withheld for taxes on awards (other than options and stock
appreciation rights awards) are returned to the reserve.
During 2018, performance share units (PSUs), restricted stock units (RSUs), stock options and deferred stock units (DSUs)
(collectively, units) were granted under the Omnibus Plan and 37,211,710 shares are available for future grants as of December 31,
2018. Units are issued to employees as part of our long-term incentive program, generally in March of any given year, and are also
issued for off-cycle grants, which are made from time to time during the year generally as sign-on awards to new hires or as a result
of a change in employee status.
AIG Long Term Incentive Plan
LTI Awards
The LTIP provides for an annual award to certain employees, including our senior executive officers and other highly compensated
employees that may be comprised of PSUs, RSUs and/or stock options.
The number of PSUs issued on the grant date (the target) provides the opportunity for the LTIP participant to receive shares of AIG
Common Stock based on AIG achieving specified performance goals at the end of a three-year performance period. These
performance goals are pre-established by AIG’s Compensation and Management Resources Committee (CMRC) for each annual
grant and may differ from year to year. The actual number of PSUs earned can vary from zero to 200 percent of the target for the
2017 and 2018 awards or zero to 150 percent of the target for the 2014 through 2016 awards, depending on AIG’s performance
relative to a specified peer group or against pre-established financial goals, as applicable.
RSUs and stock options are earned based solely on continued service by the participant.
AIG | 2018 Form 10-K 297
ITEM 8 | Notes to Consolidated Financial Statements | 20 . S h are - Ba se d C o m pe ns a ti o n Pla ns
Vesting occurs on January 1 of the year immediately following the end of the three-year performance period. For awards granted prior
to 2017, vesting occurs in three equal installments beginning on January 1 of the year immediately following the end of a performance
period and January 1 of each of the next two years. Recipients must be employed at each vesting date to be entitled to share
delivery, except upon the occurrence of an accelerated vesting event, such as an involuntary termination without cause, disability,
retirement eligibility or death during the vesting period.
LTI awards granted in 2015 and thereafter accrue dividend equivalent units (DEUs) in the form of additional PSUs and/or RSUs
whenever a cash dividend is declared on shares of AIG Common Stock; the DEUs are subject to the same vesting terms and
conditions as the underlying unit.
Unit Valuation
The fair value of time-vesting RSUs as well as PSUs that are earned based on certain company-specific metrics was based on the
closing price of AIG Common Stock on the grant date; while the fair value of PSUs that are earned based on AIG’s relative total
shareholder return (TSR) was determined on the grant date using a Monte Carlo simulation.
The following table presents the assumptions used to estimate the fair value of PSUs that vest based on AIG’s TSR:
Expected dividend yield(a)
Expected volatility(b)
Risk-free interest rate(c)
2017
2.37 %
17.58 %
2.00 %
2016
2.17 %
24.55 %
1.30 %
(a) The dividend yield is the projected annualized AIG dividend yield estimated by Bloomberg Professional service as of the valuation date.
(b) The expected volatility is based on the historical volatility of the stock price for the 360 most recent trading days prior to the valuation date estimated by Bloomberg
Professional service.
(c) The risk-free interest rate is the continuously compounded interest rate for the term between the valuation date and the end of the performance period that is assumed
to be constant and equal to the interpolated value between the closest data points on the U.S. dollar LIBOR-swap curve as of the valuation date.
Modification of LTI awards
During the fourth quarter of 2017, the Company modified the LTI awards by issuing time-vesting RSUs and canceling some
performance based units. The modification applied to most recipients who participate in the 2015, 2016 and 2017 LTI awards,
excluding the Company’s senior executives. The newly granted RSUs vest in installments over a period of up to three years. We
incurred incremental compensation expense of $142 million as a result of these actions. We recognized $71 million in 2017, $48
million in 2018 and the remainder will be recognized through December 2020.
The following table summarizes outstanding share-settled LTI awards(a):
As of or for the Year
Ended December 31, 2018(b)
Unvested, beginning of year
Granted
Vested(c)
Forfeited
Unvested, end of year(d)
Number of Units
Weighted Average
Grant-Date Fair Value
2018 LTI
2016 LTI
2017 LTI
2015 LTI
- 2,173,115 1,467,745 1,291,788
-
(266,184)
(753,272)
43,792
(530,388)
(106,524)
-
(728,576)
(98,509)
2014 LTI
823,311
-
(793,955)
(29,356)
2018 LTI 2017 LTI 2016 LTI 2015 LTI 2014 LTI
- $ 62.78 $ 60.90 $ 60.02 $ 48.81
$
-
-
48.81
60.28
48.84
62.13
55.47
55.85
55.92
58.52
63.67
63.13
-
57.87
54.46
4,640,722
(1,205,653)
(113,041)
3,322,028 1,579,995
640,660
272,332
-
$ 55.32 $ 62.32 $ 61.55 $ 60.51 $
-
(a) Excludes stock options and DSUs, which are discussed under Stock Options and Non-Employee Plan, respectively.
(b) Except for the 2014 LTI and 2015 LTI awards, PSUs represent target amount granted, and does not reflect potential increases or decreases that could result from the
final outcome of the performance goals for the respective awards, which is determined in the quarter after the applicable performance period ends.
(c) Also reflects units that vest as a result of an accelerated vesting event that occurred prior to the specified vesting date.
(d) At December 31, 2018, the total unrecognized compensation cost for outstanding RSUs and PSUs was $215 million and the weighted-average and expected period of
years over which that cost is expected to be recognized are 0.96 year and 2 years.
298 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 20 . S h are - Ba se d C o m pe ns a ti o n Pla ns
Stock Options
Stock options were issued in 2018 as part of the 2018 LTI awards and in 2017 and 2018 to certain newly hired senior executives. The
fair value of the options was estimated on the grant date using the Black-Scholes model for the time-vesting options, and a Monte
Carlo simulation for the hurdle-vesting options using the assumptions noted in the following table.
The following weighted-average assumptions were used for stock options granted:
Expected annual dividend yield(a)
Expected volatility(b)
Risk-free interest rate(c)
Expected term(d)
2018
2.32 %
23.29 %
2.83 %
4.50 - 6.47 years
2017
2.03 %
20.96 %
1.94 %
4.5 years
(a) The dividend yield is the projected annualized AIG dividend yield estimated by Bloomberg Professional service as of the valuation date.
(b) The expected volatility is based on the implied volatility of 24 months stock option estimated by the Bloomberg Professional service as of the valuation date.
(c) The risk-free interest rate is the continuously compounded interest rate for the term between the valuation date and the expiration date that is assumed to be constant
and equal to the interpolated value between the closet data points on the U.S. dollar LIBOR-swap curve as of the valuation date.
(d) The contractual terms are 7 and 10 years.
The following table provides a rollforward of stock option activity:
As of or for the Year
Ended December 31, 2018
Weighted Average
Remaining
Intrinsic Values
Units
Exercise Price
Contractual Life
(in millions)
Weighted Average
Aggregate
Outstanding, beginning of year
2,500,000
$
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year
2,752,098
-
(46,299)
5,205,799
486,229
$
$
62.90
55.38
-
55.94
58.99
59.90
6.48
7.38
4.07
$
$
-
-
The weighted average grant-date fair value of stock options granted during 2018 was $11.08. As of December 31, 2018, we
recognized $26.4 million of expense, while $24 million was unrecognized and is expected to be amortized up to 2.75 years.
Other RSU Grants
We granted 1,385,929 off-cycle time-vesting RSUs in 2018 primarily pertaining to replacement awards granted to Validus employees.
We recognized $43.3 million of expense related to these RSU grants in 2018. Total unrecognized compensation cost related to these
grants was $57 million and the weighted-average and expected period of years over which that cost is expected to be recognized are
1.14 years and 4.25 years at December 31, 2018.
NON-EMPLOYEE PLAN
Our non-employee directors, who serve on our Board of Directors, receive share-based compensation in the form of fully vested
DSUs with delivery deferred until retirement from the Board. DSUs granted in 2018, 2017 and 2016 accrue DEUs equal to the amount
of any regular quarterly dividend that would have been paid by AIG if the shares of AIG Common Stock underlying the DSUs had
been outstanding. In 2018, 2017 and 2016, we granted to non-employee directors 39,092, 32,067 and 41,974 DSUs, respectively,
under the 2013 Plan, and recognized expense of $2.1 million, $2.0 million and $2.4 million, respectively.
AIG | 2018 Form 10-K 299
ITEM 8 | Notes to Consolidated Financial Statements | 21 . E m pl o ye e B e n ef i t s
21. Employee Benefits
PENSION PLANS
We offer various defined benefit plans to eligible employees.
The U.S. AIG Retirement Plan (the qualified plan) is a noncontributory defined benefit plan that is subject to the provisions of ERISA.
U.S. salaried employees who are employed by a participating company on or before December 1, 2014 and who have completed
12 months of continuous service are eligible to participate in the plan. Effective April 1, 2012, the qualified plan was converted to a
cash balance formula comprised of pay credits based on six percent of a plan participant’s annual compensation (subject to IRS
limitations) and annual interest credits. Employees can take their vested benefits when they leave AIG as a lump sum or an annuity
option after completing at least three years of service. Employees satisfying certain age and service requirements (i.e., grandfathered
employees) remain covered under the average pay formula that was in effect prior to the conversion to the cash balance formula.
The final average pay formula is based upon a percentage of final average compensation multiplied by years of credited service, up
to 44 years. Grandfathered employees will receive the higher of the benefit under the cash balance formula or the final average pay
formula at retirement. Non-U.S. defined benefit plans generally are either based on the employee’s years of credited service and
compensation in the years preceding retirement or on points accumulated based on the employee’s job grade and other factors
during each year of service.
In the U.S. we also sponsor non-qualified unfunded defined benefit plans, such as the AIG Non-Qualified Retirement Income Plan
(AIG NQRIP) for certain employees, including key executives, designed to supplement pension benefits provided by the qualified
plan. The AIG NQRIP provides a benefit equal to the reduction in benefits under the qualified plan as a result of federal tax limitations
on compensation and benefits payable.
Plan Freeze
Effective January 1, 2016, the U.S. defined benefit pension plans were frozen. Consequently, these plans are closed to new
participants and current participants no longer earn benefits. However, interest credits continue to accrue on the existing cash
balance accounts and participants are continuing to accrue years of service for purposes of vesting and early retirement eligibility and
subsidies as they continue to be employed by AIG.
POSTRETIREMENT PLANS
We also provide postretirement medical care and life insurance benefits in the U.S. and in certain non-U.S. countries. Eligibility in the
various plans generally is based upon completion of a specified period of eligible service and attaining a specified age. Overseas,
benefits vary by geographic location.
U.S. postretirement medical and life insurance benefits are based upon the employee attaining the age of 55 and having a minimum
of ten years of service. Eligible employees who have medical coverage can enroll in retiree medical upon termination of employment.
Medical benefits are contributory, while the life insurance benefits generally are non-contributory. Retiree medical contributions vary
from none for pre-1989 retirees to actual premium payments reduced by certain subsidies for post-1992 retirees. These contributions
are subject to adjustment annually. Other cost sharing features of the medical plan include deductibles, coinsurance and Medicare
coordination. Effective April 1, 2012, the retiree medical employer subsidy for the AIG postretirement plan was eliminated for
employees who were not grandfathered. Additionally, new employees hired after December 31, 2012 are not eligible for retiree life
insurance.
300 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 21 . E m pl o ye e B e n ef i t s
The following table presents the funded status of the plans reconciled to the amount reported in the Consolidated Balance
Sheets. The measurement date for most of the non-U.S. defined benefit pension and postretirement plans is November 30,
consistent with the fiscal year end of the sponsoring companies. For all other plans, measurement occurs as of
December 31.
As of or for the Years Ended
December 31,
(in millions)
Change in projected benefit obligation:
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid:
AIG assets
Plan assets
Plan amendment
Curtailments
Settlements
Foreign exchange effect
Other
Projected benefit obligation, end of year
Change in plan assets:
Fair value of plan assets, beginning
of year
Actual return on plan assets, net of expenses
AIG contributions
Benefits paid:
AIG assets
Plan assets
Settlements
Foreign exchange effect
Other
Fair value of plan assets, end of year
Funded status, end of year
Amounts recognized in the balance
sheet:
Assets
Liabilities
Total amounts recognized
Pre-tax amounts recognized in Accumulated
other comprehensive income:
Net gain (loss)
Prior service (cost) credit
Total amounts recognized
Pension
Postretirement
U.S. Plans*
2018
2017
Non-U.S. Plans*
2018
2017
U.S. Plans
2018
2017
Non-U.S. Plans
2017
2018
$ 5,091 $ 4,948 $
1,202 $ 1,246 $
190 $ 196 $
5
162
(383)
(16)
(306)
-
-
-
-
-
11
166
372
(19)
(161)
-
-
(226)
-
-
22
16
(28)
(9)
(32)
3
-
(5)
(31)
-
29
16
(29)
(10)
(26)
-
(7)
(12)
37
(42)
1
6
(10)
(15)
-
-
-
-
-
-
2
6
-
(13)
-
-
-
-
-
(1)
$ 4,553 $ 5,091 $
1,138 $ 1,202 $
172 $ 190 $
63 $
1
2
(14)
(1)
-
-
-
-
(1)
-
50 $
80
3
3
(2)
(1)
-
(6)
-
-
1
(15)
63
$ 4,350 $ 3,843 $
(204)
16
(16)
(306)
-
-
-
584
329
(19)
(161)
(226)
-
-
$ 3,840 $ 4,350 $
(741) $
$
(713) $
875 $
6
51
803 $
67
60
- $
-
15
- $
-
13
- $
-
1
-
-
1
(9)
(32)
(5)
(25)
-
861 $
(277) $
(10)
(26)
(12)
19
(26)
875 $
(327) $
(15)
-
-
-
-
- $
(13)
-
-
-
-
- $
(172) $ (190) $
(1)
-
-
-
-
- $
(50) $
(1)
-
-
-
-
-
(63)
$
$
- $
(713)
(713) $
- $
(741)
(741) $
72 $
(349)
(277) $
68 $
(395)
(327) $
- $
- $
- $
(190)
(172)
(172) $ (190) $
(50)
(50) $
-
(63)
(63)
$ (1,450) $ (1,373) $
-
-
$ (1,450) $ (1,373) $
(149) $
(23)
(172) $
(170) $
(22)
(192) $
26 $
-
26 $
17 $
1
18 $
3 $
3
6 $
(11)
5
(6)
*
Includes non-qualified unfunded plans of which the aggregate projected benefit obligation was $250 million and $272 million for the U.S. at December 31, 2018 and
2017, respectively, and $201 million and $211 million for the non-U.S at December 31, 2018 and 2017, respectively.
The following table presents the accumulated benefit obligations for U.S. and non-U.S. pension benefit plans:
At December 31,
(in millions)
U.S. pension benefit plans
Non-U.S. pension benefit plans
2018
4,553 $
1,125 $
2017
5,091
1,188
$
$
AIG | 2018 Form 10-K 301
Defined benefit plan obligations in which the projected benefit obligation was in excess of the related plan assets and the
accumulated benefit obligation was in excess of the related plan assets were as follows:
ITEM 8 | Notes to Consolidated Financial Statements | 21 . E m pl o ye e B e n ef i t s
At December 31,
(in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$
PBO Exceeds Fair Value of Plan Assets
Non-U.S. Plans
ABO Exceeds Fair Value of Plan Assets
Non-U.S. Plans
U.S. Plans
2018
4,553 $
4,553
3,840
2017
5,091 $
5,091
4,350
2018
994 $
932
594
2017
1,054 $
979
596
U.S. Plans
2018
4,553 $
4,553
3,840
2017
5,091 $
5,091
4,350
2018
943 $
932
594
2017
991
979
596
The following table presents the components of net periodic benefit cost with respect to pensions and other postretirement
benefits:
Years Ended December 31,
Pension
Postretirement
U.S. Plans
Non-U.S. Plans
U.S. Plans
Non-U.S. Plans
(in millions)
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
3
3
-
-
1
7
-
-
7
1
$
5 $
11 $
19
$
22 $
29 $
Components of net periodic benefit
cost:
Service cost
*
Interest cost
Expected return on assets
Amortization of prior service cost (credit)
Amortization of net (gain) loss
162
166
181
(283)
(266)
(292)
-
28
-
26
-
25
Net periodic benefit cost (credit)
(88)
(63)
(67)
Curtailment gain
Settlement charges
-
-
-
60
-
149
16
(25)
2
7
22
-
-
16
(24)
-
12
33
(6)
1
31
21
(26)
-
7
33
(6)
2
$
1 $
2 $
6
-
(1)
-
6
-
-
6
-
(1)
(1)
6
-
-
2
7
-
(12)
(1)
(4)
(1)
-
$
1 $
3 $
2
-
(2)
1
2
-
-
3
-
(1)
1
6
(2)
-
Net benefit cost (credit)
$
(88) $
(3) $
82
$
22 $
28 $
29
$
6 $
6 $
(5) $
2 $
4 $
Total recognized in Accumulated other
comprehensive income (loss)
$
(77) $
32 $
(82) $
20 $
87 $ (101) $
9 $
(2) $
(7) $
12 $
9 $
Total recognized in net periodic benefit
cost and other comprehensive
income (loss)
$
11 $
35 $ (164) $
(2) $
59 $ (130) $
3 $
(8) $
(2) $
10 $
5 $
(6)
* Reflects administrative fees for the U.S. pension plans.
The estimated net loss and prior service cost that will be amortized from Accumulated other comprehensive income into net periodic
benefit cost over the next fiscal year are $38 million and $2 million, respectively, for our combined defined benefit pension plans. For
the defined benefit postretirement plans, the estimated amortization from Accumulated other comprehensive income for net gain and
prior service credit that will be amortized into net periodic benefit cost over the next fiscal year is a $3 million credit in the aggregate.
As of 2016, interest cost for pension and postretirement benefits for our U.S. plans and largest non-U.S. plans is measured by
applying the specific spot rates along the yield curve to the plans’ corresponding discounted cash flows that comprise the obligation
(the Spot Rate Approach). This method provides a more precise measurement of interest cost by aligning the timing of the plans’
discounted cash flows to the corresponding spot rates on the yield curve. Previously, interest cost was measured utilizing a single
weighted-average discount rate derived from the yield curve used to measure the benefit obligations.
A 100 basis point increase in the discount rate or expected long-term rate of return would decrease the 2018 pension expense by
approximately $5 million and $45 million, respectively, with all other items remaining the same. Conversely, a 100 basis point
decrease in the discount rate or expected long-term rate of return would increase the 2018 pension expense by approximately
$24 million and $45 million, respectively, with all other items remaining the same.
302 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 21 . E m pl o ye e B e n ef i t s
ASSUMPTIONS
The following table summarizes the weighted average assumptions used to determine the benefit obligations:
December 31, 2018
Discount rate
Rate of compensation increase
December 31, 2017
Discount rate
Rate of compensation increase
Pension
Postretirement
U.S. Plans
Non-U.S. Plans(a)
U.S. Plans
Non-U.S. Plans(a)
4.22 %
N/A
(b)
3.61 %
N/A
(b)
1.71 %
2.27 %
1.60 %
2.27 %
4.17 %
N/A
3.53 %
N/A
4.12 %
3.00 %
3.59 %
3.00 %
(a) The non-U.S. plans reflect those assumptions that were most appropriate for the local economic environments of each of the subsidiaries providing such benefits.
(b) Compensation increases are no longer applicable due to the plan freeze that became effective January 1, 2016.
The following table summarizes assumed health care cost trend rates for the U.S. plans:
At December 31,
Following year:
Medical (before age 65)
Medical (age 65 and older)
Ultimate rate to which cost increase is assumed to decline
Year in which the ultimate trend rate is reached:
Medical (before age 65)
Medical (age 65 and older)
2018
2017
5.93%
5.00%
4.50%
2038
2038
6.12%
5.00%
4.50%
2038
2038
A one percent point change in the assumed healthcare cost trend rate would have the following effect on our postretirement
benefit obligations:
At December 31,
(in millions)
U.S. plans
Non-U.S. plans
$
$
One Percent
Increase
2018
4
10
$
$
2017
4
14
One Percent
Decrease
2018
$
$
(3) $
(8) $
2017
(4)
(10)
Our postretirement plans provide benefits primarily in the form of defined employer contributions rather than defined employer
benefits. Changes in the assumed healthcare cost trend rate have a minimal impact for U.S. plans because for post-1992 retirees,
benefits are fixed dollar amounts based on service at retirement. Our non-U.S. postretirement plans are not subject to caps.
AIG | 2018 Form 10-K 303
ITEM 8 | Notes to Consolidated Financial Statements | 21 . E m pl o ye e B e n ef i t s
The following table presents the weighted average assumptions used to determine the net periodic benefit costs:
Pension
Postretirement
U.S. Plans
Non-U.S. Plans*
U.S. Plans
Non-U.S. Plans*
For the Year Ended December 31, 2018
Discount rate
Rate of compensation increase
Expected return on assets
For the Year Ended December 31, 2017
Discount rate
Rate of compensation increase
Expected return on assets
For the Year Ended December 31, 2016
Discount rate
Rate of compensation increase
Expected return on assets
3.61 %
N/A
6.75 %
4.15 %
N/A
7.00 %
4.33 %
N/A %
7.00 %
1.60 %
2.27 %
2.78 %
1.50 %
2.50 %
2.92 %
2.17 %
2.64 %
3.28 %
3.53 %
N/A
N/A
4.01 %
N/A
N/A
4.21 %
N/A
N/A
3.59 %
3.00 %
N/A
3.95 %
3.38 %
N/A
4.09 %
3.43 %
N/A
* The non-U.S. plans reflect those assumptions that were most appropriate for the local economic environments of the subsidiaries providing such benefits.
Discount Rate Methodology
The projected benefit cash flows under the U.S. AIG Retirement Plan were discounted using the spot rates derived from the Mercer
U.S. Pension Discount Yield Curve at December 31, 2018 and 2017, which resulted in a single discount rate that would produce the
same liability at the respective measurement dates. The discount rates were 4.22 percent at December 31, 2018 and 3.61 percent at
December 31, 2017. The methodology was consistently applied for the respective years in determining the discount rates for the other
U.S. pension plans.
In general, the discount rates for the non-U.S. plans were developed using a similar methodology to the U.S. AIG Retirement plan, by
using country-specific Mercer Yield Curves.
The projected benefit obligation for AIG’s Japan pension plans represents approximately 52 percent and 50 percent of the total
projected benefit obligations for our non-U.S. pension plans at December 31, 2018 and 2017, respectively. The weighted average
discount rate of 0.72 percent and 0.66 percent at December 31, 2018 and 2017, respectively, was selected by reference to the Mercer
Yield Curve for Japan.
Plan Assets
The investment strategy with respect to assets relating to our U.S. and non-U.S. pension plans is designed to achieve investment
returns that will provide for the benefit obligations of the plans over the long term, limit the risk of short-term funding shortfalls
and maintain liquidity sufficient to address cash needs. Accordingly, the asset allocation strategy is designed to maximize the
investment rate of return while managing various risk factors, including, but not limited to, volatility relative to the benefit obligations,
liquidity, diversification and concentration, and incorporates the risk/return profile applicable to each asset class.
There were no shares of AIG Common Stock included in the U.S. and non-U.S. pension plans assets at December 31, 2018 or 2017.
304 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 21 . E m pl o ye e B e n ef i t s
U.S. Pension Plan
The assets of the qualified plan are monitored by the AIG U.S. Investment Committee and actively managed by the investment
managers, which involves allocating the plan’s assets among approved asset classes within ranges as permitted by the strategic
allocation. The long-term strategic asset allocation historically has been reviewed and revised approximately every three years. The
investment strategy is focused on de-risking the Plan via regular monitoring through liability driven investing and the glide path
approach, where the glide path defines the target allocation for the “Return-Seeking” portion of the portfolio (i.e., growth assets)
based on the funded ratio. Under this approach, the allocation to growth assets is reduced and the allocation to liability-hedging
assets is increased as the Plan’s funded ratio increases in accordance with the defined glide path.
The following table presents the asset allocation percentage by major asset class for the U.S. qualified plan and the target
allocation for 2019 based on the plan’s funded status at December 31, 2018:
At December 31,
Asset class:
Equity securities
Fixed maturity securities
Other investments
Total
Target
2019
Actual
2018
Actual
2017
26 %
60 %
14 %
100 %
25 %
47 %
28 %
100 %
45 %
36 %
19 %
100 %
The expected long-term rate of return for the plan was 6.75 percent and 7.0 percent for 2018 and 2017, respectively. The expected
rate of return is an aggregation of expected returns within each asset class category, weighted for the investment mix of the assets.
The combination of the expected asset return and any contributions made by us are expected to maintain the plan’s ability to meet all
required benefit obligations. The expected asset return for each asset class was developed based on an approach that considers key
fundamental drivers of the asset class returns in addition to historical returns, current market conditions, asset volatility and the
expectations for future market returns.
Non-U.S. Pension Plans
The assets of the non-U.S. pension plans are held in various trusts in multiple countries and are invested primarily in equities and
fixed maturity securities to maximize the long-term return on assets for a given level of risk.
The following table presents the asset allocation percentage by major asset class for non-U.S. pension plans and the target
allocation:
At December 31,
Asset class:
Equity securities
Fixed maturity securities
Other investments
Cash and cash equivalents
Total
Target
2019
Actual
2018
Actual
2017
30 %
51 %
18 %
1 %
100 %
35 %
37 %
17 %
11 %
100 %
49 %
32 %
13 %
6 %
100 %
The assets of AIG’s Japan pension plans represent approximately 59 percent and 56 percent of total non-U.S. assets at December
31, 2018 and 2017, respectively. The expected long term rate of return was 2.22 percent and 2.43 percent, for 2018 and 2017,
respectively, and is evaluated by the Japanese Pension Investment Committee on a quarterly and annual basis along with various
investment managers, and is revised to achieve the optimal allocation to meet targeted funding levels if necessary. In addition, the
funding policy is revised in accordance with local regulation every five years.
The expected weighted average long-term rate of return for all our non-U.S. pension plans was 2.78 percent and 2.92 percent for the
years ended December 31, 2018 and 2017, respectively. It is an aggregation of expected returns within each asset class that was
generally developed based on the building block approach that considers historical returns, current market conditions, asset volatility
and the expectations for future market returns.
AIG | 2018 Form 10-K 305
ITEM 8 | Notes to Consolidated Financial Statements | 21 . E m pl o ye e B e n ef i t s
ASSETS MEASURED AT FAIR VALUE
The following table presents information about our plan assets and indicates the level of the fair value measurement based
on the observability of the inputs used. The inputs and methodology used in determining the fair value of these assets are
consistent with those used to measure our assets as discussed in Note 5 herein.
(in millions)
At December 31, 2018
Assets:
Cash and cash equivalents
Equity securities:
U.S.(a)
International(b)
Fixed maturity securities:
U.S. investment grade(c)
International investment grade(c)
U.S. and international high yield(d)
Mortgage and other asset-backed
securities(e)
Other fixed maturity securities
Other investment types(g):
Futures
Direct private equity(f)
Insurance contracts
Total
At December 31, 2017
Assets:
Cash and cash equivalents
Equity securities:
U.S.(a)
International(b)
Fixed maturity securities:
U.S. investment grade(c)
International investment grade(c)
U.S. and international high yield(d)
Mortgage and other asset-backed
securities(e)
Other fixed maturity securities
Other investment types(g):
Direct private equity(f)
Insurance contracts
Total
U.S. Plans
Non-U.S. Plans
Level 1
Level 2
Level 3
Total
Level 1 Level 2 Level 3
Total
$
501 $
- $
- $
501
$
97 $
- $
- $
97
240
137
-
-
-
-
240
137
-
218
-
84
-
-
-
-
-
27
-
-
1,463
157
96
36
-
-
-
18
$
905 $ 1,770 $
13
-
-
-
-
1,476
157
96
36
-
-
14
-
27
14
18
27 $ 2,702
-
-
-
-
-
-
-
1,006
204
212
142
-
-
20
$ 1,962 $ 1,584 $
12
-
-
-
-
1,018
204
212
142
-
15
-
15
20
27 $ 3,573
-
-
-
-
-
145
$ 315 $ 401 $ 145 $ 861
-
-
145
-
-
-
-
-
-
-
-
-
-
-
302
-
130
185
-
2
-
-
-
-
-
-
-
-
426
-
97
171
-
16
-
-
-
-
-
-
130
185
-
2
-
-
-
-
-
-
97
171
-
16
-
-
-
113
$ 413 $ 348 $ 113 $ 874
-
113
-
-
$
397 $
- $
- $
397
$
51 $
- $
- $
51
1,300
265
-
-
-
-
1,300
265
-
362
-
64
(a) Includes passive and active U.S. equity strategies.
(b) Includes passive and active international equity strategies.
(c) Includes investments in U.S. and non-U.S. government issued bonds, U.S. government agency or sponsored agency bonds, and investment grade corporate bonds.
(d) Consists primarily of investments in securities or debt obligations that have a rating below investment grade.
(e) Represents investments in collateralized loan obligations. As of December 31, 2017, the plan held additional asset-backed securities.
(f) Comprised of private capital financing including private debt and private equity securities.
(g) Excludes investments that are measured at fair value using the NAV per share (or its equivalent), which totaled $1,138 million and $777 million at December 31, 2018
and 2017, respectively.
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these
securities. Based on our investment strategy, we had no significant concentrations of risks at December 31, 2018.
The U.S. pension plan holds a group annuity contract with U.S. Life, one of our subsidiaries, which totaled $18 million and $20 million
at December 31, 2018 and 2017, respectively.
306 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 21 . E m pl o ye e B e n ef i t s
Changes in Level 3 Fair Value Measurements
The following table presents changes in our U.S. and non-U.S. Level 3 plan assets measured at fair value:
Net
Balance
Realized and
Changes in
Unrealized Gains
Balance
(Losses) on
At December 31, 2018
Beginning
Unrealized
Transfers
Transfers
at End
Instruments Held
(in millions)
U.S. Plan Assets:
Fixed maturity securities
U.S. investment grade
Direct private equity
Total
Non-U.S. Plan Assets:
Insurance contracts
Total
of year
Gains (Losses)
Purchases
Sales
Issuances
Settlements
In
Out
of year
at End of year
$
$
12 $
15
27 $
113
$
113 $
(2) $
(2)
(4) $
31
31 $
Net
5 $
(3) $
3
(2)
8 $
(5) $
1
1 $
-
- $
- $
-
- $
-
- $
- $
1 $
- $
-
-
-
- $
1 $
- $
13
14
27
-
- $
-
-
- $
- $
145
145
$
$
$
1
(1)
-
-
-
Changes in
Unrealized Gains
At December 31, 2017
Beginning
Unrealized
Transfers
Transfers
at End
Instruments Held
Balance
Realized and
Balance
(Losses) on
(in millions)
U.S. Plan Assets:
Fixed maturity securities
U.S. investment grade
Direct private equity
Total
Non-U.S. Plan Assets:
Insurance contracts
Total
of year
Gains (Losses)
Purchases
Sales
Issuances
Settlements
In
Out
of year
at End of year
$
$
2 $
24
26 $
- $
17 $
(7) $
(3)
1
(7)
(3) $
18 $
(14) $
108
$
108 $
4
4 $
1
1 $
-
- $
- $
-
- $
-
- $
- $
-
- $
-
- $
- $
- $
-
-
- $
- $
12
15
27
-
-
- $
- $
113
113
$
$
$
2
(1)
1
-
-
Transfers of Level 1 and Level 2 Assets
Our policy is to record transfers of assets between Level 1 and Level 2 at their fair values as of the end of each reporting period,
consistent with the date of the determination of fair value. Assets are transferred out of Level 1 when they are no longer transacted
with sufficient frequency and volume in an active market. Conversely, assets are transferred from Level 2 to Level 1 when transaction
volume and frequency are indicative of an active market. We had no material transfers between Level 1 and Level 2 during the years
ended December 31, 2018 and 2017.
Transfers of Level 3 Assets
We record transfers of assets into or out of Level 3 at their fair values as of the end of each reporting period, consistent with the date
of the determination of fair value. During the year ended December 31, 2018, we had no material transfers in or out of Level 3.
EXPECTED CASH FLOWS
Funding for the qualified plan ranges from the minimum amount required by ERISA to the maximum amount that would be deductible
for U.S. tax purposes. Contributed amounts in excess of the minimum amounts are deemed voluntary. Amounts in excess of the
maximum amount would be subject to an excise tax and may not be deductible under the Internal Revenue Code. There are no
minimum required cash contributions in 2018 for the AIG Retirement Plan. The non-qualified and postretirement plans’ benefit
payments are deductible when paid to participants.
Our annual pension contribution in 2019 is expected to be approximately $79 million for our U.S. and non-U.S. pension plans. This
estimate is subject to change, since contribution decisions are affected by various factors including our liquidity, market performance
and management’s discretion.
AIG | 2018 Form 10-K 307
The expected future benefit payments, net of participants’ contributions, with respect to the defined benefit pension plans
and other postretirement benefit plans, are as follows:
ITEM 8 | Notes to Consolidated Financial Statements | 21 . E m pl o ye e B e n ef i t s
(in millions)
2019
2020
2021
2022
2023
2024-2028
$
Pension
Postretirement
$
U.S.
Plans
274 $
270
281
279
276
1,361
Non-U.S.
Plans
77
42
41
41
42
245
U.S.
Plans
13 $
13
13
13
13
56
Non-U.S.
Plans
1
1
1
1
2
10
DEFINED CONTRIBUTION PLANS
We sponsor several defined contribution plans for U.S. employees that provide for pre-tax salary reduction contributions by
employees. The most significant plan is the AIG Incentive Savings Plan, for which the matching contribution is 100 percent of the first
six percent of a participant’s contributions, subject to the IRS-imposed limitations. Effective January 1, 2016, participants in the AIG
Incentive Savings Plan receive an additional fully vested, non-elective, non-discretionary contribution equal to three percent of the
participant’s annual base compensation for the plan year, paid each pay period regardless of whether the participant currently
contributes to the plan, and subject to the IRS-imposed limitations. Our pre-tax expenses associated with these plans were $210
million, $209 million and $236 million in 2018, 2017 and 2016, respectively.
22. Ownership
A Schedule 13G/A filed on February 14, 2019 reports aggregate ownership of 47,237,956 shares, or approximately 5.5 percent
(based on the AIG Common Stock outstanding) of AIG Common Stock as of December 31, 2018, by Capital Research Global
Investors, a division of Capital Research and Management Company.
A Schedule 13G/A filed on February 11, 2019 reports aggregate ownership of 67,664,554 shares, or approximately 7.8 percent
(based on the AIG Common Stock outstanding) of AIG Common Stock as of December 31, 2018, by The Vanguard Group, Inc. and
various subsidiaries thereof.
A Schedule 13G/A filed on February 11, 2019 reports aggregate ownership of 64,768,700 shares, or approximately 7.5 percent
(based on the AIG Common Stock outstanding) of AIG Common Stock as of December 31, 2018, by Blackrock, Inc. and various
subsidiaries thereof.
The calculation of ownership interest for purposes of the AIG Tax Asset Protection Plan and Article 13 of our Restated Certificate of
Incorporation is different than beneficial ownership for Schedule 13G.
23. Income Taxes
U.S. TAX REFORM OVERVIEW
On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act). The Tax
Act reduced the statutory rate of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG
and the insurance industry.
308 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
During December 2017, the SEC staff issued Staff Accounting Bulletin 118 (SAB 118), which provided guidance on accounting for the
tax effects of the Tax Act. SAB 118 addressed situations where accounting for certain income tax effects of the Tax Act under ASC
740 may be incomplete upon issuance of an entity’s financial statements and provides a one-year measurement period from the
enactment date to complete the accounting under ASC 740. In accordance with SAB 118, a company was required to reflect the
following:
•
Income tax effects of those aspects of the Tax Act for which accounting under ASC 740 is complete
• Provisional estimate of income tax effects of the Tax Act to the extent accounting is incomplete but a reasonable estimate is
determinable
•
If a provisional estimate cannot be determined, ASC 740 should still be applied on the basis of tax law provisions that were in
effect immediately before the enactment of the Tax Act.
At December 31, 2017, we originally recorded a provisional estimate of income tax effects of the Tax Act of $6.7 billion, including a tax
charge of $6.7 billion attributable to the reduction in the U.S. corporate income tax rate and tax benefit of $38 million related to the
deemed repatriation tax. Our provisional estimate of $6.7 billion was based in part on a reasonable estimate of the effects of the
statutory income tax rate reduction on existing deferred tax balances and of certain provisions of the Tax Act. We filed our 2017
consolidated U.S. income tax return and have completed our review of the primary impact of the Tax Act provisions on our deferred
taxes. As a result, we consider the accounting for the effects of the rate change on deferred tax balances to be complete and no
material measurement period changes were recorded for this item. As further guidance is issued by the U.S. tax authority, any
resulting changes in our estimates will be treated in accordance with the relevant accounting guidance.
The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes on foreign income are imposed on
the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT)
under which taxes are imposed on certain base eroding payments to affiliated foreign companies. There are substantial uncertainties
in the interpretation of BEAT and GILTI and while certain formal guidance was issued by the U.S. tax authority, there are still aspects
of the Tax Act that remain unclear and additional guidance is expected in 2019. Such guidance may result in changes to the
interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international
provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period
the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner.
Tax effects for which a reasonable estimate can be determined
Deemed Repatriation Tax
The Tax Act requires companies to pay a one-time transition tax, net of tax credits, related to applicable foreign taxes paid, on
previously untaxed current and accumulated earnings and profits of certain of our foreign subsidiaries. We were able to reasonably
estimate the deemed repatriation tax and originally recorded a provisional estimated tax benefit of $38 million at December 31, 2017.
We have completed our review of post-1986 earnings and profits of our foreign affiliates. Incorporating additional IRS guidance issued
with respect to the deemed repatriation tax, as well as the relevant basis adjustments, we recognized a measurement period tax
charge of $62 million. The effect of the deemed repatriation tax, which has been determined to be complete, resulted in a liability of
$24 million.
Other Provisions
The Tax Act modified computations of insurance reserves for both life and general insurance companies. For life insurance
companies, tax reserves are now computed with reference to NAIC reserves. For general insurance companies, the Tax Act extends
the discount period for certain long-tail lines of business from 10 years to 24 years and increases the discount rate, replacing the
applicable federal rate for a higher-yield corporate bond rate, and eliminates the election allowing companies to use their historical
loss payment patterns for loss reserve discounting. Adjustments related to the differences in insurance reserves balances computed
under the old tax law versus the Tax Act have to be taken into income over eight years by both life and general insurance companies.
Accordingly, these changes give rise to new deferred tax liabilities. At December 31, 2017, we recorded a provisional estimate of
$1.9 billion with respect to such deferred tax liabilities. This increase in deferred tax liabilities was offset by an increase in the deferred
tax asset related to insurance reserves as a result of applying the new provisions of the Tax Act.
As of December 31, 2018, we have completed our review of the tax reserve computations for both life and general insurance
companies, and recorded offsetting decreases of $1.4 billion to both our deferred tax liabilities and deferred tax assets.
AIG | 2018 Form 10-K 309
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
Provisions Impacting Projections of Taxable Income and Valuation Allowance Considerations
During 2018, we completed our review of 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 the U.S. tax authority. While the prescribed SAB
118 measurement period has ended, there are still certain aspects of the Tax Act that remain unclear, including the complex interplay
of the new tax rules with the rules governing the utilization of our tax attributes, and formal guidance from the U.S. tax authority is still
pending. We will continue to review the impact of any additional guidance issued by the U.S. tax authority on our valuation allowance
analysis in accordance with the relevant accounting guidance. Accordingly, as of December 31, 2018, we consider the determination
of the need for a valuation allowance related to the Tax Act to be complete based on our analysis of existing tax law and relevant tax
guidance, and no measurement period adjustment was recorded.
Tax effects for which no estimate can be determined
At December 31, 2017, our accounting for the following elements of the Tax Act was incomplete and we continued accounting for
them in accordance with ASC 740 on the basis of the tax laws in effect before enactment of the Tax Act.
The Tax Act may affect the results in certain investments and partnerships in which we are a non-controlling interest owner. At
December 31, 2017, the information needed to determine a provisional estimate was not available (such as for interest deduction
limitations in those entities and the changed definition of a U.S. Shareholder), and accordingly, no provisional estimates were
recorded. We have since completed our review of these investments and partnerships. We consider the accounting for this item to be
complete and no measurement period change was recorded.
At December 31, 2017, due to minimal formal guidance issued by state and local jurisdictions, provisional estimates were not
recorded for the impact of any state and local corporate income tax implications of the Tax Act. Guidance from state and local
jurisdictions has varied and most have not formally passed law specific to the treatment of the Tax Act. While we have not identified
any material impact at this point in time, we continue to review any guidance issued by those states that have passed tax legislation
related to the Tax Act and continue to work through the state and local corporate income tax implications of the Tax Act. We expect
further guidance throughout 2019, and the impact, if any, will be recorded when the related guidance is issued. We consider the
accounting for this item to be complete and no measurement period adjustment was recorded.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued an accounting standard that allows the optional reclassification of stranded tax effects within
Accumulated Other Comprehensive Income (AOCI) that arise due to the enactment of the Tax Act to retained earnings. We elected to
early adopt the standard for the three-month period ended March 31, 2018. As a result of adopting this standard, we reclassified
$248 million from AOCI to retained earnings. The amount reclassified includes stranded effects related to the change in the U.S.
federal corporate income tax rate on the gross temporary differences and related valuation allowances.
We use an item-by-item approach to release the stranded or disproportionate income tax effects in AOCI related to our available-for-
sale securities. Under this approach, a portion of the disproportionate tax effects is assigned to each individual security lot at the date
the amount becomes lodged. When the individual securities are sold, mature, or are otherwise impaired on an other-than-temporary
basis, the assigned portion of the disproportionate tax effect is reclassified from AOCI to income from continuing operations.
U.S. Tax Reform – SAB 118 Measurement Period Completion
As of December 31, 2018, we have completed our accounting for the tax effects of the Tax Act. Although the prescribed
measurement period has ended, there are aspects of the Tax Act that remain unclear and additional guidance from the U.S. tax
authority is pending. As further guidance is issued by the U.S. tax authority, any resulting changes in our estimates will be treated in
accordance with the relevant accounting guidance.
EFFECTIVE TAX RATE
The following table presents income (loss) from continuing operations before income tax expense (benefit) by U.S. and
foreign location in which such pre-tax income (loss) was earned or incurred:
Years Ended December 31,
(in millions)
U.S.
Foreign
Total
310 AIG | 2018 Form 10-K
2018
(12)
269
257
$
$
2017
1,940
(474)
1,466
2016
1,041
(1,115)
(74)
$
$
$
$
The following table presents the income tax expense (benefit) attributable to pre-tax income (loss) from continuing
operations:
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
Years Ended December 31,
(in millions)
Foreign and U.S. components of actual income tax expense:
U.S.:
Current
Deferred
Foreign:
Current
Deferred
Total
2018
2017
2016
$
$
134
(175)
202
(7)
154
$
427
6,865
209
25
7,526
$
$
$
140
(270)
436
(121)
185
Our actual income tax (benefit) expense differs from the statutory U.S. federal amount computed by applying the federal
income tax rate due to the following:
2018
2017
2016
Pre-Tax
Tax
Percent of
Pre-Tax
Tax
Percent of
Tax
Percent of
Years Ended December 31,
Income
Expense/
Pre-Tax
Income
Expense/
Pre-Tax
Pre-Tax
Expense/
Pre-Tax
(dollars in millions)
(Loss)
(Benefit)
Income (Loss)
(Loss)
(Benefit)
Income (Loss)
Income
(Benefit)
Income
$
255 $
54
21.0 % $
1,476 $
517
35.0 % $
(159) $
(56)
35.0 %
U.S. federal income tax at statutory
rate
Adjustments:
Tax exempt interest
Uncertain tax positions
Reclassifications from accumulated
other comprehensive income
Dispositions of Subsidiaries
Tax Attribute Restoration
Non-controlling Interest
Non-deductible transfer pricing
charges
Dividends received deduction
Effect of foreign operations
Share-based compensation
payments excess tax deduction
State income taxes
Impact of Tax Act
Global intangible low-taxed income
Other
Effect of discontinued operations
Valuation allowance:
Continuing operations
(37)
176
(72)
-
-
(1)
29
(38)
44
(13)
10
62
21
(102)
40
21
194
(14.5)
69.0
(28.2)
-
-
(0.4)
11.4
(14.8)
17.3
(5.1)
3.9
24.3
8.2
(40.0)
15.7
8.2
76.0
(111)
660
(7.5)
44.7
(184)
(12.5)
17
-
(7)
35
(90)
69
(40)
(9)
1.2
-
(0.5)
2.4
(6.1)
4.7
(2.7)
(0.6)
6,687
453.0
-
(58)
3
43
1,476
7,532
-
(3.9)
0.2
2.9
510.3
(178)
111.9
268
(168.6)
(132)
118
83.0
(74.2)
(164)
103.1
(81)
50.9
102
(75)
234
(64.2)
47.2
(147.2)
-
23
-
-
13
35
-
(14.5)
-
-
(8.2)
(22.0)
83
(52.2)
(159)
190
(119.5)
Consolidated total amounts
255
Amounts attributable to discontinued
operations
(2)
40
NM
10
6
60.0
(85)
5
(5.9)
Amounts attributable to continuing
operations
$
257 $
154
59.9 % $
1,466 $
7,526
513.4 % $
(74) $
185
(250.0) %
AIG | 2018 Form 10-K 311
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
For the year ended December 31, 2018, the effective tax rate on income from continuing operations was 59.9 percent. The effective
tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to a $62 million
measurement period adjustment related to the deemed repatriation tax, $48 million net charge primarily related to the accrual of IRS
interest (including interest related to uncertain tax positions), $44 million associated with the effect of foreign operations, $29 million of
non-deductible transfer pricing charges, $21 million of additional U.S. taxes imposed on income of our foreign subsidiaries under
international provisions of the Tax Act, and $21 million of valuation allowance activity related to certain foreign subsidiaries and state
jurisdictions, partially offset by tax benefits of $75 million associated with tax exempt income, and $72 million of reclassifications from
accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities.
Effect of foreign operations is primarily related to income and losses in our foreign operations taxed at statutory tax rates different
than 21 percent and foreign income subject to U.S. taxation.
For the year ended December 31, 2017, the effective tax rate on income from continuing operations was not meaningful. The effective
tax rate differs from the 2017 statutory tax rate of 35 percent primarily due to tax charges of $6.7 billion associated with the enactment
of the Tax Act discussed above, $660 million of tax charges and related interest associated with increases in uncertain tax positions
primarily related to cross border financing transactions and other open tax issues, $69 million associated with the effect of foreign
operations, and $35 million of non-deductible transfer pricing charges, partially offset by tax benefits of $201 million of tax exempt
income, $184 million of reclassifications from accumulated other comprehensive income to income from continuing operations related
to the disposal of available for sale securities, and $40 million of excess tax deductions related to share based compensation
payments recorded through the income statement in accordance with relevant accounting literature. Effect of foreign operations is
primarily related to losses incurred in our European operations taxed at a statutory tax rate lower than 35 percent and other foreign
taxes.
For the year ended December 31, 2016, the effective tax rate on loss from continuing operations was not meaningful. The effective
tax rate on loss from continuing operations differs from the statutory tax rate of 35 percent primarily due to tax charges of $234 million
associated with effect of foreign operations, $216 million of tax charges and related interest associated with increases in uncertain tax
positions related to cross border financing transactions, $118 million related to disposition of subsidiaries, $102 million related to non-
deductible transfer pricing charges, and $83 million related to increases in the deferred tax asset valuation allowances associated
with U.S. federal and certain foreign jurisdictions, partially offset by tax benefits of $253 million of tax exempt income, $164 million
associated with a portion of the U.S. Life Insurance companies capital loss carryforwards previously treated as expired that was
restored and utilized, $116 million related to the impact of an agreement reached with the Internal Revenue Service (IRS) related to
certain tax issues under audit, and $132 million of reclassifications from accumulated other comprehensive income to income from
continuing operations related to the disposal of available for sale securities. Effect of foreign operations is primarily related to foreign
exchange losses incurred by our foreign subsidiaries related to the weakening of the British pound following the Brexit vote taxed at a
statutory tax rate lower than 35 percent.
As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed were subject to a one-time
deemed repatriation tax. Going forward, certain foreign earnings of our foreign affiliates will be exempt from U.S. tax upon
repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will
continue to be applicable upon future repatriations of foreign earnings.
For the year ended December 31, 2018, we consider our foreign earnings with respect to certain operations in Canada, South Africa,
the Far East, Latin America, Bermuda as well as the European, Asia Pacific and Middle East regions to be indefinitely reinvested.
These earnings relate to ongoing operations and have been reinvested in active business operations. While, following the enactment
of the Tax Act, distributions from foreign affiliates are, generally, not subject to U.S. income tax, such distributions may be subject to
non-U.S. withholding taxes. A deferred tax liability of approximately $100 million to $150 million related to such withholding taxes has
not been recorded for those foreign subsidiaries whose earnings are considered to be indefinitely reinvested. Deferred taxes, if
necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.
312 AIG | 2018 Form 10-K
The following table presents the components of the net deferred tax assets (liabilities):
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
December 31,
(in millions)
Deferred tax assets:
Losses and tax credit carryforwards
Basis differences on investments
Life policy reserves
Accruals not currently deductible, and other
Investments in foreign subsidiaries
Loss reserve discount
Loan loss and other reserves
Unearned premium reserve reduction
Fixed assets and intangible assets
Other
Employee benefits
Total deferred tax assets
Deferred tax liabilities:
Deferred policy acquisition costs
Unrealized gains related to available for sale debt securities
Loan loss and other reserves
Total deferred tax liabilities
Net deferred tax assets before valuation allowance
Valuation allowance
Net deferred tax assets (liabilities)
2018
2017
$
$
11,792
2,038
2,200
608
173
272
-
504
531
962
604
19,684
(2,342)
(490)
(20)
(2,852)
16,832
(1,780)
15,052
$
$
11,931
2,133
1,996
532
159
526
34
566
442
731
601
19,651
(2,313)
(2,151)
-
(4,464)
15,187
(1,374)
13,813
The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December
31, 2018.
December 31, 2018
(in millions)
Net operating loss carryforwards
Capital loss carryforwards
Foreign tax credit carryforwards
Other carryforwards
Total AIG U.S. consolidated income tax group tax losses and credits
carryforwards on a tax return basis
$
Gross
36,268 $
82
Unrecognized tax benefit
Total AIG U.S. consolidated income tax group tax losses and credits
Expiration
Periods
2028 - 2037
2023
2019 - 2023
Various
Tax
Effected
7,616
17
3,516
814
11,963
(1,733)
carryforwards on a U.S. GAAP basis*
Includes other carryforwards, i.e. general business credits of $30 million and refundable Alternative Minimum Tax Credits of $39 million on a U.S. GAAP basis.
10,230
$
*
We have U.S. federal consolidated net operating loss and tax credit carryforwards of approximately $10.2 billion. The carryforward
periods for our foreign tax credits begin to expire in 2019. As detailed in the Assessment of Deferred Tax Asset Valuation Allowance
section of this footnote, we determined that it is more likely than not that our U.S. federal consolidated tax attribute carryforwards will
be realized prior to their expiration.
AIG | 2018 Form 10-K 313
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
ASSESSMENT OF DEFERRED TAX ASSET VALUATION ALLOWANCE
The evaluation of the recoverability of our deferred tax asset and the need for a valuation allowance requires us to weigh all positive
and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be
realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative
evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation
allowance is not needed.
Our framework for assessing the recoverability of the deferred tax asset requires us to consider all available evidence, including:
•
•
•
•
the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;
the sustainability of recent operating profitability of our subsidiaries;
the predictability of future operating profitability of the character necessary to realize the net deferred tax asset;
the carryforward period for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing
taxable temporary differences; and
• prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the
deferred tax asset.
In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the
utilization of the net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction. Under U.S. tax
law, a company generally must use its net operating loss carryforwards before it can use its foreign tax credit carryforwards, even
though the carryforward period for the foreign tax credit is shorter than for the net operating loss. Our U.S. federal consolidated
income tax group includes both life companies and non-life companies. While the U.S. taxable income of our non-life companies can
be offset by our net operating loss carryforwards, only a portion (no more than 35 percent) of the U.S. taxable income of our life
companies can be offset by those net operating loss carryforwards. The remaining tax liability of our life companies can be offset by
the foreign tax credit carryforwards. Accordingly, we utilize both the net operating loss and foreign tax credit carryforwards
concurrently which enables us to realize our tax attributes prior to expiration. As of December 31, 2018, based on all available
evidence, it is more likely than not that the U.S. net operating loss and foreign tax credit carryforwards will be utilized prior to
expiration and, thus, no valuation allowance has been established.
Estimates of future taxable income, including income generated from prudent and feasible actions and tax planning strategies and
any changes to interpretations and assumptions related to the impact of the Tax Act could change in the near term, perhaps
materially, which may require us to consider any potential impact to our assessment of the recoverability of the deferred tax asset.
Such potential impact could be material to our consolidated financial condition or results of operations for an individual reporting
period.
For the year ended December 31, 2018, recent changes in market conditions, including rising interest rates, impacted the unrealized
tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in a deferred tax asset
related to net unrealized tax capital losses. The deferred tax asset relates to the unrealized losses for which the carryforward period
has not yet begun, and as such, when assessing its recoverability, we consider our ability and intent to hold the underlying securities
to recovery. As of December 31, 2018, based on all available evidence, we concluded that a valuation allowance should be
established on a portion of the deferred tax asset related to unrealized losses that are not more-likely-than-not to be realized. For the
year ended December 31, 2018, we established $290 million of valuation allowance associated with the unrealized tax losses in the
U.S. Life Insurance Companies’ available for sale securities portfolio, all of which was allocated to other comprehensive income.
For the year ended December 31, 2018, recent changes in market conditions, including rising interest rates, impacted the unrealized
tax gains and losses in the U.S. Non-Life Companies’ available for sale securities portfolio, resulting in a decrease to the deferred tax
liability related to net unrealized tax capital gains. As of December 31, 2018, we continue to be in an overall unrealized tax gain
position with respect to the U.S. Non-Life Companies’ available for sale securities portfolio and thus concluded no valuation allowance
is necessary in the U.S. Non-Life Companies’ available for sale securities portfolio.
For the year ended December 31, 2018, we recognized a net increase of $21 million in our deferred tax asset valuation allowance
associated with certain foreign subsidiaries and state jurisdictions, primarily attributable to current year activity.
314 AIG | 2018 Form 10-K
The following table presents the net deferred tax assets (liabilities) at December 31, 2018 and 2017 on a U.S. GAAP basis:
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
December 31,
(in millions)
Net U.S. consolidated return group deferred tax assets
Net deferred tax assets (liabilities) in accumulated other comprehensive income
Valuation allowance
Subtotal
Net foreign, state and local deferred tax assets
Valuation allowance
Subtotal
Subtotal - Net U.S., foreign, state and local deferred tax assets
Net foreign, state and local deferred tax liabilities
Total AIG net deferred tax assets (liabilities)
2018
2017
$ 15,479 $ 15,603
(2,070)
(86)
13,447
1,874
(1,288)
586
14,033
(220)
$ 15,052 $ 13,813
(510)
(405)
14,564
2,031
(1,374)
657
15,221
(169)
DEFERRED TAX ASSET VALUATION ALLOWANCE OF U.S. CONSOLIDATED FEDERAL INCOME TAX
GROUP
At December 31, 2018 and 2017, our U.S. consolidated income tax group had net deferred tax assets after valuation allowance of
$14.6 billion and $13.4 billion, respectively. At December 31, 2018 and 2017, our U.S. consolidated income tax group had valuation
allowances of $405 million and $86 million, respectively.
DEFERRED TAX ASSET — FOREIGN, STATE AND LOCAL
At December 31, 2018 and 2017, we had net deferred tax assets (liabilities) of $488 million and $366 million, respectively, related to
foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.
At December 31, 2018 and 2017, we had deferred tax asset valuation allowances of $1.4 billion and $1.3 billion, respectively, related
to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns. We maintained
these valuation allowances following our conclusion that we could not demonstrate that it was more likely than not that the related
deferred tax assets will be realized. This was primarily due to factors such as cumulative losses in recent years and the inability to
demonstrate profits within the specific jurisdictions over the relevant carryforward periods.
TAX EXAMINATIONS AND LITIGATION
We file a consolidated U.S. federal income tax return with our eligible U.S. subsidiaries. Income earned by subsidiaries operating
outside the U.S. is taxed, and income tax expense is recorded, based on applicable U.S. and foreign law.
The statute of limitations for all tax years prior to 2000 has expired for our consolidated federal income tax return. We are currently
under examination for the tax years 2000 through 2013.
On March 20, 2008, we received a Statutory Notice of Deficiency (Notice) from the IRS for years 1997 to 1999. The Notice asserted
that we owe additional taxes and penalties for these years primarily due to the disallowance of foreign tax credits associated with
cross-border financing transactions. The transactions that are the subject of the Notice extend beyond the period covered by the
Notice, and the IRS has administratively challenged the later periods. The IRS has also administratively challenged other cross-
border transactions in later years. We have paid the assessed tax plus interest and penalties for 1997 to 1999. On February 26, 2009,
we filed a complaint in the United States District Court for the Southern District of New York (Southern District) seeking a refund of
approximately $306 million in taxes, interest and penalties paid with respect to the 1997 taxable year. We allege that the IRS
improperly disallowed foreign tax credits and that our taxable income should be reduced as a result of the 2005 restatement of our
consolidated financial statements.
We also filed an administrative refund claim on September 9, 2010 for our 1998 and 1999 tax years.
On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with
cross border financing transactions in the Southern District of New York. The Southern District of New York denied our summary
judgment motion and upon AIG’s appeal, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) affirmed the denial.
AIG’s petition for certiorari to the U.S. Supreme Court from the decision of the Second Circuit was denied on March 7, 2016. As a
result, the case has been remanded back to the Southern District of New York for a jury trial.
AIG | 2018 Form 10-K 315
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
In January 2018, the parties reached non-binding agreements in principle on issues presented in the dispute and are currently
reviewing the computations reflecting the settlement terms. The resolution is not final and is subject to various reviews. The litigation
has been stayed pending the outcome of the review process. We can provide no assurance regarding the outcome of any such
litigation or whether binding compromised settlements with the parties will ultimately be reached. We currently believe that we have
adequate reserves for the potential liabilities that may result from these matters.
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
The following table presents a reconciliation of the beginning and ending balances of the total amounts of gross
unrecognized tax benefits:
Years Ended December 31,
(in millions)
Gross unrecognized tax benefits, beginning of year
Increases in tax positions for prior years
Decreases in tax positions for prior years
Increases in tax positions for current year
Lapse in statute of limitations
Settlements
Activity of discontinued operations
Gross unrecognized tax benefits, end of year
2018
2017
$
4,707 $ 4,530 $
14
(6)
-
-
(6)
-
210
(33)
-
-
-
-
$
4,709 $ 4,707 $
2016
4,331
235
(39)
3
-
-
-
4,530
At December 31, 2018, 2017 and 2016, our unrecognized tax benefits, excluding interest and penalties, were $4.7 billion, $4.7 billion
and $4.5 billion, respectively. The activity for the year ended December 31, 2018 is not material. The activity for the years ended
December 31, 2017 and 2016, includes increases for amounts associated with cross border financing transactions and the impact of
settlement discussions with the IRS related to certain other open tax issues unrelated to the cross border financing transactions. With
respect to cross border financing transactions, the increases are the result of consideration of court decisions upholding the
disallowance of foreign tax credits claimed by other corporate entities not affiliated with AIG. In addition, the year ended December 31,
2017 reflects the agreement reached in the fourth quarter of 2017 by the parties in the cross border financing dispute to pursue a
potential settlement.
At December 31, 2018, 2017 and 2016, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the
effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $38 million,
$28 million and $66 million, respectively. Accordingly, at December 31, 2018, 2017 and 2016, the amounts of unrecognized tax
benefits that, if recognized, would favorably affect the effective tax rate were $4.7 billion, $4.7 billion and $4.4 billion, respectively.
Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2018, 2017, and
2016, we had accrued liabilities of $2.2 billion, $2.0 billion, and $1.2 billion, respectively, for the payment of interest (net of the federal
benefit) and penalties. For the years ended December 31, 2018, 2017, and 2016, we accrued expense of $190 million, $776 million
and $26 million, respectively, for the payment of interest and penalties. The activity for the period ended December 31, 2017, is
primarily related to a decrease in the expected federal benefit of interest due to the U.S. corporate tax rate reduction and to an
increase in interest and penalties associated with cross border financing transactions.
We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next 12 months by as much as $3.9
billion, principally as a result of potential resolutions or settlements of prior years’ tax items. The prior years’ tax items include
unrecognized tax benefits related to the deductibility of certain expenses and matters related to cross border financing transactions.
Listed below are the tax years that remain subject to examination by major tax jurisdictions:
At December 31, 2018
Major Tax Jurisdiction
United States
Australia
France
Japan
Korea
Singapore
United Kingdom
316 AIG | 2018 Form 10-K
Open Tax Years
2000-2017
2014-2017
2017-2018
2012-2017
2013-2017
2014-2017
2017-2018
ITEM 8 | Notes to Consolidated Financial Statements | 24 . Q u art er l y F in a n cia l I n f or ma ti o n (U n au di t e d )
24. Quarterly Financial Information (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(dollars in millions, except per share data)
2018
2017
2018
2017
2018
2017
2018
2017
Total revenues
$
11,712 $
12,632 $
11,631 $
12,502 $
11,486 $
11,751 $
12,560 $
12,635
March 31,
June 30,
September 30,
December 31,
Three Months Ended
Income (loss) from continuing
operations before income taxes*
Income (loss) from discontinued
operations, net of income taxes
Net income (loss)
Net income (loss) from
continuing operations attributable
to noncontrolling interests
Net income (loss) attributable to AIG
*
$
Income (loss) per common share
$
$
$
$
attributable to AIG:
Basic:
Income (loss) from continuing
operations
Income (loss) from discontinued
operations
Diluted:
Income (loss) from continuing
operations
Income (loss) from discontinued
operations
Weighted average shares
outstanding:
Basic
Diluted
Noteworthy quarterly items -
(income) expense:
Other-than-temporary
impairments
Net (gain) loss on sale of
divested businesses
Federal and foreign valuation
allowance for deferred tax assets
Net (gain) loss on extinguishment of
debt
Prior year unfavorable (favorable)
development
Restructuring and other costs
Impact of Tax Act
1,227
1,727
1,252
1,667
(1,527)
(2,803)
(695)
875
(1)
949
-
1,211
-
931
8
1,118
(39)
(1,259)
(1)
(1,713)
(2)
(560)
(3)
(6,672)
11
26
(6)
(12)
-
26
62
(12)
938 $
1,185 $
937 $
1,130 $
(1,259) $
(1,739) $
(622) $
(6,660)
1.03 $
1.21 $
1.04 $
1.21 $
(1.37) $
(1.91) $
(0.70) $
(7.33)
- $
- $
- $
0.01 $
(0.04) $
- $
(0.70) $
-
1.01 $
1.18 $
1.02 $
1.18 $
(1.37) $
(1.91) $
(0.70) $
(7.33)
- $
- $
- $
0.01 $
(0.04) $
- $
(0.70) $
-
907,951,597
980,777,243
903,215,488
925,751,084
895,237,359
908,667,044
887,508,718
908,115,499
925,266,577 1,005,315,030
916,572,481
948,248,771
895,237,359
908,667,044
887,508,718
908,115,499
87
(8)
30
4
(40)
24
-
68
36
100
(25)
(13)
(1)
61
181
-
7
5
(26)
200
-
67
60
(8)
(4)
391
47
-
35
(2)
5
1
949
35
62
88
13
24
1
901
31
-
93
(3)
(21)
(3)
546
136
-
37
(241)
40
(1)
212
154
6,687
* For the three-month period ended December 31, 2018, our results include out of period adjustments relating to prior periods that decreased Net income attributable to
AIG by $87 million, and decreased Income from continuing operations before income taxes by $132 million. The out of period adjustments for the three-month period
are primarily related to decreases in Premiums and decreases in Net realized capital gains and losses. We determined that these adjustments were not material to the
current quarter or to any previously reported quarterly financial statements. Had these adjustments been recorded in their appropriate periods, Net income attributable
to AIG for the three-month period ended September 30, 2018 would have decreased by $40 million with no impact to the three-month periods ended June 30, 2018 and
March 31, 2018, respectively.
AIG | 2018 Form 10-K 317
ITEM 8 | Notes to Consolidated Financial Statements | 25 . In f or ma ti o n P r o vi d e d in C o n ne ct i on w ith O u ts ta n di n g De b t
25. Information Provided in Connection with Outstanding Debt
The following Condensed Consolidating Financial Statements reflect the results of AIG Life Holdings, Inc. (AIGLH), a holding
company and a wholly owned subsidiary of AIG. AIG provides a full and unconditional guarantee of all outstanding debt of AIGLH.
CONDENSED CONSOLIDATING BALANCE SHEETS
(in millions)
December 31, 2018
Assets:
Short-term investments(a)
Other investments(b)
Total investments
Cash
Loans to subsidiaries(c)
Investment in consolidated subsidiaries(c)
Other assets, including deferred income taxes(d)
Total assets
Liabilities:
Insurance liabilities
Long-term debt
Other liabilities, including intercompany balances(b)
Loans from subsidiaries(c)
Total liabilities
Total AIG shareholders’ equity
Non-redeemable noncontrolling interests
Total equity
Total liabilities and equity
December 31, 2017
Assets:
Short-term investments(a)
Other investments(b)
Total investments
Cash
Loans to subsidiaries(c)
Investment in consolidated subsidiaries(c)
Other assets, including deferred income taxes(d)
Total assets
Liabilities:
Insurance liabilities
Long-term debt
Other liabilities, including intercompany balances(b)
Loans from subsidiaries(c)
Total liabilities
Total AIG shareholders’ equity
Non-redeemable noncontrolling interests
Total equity
Total liabilities and equity
American
International
Group, Inc.
(As Guarantor)
Validus
Holdings,
Ltd.
Other
Subsidiaries
Reclassifications
and
Eliminations
AIGLH
Consolidated
AIG
$
$
$
$
$
$
$
$
1,141 $
3,377
4,518
2
34,963
33,300
15,389
88,172 $
2 $
-
2
9
-
4,029
1,798
5,838 $
- $
-
-
9
-
26,321
124
26,454 $
10,329 $
301,158
311,487
2,853
615
-
159,430
474,385 $
- $
- $
- $
293,652 $
22,422
8,774
615
31,811
56,361
-
56,361
88,172 $
2,541 $
6,004
8,545
3
35,004
40,135
16,016
99,703 $
- $
21,557
12,458
517
34,532
65,171
-
65,171
99,703 $
359
228
-
587
5,251
-
5,251
5,838 $
643
144
-
787
25,667
-
25,667
26,454 $
11,116
100,974
34,963
440,705
32,732
948
33,680
474,385 $
- $
-
-
-
-
-
-
- $
- $
-
-
-
-
-
-
-
- $
- $
-
-
20
-
30,359
170
30,549 $
- $
642
143
-
785
29,764
-
29,764
30,549 $
11,559 $
305,902
317,461
2,339
517
-
159,594
479,911 $
282,105 $
9,441
112,275
35,004
438,825
40,549
537
41,086
479,911 $
(1,798) $
-
(1,798)
-
(35,578)
(63,650)
(1,839)
(102,865) $
- $
-
(3,637)
(35,578)
(39,215)
(63,650)
-
(63,650)
(102,865) $
(3,714) $
-
(3,714)
-
(35,521)
(70,494)
(2,133)
(111,862) $
- $
-
(6,028)
(35,521)
(41,549)
(70,313)
-
(70,313)
(111,862) $
9,674
304,535
314,209
2,873
-
-
174,902
491,984
293,652
34,540
106,483
-
434,675
56,361
948
57,309
491,984
10,386
311,906
322,292
2,362
-
-
173,647
498,301
282,105
31,640
118,848
-
432,593
65,171
537
65,708
498,301
(a) At December 31, 2018, includes restricted cash of $124 million and $18 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries,
respectively. At December 31, 2017, includes restricted cash of $4 million and $54 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries,
respectively.
(b) Includes intercompany derivative positions, which are reported at fair value before credit valuation adjustment.
(c) Eliminated in consolidation.
(d) At December 31, 2018, includes restricted cash of $1 million and $342 million for American International Group, Inc. (As Guarantor) and Other Subsidiaries,
respectively. At December 31, 2017, includes restricted cash of $1 million and $316 million for American International Group, Inc. (As Guarantor) and Other
Subsidiaries, respectively.
318 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 25 . In f or ma ti o n P r o vi d e d in C o n ne ct i on w ith O u ts ta n di n g De b t
CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
American
International
Validus
Group, Inc.
Holdings,
Reclassifications
Other
and
Consolidated
(As Guarantor)
Ltd.
AIGLH
Subsidiaries
Eliminations
AIG
(in millions)
Year Ended December 31, 2018
Revenues:
*
Equity in earnings of consolidated subsidiaries
Other income
Total revenues
Expenses:
Interest expense
Loss on extinguishment of debt
Other expenses
Total expenses
Income (loss) from continuing operations before income tax
expense (benefit)
Income tax expense (benefit)
Income (loss) from continuing operations
Loss from discontinued operations, net
of income taxes
Net income (loss)
Less:
Net income from continuing operations
attributable to noncontrolling interests
Net income (loss) attributable to AIG
Year Ended December 31, 2017
Revenues:
*
Equity in earnings of consolidated subsidiaries
$
$
Other income
Total revenues
Expenses:
Interest expense
(Gain) loss on extinguishment of debt
Other expenses
Total expenses
Income (loss) from continuing operations before income tax
expense (benefit)
Income tax expense (benefit)
Income (loss) from continuing operations
Income (loss) from discontinued operations, net
of income taxes
Net income (loss)
Less:
Net income (loss) from continuing operations
attributable to noncontrolling interests
$
(580) $
(240) $
2,847 $
- $
(2,027) $
938
358
954
-
803
1,757
(1,399)
(1,433)
34
23
(217)
1
2,848
18
-
27
45
(262)
-
(262)
50
-
3
53
2,795
39
2,756
(40)
(6)
-
-
(262)
2,756
46,506
46,506
302
7
45,048
45,357
1,149
1,548
(399)
(2)
(401)
(79)
(2,106)
(15)
-
(65)
(80)
(2,026)
-
(2,026)
-
(2,026)
-
-
-
67
-
(6) $
(262) $
2,756 $
(468) $
(2,026) $
(149) $
- $
1,978 $
- $
(1,829) $
-
1,978
50
-
2
52
1,926
(3)
1,929
-
1,929
48,802
48,802
176
(7)
46,116
46,285
2,517
2,607
(90)
5
(85)
(173)
(2,002)
(7)
-
(179)
(186)
(1,816)
-
(1,816)
-
(1,816)
891
742
949
2
952
1,903
(1,161)
4,922
(6,083)
(1)
(6,084)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
47,389
47,389
1,309
7
45,816
47,132
257
154
103
(42)
61
67
(6)
-
49,520
49,520
1,168
(5)
46,891
48,054
1,466
7,526
(6,060)
4
(6,056)
-
28
-
28
Net income (loss) attributable to AIG
$
(6,084) $
- $
1,929 $
(113) $
(1,816) $
(6,084)
AIG | 2018 Form 10-K 319
ITEM 8 | Notes to Consolidated Financial Statements | 25 . In f or ma ti o n P r o vi d e d in C o n ne ct i on w ith O u ts ta n di n g De b t
(in millions)
Year Ended December 31, 2016
Revenues:
Equity in earnings of consolidated subsidiaries
*
Other income
Total revenues
Expenses:
Interest expense
(Gain) loss on extinguishment of debt
Other expenses
Total expenses
Income (loss) from continuing operations before income tax
expense (benefit)
Income tax expense (benefit)
Income (loss) from continuing operations
Loss from discontinued operations, net
of income taxes
Net income (loss)
Less:
Net income from continuing operations
attributable to noncontrolling interests
American
International
Validus
Group, Inc.
Holdings,
Reclassifications
Other
and
Consolidated
(As Guarantor)
Ltd.
AIGLH
Subsidiaries
Eliminations
AIG
$
(1,269) $
- $
(197) $
- $
1,466 $
516
(753)
988
77
295
1,360
(2,113)
(1,301)
(812)
(37)
(849)
-
-
-
-
-
-
-
-
-
-
-
-
-
5
(192)
51
-
16
67
(259)
(21)
(238)
-
(238)
52,875
52,875
227
(3)
51,819
52,043
832
1,507
(675)
(53)
(728)
(1,029)
437
(6)
-
(1,023)
(1,029)
1,466
-
1,466
-
1,466
-
500
-
-
52,367
52,367
1,260
74
51,107
52,441
(74)
185
(259)
(90)
(349)
500
(849)
Net income (loss) attributable to AIG
$
(849) $
- $
(238) $
(1,228) $
1,466 $
* Eliminated in consolidation.
320 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 25 . In f or ma ti o n P r o vi d e d in C o n ne ct i on w ith O u ts ta n di n g De b t
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Year Ended December 31, 2018
Net income (loss)
Other comprehensive income (loss)
Comprehensive income (loss)
Total comprehensive income attributable to
noncontrolling interests
Comprehensive income (loss) attributable to AIG
Year Ended December 31, 2017
Net income (loss)
Other comprehensive income (loss)
Comprehensive income (loss)
Total comprehensive income attributable to
noncontrolling interests
Comprehensive income (loss) attributable to AIG
Year Ended December 31, 2016
Net income (loss)
Other comprehensive income (loss)
Comprehensive income (loss)
Total comprehensive income attributable to
noncontrolling interests
$
$
$
$
$
American
International
Validus
Group, Inc.
Holdings,
Reclassifications
Other
and
Consolidated
(As Guarantor)
Ltd.
AIGLH
Subsidiaries
Eliminations
AIG
(6) $
(262) $
2,756 $
(401) $
(2,026) $
(6,302)
(6,308)
-
(262)
2,508
5,264
12,298
11,897
(14,797)
(16,823)
61
(6,293)
(6,232)
-
-
-
76
-
76
(6,308) $
(262) $
5,264 $
11,821 $
(16,823) $
(6,308)
(6,084) $
- $
1,929 $
(85) $
(1,816) $
7,851
9,780
17,857
17,772
(25,708)
(27,524)
2,235
(3,849)
-
-
-
-
(3,849) $
- $
9,780 $
17,744 $
(27,524) $
(3,849)
-
28
-
28
(849) $
- $
(238) $
(728) $
1,466 $
693
(156)
-
-
-
-
4,080
3,842
52,153
51,425
(56,233)
(54,767)
-
500
-
(6,056)
2,235
(3,821)
(349)
693
344
500
(156)
Comprehensive income (loss) attributable to AIG
$
(156) $
- $
3,842 $
50,925 $
(54,767) $
AIG | 2018 Form 10-K 321
ITEM 8 | Notes to Consolidated Financial Statements | 25 . In f or ma ti o n P r o vi d e d in C o n ne ct i on w ith O u ts ta n di n g De b t
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in millions)
Year Ended December 31, 2018
American
International
Validus
Group, Inc. Holdings,
Ltd.
(As Guarantor)
Reclassifications
AIGLH
Other
Subsidiaries
and Consolidated
AIG
Eliminations
Net cash (used in) provided by operating activities
$
1,256 $
656 $
2,445 $
1,651 $
(5,947) $
61
Cash flows from investing activities:
Sales of investments
Sales of divested businesses, net
Purchase of investments
Loans to subsidiaries – net
Contributions from (to) subsidiaries - net
Acquisition of businesses, net of cash and
restricted cash acquired
Net change in short-term investments
Other, net
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Issuance of long-term debt
Repayments of long-term debt
Purchase of common stock
Intercompany loans - net
Cash dividends paid
Other, net
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and
restricted cash
Change in cash and restricted cash
Cash and restricted cash at beginning of year
Cash and restricted cash at end of year
Year Ended December 31, 2017
Net cash (used in) provided by operating activities
$
$
Cash flows from investing activities:
Sales of investments
Sales of divested businesses, net
Purchase of investments
Loans to subsidiaries – net
Contributions from (to) subsidiaries - net
Net change in short-term investments
Other, net
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Issuance of long-term debt
Repayments of long-term debt
Purchase of common stock
Intercompany loans - net
Cash dividends paid
Other, net
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and
restricted cash
Change in cash and restricted cash
Cash and restricted cash at beginning of year
Change in cash of businesses held for sale
5,587
-
(1,980)
868
1
(5,475)
1,533
(73)
461
2,470
(1,493)
(1,739)
90
(1,138)
212
(1,598)
-
119
8
13
-
-
-
-
112
-
-
125
-
(350)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(6)
(2,456)
(416)
(772)
-
(2,456)
-
9
-
-
(11)
20
59,918
10
(59,778)
(90)
-
(354)
(9)
273
(30)
2,264
(1,829)
-
(868)
(3,485)
2,812
(1,106)
(11)
504
2,709
(3,206)
-
3,206
(778)
(1)
-
-
-
(779)
-
-
-
778
5,947
1
6,726
-
-
-
127 $
9 $
9 $
3,213 $
- $
62,312
10
(58,552)
-
-
(5,717)
1,524
200
(223)
4,734
(3,672)
(1,739)
-
(1,138)
2,609
794
(11)
621
2,737
3,358
36 $
- $
1,413 $
(6,659) $
(2,608) $
(7,818)
5,821
40
(2,465)
199
2,446
1,994
(183)
7,852
1,505
(1,724)
(6,275)
(63)
(1,172)
(154)
(7,883)
-
5
3
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(5)
(5)
-
-
-
-
(1,422)
-
(1,422)
-
(14)
34
-
74,477
752
(64,539)
63
-
104
(1,955)
8,902
1,851
(1,974)
-
(199)
(1,186)
(200)
(1,708)
(29)
506
2,070
133
(3,758)
-
3,758
(262)
(2,446)
-
-
(2,708)
-
-
-
262
2,608
2,446
5,316
-
-
-
-
76,540
792
(63,246)
-
-
2,098
(2,143)
14,041
3,356
(3,698)
(6,275)
-
(1,172)
2,092
(5,697)
(29)
497
2,107
133
2,737
Cash and restricted cash at end of year
$
8 $
- $
20 $
2,709 $
- $
322 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 25 . In f or ma ti o n P r o vi d e d in C o n ne ct i on w ith O u ts ta n di n g De b t
(in millions)
Year Ended December 31, 2016
American
International
Validus
Group, Inc. Holdings,
Reclassifications
Other
and Consolidated
(As Guarantor)
Ltd.
AIGLH
Subsidiaries
Eliminations
AIG
Net cash (used in) provided by operating activities
$
2,112 $
- $
1,707 $
3,634 $
(3,951) $
3,502
Cash flows from investing activities:
Sales of investments
Sales of divested businesses, net
Purchase of investments
Loans to subsidiaries – net
Contributions from (to) subsidiaries - net
Net change in short-term investments
Other, net
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Issuance of long-term debt
Repayments of long-term debt
Purchase of common stock
Intercompany loans - net
Cash dividends paid
Other, net
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash and
restricted cash
Change in cash and restricted cash
Cash and restricted cash at beginning of year
Change in cash of businesses held for sale
Cash and restricted cash at end of year
$
5,769
2,160
(1,002)
1,525
1,637
(1,170)
(141)
8,778
3,831
(1,996)
(11,460)
3
(1,372)
(309)
(11,303)
-
(413)
416
-
3 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(63)
-
(3)
(1,723)
-
(1,789)
-
(82)
116
-
80,453
649
(80,668)
(3)
-
(1,919)
(879)
(2,367)
2,123
(2,023)
-
(1,522)
(2,228)
2,799
(851)
55
471
1,706
(107)
(11,685)
-
11,685
(1,522)
(1,637)
-
-
(3,159)
-
-
-
1,522
3,951
1,637
7,110
-
-
-
-
- $
34 $
2,070 $
- $
74,537
2,809
(69,985)
-
-
(3,089)
(1,020)
3,252
5,954
(4,082)
(11,460)
-
(1,372)
4,127
(6,833)
55
(24)
2,238
(107)
2,107
AIG | 2018 Form 10-K 323
ITEM 8 | Notes to Consolidated Financial Statements | 25 . In f or ma ti o n P r o vi d e d in C o n ne ct i on w ith O u ts ta n di n g De b t
SUPPLEMENTARY DISCLOSURE OF CONDENSED CONSOLIDATING CASH FLOW INFORMATION
American
International
Group, Inc.
(As Guarantor)
Validus
Holdings,
Ltd.
Reclassifications
AIGLH
Other
Subsidiaries
and Consolidated
AIG
Eliminations
2 $
9 $
9 $
2,853 $
- $
2,873
124
1
-
-
-
-
18
342
-
-
142
343
127 $
9 $
9 $
3,213 $
- $
3,358
(914) $
(17) $
(48) $
(333) $
- $
(1,312)
1
-
(1)
-
(32) $
895
- $
-
- $
-
(122) $
(895)
-
- $
-
-
(154)
-
3 $
- $
20 $
2,339 $
- $
2,362
4
1
-
-
-
-
54
316
-
-
58
317
8 $
- $
20 $
2,709 $
- $
2,737
(948) $
-
(329) $
614
- $
-
- $
-
(48) $
(286) $
- $
(1,282)
(1)
1
- $
-
(215) $
(614)
-
- $
-
-
(544)
-
2 $
- $
34 $
1,832 $
- $
1,868
-
1
-
-
-
-
46
192
-
-
46
193
3 $
- $
34 $
2,070 $
- $
2,107
(975) $
2
(15) $
479
- $
-
- $
-
(52) $
(304) $
- $
(1,331)
-
- $
-
(2)
(478) $
(479)
-
- $
-
-
(493)
-
(in millions)
Year Ended December 31, 2018
Cash
Restricted cash included in Short-term investments
Restricted cash included in Other assets
Total cash and restricted cash shown in the Condensed
Consolidating Statements of Cash Flows
Cash (paid) received during the year ended
December 31, 2018 for:
Interest:
Third party
Intercompany
Taxes:
Income tax authorities
Intercompany
Year Ended December 31, 2017
Cash
Restricted cash included in Short-term investments
Restricted cash included in Other assets
Total cash and restricted cash shown in the Condensed
Consolidating Statements of Cash Flows
Cash (paid) received during the year ended
December 31, 2017 for:
Interest:
Third party
Intercompany
Taxes:
Income tax authorities
Intercompany
Year Ended December 31, 2016
Cash
Restricted cash included in Short-term investments
Restricted cash included in Other assets
Total cash and restricted cash shown in the Condensed
Consolidating Statements of Cash Flows
Cash (paid) received during the year ended
December 31, 2016 for:
Interest:
Third party
Intercompany
Taxes:
Income tax authorities
Intercompany
$
$
$
$
$
$
$
$
$
$
$
$
324 AIG | 2018 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 25 . In f or ma ti o n P r o vi d e d in C o n ne ct i on w ith O u ts ta n di n g De b t
AMERICAN INTERNATIONAL GROUP, INC. (AS GUARANTOR) SUPPLEMENTARY DISCLOSURE OF
NON-CASH ACTIVITIES:
Years Ended December 31,
(in millions)
Intercompany non-cash financing and investing activities:
Capital contributions
Dividends received in the form of securities
Return of capital
Fixed maturity securities received in exchange for equity securities
Non-cash financing/investing activities:
Non-cash consideration received from sale of United Guaranty
26. Subsequent Events
2018
2017
2016
$
2,369 $
745
2,706
-
-
259 $
735
26
-
-
3,245
5,234
-
440
1,101
DIVIDENDS DECLARED AND INCREASE IN SHARE REPURCHASE AUTHORIZATION
On February 13, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March
29, 2019 to shareholders of record on March 15, 2019.
On February 13, 2019, our Board of Directors authorized an additional increase to its previous repurchase authorization of AIG
Common Stock of $1.5 billion, resulting in an aggregate remaining authorization on such date of approximately $2.0 billion.
AIG | 2018 Form 10-K 325
Part II
ITEM 9 | Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
ITEM 9A | Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted
under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. In
connection with the preparation of this Annual Report on Form 10-K, an evaluation, which excluded the impact of the acquisitions of
Validus Holdings and Glatfelter Insurance Group (collectively, the Acquired Businesses), was carried out by AIG management, with
the participation of AIG’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of December 31, 2018. Based on this
evaluation, AIG’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective as of December 31, 2018.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of AIG is responsible for establishing and maintaining adequate internal control over financial reporting. AIG’s internal
control over financial reporting is a process, under the supervision of AIG’s Chief Executive Officer and Chief Financial Officer,
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of AIG’s financial
statements for external purposes in accordance with U.S. GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
AIG management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31,
2018 based on the criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
AIG management has concluded that, as of December 31, 2018, our internal control over financial reporting was effective based on
the criteria articulated in the 2013 Internal Control – Integrated Framework issued by the COSO. The effectiveness of our internal
control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report, which is included in this Annual Report on Form 10-K.
We excluded the Acquired Businesses from our assessment of internal control over financial reporting as of December 31, 2018
because they were acquired by the Company in purchase business combinations during 2018. The Acquired Businesses combined
represented approximately 2 percent of consolidated assets at December 31, 2018 and approximately 3 percent of consolidated
revenues for the year ended December 31, 2018.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Other than integrating the Acquired Businesses, there have been no changes in our internal control over financial reporting that have
occurred during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
326 AIG | 2018 Form 10-K
Part III
ITEM 10 | Directors, Executive Officers and Corporate Governance
All information required by Items 10, 11, 12, 13 and 14 of this Form 10-K is incorporated by reference from the definitive proxy
statement for AIG’s 2019 Annual Meeting of Shareholders, which will be filed with the SEC not later than 120 days after the close of
the fiscal year pursuant to Regulation 14A.
ITEM 11 | Executive Compensation
See Item 10 herein.
ITEM 12 | Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
See Item 10 herein.
ITEM 13 | Certain Relationships and Related Transactions, and
Director Independence
See Item 10 herein.
ITEM 14 | Principal Accounting Fees and Services
See Item 10 herein.
Part IV
ITEM 15 | Exhibits, Financial Statement Schedules
(a) Financial Statements and Schedules. See accompanying Index to Financial Statements.
(b) Exhibits. See accompanying Exhibit Index.
ITEM 16 | Form 10-K Summary
None.
AIG | 2018 Form 10-K 327
Exhibit Index
Exhibit
Number
2
3
3(i)
3(ii)
4
9
10
Description
Plan of acquisition, reorganization, arrangement,
liquidation or succession
(1) Stock Purchase Agreement dated as of August 15,
2016 between American International Group, Inc. and
Arch Capital Group Ltd.
(2) First Amendment to Stock Purchase Agreement,
dated as of December 29, 2016 between American
International Group, Inc. and Arch Capital Group Ltd.
(3) Agreement and Plan of Merger, by and among AIG,
Venus Holdings Limited and Validus Holdings, Ltd.,
dated January 21, 2018
Articles of incorporation and by-laws
Amended and Restated Certificate of Incorporation of
AIG
AIG By-laws, amended November 16, 2015
Instruments defining the rights of security holders,
including indentures
(1) Warrant Agreement (including Form of Warrant),
dated as of January 6, 2011, between AIG and Wells
Fargo Bank, N.A., as Warrant Agent
(2) Tax Asset Protection Plan, dated as of March 9,
2011, between AIG and Wells Fargo Bank, N.A., as
Rights Agent, including as Exhibit A the forms of Rights
Certificate and of Election to Exercise
(3) Amendment No. 1, dated as of January 8, 2014, to
Tax Asset Protection Plan, between AIG and Wells
Fargo Bank, National Association, as Rights Agent
(4) Amendment No. 2, dated as of December 14, 2016,
to Tax Asset Protection Plan, between AIG and Wells
Fargo Bank, National Association, as Rights Agent
Voting Trust Agreement
Material contracts
(1) AIG Amended and Restated Executive Severance
Plan*
(2) AIG Amended and Restated 2007 Stock Incentive
Plan*
(3) AIG Amended and Restated Form of Non-Employee
Director Deferred Stock Units Award Agreement*
Location
Incorporated by reference to Exhibit 2.1 to AIG’s
Current Report on Form 8-K filed with the SEC on
August 16, 2016 (File No. 1-8787).
Incorporated by reference to Exhibit 10.51 to AIG’s
Annual Report on Form 10-K for the year ended
December 31, 2016 (File No. 1-8787).
Incorporated by reference to Exhibit 2.1 to AIG’s
Current Report on Form 8-K filed with the SEC on
January 22, 2018 (File No. 1-8787).
Incorporated by reference to Exhibit 3.1 to AIG’s
Current Report on Form 8-K filed with the SEC on June
28, 2017 (File No. 1-8787).
Incorporated by reference to Exhibit 3.1 to AIG’s
Current Report on Form 8-K filed with the SEC on
November 16, 2015 (File No. 1-8787).
Certain instruments defining the rights of holders of
long-term debt securities of AIG and its subsidiaries
are omitted pursuant to Item 601(b)(4)(iii) of
Regulation S-K. AIG hereby undertakes to furnish to
the Commission, upon request, copies of any such
instruments.
Incorporated by reference to Exhibit 10.1 to AIG’s
Current Report on Form 8-K filed with the SEC on
January 7, 2011 (File No. 1-8787).
Incorporated by reference to Exhibit 4.1 to AIG’s
Current Report on Form 8-K filed with the SEC on
March 9, 2011 (File No. 1-8787).
Incorporated by reference to Exhibit 4.1 to AIG’s
Current Report on Form 8-K filed with the SEC on
January 8, 2014 (File No. 1-8787).
Incorporated by reference to Exhibit 4.1 to AIG’s
Current Report on Form 8-K filed with the SEC on
December 14, 2016 (File No. 1-8787).
None.
Incorporated by reference to Exhibit 10.1 to AIG’s
Current Report on Form 8-K filed with the SEC on
September 26, 2008 (File No. 1-8787).
Incorporated by reference to Exhibit 10.62 to AIG’s
Annual Report on Form 10-K for the year ended
December 31, 2008 (File No. 1-8787).
Incorporated by reference to Exhibit 10.69 to AIG’s
Annual Report on Form 10-K for the year ended
December 31, 2008 (File No. 1-8787).
328 AIG | 2018 Form 10-K
Incorporated by reference to Exhibit 10.1 to AIG’s
Current Report on Form 8-K filed with the SEC on June
27, 2017 (File No. 1-8787).
Incorporated by reference to AIG’s Definitive Proxy
Statement, dated April 12, 2010 (Filed No. 1-8787).
Incorporated by reference to Exhibit 10.14 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2012 (File No. 1-8787).
Incorporated by reference to Exhibit 99.3 to AIG’s
Current Report on Form 8-K filed with the SEC on
February 8, 2010 (File No. 1-8787).
Incorporated by reference to Exhibit 99.4 to AIG’s
Current Report on Form 8-K filed with the SEC on
February 8, 2010 (File No. 1-8787).
Incorporated by reference to Exhibit 10.2 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2015 (File No. 1-8787).
Incorporated by reference to Exhibit 10.3 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2015 (File No. 1-8787).
Incorporated by reference to Exhibit 10.4 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2015 (File No. 1-8787).
Incorporated by reference to Exhibit 10.5 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2016 (File No. 1-8787).
Incorporated by reference to Exhibit 10.1 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2015 (File No. 1-8787).
Incorporated by reference to Exhibit 10.6 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2011 (File No. 1-8787).
(4) Fourth Amended and Restated Credit Agreement,
dated as of June 27, 2017, among AIG, the subsidiary
borrowers party thereto, the lenders party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent,
and each Several L/C Agent party thereto
(5) American International Group, Inc. 2010 Stock
Incentive Plan*
(6) AIG Amended Form of 2010 Stock Incentive Plan
DSU Award Agreement*
(7) Release and Restrictive Covenant Agreement
between AIG and Peter Hancock*
(8) Non-Competition and Non-Solicitation Agreement
between AIG and Peter Hancock, dated February 8,
2010*
(9) Letter Agreement, dated August 14, 2013, between
AIG and Kevin Hogan*
(10) Non-Solicitation and Non-Disclosure Agreement,
dated August 14, 2013, between AIG and Kevin Hogan*
(11) Introductory Bonus Agreement, dated August 14,
2013, between AIG and Kevin Hogan*
(12) Executive Officer Form of Release and Restrictive
Covenant Agreement*
(13) AIG Non-Qualified Retirement Income Plan (as
amended)*
(14) Master Transaction Agreement, dated as of April
19, 2011, by and among American Home Assurance
Company, Chartis Casualty Company (f/k/a American
International South Insurance Company), Chartis
Property Casualty Company (f/k/a AIG Casualty
Company), Commerce and Industry Insurance
Company, Granite State Insurance Company, Illinois
National Insurance Co., National Union Fire Insurance
Company of Pittsburgh, Pa., New Hampshire Insurance
Company, The Insurance Company of the State of
Pennsylvania, Chartis Select Insurance Company (f/k/a
AIG Excess Liability Insurance Company Ltd.), Chartis
Specialty Insurance Company (f/k/a American
International Specialty Lines Insurance Company),
Landmark Insurance Company, Lexington Insurance
Company, AIU Insurance Company, American
International Reinsurance Company, Ltd. and American
Home Assurance Company, National Union Fire
Insurance Company of Pittsburgh, Pa., New Hampshire
Insurance Company and Chartis Overseas Limited
acting as members of the Chartis Overseas Association
as respects business written or assumed by or from
affiliated companies of Chartis Inc. (collectively, the
Reinsureds), Eaglestone Reinsurance Company and
National Indemnity Company
AIG | 2018 Form 10-K 329
(15) AIG 2013 Long-Term Incentive Plan (as
amended)*
(16) Form of 2015 Performance Share Units Award
Agreement*
(17) AIG Clawback Policy*
(18) AIG 2013 Short-Term Incentive Plan*
(19) Form of 2013 Short-Term Incentive Plan Award
Letter*
(20) AIG Annual Short-Term Incentive Plan (as
amended)*
(21) AIG 2013 Omnibus Incentive Plan*
(22) AIG 2012 Executive Severance Plan (as
amended)*
(23) Form of AIG 2013 Omnibus Incentive Plan Non-
Employee Director DSU Award Agreement*
(24) Aggregate Excess of Loss Reinsurance
Agreement, dated January 20, 2017, by and between
AIG Assurance Company, AIG Property Casualty
Company, AIG Specialty Insurance Company, AIU
Insurance Company, American Home Assurance
Company, Commerce and Industry Insurance
Company, Granite State Insurance Company, Illinois
National Insurance Co., Lexington Insurance Company,
National Union Fire Insurance Company of Pittsburgh,
Pa., New Hampshire Insurance Company and The
Insurance Company Of The State Of Pennsylvania and
National Indemnity Company (portions of this exhibit
have been redacted pursuant to a request for
confidential treatment).
(25) Trust Agreement, dated January 20, 2017, by and
among National Union Fire Insurance Company of
Pittsburgh, Pa., National Indemnity Company, and
Wells Fargo Bank, National Association (portions of this
exhibit have been redacted pursuant to a request for
confidential treatment).
(26) Parental Guarantee Agreement, dated January 20,
2017, by Berkshire Hathaway Inc. in favor of National
Union Fire Insurance Company of Pittsburgh, Pa.
(27) AIG Long Term Incentive Plan*
Incorporated by reference to Exhibit 10.35 to AIG’s
Annual Report on Form 10-K for the year ended
December 31, 2015 (File No. 1-8787).
Incorporated by reference to Exhibit 10.5 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2015 (File No. 1-8787).
Incorporated by reference to Exhibit 10.3 to AIG’s
Current Report on Form 8-K filed with the SEC on
March 27, 2013 (File No. 1-8787).
Incorporated by reference to Exhibit 10.5 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2014 (File No. 1-8787).
Incorporated by reference to Exhibit 10.5 of AIG’s
Current Report on Form 8-K filed with the SEC on
March 27, 2013 (File No. 1-8787).
Incorporated by reference to Exhibit 10.43 on AIG’s
Annual Report on Form 10-K for the year ended
December 31, 2016 (File No. 1-8787).
Incorporated by reference to Appendix B in AIG’s
Definitive Proxy Statement on Schedule 14A, dated
April 4, 2013 (File No. 1-8787).
Incorporated by reference to Exhibit 10.1 of AIG’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2016 (File No. 1-8787).
Incorporated by reference to Exhibit 10.52 to AIG’s
Annual Report on Form 10-K for the year ended
December 31, 2016 (File No. 1-8787).
Incorporated by reference to Exhibit 10.1 to AIG's
Current Report on Form 8-K filed with the SEC on
February 14, 2017 (File No. 1-8787).
Incorporated by reference to Exhibit 10.2 to AIG's
Current Report on Form 8-K filed with the SEC on
February 14, 2017 (File No. 1-8787).
Incorporated by reference to Exhibit 10.3 to AIG's
Current Report on Form 8-K filed with the SEC on
February 14, 2017 (File No. 1-8787).
Incorporated by reference to Exhibit 10.1 to AIG’s
Current Report on Form 8-K filed with the SEC on
March 17, 2017 (File No. 1-8787).
330 AIG | 2018 Form 10-K
(28) Form of AIG Long Term Incentive Award
Agreement*
Incorporated by reference to Exhibit 10.2 to AIG’s
Current Report on Form 8-K filed with the SEC on
March 17, 2017 (File No. 1-8787).
(29) Letter Agreement between American International
Group, Inc. and Peter D. Hancock, dated March 17,
2017*
Incorporated by reference to Exhibit 10.3 to AIG’s
Current Report on Form 8-K filed with the SEC on
March 17, 2017 (File No. 1-8787).
(30) Letter Agreement, dated November 3, 2010,
between AIG and Siddhartha Sankaran*
Incorporated by reference to Exhibit 10.7 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2017 (File No. 1-8787).
(31) Non-Competition, Non-Solicitation and Non-
Disclosure Agreement, dated November 5, 2010,
between AIG and Siddhartha Sankaran*
Incorporated by reference to Exhibit 10.8 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2017 (File No. 1-8787).
(32) Letter Agreement, dated July 22, 2015, between
AIG and Douglas A. Dachille*
Incorporated by reference to Exhibit 10.9 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2017 (File No. 1-8787).
(33) Non-Solicitation and Non-Disclosure Agreement,
dated July 22, 2015, between AIG and Douglas A.
Dachille*
Incorporated by reference to Exhibit 10.10 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2017 (File No. 1-8787).
(34) Letter Agreement, dated May 14, 2017, between
American International Group, Inc. and Brian
Duperreault*
Incorporated by reference to Exhibit 10.1 to AIG’s
Current Report on Form 8-K filed with the SEC on May
15, 2017 (File No. 1-8787).
(35) Form of Stock Option Award Agreement, between
American International Group, Inc. and Brian
Duperreault*
Incorporated by reference to Exhibit 10.2 to AIG’s
Current Report on Form 8-K filed with the SEC on May
15, 2017 (File No. 1-8787).
(36) Letter Agreement, dated July 3, 2017, between
American International Group, Inc. and Peter Zaffino*
Incorporated by reference to Exhibit 10.1 to AIG’s
Current Report on Form 8-K filed with the SEC on July
6, 2017 (File No. 1-8787).
(37) Non-Solicitation and Non-Disclosure Agreement,
dated July 5, 2017, between American International
Group, Inc. and Peter Zaffino*
Incorporated by reference to Exhibit 10.1 to AIG’s
Current Report on Form 8-K filed with the SEC on July
6, 2017 (File No. 1-8787).
(38) Form of Stock Option Award Agreement, between
American International Group, Inc. and Peter Zaffino*
(39) Form of Long Term Incentive Stock Option Award
Agreement*
(40) AIG Long Term Incentive Plan (as amended)*
(41) Description of Non-Management Director
Compensation*
(42) AIG Long Term Incentive Plan (as amended and
restated)*
Incorporated by reference to Exhibit 10.2 to AIG’s
Current Report on Form 8-K filed with the SEC on July
6, 2017 (File No. 1-8787).
Incorporated by reference to Exhibit 10.60 to AIG’s
Annual Report on Form 10-K for the year ended
December 31, 2017 (File No. 1-8787).
Incorporated by reference to Exhibit 10.2 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2018 (File No. 1-8787).
Incorporated by reference to “Compensation of
Directors” in AIG’s Definitive Proxy Statement on
Schedule 14A, dated March 27, 2018 (File No. 1-8787).
Incorporated by reference to Exhibit 10.1 to AIG’s
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2018 (File No. 1-8787).
(43) Release and Restrictive Covenant Agreement
between AIG and Siddhartha Sankaran, dated
December 7, 2018*
Incorporated by reference to Exhibit 10.1 to AIG’s
Current Report on Form 8-K filed with the SEC on
December 7, 2018 (File No. 1-8787).
AIG | 2018 Form 10-K 331
(44) Letter Agreement, dated May 10, 2018, between
AIG and Mark Lyons*
(45) Non-Solicitation and Non-Disclosure Agreement,
dated May 13, 2018, between AIG and Mark Lyons*
Incorporated by reference to Exhibit 10.1 to AIG’s
Current Report on Form 8-K/A, Amendment No. 1, filed
with the SEC on December 14, 2018 (File No. 1-8787).
Incorporated by reference to Exhibit 10.2 to AIG’s
Current Report on Form 8-K/A, Amendment No. 1, filed
with the SEC on December 14, 2018 (File No. 1-8787).
Filed herewith.
Filed herewith.
Included on signature page and filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
Filed herewith.
21
23
24
31
32
99.02
101
Subsidiaries of Registrant
Consent of Independent Registered Public Accounting
Firm
Powers of attorney
Rule 13a-14(a)/15d-14(a) Certifications
Section 1350 Certifications**
Securities Registered pursuant to Section 12(b) of the
Act
Interactive data files pursuant to Rule 405 of
Regulation S-T: (i) the Consolidated Balance Sheets
as of December 31, 2018 and December 31, 2017,
(ii) the Consolidated Statements of Income for the
three years ended December 31, 2018, (iii) the
Consolidated Statements of Equity for the three years
ended December 31, 2018, (iv) the Consolidated
Statements of Cash Flows for the three years ended
December 31, 2018, (v) the Consolidated Statements
of Comprehensive Income (Loss) for the three years
ended December 31, 2018 and (vi) the Notes to the
Consolidated Financial Statements.
* This exhibit is a management contract or a compensatory plan or arrangement.
** This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.
332 AIG | 2018 Form 10-K
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly
caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th of
February, 2019.
AMERICAN INTERNATIONAL GROUP, INC.
By
/S/ BRIAN DUPERREAULT
(Brian Duperreault, President and Chief Executive Officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Brian
Duperreault and Mark D. Lyons, and each of them severally, his or her true and lawful attorney-in-fact, with full power of substitution
and resubstitution, to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and
all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934, as amended, and
any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on
Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and
hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed
below by the following persons on behalf of the Registrant and in the capacities indicated on the 15th of February, 2019.
AIG | 2018 Form 10-K 333
SIGNATURE
TITLE
/S/ BRIAN DUPERREAULT
(Brian Duperreault)
/S/ MARK D. LYONS
(Mark D. Lyons)
President, Chief Executive Officer and Director
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/S/ JONATHAN WISMER
Senior Vice President – Deputy Chief Financial Officer and
(Jonathan Wismer)
/S/ W. DON CORNWELL
(W. Don Cornwell)
/S/ JOHN H. FITZPATRICK
(John H. Fitzpatrick)
/S/ WILLIAM G. JURGENSEN
(William G. Jurgensen)
/S/ CHRISTOPHER S. LYNCH
(Christopher S. Lynch)
/S/ HENRY S. MILLER
(Henry S. Miller)
/S/ LINDA A. MILLS
(Linda A. Mills)
/S/ THOMAS F. MOTAMED
(Thomas F. Motamed)
/S/ SUZANNE NORA JOHNSON
(Suzanne Nora Johnson)
/S/ RONALD A. RITTENMEYER
(Ronald A. Rittenmeyer)
/S/ DOUGLAS M. STEENLAND
(Douglas M. Steenland)
/S/ THERESA M. STONE
(Theresa M. Stone)
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
334 AIG | 2018 Form 10-K
Summary of Investments — Other than Investments in Related Parties
At December 31, 2018
(in millions)
Fixed maturities:
U.S. government and government sponsored entities
Obligations of states, municipalities and political subdivisions
Non-U.S. governments
Public utilities
All other corporate debt securities
Mortgage-backed, asset-backed and collateralized
Total fixed maturity securities
Equity securities and mutual funds:
Common stock:
Public utilities
Banks, trust and insurance companies
Industrial, miscellaneous and all other
Total common stock
Preferred stock
Mutual funds
Total equity securities and mutual funds(b)
Mortgage and other loans receivable, net of allowance
Other invested assets
Short-term investments, at cost (approximates fair value)
Derivative assets(c)
Total investments
Cost(a)
Fair Value
$
5,835 $
5,925 $
15,421
14,421
17,431
114,676
69,411
237,195
16,001
14,570
17,628
114,743
71,939
240,806
1
784
320
1,105
13
135
1,253
43,135
19,938
9,674
916
312,111 $
1
784
320
1,105
13
135
1,253
43,627
19,341
9,674
916
315,617 $
$
Schedule I
Amount at
which shown in
the Balance Sheet
5,925
16,001
14,570
17,628
114,743
71,939
240,806
1
784
320
1,105
13
135
1,253
43,135
19,341
9,674
916
315,125
(a) Original cost of fixed maturities is reduced by other-than-temporary impairment charges and by repayments and adjusted for amortization of premiums or accretion of
discounts.
(b) As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer classified and
accounted for as available for sale securities.
(c) The balance is reported in Other assets.
AIG | 2018 Form 10-K 335
Condensed Financial Information of Registrant
Balance Sheets — Parent Company Only
December 31,
(in millions)
Assets:
Short-term investments(a)
Other investments
Total investments
Cash
Loans to subsidiaries(b)
Due from affiliates - net(b)
Intercompany tax receivable(b)
Deferred income taxes
Investments in consolidated subsidiaries(b)
Other assets(c)
Total assets
Liabilities:
Due to affiliate(b)
Intercompany tax payable(b)
Deferred tax liabilities
Notes and bonds payable
Junior subordinated debt
MIP notes payable
Series AIGFP matched notes and bonds payable
Loans from subsidiaries(b)
Other liabilities (includes intercompany derivative liabilities of $105 in 2018 and $63 in 2017)
Total liabilities
AIG Shareholders’ equity:
Common stock
Treasury stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total AIG shareholders’ equity
Total liabilities and equity
(a) At December 31, 2018 and 2017, included restricted cash of $124 million and $4 million, respectively.
(b) Eliminated in consolidation.
(c) At December 31, 2018 and 2017, included restricted cash of $1 million and $1 million, respectively.
See accompanying Notes to Condensed Financial Information of Registrant.
$
$
$
Schedule II
2018
2017
1,141 $
3,377
4,518
2
34,963
1,206
3,053
10,747
33,300
383
88,172 $
2,329 $
2,954
-
20,853
1,548
-
21
615
3,491
31,811
2,541
6,004
8,545
3
35,004
1,585
3,058
11,030
40,135
343
99,703
4,340
4,577
-
20,339
841
356
21
517
3,541
34,532
4,766
(49,144)
81,268
20,884
(1,413)
56,361
88,172 $
4,766
(47,595)
81,078
21,457
5,465
65,171
99,703
$
336 AIG | 2018 Form 10-K
Condensed Financial Information of Registrant (Continued)
Statements of Income — Parent Company Only
Years Ended December 31,
(in millions)
Revenues:
Equity in undistributed net income (loss) of consolidated subsidiaries(a)
Dividend income from consolidated subsidiaries(a)
Interest income(b)
Net realized capital gains (losses)
Other income
Expenses:
Interest expense
Net loss on extinguishment of debt
Net (gain) loss on sale of divested businesses(c)
Other expenses
Loss from continuing operations before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Loss from discontinued operations
Net income (loss) attributable to AIG Parent Company
(a) Eliminated in consolidation.
Schedule II
2018
2017
2016
$
(5,160) $
4,580
961
(49)
26
954
-
3
800
(1,399)
(1,433)
34
(40)
$
(6) $
(2,375) $
2,226
656
46
189
949
2
30
922
(1,161)
4,922
(6,083)
(1)
(6,084) $
(8,633)
7,364
411
2
103
988
77
(690)
985
(2,113)
(1,301)
(812)
(37)
(849)
(b) Includes interest income on intercompany borrowings of $840 million, $512 million and $294 million on December 31, 2018, 2017 and 2016, respectively,
eliminated in consolidation.
(c) Primarily includes pre-tax gain of $697 million on the sale of United Guaranty on December 31, 2016.
See accompanying Notes to Condensed Financial Information of Registrant.
Condensed Financial Information of Registrant (Continued)
Statements of Comprehensive Income — Parent Company Only
Years Ended December 31,
(in millions)
Net income
Other comprehensive income
Total comprehensive loss attributable to AIG
See accompanying Notes to Condensed Financial Information of Registrant.
Schedule II
2018
(6) $
(6,302)
(6,308) $
2017
(6,084) $
2,235
(3,849) $
2016
(849)
693
(156)
$
$
AIG | 2018 Form 10-K 337
Condensed Financial Information of Registrant (Continued)
Statements of Cash Flows — Parent Company Only
Years Ended December 31,
(in millions)
Net cash provided by operating activities
Cash flows from investing activities:
Sales and maturities of investments
Sales of divested businesses
Purchase of investments
Net change in short-term investments
Contributions to subsidiaries - net
Acquisition of business
Mortgage and other loan receivables - originations and purchases
Payments received on mortgages and other loan receivables
Loans to subsidiaries - net
Other, net
Net cash provided by investing activities
Cash flows from financing activities:
Issuance of long-term debt
Repayment of long-term debt
Cash dividends paid
Loans from subsidiaries - net
Purchase of Common Stock
Other, net
Net cash used in financing activities
Change in cash and restricted cash
Cash and restricted cash at beginning of year
Cash and restricted cash at end of year
Supplementary disclosure of cash flow information:
(in millions)
Cash
Restricted cash included in Short-term investments
Restricted cash included in Other assets
Total cash and restricted cash shown in Statements of Cash Flows — Parent
Company Only
Cash (paid) received during the period for:
Interest:
Third party
Intercompany
Taxes:
Income tax authorities
Intercompany
Intercompany non-cash financing and investing activities:
Capital contributions
Return of capital
Dividends received in the form of securities
Fixed maturity securities received in exchange for equity securities
Non-cash financing/investing activities
Non-cash consideration received from sale of United Guaranty
See accompanying Notes to Condensed Financial Information of Registrant.
338 AIG | 2018 Form 10-K
2018
1,256 $
$
2017
36 $
5,587
-
(1,980)
1,533
1
(5,475)
-
-
868
(73)
461
5,714
40
(2,465)
1,994
2,446
-
-
107
199
(183)
7,852
2,470
(1,493)
(1,138)
90
(1,739)
212
(1,598)
119
8
127 $
1,505
(1,724)
(1,172)
(63)
(6,275)
(154)
(7,883)
5
3
8 $
Schedule II
2016
2,112
5,598
2,160
(1,002)
(1,170)
1,637
-
(85)
171
1,525
(56)
8,778
3,831
(1,996)
(1,372)
3
(11,460)
(309)
(11,303)
(413)
416
3
$
$
Years Ended December 31,
2018
2
124 $
1
2017
3
4 $
1
$
127 $
8 $
$
(914) $
1
(32)
895
2,369
2,706
745
-
(948) $
-
(329)
614
259
26
735
-
2016
2
-
1
3
(975)
2
(15)
479
3,245
-
5,234
440
-
-
1,101
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
American International Group, Inc.’s (the Registrant) investments in consolidated subsidiaries are stated at cost plus equity in
undistributed income of consolidated subsidiaries. The accompanying condensed financial statements of the Registrant should be
read in conjunction with the consolidated financial statements and notes thereto of American International Group, Inc. and
subsidiaries included in the Registrant’s 2018 Annual Report on Form 10-K for the year ended December 31, 2018 (Annual Report on
Form 10-K) filed with the Securities and Exchange Commission on February 15, 2019.
The Registrant includes in its Statement of Income dividends from its subsidiaries and equity in undistributed income (loss) of
consolidated subsidiaries, which represents the net income (loss) of each of its wholly-owned subsidiaries.
Certain prior period amounts have been reclassified to conform to the current period presentation.
The five-year debt maturity schedule is incorporated by reference from Note 15 to Consolidated Financial Statements.
The Registrant files a consolidated federal income tax return with certain subsidiaries and acts as an agent for the consolidated tax
group when making payments to the Internal Revenue Service. The Registrant and its subsidiaries have adopted, pursuant to a
written agreement, a method of allocating consolidated Federal income taxes. Amounts allocated to the subsidiaries under the written
agreement are included in Due from affiliates in the accompanying Condensed Balance Sheets.
Income taxes in the accompanying Condensed Balance Sheets are composed of the Registrant’s current and deferred tax assets, the
consolidated group’s current income tax receivable and deferred taxes related to tax attribute carryforwards of AIG’s U.S.
consolidated income tax group.
For additional information see Note 23 to the Consolidated Financial Statements.
The consolidated U.S. deferred tax asset for net operating loss, capital loss and tax credit carryforwards are recorded by the Parent
Company, which files the consolidated U.S. Federal income tax return, and are not allocated to its subsidiaries. Generally, as, and if,
the consolidated net operating losses and other tax attribute carryforwards are utilized, the intercompany tax balance will be settled
with the subsidiaries.
AIG | 2018 Form 10-K 339
Supplementary Insurance Information
At December 31, 2018 and 2017
Segment (in millions)
2018
General Insurance companies
Life and Retirement companies
Other(a)
2017
General Insurance companies
Life and Retirement companies
Other(a)
Schedule III
Liability
for Unpaid
Losses and
Loss
Adjustment
Expenses,
Deferred
Policy
Acquisition
Future Policy
Costs
Benefits
Unearned
Premiums
$
$
$
$
2,890
9,804
-
$
113,696
$
19,235
$
13,431
1,447
13
-
12,694
$
128,574
$
19,248
$
2,587
8,407
-
$
73,530
$
18,795
$
44,615
5,680
-
235
10,994
$
123,825
$
19,030
$
Policy
and
Contract
Claims
14
843
7
864
-
851
9
860
For the years ended December 31, 2018, 2017 and 2016
Segment (in millions)
2018
General Insurance
Life and Retirement
Other Operations(a)
Legacy Operations
2017
General Insurance
Life and Retirement
Other Operations(a)
Legacy Operations
2016
General Insurance
Life and Retirement
Other Operations(a)
Legacy Operations
Premiums
and
Policy
Fees
Net
Investment
Income
Losses
Amortization
and Loss
Expenses
Incurred,
Benefits
of Deferred
Policy
Acquisition
Costs
Other
Operating
Expenses
Net
Premiums
Written(b)
$
27,505 $
5,261
39
600
2,668
7,922
(439)
2,325
$
20,824
$
4,596
$
7,692
357
2,293
680
5
105
5,222
2,412
-
-
$
26,407
-
199
-
$
$
$
$
33,405 $
12,476
$
31,166
$
5,386
$
7,634
$
26,606
26,026 $
3,668
$
21,642
$
3,765
$
6,844
712
727
7,816
(81)
2,776
8,607
1,076
2,239
743
(296)
76
5,100
2,296
-
-
$
25,438
-
314
4
34,309 $
14,179
$
33,564
$
4,288
$
7,396
$
25,756
29,586 $
3,554
$
25,103
$
4,121
$
4,878
1,845
816
7,622
(24)
2,913
6,945
743
3,351
613
(321)
108
5,967
2,700
-
-
$
28,393
-
819
21
$
37,125 $
14,065
$
36,142
$
4,521
$
8,667
$
29,233
(a) Includes consolidation and elimination entries.
(b) Balances reflect the segment changes discussed in Note 3 – Segment Information to the Consolidated Financial Statements.
340 AIG | 2018 Form 10-K
Reinsurance
At December 31, 2018, 2017 and 2016 and for the years then ended
Schedule IV
(in millions)
2018
Long-duration insurance in force
Premiums:
General Insurance companies
Life and Retirement companies
Other
Total
2017
Long-duration insurance in force
Premiums:
General Insurance companies
Life and Retirement companies
Other
Total
2016
Long-duration insurance in force
Premiums:
General Insurance companies
Life and Retirement companies
Other
Total
Gross
Amount
Ceded to
Other
Companies
Assumed
from Other
Companies
Net Amount
Percent of
Amount
Assumed
to Net
$ 1,094,774 $
228,846 $
300 $
866,228
- %
$
$
30,335 $
3,488
-
33,823 $
7,755 $
850
-
8,605 $
4,026 $
405
-
4,431 $
26,606
3,043
-
29,649
15.1 %
13.3
-
14.9 %
$ 1,061,095 $
202,402 $
321 $
859,014
- %
$
$
30,205 $
5,053
-
35,258 $
7,533 $
809
-
8,342 $
3,084 $
285
-
3,369 $
25,756
4,529
-
30,285
12.0 %
6.3
-
11.1 %
$ 1,025,653 $
174,363 $
339 $
851,629
- %
$
$
33,970 $
4,609
-
38,579 $
7,561 $
789
-
8,350 $
2,824 $
123
-
2,947 $
29,233
3,943
-
33,176
9.7 %
3.1
-
8.9 %
AIG | 2018 Form 10-K 341
Valuation and Qualifying Accounts
For the years ended December 31, 2018, 2017 and 2016
Schedule V
Additions
Balance, Charged to
Beginning
Costs and
Reclassified
to Assets of
Businesses
Divested
of year
Expenses
Charge Offs Acquisitions Held for Sale Businesses
Other
Balance,
Changes* End of year
$
322 $
93 $
(19) $
- $
- $
- $
1 $
397
236
187
2
(8)
21
(20)
(45)
-
-
8
82
-
-
-
-
-
-
(2)
(2)
216
140
302
1,779
(in millions)
2018
Allowance for mortgage and
other loans receivable
Allowance for premiums and
insurances balances receivable
Allowance for reinsurance assets
Federal and foreign valuation
allowance for deferred tax assets
1,374
2017
Allowance for mortgage and
other loans receivable
$
297 $
49 $
(25) $
- $
- $
- $
1 $
322
Allowance for premiums and
insurances balances receivable
Allowance for reinsurance assets
Federal and foreign valuation
262
207
allowance for deferred tax assets
2,831
2016
Allowance for mortgage and
36
33
43
(58)
(50)
-
-
-
-
-
-
-
(8)
-
-
4
(3)
236
187
(1,500)
1,374
other loans receivable
$
308 $
(7) $
(15) $
- $
- $
- $
11 $
297
Allowance for premiums and
insurances balances receivable
Allowance for reinsurance assets
Federal and foreign valuation
333
272
allowance for deferred tax assets
3,012
26
(23)
83
(88)
(34)
-
-
-
-
(2)
(8)
-
(7)
-
-
-
-
262
207
(264)
2,831
*
Includes recoveries of amounts previously charged off and reclassifications to/from other accounts.
342 AIG | 2018 Form 10-K
American International Group, Inc., and Subsidiaries
Subsidiaries of Registrant
As of December 31, 2018
American International Group, Inc.
AIG Capital Corporation
AIG Global Asset Management Holdings Corp.
AIG Asset Management (Europe) Limited
AIG Asset Management (U.S.), LLC
AIG Global Real Estate Investment Corp.
AIGGRE Europe Real Estate Fund I GP S.a r.l.
AIGGRE U.S. Real Estate Fund I GP, LLC
AIGGRE U.S. Real Estate Fund I, LP
AIGGRE U.S. Real Estate Fund II GP, LLC
Mt. Mansfield Company, Inc.
AIG Employee Services, Inc.
AIG Federal Savings Bank
AIG Financial Products Corp.
AIG Matched Funding Corp.
AIG-FP Pinestead Holdings Corp.
AIG Life Insurance Company (Switzerland) Ltd
AIG Markets, Inc.
AIG Property Casualty Inc.
AIG Claims, Inc.
AIG PC Global Services, Inc.
AIG Property Casualty International, LLC
AIG Egypt Insurance Company S.A.E.
AIG Insurance Management Services, Inc.
Grand Isle SAC Limited
AIG International Holdings GmbH
AIG APAC HOLDINGS PTE. LTD.
AIG Asia Pacific Insurance Pte. Ltd.
AIG Australia Limited
AIG Insurance Hong Kong Limited
AIG Insurance New Zealand Limited
AIG Korea Inc.
AIG Malaysia Insurance Berhad
AIG Philippines Insurance, Inc.
AIG Re-Takaful (L) Berhad
AIG Vietnam Insurance Company Limited
PT AIG Insurance Indonesia
Thai CIT Holding Company Limited
AIG Insurance (Thailand) Public Company Limited
AIG Canada Holdings Inc.
AIG Insurance Company of Canada
AIG Europe Holdings S.a.rl.
AIG Advisors S.r.l.
AIG Europe S.A.
AIG Global Reinsurance Operations
Avondhu Limited
AIG Holdings Europe Limited
AIG Israel Insurance Company Ltd
AIG Life Limited
Group Risk Services Limited
Group Risk Technologies Limited
American International Group UK Limited
AIG Europe (Services) Limited
Laya Healthcare Limited
AIG Investments UK Limited
AIG Japan Holdings Kabushiki Kaisha
AIG General Insurance Co., Ltd.
American Home Assurance Co., Ltd.
Exhibit 21
Percentage
of Voting
Securities
held by
Immediate
Parent
(1)
(2)
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
95.08
100
100
100
100
100
100
100
100
100
100
100
100
100
74.45
49
51
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
(3)
(4)
Jurisdiction of
Incorporation or
Organization
Delaware
Delaware
Delaware
England and Wales
Delaware
Delaware
Luxembourg
Delaware
Delaware
Delaware
Vermont
Delaware
The United States
Delaware
Delaware
Delaware
Switzerland
Delaware
Delaware
Delaware
Delaware
Delaware
Egypt
Vermont
Bermuda
Switzerland
Singapore
Singapore
Australia
Hong Kong
New Zealand
Korea, Republic of
Malaysia
Philippines
Malaysia
Vietnam
Indonesia
Thailand
Thailand
Canada
Canada
Luxembourg
Italy
Luxembourg
Belgium
Jersey
England and Wales
Israel
England
England
England
England
England
Ireland
England and Wales
Japan
Japan
Japan
AIG | 2018 Form 10-K 343
As of December 31, 2018
AIG Latin America Investments, S.L.
AIG Brazil Holding I, LLC
AIG Seguros Brasil S.A.
AIG Resseguros Brasil S.A.
AIG Insurance Company-Puerto Rico
AIG Latin America I.I.
AIG Seguros Mexico, S.A. de C.V.
American International Overseas Limited
Chartis Takaful Enaya B.S.C. (c)
American International Underwriters del Ecuador-Holding S.A.
AIG-Metropolitana Cia. de Seguros y Reaseguros S.A.
AIG MEA Holdings Limited
AIG CIS Investments, LLC
AIG Insurance Company, JSC
AIG Insurance Limited
AIG Lebanon SAL
AIG MEA Limited
AIG Kenya Insurance Company Limited
AIG Uganda Limited
Private Joint-Stock Company AIG Ukraine Insurance Company
Johannesburg Insurance Holdings (Proprietary) Limited
AIG Life South Africa Limited
AIG South Africa Limited
AIG Travel, Inc.
AIG Travel Assist, Inc.
AIG Travel Asia Pacific Pte. Ltd.
AIG Travel Assist Malaysia Sdn. Bhd.
AIG Travel EMEA Limited
Travel Guard Group Canada, Inc./Groupe Garde Voyage du Canada, Inc.
Travel Guard Group, Inc.
American International Reinsurance Company, Ltd.
Validus Holdings, Ltd.
Talbot Holdings Ltd.
Talbot Underwriting Holdings Ltd.
Talbot Underwriting Ltd.
Validus Reinsurance, Ltd.
Validus Holdings (UK) Ltd.
Validus Reinsurance (Switzerland) Ltd
Validus Ventures Ltd.
AlphaCat Managers Ltd.
AIG Property Casualty U.S., Inc.
AIG Aerospace Insurance Services, Inc.
AIG Assurance Company
AIG Property Casualty Company
AIG Specialty Insurance Company
AIG WarrantyGuard, Inc.
AIU Insurance Company
American Home Assurance Company
AIGGRE EOLA LLC
Jefferson Eola Venture LLC
American Home Assurance Company Escritorio de Representacao no Brasil Ltda.
AIG Insurance Company China Limited
Commerce and Industry Insurance Company
Eaglestone Reinsurance Company
Arthur J. Glatfelter Agency, Inc.
Volunteer Firemen's Insurance Services, Inc.
Granite State Insurance Company
Illinois National Insurance Co.
Lexington Insurance Company
Pine Street Real Estate Holdings Corp.
National Union Fire Insurance Company of Pittsburgh, Pa.
American International Overseas Association
344 AIG | 2018 Form 10-K
Jurisdiction of
Incorporation or
Organization
Spain
Delaware
Brazil
Brazil
Puerto Rico
Puerto Rico
Mexico
Bermuda
Bahrain
Ecuador
Ecuador
United Arab Emirates
Russian Federation
Russian Federation
Sri Lanka
Lebanon
United Arab Emirates
Kenya
Uganda
Ukraine
South Africa
South Africa
South Africa
Delaware
Delaware
Singapore
Malaysia
England and Wales
Canada
Wisconsin
Bermuda
Bermuda
Bermuda
England and Wales
England and Wales
Bermuda
England and Wales
Switzerland
Bermuda
Bermuda
Delaware
Georgia
Illinois
Pennsylvania
Illinois
Delaware
New York
New York
Delaware
Delaware
Brazil
China
New York
Pennsylvania
Pennsylvania
Pennsylvania
Illinois
Illinois
Delaware
New Hampshire
Pennsylvania
Bermuda
Percentage
of Voting
Securities
held by
Immediate
Parent
100
100
90.56
100
100
100
100
100
100
100
32.06
100
99.99
100
100
100
100
66.67
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
50
100
100
100
100
100
100
100
100
100
100
100
78
(1)
(5)
(6)
(7)
As of December 31, 2018
American International Realty Corp.
National Union Fire Insurance Company of Vermont
New Hampshire Insurance Company
Risk Specialists Companies Insurance Agency, Inc.
Service Net Warranty, LLC
The Insurance Company of the State of Pennsylvania
Western World Insurance Group, Inc.
Crop Risk Services, Inc.
Western World Insurance Company
Stratford Insurance Company
Tudor Insurance Company
AIG Technologies, Inc.
AIG Shared Services Corporation
AM Holdings LLC
American Security Life Insurance Company Limited
Blackboard U.S. Holdings, Inc.
Blackboard Customer Care Insurance Services, LLC
Blackboard Services, LLC
Blackboard Specialty Insurance Company
Blackboard Insurance Company
Fortitude Group Holdings, LLC
Fortitude Life & Annuity Solutions, Inc.
Fortitude Reinsurance Company Ltd.
MG Reinsurance Limited
SAFG Retirement Services, Inc.
AIG Life Holdings, Inc.
AGC Life Insurance Company
AIG Life of Bermuda, Ltd.
American General Life Insurance Company
SA Affordable Housing, LLC
SunAmerica Affordable Housing Partners, Inc.
SunAmerica Asset Management, LLC
AIG Capital Services, Inc.
The United States Life Insurance Company in the City of New York
The Variable Annuity Life Insurance Company
VALIC Financial Advisors, Inc.
Valic Retirement Services Company
Jurisdiction of
Incorporation or
Organization
Delaware
Vermont
Illinois
Massachusetts
Delaware
Illinois
Delaware
Illinois
New Hampshire
New Hampshire
New Hampshire
New Hampshire
New York
Delaware
Liechtenstein
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Bermuda
Vermont
Delaware
Texas
Missouri
Bermuda
Texas
Delaware
California
Delaware
Delaware
New York
Texas
Texas
Texas
(1)
Percentage
of Voting
Securities
held by
Immediate
Parent
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
80.10
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Percentages include directors' qualifying shares.
Substantially all subsidiaries listed are consolidated in the accompanying financial statements. Certain subsidiaries have been omitted from the
tabulation. The omitted subsidiaries, when considered in the aggregate, do not constitute a significant subsidiary.
Also owned 25.55 percent by PT Tiara Citra Cemerlang.
Also owned 48.99 percent by AIG Asia Pacific Insurance Pte. Ltd.
Also owned 9.44 percent by AIG Brazil Holding II, LLC.
Also owned 19.72 percent by AIG Latin America Investments, S.L.
Also owned 12 percent by New Hampshire Insurance Company and 10 percent by American Home Assurance Company.
AIG | 2018 Form 10-K 345
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No.333-223282) and Form
S-8 (No.333-31346, No.333-68640, No.333-101640, No.333-148148, No.333-168679, No.333-188634 and No.333-219180) of
American International Group, Inc. of our report dated February 15, 2019 relating to the financial statements, financial
statement schedules and the effectiveness of internal control over financial reporting, which appears in the Annual Report on
Form 10-K.
Exhibit 23
/s/ PricewaterhouseCoopers LLP
New York, New York
February 15, 2019
346 AIG | 2018 Form 10-K
Exhibit 31
CERTIFICATIONS
I, Brian Duperreault, certify that:
1. I have reviewed this Annual Report on Form 10-K of American International Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 15, 2019
/S/ BRIAN DUPERREAULT
Brian Duperreault
President and Chief Executive Officer
AIG | 2018 Form 10-K 347
CERTIFICATIONS
I, Mark D. Lyons, certify that:
1. I have reviewed this Annual Report on Form 10-K of American International Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 15, 2019
/S/ MARK D. LYONS
Mark D. Lyons
Executive Vice President and
Chief Financial Officer
348 AIG | 2018 Form 10-K
Exhibit 32
CERTIFICATION
In connection with this Annual Report on Form 10-K of American International Group, Inc. (the “Company”) for the year ended
December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian Duperreault,
President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Date: February 15, 2019
/S/ BRIAN DUPERREAULT
Brian Duperreault
President and Chief Executive Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or
as a separate disclosure document.
AIG | 2018 Form 10-K 349
CERTIFICATION
In connection with this Annual Report on Form 10-K of American International Group, Inc. (the “Company”) for the year ended
December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark D. Lyons,
Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that to my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Date: February 15, 2019
/S/ MARK D. LYONS
Mark D. Lyons
Executive Vice President and
Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or
as a separate disclosure document.
350 AIG | 2018 Form 10-K
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of Each Class
Common Stock, Par Value $2.50 Per Share
Warrants (expiring January 19, 2021)
5.75% Series A-2 Junior Subordinated Debentures
4.875% Series A-3 Junior Subordinated Debentures
Stock Purchase Rights
Name of Each Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Exhibit 99.02
AIG | 2018 Form 10-K 351
Comment on
Regulation G
Throughout this Annual Report, AIG presents its financial condition and results of operations in the way it believes will be most meaningful and
representative of its business results. Some of the measurements AIG uses 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 AIG presents may not be comparable to similarly-named measures reported by other companies. The reconciliations of such
measures to the most comparable GAAP measures in accordance with Regulation G are included within this Annual Report, AIG’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2018 (included herein) or in the Fourth Quarter 2018 Financial Supplement available in the
Investors section of AIG’s website, www.aig.com.
Core and Life and Retirement Adjusted Attributed Equity is an attribution of total AIG Adjusted Shareholders’ Equity to these segments
based on our internal capital model, which incorporates the segments’ respective risk profiles. Adjusted Attributed Equity represents our best estimates
based on current facts and circumstances and will change over time.
Core and Life and Retirement Return on Equity — Adjusted After-tax Income (Adjusted Return on Attributed Equity)
is used to show the rate of return on Adjusted Attributed Equity. Adjusted Return on Attributed Equity is derived by dividing actual or annualized
Adjusted After-tax Income by Average Adjusted Attributed Equity.
Adjusted After-tax Income Attributable to Core and Life and Retirement is derived by subtracting attributed interest expense and
income tax expense from Adjusted Pre-tax Income. Attributed debt and the related interest expense is calculated based on our internal capital model.
Tax expense or benefit is calculated based on an internal attribution methodology that considers among other things the taxing jurisdiction in which
the segments conduct business, as well as the deductibility of expenses in those jurisdictions.
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
funding agreements and mutual funds.
352
AIG | 2018 Annual Report
Cautionary Statement Regarding
Forward-Looking Information
This Annual Report may include, and officers and representatives of AIG may from time to time make and discuss, projections, goals, assumptions and
statements that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These projections,
goals, assumptions and statements are not historical facts but instead represent only a belief regarding future events, many of which, by their nature,
are inherently uncertain and outside AIG’s control. These projections, goals, assumptions and statements include statements preceded by, followed by
or including words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” “goal” or “estimate.”
These projections, goals, assumptions and statements may relate to future actions, prospective services or products, future performance or results of
current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, anticipated organizational,
business or regulatory changes, anticipated sales, monetization and/or acquisitions of businesses or assets, or successful integration of acquired
businesses, management succession and retention plans, exposure to risk, trends in operations and financial results.
It is possible that AIG’s actual results and financial condition will differ, possibly materially, from the results and financial condition indicated in these
projections, goals, assumptions and statements. Factors that could cause AIG’s actual results to differ, possibly materially, from those in the specific
projections, goals, assumptions and statements include:
• changes in market and industry conditions;
• the occurrence of catastrophic events, both natural and man-made;
• AIG’s ability to successfully reorganize its businesses and execute on its initiatives to improve its underwriting capabilities and reinsurance
programs, as well as improve profitability, without negatively impacting client relationships or its competitive position;
• AIG’s ability to successfully dispose of, monetize and/or acquire businesses or assets or successfully integrate acquired businesses;
• actions by credit rating agencies;
• changes in judgments concerning insurance underwriting and insurance liabilities;
• changes in judgments concerning potential cost saving opportunities;
• the impact of potential information technology, cybersecurity or data security breaches, including as a result of cyber-attacks
or security vulnerabilities;
• disruptions in the availability of AIG’s electronic data systems or those of third parties;
• the effectiveness of AIG’s strategies to recruit and retain key personnel and its ability to implement effective succession plans;
• negative impacts on customers, business partners and other stakeholders;
• AIG’s ability to successfully manage Legacy portfolios;
• concentrations in AIG’s investment portfolios;
• the requirements, which may change from time to time, of the global regulatory framework to which AIG is subject;
• significant legal, regulatory or governmental proceedings;
• changes in judgments concerning the recognition of deferred tax assets and goodwill impairment; and
• such other factors discussed in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Part I,
Item 1A. Risk Factors in AIG’s Annual Report on Form 10-K for the year ended December 31, 2018.
AIG is not under any obligation (and expressly disclaims 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.
AIG | 2018 Annual Report
353
Non-GAAP
Reconciliation
Reconciliations of Adjusted Return on Equity
($ in millions)
Core:
Adjusted pre-tax income
Interest expense (benefit) on attributed financial debt
Adjusted pre-tax income including attributed interest expenses
Income tax expense
Adjusted after-tax income
Ending adjusted attributed equity
Average adjusted attributed equity
Adjusted return on attributed equity
Life and Retirement:
Adjusted pre-tax income
Interest expense on attributed financial debt
Adjusted pre-tax income including attributed interest expenses
Income tax expense
Adjusted after-tax income
Ending adjusted attributed equity
Average adjusted attributed equity
Adjusted return on attributed equity
Reconciliations of Premiums and Deposits
($ in millions)
Life and Retirement:
Premiums
Deposits
Other
Total premiums and deposits
354
AIG | 2018 Annual Report
Twelve Months Ended December 31,
2018
2017
2016
$
$
$
$
$
1,196
(10)
1,206
281
925
$ 38,735
$ 40,394
2.3 %
$
$
$
$
$
3,190
107
3,083
610
2,473
$ 19,695
$ 19,664
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,688
(159)
1,847
466
1,381
39,931
43,826
3.2 %
3,831
23
3,808
1,242
2,566
20,304
20,687
$
$
$
$
$
$
$
$
$
$
$
$
$
$
408
(122)
530
120
410
47,651
51,319
0.8
%
3,428
92
3,336
1,041
2,295
20,547
21,269
12.6 %
12.4 %
10.8
%
Twelve Months Ended December 31,
2018
2017
2016
$
2,592
$
4,046
$
2,288
$ 27,846
$ 22,681
$ 26,294
$
768
$
731
$
722
$ 31,206
$ 27,458
$ 29,304
Shareholder
Information
Corporate Headquarters
American International Group, Inc.
175 Water Street
New York, NY 10038
(212) 770-7000
Stock Market Listing
New York Stock Exchange
NYSE common stock trading symbol: AIG
SEC Certifications
The certifications by the Chief Executive Officer
and the Chief Financial Officer of AIG,
required under Section 302 of the Sarbanes-Oxley
Act of 2002, were filed as exhibits to AIG’s
Annual Report on Form 10-K for the year ended
December 31, 2018, and are included herein.
NYSE Certification
The Chief Executive Officer of AIG made an
unqualified certification to the NYSE with respect
to AIG’s compliance with the NYSE Corporate
Governance Listing Standards in July 2018.
Annual Meeting of Shareholders
The 2019 Annual Meeting of Shareholders will
be held on Tuesday, May 21, 2019, at 11:00 a.m.,
at 175 Water Street, New York, NY.
Shareholder Assistance
Visit the AIG corporate website at www.aig.com.
Requests for copies of the Annual Report to
Shareholders and Annual Report on Form 10-K
for the year ended December 31, 2018,
should be directed to:
Investor Relations
American International Group, Inc.
175 Water Street
New York, NY 10038
(212) 770-6293
Transfer Agent and Registrar
EQ Shareowner Services
PO Box 64854
St. Paul, MN 55164-0854
(888) 899-8293
shareowneronline.com
Courier Service Address
EQ Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120-4100
Duplicate Mailings/Householding
A shareholder who receives multiple copies
of AIG’s proxy materials and Annual Report
may eliminate duplicate report mailings
by contacting AIG’s transfer agent.
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American International Group, Inc.
175 Water Street
New York, NY 10038
www.aig.com