American International Group, Inc.
2019 Annual Report
Independent Chair of the Board
Letter to Shareholders
Dear AIG Shareholder,
2019 was a year of significant momentum as
Brian Duperreault and his leadership team
continued to execute against AIG’s strategy to
deliver long-term value for you, our shareholders.
Their many notable actions over the last two years
have begun to positively impact our financial
results, and they are taking decisive actions to
position the company for the future.
Your Board of Directors continues to provide
oversight of this journey, and you can find more
detail on specific actions over the past year and the
company’s progress in Brian’s letter. The Board also
remains focused on governance matters, and there
were several notable developments in this area.
In 2019, we welcomed four new independent
directors to the Board – Thomas Motamed, Peter
Porrino, Amy Schioldager and Therese Vaughan.
Also, Suzanne Nora Johnson has informed the
Board of her decision not to stand for re-election
this year. On behalf of the Board, I would like to
thank Suzanne for her outstanding service and
leadership over the last 12 years.
In December, the Board named Peter Zaffino
as President of AIG, in addition to his roles
as Global Chief Operating Officer and CEO of
General Insurance, effective January 1, 2020.
This appointment reflects the value Peter has
already delivered during his tenure by leading the
turnaround within General Insurance and overseeing
AIG 200, a global, multi-year effort designed to
position AIG as a top-performing company.
On behalf of the Board, I would like to thank
employees across AIG for their continued hard
work and dedication. Their many accomplishments
are reflected in AIG’s broad improvements in
financial performance in 2019.
Chief Executive Officer
Letter to Shareholders
Dear AIG Shareholder,
Our financial results for the full year 2019 reflect the significant progress we have
made to position AIG for long-term, sustainable and profitable growth.
The foundational work we have undertaken
at AIG since mid-2017 was evident in our 2019
financial performance, with broad-based
improvements in all business segments,
especially General Insurance.
Last year we also launched AIG 200, our global,
multi-year effort across the enterprise to position
AIG for the future. This work will improve how
we do business and strategically position AIG to
become a top-performing company as we create
value for all of our stakeholders.
I am proud of our many accomplishments in
2019. They are early proof points on AIG’s journey
to profitable growth as we instill a culture of
underwriting and operational excellence while
efficiently managing capital. There is still much
work to be done, but we have a clear path
toward becoming an industry leader and the top
performer we aim to be.
Overview of 2019 Performance
The improvements in 2019 financial results were
driven by contributions from across the company.
Several enterprise-level highlights include:
·
Net Income Attributable to AIG Common
Shareholders swung from a $6 million loss
in 2018 to a $3.3 billion profit in 2019 and
Adjusted After-tax Income Attributable to AIG
Looking ahead, the Board remains confident in
AIG’s future and is diligently focused on building
value for you over the long term.
Sincerely,
Douglas M. Steenland
Independent Chair of the Board
Common Shareholders* of $4.1 billion was
nearly four times what it was last year.
Return on Common Equity (ROCE) and
Adjusted ROCE* increased from 0.0%
and 2.1%, respectively, in 2018 to 5.3%
and 8.3%, respectively.
We returned capital in the form of
more than $1 billion in dividends to our
common shareholders.
Net Investment Income was $14.6 billion, an
increase of $2.1 billion over 2018.
·
·
·
*
These are non-GAAP financial measures. Reconciliations to the most comparable GAAP measures
are included within AIG’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019
(included herein) as follows. Adjusted After-tax Income Attributable to AIG Common Shareholders is
defined on page 43 of the Annual Report on Form 10-K and reconciled on page 69 of the Annual Report
on Form 10-K. Adjusted ROCE is defined on page 43 of the Annual Report on Form 10-K and reconciled
on page 40 of the Annual Report on Form 10-K. Accident Year Combined Ratio, as adjusted is defined
on page 44 of the Annual Report on Form 10-K and reconciled on page 76 of the Annual Report on
Form 10-K.
** This is a non-GAAP financial measure. The definition of such measure and reconciliation to the most
comparable GAAP measure are included on pages 351 and 352, respectively, of this Annual Report.
Shareholder Information
Requests for copies of the 2019 Annual Report should be directed to AIG Investor Relations. Shareholders may eliminate duplicate mailings
of AIG’s proxy materials by contacting AIG’s transfer agent. Contact details can be found at www.aig.com/investor-relations.
Cautionary Statement Regarding
Forward-Looking Information
This Annual Report and other publicly available documents may include, and officers and representatives of AIG may from time to time make and discuss,
projections, goals, assumptions and statements that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995. These projections, goals, assumptions and statements are not historical facts but instead represent only a belief regarding future events, many of
which, by their nature, are inherently uncertain and outside AIG’s control. These projections, goals, assumptions and statements include statements preceded
by, followed by or including words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” “goal” or “estimate.”
These projections, goals, assumptions and statements may relate to future actions, prospective services or products, future performance or results of current
and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, anticipated organizational, business or
regulatory changes, anticipated sales, monetization and/or acquisitions of businesses or assets, or successful integration of acquired businesses, management
succession and retention plans, exposure to risk, trends in operations and financial results.
•
•
the effectiveness of our risk management
policies and procedures, including with
respect to our business continuity and disaster
recovery plans; 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, 2019.
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.
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,
including the significant global economic
slowdown, market volatility and business
interruption driven by responses to the
COVID-19 pandemic;
the occurrence of catastrophic events, both
natural and man-made, including pandemics
(such as COVID-19), and the effects of
climate change;
AIG’s ability to effectively execute on AIG 200
operational programs designed to achieve
underwriting excellence, modernization of
AIG’s operating infrastructure, enhanced user
and customer experiences and unification
of AIG;
AIG’s ability to consummate the sale of its
controlling interest in Fortitude Holdings
and AIG’s ability to successfully manage
Legacy Portfolios;
•
•
•
•
•
•
•
•
•
•
•
•
changes in judgments concerning potential
cost saving opportunities;
actions by credit rating agencies;
changes in judgments concerning insurance
underwriting and insurance liabilities;
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 strategies to recruit
and retain key personnel and to implement
effective succession plans;
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;
concentrations in AIG’s investment portfolios;
changes to the valuation of AIG’s investments;
AIG’s ability to successfully dispose of,
monetize and/or acquire businesses or assets
or successfully integrate
acquired businesses;
changes in judgments concerning the
recognition of deferred tax assets and
goodwill impairment;
1
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General Insurance: Delivered on commitment
to underwriting profitability following
significant, foundational actions
The most notable improvement in our financials in
2019 was the return to underwriting profitability in
General Insurance. AIG’s full year 2019 Combined
Ratio of 99.6% and Accident Year Combined Ratio,
as adjusted*, of 96.0% improved by 11.8 points and
3.7 points, respectively.
This was achieved through focused execution
of the strategy established by Peter Zaffino
and the world-class leadership team he has
assembled across General Insurance. Together
they established a new, comprehensive
underwriting strategy, clearly outlined a defined
risk appetite for clients and distribution partners,
and completed significant, foundational work to
improve our portfolio. This included
meaningfully reducing volatility through decisive
underwriting actions and a comprehensive
reinsurance strategy.
Looking ahead, we remain diligently focused
on our strategy to instill a culture of
underwriting excellence and to enhance
underwriting profitability while continuing to
reposition our portfolio.
I would like to thank AIG’s clients, along with our
distribution and reinsurance partners, who have
supported the actions taking place in General
Insurance over the past two years, as well as the
many colleagues who have made these actions
possible. While there remains much work to be done
in General Insurance, we have great momentum on
which we will continue to build in 2020.
Life and Retirement: Uniquely positioned
to meet customer needs in an evolving
market environment
Life and Retirement continued to deliver solid
results under the leadership of Kevin Hogan and
his executive team. For the full year 2019, the
business delivered an Adjusted Return on Attributed
Common Equity** of 13.7% and assets under
administration in Individual and Group Retirement
increased by more than 14%. Strong returns in
alternative investments and favorable equity
market performance supported these results.
The value of Life and Retirement’s diversified
portfolio and distribution network is evident in
the ability to tailor our offerings to best meet the
needs of customers and distributors. With the
depth of talent in leadership roles and strong bench
across the business, I believe Life and Retirement
continues to be uniquely positioned to provide
financial and retirement security in this changing
market environment.
I would like to thank the colleagues across this
business who help us meet the important and
growing need for protection, retirement savings
and lifetime income solutions. I would also like
to thank our customers and distributors for their
continued support.
Capital Management: Continuing to build AIG
into a more valuable company
Alongside our efforts to enhance performance
within AIG’s businesses, we are focused on
further strengthening our balance sheet to
support growth. This includes more efficiently
managing Legacy liabilities and reducing
leverage, while also evaluating opportunities to
return capital to shareholders.
A significant milestone in this area was the
agreement reached in November 2019 to sell a
majority interest in Fortitude Group Holdings, LLC,
which is expected to close in mid-2020, subject to
regulatory approvals.
AIG 200: Instilling a commitment to
operational excellence
As we begin to see the results of our turnaround
efforts reflected in financial results, we are also
focused on instilling a commitment to operational
excellence across the company through AIG 200.
This program is critical to establishing the
infrastructure necessary to position AIG for the
delivery of sustainable, long-term value well into
the future. We expect to invest approximately $1.3
billion over the next three years to deliver $1.0 billion
in run-rate expense savings by year-end 2022.
I asked Peter Zaffino to lead this important program
last year, and he began by recruiting a team of
senior leaders with deep transformation expertise
and a proven track record of success.
Much like our early approach to the ongoing
turnaround of General Insurance, the work that
took place last year was foundational and focused
on identifying long-term and lasting solutions to
improve underlying operational performance.
This work will require intense focus, disciplined
execution and investment over time, and I am
confident AIG will emerge a vastly improved and
stronger company.
Our Communities and Colleagues:
Committed to making a difference
As an insurer, we are dedicated to helping
individuals and businesses, and the communities
in which they operate, prepare for the risks that lie
ahead. We also aim to make a difference through
our commitment to sustainability and corporate
citizenship, while continuing to build a culture that
values diversity and inclusion.
I believe that a continued commitment to
sustainability can deliver long-term value to
our company, our stakeholders and our global
community. We reached several sustainability
leadership and reporting milestones last year. We
appointed AIG’s first Chief Sustainability Officer
to lead the development of a company-wide
sustainability strategy and program. We also
published our inaugural Task Force on Climate-
related Financial Disclosures (TCFD) report to
provide greater transparency and align reporting
activities in this area with industry standards. The
TCFD report and more information about AIG’s
approach to sustainability and community are on
our Corporate Responsibility website.
AIG’s people remain our greatest strength and
we benefit from their many unique perspectives.
Continuing to foster a culture of diversity and
inclusion remains an important priority for me.
I am proud that membership in our nearly 140
Employee Resource Groups across the company,
which represent 13 dimensions of diversity,
increased again this year as our colleagues continue
to advocate for one another. Improvements in the
company’s financial and operating performance
and efforts to make a difference in our communities
would not be possible without the focus and
determination of our colleagues around the world.
I would like to thank everyone across AIG for their
contributions over the past year, and I look forward
to what we will accomplish together going forward.
Coronavirus Pandemic: Supporting
colleagues and other stakeholders
Looking ahead to 2020, I want to address the
coronavirus pandemic and its global impact on our
communities. At AIG, we put protections in place
to safeguard our colleagues while implementing
business continuity plans designed to ensure that
we can continue to serve our clients, policyholders,
distribution partners and other stakeholders
without significant interruption.
Over the past two years, we have made important
strides to improve operating performance, and
we are therefore better positioned to navigate
an environment driven by increased uncertainty,
dramatic interest rate actions and continued
stock market volatility. The foundational work we
continue to build on has strengthened our ability to
navigate and lead through the complexity brought
on by the coronavirus pandemic. I hope that all
the communities where we work and live remain
safe and healthy as we cross this unprecedented
landscape together.
Conclusion: On track to achieve goal of
becoming a top-performing company
Our teams have taken decisive actions on several
fronts towards achieving underwriting excellence
and positioning AIG for improved operational
and financial performance. We continue to make
meaningful progress on our goal of becoming a
top-performing company and a leading insurance
franchise. However, the early part of 2020 has seen
extremely volatile equity markets and AIG has
been impacted by many macro headwinds that
now exist in the global financial markets due to
coronavirus. As a result, AIG’s stock price has been
negatively affected, as have the shares of many
companies across industries. Notwithstanding these
unprecedented circumstances, I remain confident
that we are on the right path to position AIG for long-
term, sustainable and profitable growth.
Thank you for your continued support.
Sincerely,
Brian Duperreault
Chief Executive Officer
AIG | 2019 Annual Report
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Our Commitments: Sustainability,
Citizenship and Diversity & Inclusion
Sustainability:
Future-proofing our Communities
We believe a commitment to sustainability helps future-proof communities by addressing societal
and environmental factors, while enabling economic progress. We are focused on the key themes
of resilience and financial security – building on our expertise and capabilities in managing risks of
many kinds – and how we can facilitate, design and drive innovative solutions to help clients and
partners adapt to our changing world.
•
•
•
Launching a Sustainability Integration Team
to identify and drive broader sustainability
initiatives within their respective areas across
the company.
Publishing our inaugural Taskforce for
Climate-related Financial Disclosures
(TCFD) report, which allows us to provide
greater transparency and align our reporting
activities with industry standards.
Planning an Employee Sustainability
Network, where employees can take action at
a more local, grassroots level. We have seen
significant interest among our employees,
many of whom are already leading green
activities in our Paris, Auckland, São Paulo
and Singapore offices.
Climate Change
AIG recognizes the impact of climate change
on its business and global communities and is
committed to playing a role in addressing these
challenges. We also acknowledge that climate
change is a complex issue and that the world
cannot currently meet its energy needs through
purely green technologies.
AIG is well positioned to leverage its global
risk and industry expertise to help mitigate
greenhouse gas emissions and navigate climate
change risks and opportunities in its engagement
with clients, policyholders and other stakeholders.
As a global insurer, AIG is committed to
protecting communities and individuals as
they face this challenge.
AIG formed a cross-functional, CEO-backed
Climate Change Working Group to develop a
cohesive strategy to assess impactful initiatives
and will work to further evolve our approach
across our global enterprise. We will continue to
report updates from time to time.
AIG continues to develop and refine our
climate strategy building on our actions
to date. They include:
Looking Ahead
As a first step in developing our
sustainability agenda, we are focused on
key themes of community resilience and
financial security. This work includes:
•
•
•
Partnering with Wood Group Plc to create a
Resilience Framework that helps our clients
and communities arrive at more resilient
solutions for urban development projects
through a multi-tiered approach for design
and construction.
o
Combining AIG’s risk mitigation with
Wood’s environmental and engineering
expertise, the collaboration recognizes
the importance of having an end-to-end
framework that cities can use to manage
climate change and environmental risks.
This framework was recently reviewed
and endorsed by the United Nations
Industrial Development Organization
(UNIDO). It is now being utilized by
member cities and communities that are
working toward designing resilience into
urban infrastructure projects.
o
Membership in the Insurance Development
Forum, a public/private partnership whose
mission is to optimize the use of insurance
and its related risk management capabilities
to build greater resilience and protection for
people, communities, businesses, and public
institutions that are vulnerable to disasters
and their associated economic risks.
Partnering with the Foundation for
Financial Planning as AIG Retirement
Services promotes financial security by
connecting the financial planning community
to people in need. Through this effort,
financial advisors help alleviate the financial
stress that comes with a cancer diagnosis
by providing pro bono advice to help put
patients and their families on a path to a more
secure financial future.
•
3
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Announcing the appointment of our first
Chief Sustainability Officer to lead the
development and implementation of a
company-wide sustainability strategy.
For the latest information on these important topics,
visit: www.aig.com/corporate-responsibility
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Citizenship:
Leveraging the Commitment of AIG Colleagues
Across AIG and our global footprint, we are focused on leveraging the experience, knowledge
and enthusiasm of our employees to give back to the communities we serve through programs,
partnerships with nonprofits and philanthropic giving.
In 2019, our colleagues volunteered nearly 80,000 hours through
a variety of AIG programs that align with their interests and skills.
Culture:
Building a Culture
of Diversity & Inclusion
We believe that diversity and inclusion are
critical to our success – promoting a creative
workplace that leads to innovation, growth
and profitability.
We invest in each employee through a wide variety
of programs and initiatives – seeking to ensure that
our people are not only respected as individuals,
but also truly valued for their unique perspectives.
AIG celebrates Global Volunteer
Month each year. In April 2019
alone, over 4,000 employees
from more than 35 countries
participated in more than
230 activities.
•
•
Since 2014, AIG and Junior Achievement
have closely partnered to support financial
education and workforce readiness. More
than 700 employees participated in activities
with students, and our 2019 grant has enabled
almost 18,000 students to participate in JA
programming in 22 cities around the world
where AIG has the largest employee and
business footprint.
In partnership with Humanitarian OpenStreet
Map, our volunteers facilitate preparedness
and relief efforts by virtually mapping
disaster-prone parts of the world that are
either unmapped or altered by catastrophic
events. As of March 1, 2020, employees – in
office team-building events and their own
homes – contributed over 18,000 edits and
mapped more than 33 miles of roads.
•
•
AIG has sponsored several promising
Enactus student social entrepreneur teams
who focus on various ways to enhance
resilience for cities, such as through
bio-stoves, solar power, aquaponics, clean
water and wellness.
AIG’s award-winning Legal Pro Bono
program has provided nearly 25,000
hours of counsel and mentorship on
approximately 400 projects since 2012.
The work spans a wide range of matters,
including advising small business
entrepreneurs; helping veterans obtain
benefits, special needs children obtain vital
educational services, and immigrant groups
obtain legal services; providing estate planning
for first responders; and representing
survivors of domestic abuse.
We support the individual causes that matter to our colleagues
and their communities by providing:
16 Hours
Volunteer Time Off for
each employee per year
$10,000
AIG Matching Grants Program funding available to
each employee per year to amplify their charitable
giving to qualifying nonprofit organizations and schools
We also promote advancement of the arts through AIG’s Museum Membership
Program, which includes 20 institutions in four countries.
•
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•
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To enhance the diversity of our workforce,
especially at senior levels, we offer three
career-development programs focused
on women and people of color. They provide
support such as mentor matching and coaching.
Our 138 Employee Resource Groups (ERGs)
reflect 13 dimensions of diversity and provide
a forum for employees to advocate for one
another and advance diversity and inclusion
within our communities.
o
Membership continues to increase,
rising by 16% in 2019, representing 24%
of all employees.
Our employees are multifaceted and allies
for others: approximately 62% of ERG
participants are members of more than
one group.
o
AIG offers unconscious bias training to all
employees to help them recognize and manage
assumption “blind spots” in their interactions.
AIG introduces new, entry-level analysts to
our two-year development program through
the AIG Insurance Academy, which takes place
four times each year. This is one example of
how we are preparing for the insurance
industry’s generational shift.
We are proud to be recognized as leaders
in employee culture best practices.
•
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For the eighth year in a row, AIG earned
a 100% score on the Human Rights
Campaign’s Corporate Equality Index,
which assesses corporate policies and
practices related to LGBTQ+ employees. AIG is
recognized as one of the Best Places to Work
for LGBTQ Equality.
AIG was featured on DiversityInc’s Top
50 Companies for Diversity list for the
second year in a row, moving up to 39th
from 45th, after four previous years as a
Noteworthy Company. AlG also placed ninth
on DiversityIncʼs Top Companies for Executive
Women list in 2019.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
For the fiscal year ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-8787
American International Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
13-2592361
(I.R.S. Employer Identification No.)
175 Water Street, New York, New York
(Address of principal executive offices)
10038
(Zip Code)
Registrant’s telephone number, including area code (212) 770-7000
______________________________
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
Depositary Shares Each Representing a 1/1,000th Interest in a Share of
Series A 5.85% Non-Cumulative Perpetual Preferred Stock
Trading Symbol
AIG
AIG WS
AIG 67BP
AIG 67EU
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
AIG PRA
New York Stock Exchange
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 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
Non-accelerated filer
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 $46,348,000,000.
As of February 10, 2020, there were outstanding 873,422,023 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 2020 Annual Meeting of Shareholders
Form 10-K Reference Locations
Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14
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AMERICAN INTERNATIONAL GROUP, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2019
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
Part I
ITEM 1 | Business
ITEM 1 | Business
Maximizing Industry
Maximizing Industry
Leadership and
Leadership and
Global Footprint
Global Footprint
Creating Value through Profitable
Creating Value through Profitable
Growth and Instilling a Culture of
Growth and Instilling a Culture of
Underwriting and Operational
Underwriting and Operational
Excellence
Excellence
American International Group, Inc. (AIG)
American International Group, Inc. (AIG)
is a leading global insurance organization. Building on our long history, we provide a wide
is a leading global insurance organization. Building on our long history, we provide a wide
range of property casualty insurance, life insurance, retirement solutions, and other financial
range of property casualty insurance, life insurance, retirement solutions, and other financial
services to customers in more than 80 countries and jurisdictions. These diverse offerings
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,
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
manage risks and provide for retirement security. AIG common stock is listed on the New York
Stock Exchange.
Stock Exchange.
The impact of the steps that we took in 2018 and 2019 is evident in 2019’s financial
The impact of the steps that we took in 2018 and 2019 is evident in 2019’s financial
performance. The improvement in General Insurance yielded full-year underwriting profitability
performance. The improvement in General Insurance yielded full-year underwriting profitability
and Life and Retirement continued to deliver solid returns despite narrowing credit spreads
and Life and Retirement continued to deliver solid returns despite narrowing credit spreads
and the ongoing low interest rate environment. We plan to build on this momentum in 2020 to
and the ongoing low interest rate environment. We plan to build on this momentum in 2020 to
deliver strong financial results and further AIG’s position as a leading global insurance
deliver strong financial results and further AIG’s position as a leading global insurance
company.
company.
In this Annual Report, unless otherwise mentioned or unless the context indicates otherwise, we use the terms “AIG,” the “Company,”
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
“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.
the term “AIG Parent” to refer solely to American International Group, Inc., and not to any of its consolidated subsidiaries.
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AIG | 2019 Form 10-K 3
AIG | 2019 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
geographies and segmentations, providing
differentiated service and expertise.
Breadth of Loyal Customers
including millions of clients and
policyholders ranging from multi-national
Fortune 500 companies to individuals
throughout the world.
Broad and Long-Standing
Distribution Relationships
with brokers, agents, advisors, banks
and other distributors across all lines of
business.
Highly-Engaged Global Workforce
of approximately 46,000 employees in more than 80 countries
and jurisdictions.
Balance Sheet Quality and Strength
as demonstrated by over $65 billion in shareholders’ equity and
AIG Parent liquidity sources of $12.1 billion as of December 31,
2019.
Creating Value Through Profitable Growth and Instilling a
Culture of Underwriting and Operational Excellence
2020 Priorities
Business Mix & Targeted Growth – Build on strategic
AIG 200 – Execute multi-year efficiency initiatives to
portfolio improvement and product diversity by investing in
attractive growth opportunities in our best-performing
businesses or new areas, and optimizing our global footprint
support underwriting excellence, modernize our operating
infrastructure, enhance user and customer experiences and
become a more unified company
Underwriting Excellence – Maintain discipline in risk
selection by continuing to use recently implemented
underwriting framework and guidelines to enhance the
existing portfolio
Capital Management – Generate and redeploy capital for
the best long-term value creation for shareholders
Leadership, Culture and Talent – Continue to attract and
develop world-class employees while furthering our
commitment to diversity and inclusion
Effective Risk Management – Continue to manage risk
and volatility for the company by maintaining discipline in
underwriting, optimizing reinsurance and closing the sale of
our legacy portfolio
2019 Highlights
General Insurance Achieved Calendar Year
Underwriting Profitability
2019 Calendar Year Combined Ratio of 99.6 compared to 111.4
in 2018 and 2019 Accident Year Combined Ratio, As Adjusted
of 96.0 compared to 99.7 in 2018*
Underwriting profitability delivered through continued
underwriting actions taken to strengthen our portfolio and to
maintain pricing, reinsurance and expense discipline
Life and Retirement Continued to Deliver Solid
Returns
Full-Year 2019 Adjusted Pre-tax Income of $3.5 billion
compared to $3.2 billion in 2018
Results reflected ongoing strategy to leverage our broad
product portfolio and diverse distribution network to satisfy
customer needs
Efficient Management of Legacy Portfolio
On November 25, 2019, we announced an agreement to sell a controlling financial interest in Fortitude Group Holdings, LLC
(Fortitude Holdings), the reinsurer of the majority of AIG’s Legacy Portfolio, which we anticipate closing in mid-2020, subject to
regulatory approvals**
Growth in Net Investment Income
Full-Year 2019 Consolidated Net Investment Income of $14.6 billion compared to $12.5 billion in 2018
* Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measure see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations (MD&A).
** For further discussion on the Fortitude Holdings transaction see Note 4 to the Consolidated Financial Statements.
4 AIG | 2019 Form 10-K
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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. In November 2019, we announced
the sale of a controlling financial interest in Fortitude Holdings, the holding company for Fortitude Re. There can be no guarantee that
we will receive the required regulatory approvals or that closing conditions will be satisfied in order to consummate the
November 2019 transaction.
Consistent with how we manage our business, our General Insurance North America operating segment primarily includes insurance
businesses in the United States, Canada and Bermuda. Our General Insurance International operating segment includes regional
insurance businesses in Japan, the United Kingdom, Europe, Asia Pacific, Latin America and Caribbean, Middle East and Africa, and
China. General Insurance results are presented before consideration of internal reinsurance agreements.
For further discussion on our business segments see Item 7. MD&A and Note 3 to the Consolidated Financial Statements.
Business Segments
General Insurance
Life and Retirement
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 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 (Glatfelter).
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. On November 25, 2019, we
announced an agreement to sell a controlling financial interest in Fortitude
Group Holdings, LLC (Fortitude Holdings), the reinsurer of the majority of
AIG’s Legacy Portfolio, which we anticipate closing in mid-2020, subject to
regulatory approvals.
AIG | 2019 Form 10-K 5
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ITEM 1 | Business | AIG
Diversified Mix of Businesses
(dollars in millions)
64%
General Insurance
North America
34%
International
30%
2%
Other Operations
$15,782
2019
Adjusted
Revenues*
34%
Life and Retirement
12%
10%
6%
6%
Individual Retirement
Life Insurance
Group Retirement
Institutional Markets
* Our Total revenues were $49.7 billion in 2019. 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 2019, 5.6 percent of our property casualty direct premiums were written in the state of California, and 15.3 percent and 6.9 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 | 2019 Form 10-K
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$845 $2,912 $2,947 $4,352 $5,654 $14,100
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 on meeting the specific needs of
each business unit. The investment 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 issued by corporations, municipalities and other governmental agencies, as well as structured securities
collateralized by, among other assets, residential and commercial real estate and commercial mortgage loans.
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 14 to the Consolidated
Financial Statements.
Our Employees
We believe that a major strength of AIG is the dedication, commitment and loyalty of our colleagues. At December 31, 2019 and 2018,
we had approximately 46,000 and 49,600 employees, respectively. We believe that our relations with our colleagues are good.
AIG | 2019 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 Federal Deposit Insurance Corporation 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 Securities and Exchange
Commission (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.
8 AIG | 2019 Form 10-K
ITEM 1 | Business
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)
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.
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. On December 4, 2019, the Council finalized amendments to its guidance on nonbank financial company designations.
The new guidance prioritizes an activities-based approach to monitoring and addressing potential systemic risk, and indicates that the
Council will pursue entity specific SIFI designations only if a potential risk or threat cannot be adequately addressed through an
activities-based approach. The guidance became effective on January 29, 2020. We will monitor developments resulting from these
changes.
AIG | 2019 Form 10-K 9
ITEM 1 | Business
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
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, 2019.
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. In December 2012, the NAIC approved a new Valuation Manual (VM) containing a principle-
based approach to life insurance company reserves. Principle-based reserving (PBR) is designed to tailor the reserving process to
more closely reflect the risks of specific products, rather than the factor-based approach typically employed historically. The VM
became effective on January 1, 2017, after revisions to the NAIC’s model Standard Valuation Law were enacted by the requisite
number of states, representing the required premium volume. Variable Annuity (VA) reserving requirements are contained in
subsection 21 of the VM (VM-21), and replace the previous Actuarial Guideline XLVIII (AG 43) requirements, which also employed a
principle-based approach. Substantial revisions to VM-21 have been adopted effective January 1, 2020, with options for early
adoption or phased-in adoption. We have not elected either of these adoptions, and instead have applied VM-21 in full, effective
January 1, 2020, to both new and existing VA business. VM-21 is also referred to as “VA PBR”. Subsection 20 of the Valuation
Manual (VM-20) applies to individual life insurance reserves, most notably term insurance and universal life with secondary
10 AIG | 2019 Form 10-K
ITEM 1 | Business
guarantees (ULSG). VM-20 is also referred to as “Life PBR”, and replaces Regulation XXX and Guideline AXXX for new life
insurance business issued after January 1, 2017. As permitted by applicable regulations, we deferred implementation of Life PBR
until January 1, 2020, and have implemented it as of such date with respect to relevant policies issued on or after January 1, 2020.
See Item 1A. Risk Factors and Note 20 to the Consolidated Financial Statements for risk and additional information related to these
statutory reserving requirements.
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.
ERISA
We provide products and services to certain employee benefit plans that are subject to the Employee Retirement Income Security Act
of 1974, as amended (ERISA), and/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. The applicable provisions of ERISA and the Internal Revenue
Code are subject to enforcement by the DOL, the Internal Revenue Service (IRS) and the Pension Benefit Guaranty Corporation.
Standard of Care Developments
In our Life and Retirement business, we and our distributors are subject to laws and regulations regarding the standard of care
applicable to sales of our products and the provision of advice to our customers. In recent years, many of these laws and regulations
have been revised or reexamined while others have been newly adopted. We continue to closely follow these legislative and
regulatory activities. Changes in standard of care requirements or new standards issued by governmental authorities, such as the
DOL, the SEC, the NAIC or state regulators and/or legislators, may affect our businesses, results of operations and financial
condition.
DOL Fiduciary Rule
In June 2018, a Fifth Circuit Court of Appeals decision became effective vacating the DOL Fiduciary Rule that redefined who would be
considered a “fiduciary” for purposes of transactions with ERISA qualified plans, related plan participants and Individual Retirement
Accounts. Before it was vacated, the uncertainty in the annuity market around the impact and implementation of the DOL Fiduciary
Rule had negatively impacted industry sales of annuity products, including those offered by Individual Retirement. The DOL has
indicated that it plans to issue a revised fiduciary rule package to replace the DOL Fiduciary Rule vacated by the Fifth Circuit. At this
time, we cannot predict whether or when the DOL will promulgate any new fiduciary regulation, the scope or substance of such
regulation, the impact such regulation may have on our businesses and operations, or how such regulation may work in conjunction
with other similarly proposed and/or enacted laws and regulations.
SEC Best Interest Regulation
In June 2019, the SEC adopted a package of final rulemakings and interpretations, which include Regulation Best Interest
(Regulation BI) and the creation of a new disclosure tool called Form CRS Relationship Summary (Form CRS). Regulation BI
establishes new rules regarding the standard of care a broker must meet when making a recommendation to a retail customer in
connection with the sale of a security or other covered recommendation. Form CRS requires enhanced disclosure by broker-dealers
and investment advisors regarding client relationships and certain conflicts of interest issues. The compliance date for Regulation BI
and Form CRS is June 30, 2020.
At the same time, the SEC issued two interpretations under the Investment Advisers Act of 1940. The first addressed the standard of
conduct applicable to SEC-registered investment advisors, including details regarding the fiduciary duty owed to clients, required
disclosures and the advisor’s continuous monitoring obligations. The second interpretation clarified when investment advice would be
considered “solely incidental” to brokerage activity for purposes of the broker-dealer exclusion from SEC investment advisor
registration. These two SEC interpretations became final upon publication. The SEC has recently issued FAQs on certain aspects of
AIG | 2019 Form 10-K 11
ITEM 1 | Business
Regulation BI and Form CRS, and we expect that it will continue to provide guidance regarding these final rules and will further clarify
its interpretations through the issuance of additional FAQs and other publications. We continue to evaluate the full impact of this
package of final rulemakings and interpretations on us and our customers, distribution partners and financial advisors, while preparing
for compliance with them. We will implement and enhance processes and procedures, where needed, to comply with the final rules
and interpretations.
State Developments
The NAIC has been working on revisions to the Suitability in Annuity Transactions Model Regulation (#275), related to the standard of
care that would be applicable in a sale or recommendation of an annuity. The proposed revisions were adopted by NAIC’s Life
Insurance and Annuities (A) Committee at the end of December 2019, with final approval expected by the NAIC Executive/Plenary
Committee. Amendments to this NAIC model regulation could ultimately form the basis of amendments to state insurance law
suitability rules applicable to our business.
In addition, certain state regulators and legislatures have already adopted, or are considering adoption of, best interest standards. For
example, in July 2018, the 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). The compliance date for Regulation 187 was August 1, 2019 for annuity products and was 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 are implementing and enhancing processes and procedures, where needed, to comply with this regulation. Other states, such as
Nevada, New Jersey, and Massachusetts, have also proposed standard of care regulations applicable to insurance producers,
agents, financial advisors, investment advisers, broker-dealers and/or insurance companies. The proposed standards vary in scope,
applicability and timing of implementation. We are closely monitoring these developments and evaluating their potential impacts on
our products and services, our customers, distribution partners and financial advisors, and the life and retirement industry overall in
the U.S.
Securities, Investment Adviser, Broker-Dealer and Investment Company Regulation
Our investment products and services are subject to applicable 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.
Our variable life insurance, variable annuity and mutual fund products are “securities” within the meaning of federal securities laws
and may be required to be registered under the Securities Act. They are subject to regulation by the SEC and FINRA, and as
“securities”, these products are also subject to filing and certain other requirements under federal securities laws unless an exemption
applies. As a result, some of our subsidiaries and their activities in offering and selling these products are subject to extensive
regulation by the SEC and FINRA.
Our mutual funds, and in certain states our variable life insurance and variable annuity products, are also “securities” within the
meaning of state securities laws. As securities, unless an exemption applies, these products are subject to filing and certain other
requirements under applicable state securities laws, and sales activities with respect to these products generally are also subject to
state securities regulations. Such regulations may affect investment advice, sales and related activities for these products.
In addition to being registered under the Securities Act, which regulates disclosure regarding investment products, some of the
separate account, mutual fund and other pooled investment products offered by our businesses are registered as investment
companies under the Investment Company Act of 1940, as amended. Some of these products may also be qualified for sale in
various states, the District of Columbia and Puerto Rico. Our separate account investment products are also subject to applicable
state insurance regulation. We also have several subsidiaries that are registered as broker-dealers under the Securities Exchange Act
of 1934 (“Exchange Act”), as amended, and/or as investment advisers under the Investment Advisers Act of 1940, as amended, and
their activities are subject to federal and state regulation. For example, the Investment Company Act and the Investment Advisers Act
impose substantive regulation on the structure and governance of the investment products and services offered by these subsidiaries,
while the offer and sale of our investment products by certain of our registered broker-dealer subsidiaries may be subject to, among
other regulations, the SEC’s best interest regulation and the evolving standard of care laws and regulations referenced above.
Further, our licensed sales professionals appointed with our broker-dealer and/or investment adviser subsidiaries and our other
employees, insofar as they sell products that are securities, including wholesale and retail activity, are subject to the Exchange Act
and to examination requirements and regulation by the SEC, FINRA and state securities commissioners. Regulation and examination
requirements also extend to our subsidiaries that employ or control those individuals.
12 AIG | 2019 Form 10-K
ITEM 1 | Business
Privacy, Data Protection and Cybersecurity
We are subject to U.S. laws and regulations that require financial institutions and other businesses to protect personal and other
sensitive information and provide notice of their practices relating to the collection, disclosure and other processing of personal
information. We also are subject to U.S. laws and regulations requiring notification to affected individuals and regulators of security
breaches. Below we highlight a few, key, recently-enacted regulations.
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 March 1,
2019. AIG companies covered by the regulation annually file certifications of compliance with the then-in-effect requirements.
Requirements under the NYDFS’ cybersecurity regulation are similar in many, but not all, respects to those under the NAIC Model
Law.
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 eight states and may be enacted in other
states.
In 2018, California enacted the California Consumer Privacy Act of 2018 (CCPA), with an effective date of January 1, 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 and Financial Services 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, American International Group UK Limited (AIG UK). The UK’s Financial Conduct Authority has oversight of AIG UK for
AIG | 2019 Form 10-K 13
ITEM 1 | Business
consumer protection and competition matters. For example, we are subject to the UK’s Senior Managers and Certification Regime
(“SMCR”), legislation that is intended is to reduce harm to consumers and strengthen market integrity by making senior individuals
more accountable for their conduct and competence. The SMCR comprises 3 elements: the Senior Managers Regime, which requires
that firms appoint an individual with responsibility for each senior management function and subjects such individuals to regulatory
pre-approval; the Certification Regime, which requires firms to certify (on an on-going basis) the fitness and propriety of certain
employees who could harm the firm, its customers or the market; and the Conduct Rules, which are high-level standards of behavior
expected of those working in financial services.
The Luxembourg insurance regulator, the Commissariat aux Assurances 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 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, if adopted by the states within the five-year time period, 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 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 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 for
commercial (re)insurers; compliance with minimum enhanced capital requirements; compliance with the BMA’s Insurance Code of
Conduct; compliance with minimum solvency margins and liquidity ratios (the latter for general business (re)insurers); limitations on
dividends and distributions; preparation of an annual Financial Condition Report for commercial (re)insurers 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.
14 AIG | 2019 Form 10-K
ITEM 1 | Business
The Registrar of Companies (the ROC) regulates the compliance by AIG’s entities in Bermuda which carry on a Relevant Activity, as
defined in Bermuda’s Economic Substance Act 2018 and related Economic Substance Regulations 2018 (as amended, the ES Laws).
The purpose of the ES Laws are to ensure that Bermuda does not facilitate the use of structures which attract profits but which do not
reflect real economic activity that is being undertaken in Bermuda. The ROC imposes the filing of an annual declaration form
demonstrating compliance with the requirements of the ES Laws by entities which carry on a Relevant Activity.
The Japan Financial Services Agency (JFSA) regulates AIG’s operating insurance and reinsurance subsidiaries in Japan. The JFSA
has extensive authority under the Insurance Business Act and related regulations to oversee company licensing, sales practices,
business conduct, investments, reserves and solvency, among other items. Our Japanese insurance and reinsurance operations are
required to maintain a minimum solvency margin ratio (SMR), which is a measure of capital adequacy. The failure to maintain an
appropriate SMR, or comply with other similar indicators of financial health, could result in the JFSA imposing corrective actions on
our operations.
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 solicit or target individuals in
the EU to offer goods or services to EEA data subjects or monitor personal behavior of EEA data subjects (e.g., in an online context)).
We have sought to address these 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
personal and other sensitive information and provide notice of their practices relating to the collection, disclosure and other
processing 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 to 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 and mitigating systemic risks posed by the insurance sector, and the IAIS has developed
standards relative to many of the areas of focus of the FSB, which go beyond the IAIS’ basic Insurance Core Principles. The IAIS has
adopted ComFrame, a Common Framework for the Supervision of Internationally Active Insurance Groups (IAIGs). ComFrame sets
out qualitative and quantitative standards tailored to the international activity and size of IAIGs. These standards assist supervisors in
collectively addressing an IAIG’s activities and risks, identifying and avoiding supervisory gaps and coordinating supervisory activities,
particularly between the group-wide supervisor and other involved supervisors. ComFrame provides standards for group supervision,
governance and internal controls, enterprise risk management, and recovery and resolution planning. As part of ComFrame, the IAIS
is developing a risk-based global insurance capital standard (ICS) applicable to IAIGs, with the purpose of creating a common
language for supervisory discussions of group solvency of IAIGs. We currently meet the criteria set forth to identify an IAIG.
AIG | 2019 Form 10-K 15
ITEM 1 | Business
The IAIS has adopted ICS version 2.0 for a five year monitoring phase, an initial phase commencing January 2020, during which ICS
version 2.0 will be used for confidential reporting to group-wide supervisors and discussion in supervisory colleges, but will not trigger
supervisory action. The purpose of the monitoring period is to monitor the performance of the ICS over a period of time, and not to
assess the capital adequacy of IAIGs. During the monitoring period, the IAIS will collect and consider feedback from supervisors,
stakeholder engagement, a public consultation, and the results of an economic impact assessment, all of which could result in
changes to ICS Version 2.0.
At the conclusion of the five year monitoring period, the IAIS has agreed to a second phase of implementation, whereby the ICS will
be applied as a group-wide prescribed capital requirement, defined as a solvency control level above which the supervisor does not
intervene on capital adequacy grounds.
Confidential reporting of ICS version 2.0 will include reporting by IAIGs of a reference ICS, a consolidated group-wide measure based
on a standard method for determining capital requirements and a market adjusted valuation of assets and liabilities. In recognition
that the United States and other interested jurisdictions are developing an Aggregation Method (AM) to a group capital calculation, the
IAIS is aiding in the development of the AM, including the collection of data from interested jurisdictions. Although the AM is not part of
ICS version 2.0, the IAIS aims to be in a position by the end of the monitoring phase to assess whether the AM provides substantially
the same outcome as the ICS, in which case it will be considered an outcome-equivalent approach to the ICS. The IAIS has begun
work on developing criteria to assess whether the AM provides comparable outcomes to the ICS, including a project plan focused on
delivery by the end of the monitoring period.
The IAIS has adopted a Holistic Framework for the assessment and mitigation of systemic risk in the insurance sector, for
implementation from the beginning of 2020. The Holistic Framework recognizes that systemic risk can emanate from specific
activities and exposures arising from either sector-wide trends or concentrations in individual insurers. The Holistic Framework
consists of:
an enhanced set of supervisory policy measures for macroprudential purposes (including supervisory requirements applied to
insurers targeting liquidity risk, macroeconomic exposure, and counterparty exposure; enhanced macroprudential supervision;
crisis management and planning; and supervisory powers of intervention),
an annual IAIS global monitoring exercise to assess trends and to detect the potential build-up of systemic risks (including an
assessment of the possible concentration of systemic risks at individual insurers),
mechanisms for collective IAIS discussion and assessment, including coordinated supervisory responses when needed, and
an IAIS assessment of the consistency of implementation across jurisdictions.
In light of the IAIS adoption of the Holistic Framework, the FSB has decided to continue as of the beginning of 2020 its suspension of
the identification of global systemically important insurers (G-SII). In November 2022, based on the initial years of implementation of
the Holistic Framework, the FSB will 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
time, as these standards have been adopted only recently and in some cases remain under development, 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 ultimately 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 UK left the EU on January 31, 2020. Under the negotiated withdrawal agreement, there is an 11 month
“transition period” during which EU rules will continue to apply in the UK and negotiations will continue to determine the future
relationship between the UK and EU.
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
left the EU without a withdrawal agreement in place, or in the event that an eventual agreement did not preserve access to these EU
freedoms for UK insurers, AEL would have been 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 it is unlikely that AEL’s structure
would have remained efficient beyond the transitional period.
16 AIG | 2019 Form 10-K
ITEM 1 | Business
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, 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 that may arise if the UK and EU are unable to agree provisions governing relevant
aspects of their future relationship during the transition period 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 through to 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 has and continues to implement
new policies, procedures and reporting protocols required to ensure compliance with this legislation and its related rules.
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.
AIG | 2019 Form 10-K 17
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 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 above and beyond a
risk’s singular impact.
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 or market volatility have in the past led, and may
in the future lead to, among other consequences, 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 as well as ongoing trade disputes between the
U.S. and China, the effects of Brexit (as defined below) on business investment, hiring, migration and labor supply and intensifying
trade protectionism including through tariffs, subsidies and other government actions. 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) widening of credit spreads and higher than expected defaults
that could reduce investment asset valuations, increase credit losses across numerous asset classes, and increase statutory capital
requirements, (iii) increased market volatility and uncertainty that could decrease liquidity and increase borrowing costs, and (iv)
disruption to our business operations in countries experiencing geopolitical tensions as well as increased costs associated with
meeting customer needs in such regions. Other ways in which we have in the past been, and could in the future 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, declining or negative interest rates, or rapidly increasing interest rates, may materially and adversely affect
our profitability. Interest rates have been declining globally, including in the United States. Sustained low interest rates can
negatively affect the performance of our investments and reduce the level of investment income earned on our investment portfolios.
We experience lower investment income as well as accept lower sales of new Life and Retirement insurance products and polices
when a low or declining U.S. interest rate environment persists, and/or interest rates turn or, in certain circumstances remain negative
across various global economies. 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 levels of 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. In addition, 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 significant
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, which could 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
constitute a substantial portion of our investment portfolio. This in turn could adversely affect our ability to realize our deferred tax
assets.
18 AIG | 2019 Form 10-K
ITEM 1A | Risk Factors
RESERVES AND EXPOSURES
The amount and timing of insurance and reinsurance liability claims are difficult to predict and such claims may exceed the
related reserves established 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.
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 continue to 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 and 2017, we recorded net adverse prior year development of $366 million and $999 million,
respectively, in adjusted pre-tax income (loss), to strengthen our General Insurance loss reserves, reflecting adverse development in
classes of business with long reporting tails, primarily in Casualty and Financial Lines. Whereas, in 2019, we recorded favorable net
development of $294 million, including $442 million in U.S. Workers’ Compensation. 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, and changes in the tort environment. 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 changes to policyholder behavior during stressed economic
periods, or due to misestimation of long-term assumptions such as mortality, mortality improvement, interest rate and fixed expense
assumptions. While mortality approximations are 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 we regularly carry out loss recognition and cash
flow testing.
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 14 to the Consolidated Financial Statements.
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 or a combination thereof.
Additionally, we are exposed to credit risk with respect to our subsidiaries’ reinsurers to the extent the reinsurance receivable is not
secured, or is inadequately secured, by collateral or does not benefit from other credit enhancements. We also bear the risk that a
reinsurer is, or 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
AIG | 2019 Form 10-K 19
ITEM 1A | Risk Factors
and regulations, materially impacts a reinsurance transaction. The insolvency of one or more of our reinsurers, or the inability or
unwillingness of such reinsurers to make timely payments under the terms of our contracts or payments in an amount equal to our
reinsurance recoverable, 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 (TRIPRA), which provides U.S. government risk assistance to the
insurance industry to manage the exposure to terrorism incidents in the U.S. TRIPRA was reauthorized in December 2019 for a
further seven years. Under TRIPRA, once our losses for certain acts of terrorism exceed a deductible equal to 20 percent of our
direct commercial property and casualty insurance premiums for covered lines for the prior calendar year, the federal government will
reimburse us for 80 percent of losses in excess of our deductible, up to a total industry program limit of $100 billion. TRIPRA 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.
For additional information on our reinsurance recoverable, see Item 7. MD&A — Enterprise Risk Management — Insurance Risks —
Reinsurance Activities — Reinsurance Recoverable.
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
incurred pre-tax catastrophe losses of $1.3 billion in 2019, which included losses from typhoons in Japan, Hurricane Dorian, a tornado
in Dallas and wildfires in California, and 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.
Catastrophic events, and any relevant regulations, could expose us to:
widespread claim costs associated with property, workers’ compensation, accident and health, 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 catastrophe-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. For example, modeling for
terrorism and cyber events may be more difficult and less reliable.
In addition, legislative and regulatory initiatives and court decisions following major catastrophes (both natural and man-made) 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 and unanticipated catastrophe claims; or impose other restrictions after the occurrence of a major catastrophe,
which would reduce our ability to mitigate exposure.
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.
For a discussion regarding the effects of climate change to our business, see “Climate change may adversely affect our business and
financial condition” below.
20 AIG | 2019 Form 10-K
ITEM 1A | Risk Factors
Climate change may adversely affect our business and financial condition. AIG supports the scientific consensus that climate
change is a reality of increasing global concern. Climate change, indicated by higher concentrations of greenhouse gases, a warming
atmosphere and ocean, diminished snow and ice, and sea level rise, appears to have contributed to unpredictability, increase in the
frequency and severity of natural disasters and the creation of uncertainty as to future trends and exposures. As such, climate change
potentially poses serious financial implications for the insurance industry in areas such as underwriting, claims and investments.
Climate change exposes us to physical risks which may challenge our ability to effectively underwrite, model and price catastrophe
risk particularly if the frequency and severity of catastrophic events such as pandemics, hurricanes, tornadoes, floods, wildfires and
windstorms and other natural disasters continue to increase. For example, losses resulting from actual policy experience may be
adverse as compared to the assumptions made in product pricing and our ability to mitigate our exposure may be reduced.
Climate change-related risks may also adversely impact the value of the securities that we hold or lead to increased credit risk of
other counterparties we transact business with, including reinsurers. In addition, our reputation or corporate brand could be negatively
impacted as a result of changing customer or societal perceptions of organizations that we either insure or invest in due to their
actions (or lack thereof) with respect to climate change. We cannot predict the long-term impacts of climate change on our business
and results of operations.
Concentration of our insurance, reinsurance and other risk exposures may have adverse effects. We are exposed to risks as a
result of concentrations in our insurance and reinsurance policies, investments, 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 retention and risk appetite limits we define
as part of our Risk Appetite Statement. In certain circumstances, however, these risk management arrangements may not be
available on acceptable terms or may prove to be ineffective for certain exposures. Our risk exposures under insurance and
reinsurance policies, derivatives and other obligations are, from time to time, compounded by risk exposure assumed in our
investment business. 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.
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, and
therefore, adversely impact our pre-tax income.
DAC for investment-oriented products is generally amortized in proportion to estimated gross profits. Estimated gross profits are
affected by a number of factors, including levels of current and expected interest rates, net investment income and spreads, net
realized capital gains and losses, fees, surrender rates, mortality experience, policyholder behavior 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, and thereby a strain on cash flow. Additionally, this would also result in a decrease in future profitability and an acceleration
of the amortization of DAC, and therefore lower than expected pre-tax income earned during the then current period.
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, but not limited to, 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 in the then current
period, 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 10 and 14 to
the Consolidated Financial Statements.
AIG | 2019 Form 10-K 21
ITEM 1A | Risk Factors
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 are exposed to credit risk arising from exposures to various
counterparties related to investments, derivatives, premiums receivable, certain General Insurance businesses and reinsurance
recoverables. These counterparties include, but are not limited to, issuers of fixed income and equity securities we hold, borrowers of
loans we hold, customers, trading counterparties, counterparties under swaps and other derivatives contracts, reinsurers, corporate
and governmental entities whose payments or performance we insure, joint venture partners, 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, financial distress, lack of liquidity, adverse economic conditions, operational failure, fraud,
government intervention and other reasons. In addition, for exchange-traded derivatives, such as futures, options as well as "cleared"
over-the-counter derivatives, we are generally exposed to the credit risk of the relevant central counterparty clearing house and
futures commission merchants through which we clear derivatives. 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 investments are subject to market risks and uncertainties, including, in addition to interest rate risk,
currency rate risk, commodity risk and equity risk. 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 upcoming phasing
out of LIBOR and uncertainty related to LIBOR replacement rates may affect our business and results of operations” below.
For a discussion regarding risks associated with interest rate volatility, see “Sustained low, declining or negative interest rates, or
rapidly increasing interest rates, may materially and adversely affect our profitability” above.
Furthermore, our alternative investment portfolio, which is subject to increased volatility, includes investments for which changes in
fair value are reported through pre-tax income. 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 pre-tax income.
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 to real estate and real estate-related securities, including residential mortgage-backed, commercial
mortgage-backed and other asset-backed securities and residential 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,
the U.S. federal, state and local government issuers and authorities, and global 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 the valuation of 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 investments 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 or lead to volatility in our net income. During periods of market disruption, it may be
difficult to value certain of our investments or derivatives 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 other disposition may have a material adverse effect on our results of operations,
financial condition and liquidity.
22 AIG | 2019 Form 10-K
ITEM 1A | Risk Factors
Furthermore, accounting treatment of certain investments can lead to volatility in our net income. For example, we are a party to
certain modified coinsurance arrangements with Fortitude Holdings which contain an embedded derivative and therefore, if and when
the sale of our controlling financial interest in Fortitude Holding closes and Fortitude Holdings is deconsolidated, changes in fair value
associated with the reinsurance agreement will be recorded through the income statement whereas the change in the fair value of the
invested assets supporting the modified coinsurance arrangements are generally recorded in other comprehensive income, resulting
in an accounting asymmetry in our financial statements that may result in a material impact on our net income attributable to common
shareholders that does not occur today because the reinsurance transactions are currently eliminated in consolidation.
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 and Preferred 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. Certain of our subsidiaries are 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, including to maintain regulatory capital ratios, comply with rating agency requirements and meet
unexpected cash flow obligations as well as pursuant to capital maintenance agreements we have in place with certain subsidiaries. If
our liquidity is insufficient to meet our needs, at such time, we may 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 financial strength
or 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. We are also subject to certain other
restrictions on our capital. For example, we expect to contribute approximately $1.45 billion of the proceeds of our sale of a
controlling interest in Fortitude Holdings to certain of our insurance company subsidiaries for a period of time following the closing of
the transaction. 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 a further discussion of our liquidity, see Item 7. MD&A — Liquidity and Capital Resources.
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, and a downgrade in our credit ratings could adversely affect our business, our results of operations or our liquidity” below.
For further discussion of the Fortitude membership interest purchase agreement, see “Business or asset acquisitions and dispositions
may expose us to certain risks” below.
We may not be able to generate cash to meet our needs due to the illiquidity of some of our investments. AIG Parent and its
subsidiaries have a diversified investment portfolio. However, economic conditions as well as adverse capital market conditions,
including a lack of buyers, volatility, credit spread changes, interest rate changes, foreign currency exchange rates and/or decline in
collateral values have in the past impacted, and may in the future impact, the liquidity and value of our investments.
For example, we have made investments in certain securities that are generally considered illiquid, including certain fixed income
securities and certain structured securities, privately placed 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 $66 billion at December 31,
2019. Adverse changes in the valuation of real estate and real estate-linked assets, deterioration of capital markets and widening
credit spreads have in the past, and may in the future, materially adversely affect the liquidity and the value of our other investment
portfolios, including our residential and commercial mortgage related securities portfolios.
In the event additional liquidity is required by one or more of our companies, it may be difficult for us to generate additional liquidity by
selling, pledging or otherwise monetizing these or other of our investments at reasonable prices and time frames.
AIG | 2019 Form 10-K 23
ITEM 1A | Risk Factors
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, and a downgrade in our credit
ratings could adversely affect our business, our results of operations or our liquidity. 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.
Credit rating agencies estimate a company’s ability to meet its ongoing financial obligations and high IFS and credit 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, or increased collateral posting obligations under, 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.
In addition, 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 the outlook for our IFS and credit 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. In 2019 and throughout 2020 to
date, certain rating agencies revised their outlook for our IFS and credit ratings to stable, while one rating agency has maintained a
negative outlook. 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 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 upcoming phasing out of LIBOR and uncertainty related to LIBOR
replacement rates may affect our business and results of operations. Since the UK Financial Conduct Authority announced in
2017 that it would no longer compel banks to submit London Interbank Offered Rate (LIBOR) rates after 2021, we are determining
how our hedging strategies, asset portfolio, liabilities, systems and operations may be affected in a post-LIBOR environment.
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 and other 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 and other liabilities.
Markets are slowly developing in response to these alternative reference rates. Questions concerning liquidity and how to
appropriately adjust these rates to eliminate any economic value transfer at the time of transition remain a significant concern for us
and others in the marketplace. The effect of any changes or reforms to LIBOR or discontinuation of LIBOR on new or existing
financial instruments to which we have exposure or on our businesses will vary depending on (1) existing fallback provisions in
individual contracts and (2) whether, how, and when industry participants develop and widely adopt alternative reference rates and
fallbacks for both legacy and new products or instruments. At this time, we cannot predict how markets will respond to these potential
alternative reference rates or the effect of any changes to or discontinuation of LIBOR on new or existing financial instruments to
which we have exposure and our liability profile.
Internal actions taken to address the transition from LIBOR and to mitigate potential risks include, among other things, ensuring new
legal contracts and our asset and debt issuances reference appropriate LIBOR fallback provisions and identifying fallback provisions
in existing contracts and investments which mature after 2021, updating valuation and actuarial models which utilize LIBOR,
determining the impact of new accounting and tax requirements, adjusting applicable technology applications to be able to support
both LIBOR and new alternative rates and executing test trades for derivatives, assets and debt issuances utilizing the new
alternative reference rates. We also participate in certain LIBOR replacement working groups under the auspices of ISDA and the
U.S. based Alternative Reference Rate Committee (ARRC) and conduct periodic discussions with our industry peers, banking
24 AIG | 2019 Form 10-K
ITEM 1A | Risk Factors
institutions and the relevant administrators of LIBOR and the ARRC in order to monitor, provide appropriate feedback and otherwise
participate in discussions regarding the transition from LIBOR.
We continue to actively monitor both market and regulatory changes in order to prepare for any discontinuation of the LIBOR
benchmark.
BUSINESS AND OPERATIONS
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 other charges and future net investment income earned on
revenues received will result in an acceptable profit in excess of expected claims, assumed expense loads and the cost of capital. 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. For example, some of our life insurance business and annuity policies provide management the right to
adjust certain nonguaranteed charges or benefits if necessary; however, this right is limited and may be subject to guaranteed
minimums or maximums, and the exercise of these rights could result in reputational and/or litigation risk. Inadequate pricing could
have a material adverse effect on the profitability of our operations and our financial condition.
Failure to effectively execute on AIG 200 could result in costs that are greater than expected, savings that are less than
expected and disruption to our businesses that could have a material effect on our operations or financial condition. In
2019, we announced AIG 200, our global, multi-year and enterprise-wide program involving transformational change across the
company that is guided by four core objectives: achieving underwriting excellence, modernizing operating infrastructure, enhancing
user and customer experiences and becoming a more unified company. AIG 200 is comprised of ten operational programs that are
complex and require significant investment and resource prioritization. We may not achieve some or all of the expected benefits from
these operational programs, and the work we are undertaking could result in disruption to our businesses and loss of talent. Other
risks associated with AIG 200 include delays in execution across the programs, particularly with respect to implementation of
technology platforms, lack of sufficient resources to execute on a timely basis, inefficiencies stemming from changes that may be
required to programs or sequencing, and failure to meet operational and financial targets due to additional priorities or other factors.
These risks may impair our ability to achieve anticipated improvements in our businesses or may otherwise harm our operations
which could materially and adversely affect our businesses, financial condition and cash flow.
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, including crediting rate guarantees tied to the
performance of various market indices.
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, Index Annuity and Universal Risk Management and
Hedging Programs.
Differences between the change in fair value of the embedded derivatives associated with some of these guarantees and the value of
the related hedging portfolio can be caused by extreme and unanticipated movements in the level of 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 has in the past resulted in,
and could in the future result in, an increase in the fair value of liabilities associated with the guaranteed benefits, thus reducing our
pre-tax 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 is not fully, and may not be effectively, hedged.
For more information regarding these products see Notes 6 and 15 to the Consolidated Financial Statements, Item 1. Business –
Regulation, and Item 7. MD&A – Critical Accounting Estimates – 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. have in the past been, and may in the future 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.
AIG | 2019 Form 10-K 25
ITEM 1A | Risk Factors
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.
In addition, AIG Parent and its subsidiaries are subject to various extraterritorial laws and regulations, including such laws adopted by
the U.S. that affect how we do business around the world. These laws and regulations may conflict and we may incur penalties and/or
reputational harm if we fail to adhere to them.
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 UK left the EU on January 31, 2020. Under the negotiated withdrawal
agreement, there is an 11 month “transition period” during which EU rules will continue to apply in the UK and negotiations will
continue to determine the future relationship between the UK and EU. There can be no assurance that an agreement with regard to
future trade and wider cooperation will be reached prior to the expiry of the transition period. 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 European subsidiary in Luxembourg with branches
across the EEA and Switzerland, and a 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 and could continue to affect 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 and the capital invested in our UK
and EU subsidiaries.
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 regional and operational restructuring initiatives. 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 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.
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, limit the
products they sell, including the types of products offered by us, or otherwise reduce or terminate their distribution relationships with
us. This could be due to various reasons, such as industry consolidation of distributors or other industry changes that increase the
competition for access to distributors, developments in laws or regulations that affect our business or industry, including the marketing
and sale of our products and services, adverse developments in our business, adverse rating agency actions or concerns about
market-related risks. An interruption or reduction 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, we are responsible for the actions of our employee agents and can, in certain circumstances, be held responsible for the
actions of our third-party distributors, including broker dealers, registered representatives, insurance agents and agencies and
marketing organizations, in connection with the marketing and sale of our products by such parties in a manner that is deemed not
compliant with applicable laws and regulations. This is particularly acute with respect to unaffiliated distributors. If our products are
distributed to customers for whom they are unsuitable or distributed in a manner deemed inappropriate, we could suffer reputational
and/or other financial harm to our business.
For a discussion regarding suitability standards, Item 1. Business – Regulation – U.S. Regulation.
We are exposed to certain risks if we are unable to maintain the availability of our electronic data systems and safeguard
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, which themselves may rely on the systems of other third
26 AIG | 2019 Form 10-K
ITEM 1A | Risk Factors
parties. 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 we may be
unable to perform our 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. Also, like other global companies, we have an increasing challenge of
attracting and retaining highly qualified security personnel to assist us in combatting these security threats. The frequency and
sophistication of such threats continue to increase and often become further heightened in connection with geopolitical tensions. We
must continuously monitor and develop our information technology networks and infrastructure in an effort to prevent, detect, address
and mitigate the risk of threats to our data and systems, including malware and computer virus attacks, ransomware, unauthorized
access, business e-mail compromise, 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 actions
designed as preventative, 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 compromise 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 and secure, 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 information technology services provided by a vendor, failure of a vendor to handle current or
higher volumes, cyber-attacks and security breaches at a vendor have in the past, and could in the future, 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 exposes us to heightened regulatory scrutiny and requires us to incur significant technical, legal and other expenses
in an effort 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, and Item 7. MD&A – Enterprise Risk Management –
Operational Risk Management – Cybersecurity Risk. 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, including to maintain or upgrade
our business continuity plans (including, for example, use of cloud services), 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 and
interconnectedness of these systems and processes, these changes, as well as changes designed to update and enhance our
protective measures to address new threats, increase the risk of a system or process failure or the creation of a gap in the associated
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 including any financial accommodations required by regulators, our ability to satisfy such
AIG | 2019 Form 10-K 27
ITEM 1A | Risk Factors
terms, conditions and accommodations, 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. For example, on November 25, 2019, we entered
into a membership interest purchase agreement with Fortitude Holdings, The Carlyle Group L.P. (Carlyle), Carlyle FRL, L.P., an
investment fund advised by an affiliate of Carlyle (Carlyle FRL), T&D United Capital Co., Ltd. (T&D) and T&D Holdings, Inc., pursuant
to which, subject to the satisfaction or waiver of certain conditions set forth therein, Carlyle FRL will purchase from AIG a 51.6 percent
ownership interest in Fortitude Holdings and T&D will purchase from AIG a 25 percent ownership interest in Fortitude Holdings. There
can be no guarantee that we will receive the required regulatory approvals or that closing conditions will be satisfied in order to
consummate the transaction. 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. In
addition, with respect to certain dispositions, we are subject to restrictions on our use of proceeds. For example, we expect to
contribute approximately $1.45 billion of the proceeds of the sale of Fortitude Holdings to certain of our insurance company
subsidiaries for a period of time following the closing of the transaction.
Significant legal proceedings may adversely affect our results of operations or financial condition. In the normal course of
business, 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. 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. Such investigations, inquiries or examinations could develop into administrative, civil or criminal proceedings or
enforcement actions, in which remedies could include fines, penalties, restitution or alterations in our business practices, and could
result in additional expenses, limitations on certain business activities and reputational damage. 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, indemnification
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 a discussion of certain legal proceedings, including certain tax controversies, see Notes 17 and 23 to the Consolidated Financial
Statements.
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 17 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 17 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 sufficiently or accurately anticipated or identified. For example, our current business continuity and disaster recovery plans
may not be sufficient to reduce the impact of pandemics and other natural or man-made catastrophic events that are beyond our
anticipated thresholds or impact tolerances. 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
28 AIG | 2019 Form 10-K
ITEM 1A | Risk Factors
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 financial 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.
REGULATION
Our businesses are heavily regulated and changes in laws and regulations 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 laws and regulations in the jurisdictions in
which we operate. Our business and financial condition are also subject to supervision and regulation by authorities in 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 on our insurance and reinsurance business
varies, but generally is governed by state statutes that 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. The laws and regulations
that apply to our business and operations generally grant regulatory agencies and/or self-regulatory organizations broad rulemaking
and enforcement powers, including the power to regulate the issuance, sale and distribution of our products, the delivery of our
services, the nature or extent of disclosures required to be given to our customers, the compensation of our distribution partners, the
manner in which we handle claims on our policies and the administration of our policies and contracts and to limit or restrict the
conduct of business for failure to comply with applicable securities laws and regulations.
We strive to comply with laws and regulations applicable to our businesses, operations and legal entities. The application of and
compliance with such laws and regulations may be subject to interpretation, evolving industry practices and regulatory expectations
that could result in increased compliance costs. The relevant authorities may not agree with our interpretation of these laws and
regulations, including our implementation of requirements related to new or changes in capital, reserving and accounting treatment, or
with our policies and procedures adopted to address evolving industry practices or meet regulatory expectations. Such authorities’
interpretation and views may also change from time to time. If we are found not to have complied with applicable legal or regulatory
requirements, these authorities could preclude or temporarily suspend us from carrying on some or all of our activities, impose
substantial fines or require corrective actions to be taken, which individually or in the aggregate could adversely affect our business,
operations and financial condition.
We also strive to maintain all required licenses and approvals. Regulatory authorities have relatively broad discretion to grant, renew
or revoke licenses and approvals. If we do not have the required licenses and approvals, 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 apply enhanced supervision to 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. Regulators in other jurisdictions in which we do business have adopted capital and liquidity standards applicable to
insurers and reinsurers operating in their jurisdiction. Failure to comply with such RBC capital, liquidity and similar requirements would
generally permit the insurance regulator to take certain regulatory actions that could materially impact the affected company’s
operations. 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 and
testing methodologies for assessing group-wide regulatory capital, which might evolve into more formal group-wide capital
requirements on certain insurance companies and/or their holding companies that may augment state-law RBC standards, and similar
international 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 insurance and reinsurance 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
AIG | 2019 Form 10-K 29
ITEM 1A | Risk Factors
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.
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 satisfaction of the IAIG criteria and certain standard-setting initiatives by the FSB and the IAIS, including, but not
limited to, the IAIS’ development of a Common Framework for the Supervision of IAIGs, a holistic framework for the assessment and
mitigation of systemic risk and a risk-based global 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 also 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 in
which we operate, 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 Foreign Corrupt Practices Act, the Office of Foreign Assets Control regulations and similar laws
and regulations that apply to us may expose us to significant penalties. The USA PATRIOT Act of 2001 requires companies to
know certain information about their clients and to monitor their transactions for suspicious activities. The Foreign Corrupt Practices
Act makes it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in
obtaining or retaining business. 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, Actuarial Guideline AXXX and Principle-Based Reserving
(PBR) may not be successful in whole or in part resulting in an adverse effect on our financial condition and results of
operations. 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 (Guideline AXXX)
clarifies the application of Regulation XXX as to certain universal life insurance policies with secondary guarantees. In December
2012, the NAIC approved a new Valuation Manual (VM) containing a principle-based approach to life insurance company reserves,
which became effective on January 1, 2017, and replaced Regulation XXX and Guideline AXXX for new life insurance business
issued after January 1, 2017. As permitted by applicable regulations, we deferred implementing PBR until January 1, 2020, and have
applied it as of such date for relevant life insurance business issued on or after January 1, 2020.
For additional information regarding principle-based reserving, see Item 1. Business – Regulation – U.S. Regulation – Insurance
Regulation.
For the portion of our life insurance business subject to Regulation XXX and Guideline AXXX, our domestic Life and Retirement
companies manage the capital impact of statutory reserve requirements under Regulation XXX and Guideline AXXX through
reinsurance transactions. 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 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
financial condition or results of operations.
For the portion of our life insurance business subject to PBR, the application of PBR involves numerous interpretations. If our actions
to efficiently manage the impact of PBR on our life insurance business reserving 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 20 to the Consolidated Financial Statements.
30 AIG | 2019 Form 10-K
ITEM 1A | Risk Factors
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 operational 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, do not perform as anticipated or in compliance with applicable laws
and regulations, or such third-party provider in turn relies on services from another third-party provider, who experiences such
disruptions, nonperformance or noncompliance, we may experience operational difficulties, an inability to meet obligations (including,
but not limited to, legal, regulatory or policyholder obligations), a loss of business, increased costs or 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.
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 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 have in the past, and may in the future, periodically consider
various proposals that may affect, among other things, our business practices and product designs, how we market, sell or service
certain products we offer, our capital, reserving and accounting requirements, 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.
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 SIFI on September 29, 2017, but the Council remains authorized
under Dodd-Frank to determine, subject to certain statutory and regulatory standards and to recent changes to the Council’s guidance
favoring an activities-based approach to systemic risk identification and mitigation, 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 additional regulatory changes related to Dodd-Frank. We cannot predict the requirements of any additional
regulations that may be ultimately adopted or the impact they may have on our businesses, consolidated results of operations,
liquidity and financial condition.
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.
An “ownership change” could limit our ability to utilize tax loss and credit carryforwards to offset future taxable income. As
of December 31, 2019, on a U.S. GAAP basis, we had U.S. federal net operating loss carryforwards of approximately $32.1 billion
and $2.2 billion in foreign tax credits. 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) by one or more “5-percent
shareholders” (as defined in the Code) has increased by more than 50 percentage points 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 of the Code 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.
AIG | 2019 Form 10-K 31
ITEM 1A | Risk Factors
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. Thereafter, on December 11, 2019, the
Board adopted a second amendment to the Plan, extending its expiration date to December 11, 2022. The Board intends to submit
the third amendment of the Plan to our shareholders for ratification at our 2020 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 Board intends to submit to our shareholders for approval at our 2020 Annual
Meeting of Shareholders an amendment and restatement 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
the third anniversary of the date of our 2019 Annual Meeting of Shareholders.
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 Common Stock then outstanding or (ii) increase the percentage of AIG Common 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
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 recently issued proposed and final
regulations for BEAT and other provisions of the Tax Act, there are still certain aspects of the Tax Act that remain unclear. AIG will
continue to review the impact of BEAT, GILTI and related provisions 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, new tax laws outside the U.S. similar to BEAT or enacted in response to proposals by the Organisation for Economic Co-
operation and Development could make substantive changes to the global international tax regime. Such changes could impact
cross border reinsurance transactions, which could increase our tax costs globally.
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.
32 AIG | 2019 Form 10-K
ITEM 1A | Risk Factors
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, including those related to evolving customer preferences and
the digitization of insurance products may present competitive risks. Technological advancements and innovation are occurring in
distribution, underwriting, claims and operations at a rapid pace, and that pace may increase, particularly as companies increasingly
use data analytics and technology as part of their business strategy. While we seek opportunities to leverage technological
advancements and innovation for our customers’ benefit, our business and results of operations could be materially and adversely
affected if external technological advancements or innovation, or the regulation of 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 IFS 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.
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 have, and may in the future, 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.
AIG | 2019 Form 10-K 33
ITEM 1A | Risk Factors
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. To the extent that any of our operating practices and
procedures do not accurately produce, or reproduce, data that we use to conduct any or all aspects of our business, such errors may
negatively impact our business, reputation, results of operations, and financial condition. For example, modeling for man-made
catastrophes, such as terrorism and cyber events is especially difficult and less reliable given such models are in the early stages of
development and therefore, not widely adopted or available. As our businesses continue to expand and evolve, the number and
complexity of models we employ has grown, increasing our inherent 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 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 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, 2022 and will significantly change 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 took effect on January 1, 2020.
This standard changes how we account for credit losses for most financial assets, premiums receivable and reinsurance receivables.
The standard replaces 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 applies 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 are 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 impacts 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 22 to the Consolidated Financial Statements.
34 AIG | 2019 Form 10-K
ITEM 1A | Risk Factors
If our businesses do not perform well and/or their estimated fair values decline, 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 13 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.
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
During 2019, we executed a sale and concurrent leaseback of our corporate headquarters building, which includes a portion of the
operations of our General Insurance companies, located at 175 Water Street, New York, New York. We operate from approximately
167 offices in the United States and approximately 342 offices in approximately 54 foreign countries. We own 14 office buildings in the
United States.
Our General Insurance companies own offices in 12 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, 2019, approximately 15 percent of our consolidated assets were located outside the U.S. and Canada, including
$405 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 7 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.
AIG | 2019 Form 10-K 35
ITEM 3 | Legal Proceedings
For a discussion of legal proceedings see Note 17 to the Consolidated Financial Statements, which is incorporated herein by
reference.
ITEM 4 | Mine Safety Disclosures
Not applicable.
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).There
were approximately 22,327 stockholders of record of AIG Common Stock as of February 10, 2020.
Equity Compensation Plans
Our table of equity compensation plans will be included in the definitive proxy statement for AIG’s 2020 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
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.
During the three-month period ended December 31, 2019, we did not repurchase any shares of AIG Common Stock or any warrants
to purchase shares of AIG Common Stock under this authorization.
As of December 31, 2019, approximately $2.0 billion remained under the authorization. We did not repurchase any shares of AIG
Common Stock or any warrants to purchase shares of AIG Common Stock from January 1, 2020 to February 12, 2020. 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. The repurchase of AIG Common Stock is also subject to the terms of AIG’s Series A 5.85% Non-Cumulative Preferred
Stock (Series A Preferred Stock), pursuant to which AIG may not (other than in limited circumstances) purchase, redeem or otherwise
acquire AIG Common Stock unless the full dividends for the latest completed dividend period on all outstanding shares of Series A
Preferred Stock have been declared and paid or provided for.
For additional information on our share purchases see Note 18 to the Consolidated Financial Statements.
36 AIG | 2019 Form 10-K
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, 2014 to December 31, 2019) with the cumulative total return of the S&P’s 500 stock index (which includes AIG), the
S&P Property and Casualty Insurance Index and the S&P Life and Health Insurance Index.
Value of $100 Invested on December 31, 2014
(All $ as of December 31st)
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
$
2014
100.00
100.00
100.00
100.00
$
2015
112.15
101.38
109.53
93.69
$
As of December 31,
2017
2016
112.56
120.86
138.29
113.51
155.10
126.73
136.20
116.98
$
$
2018
76.44
132.23
147.83
107.91
$
2019
102.11
173.86
186.07
132.92
AIG | 2019 Form 10-K 37
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.
ITEM 6 | Selected Financial Data
(in millions, except per common share data)
Revenues:
Premiums
Policy fees
Net investment income
Net realized capital gains (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) loss on sale of divested businesses
2019
Years Ended December 31,
2018
2017
2016
2015
$
30,561
$
30,614
$
31,374
$
34,393
$
36,655
3,015
14,619
632
919
49,746
2,791
12,476
(130)
1,638
47,389
2,935
14,179
(1,380)
2,412
49,520
25,402
27,412
29,972
3,832
5,164
8,537
1,417
32
75
3,754
5,386
9,302
1,309
7
(38)
3,592
4,288
9,107
1,168
(5)
(68)
2,732
14,065
(1,944)
3,121
52,367
32,437
3,705
4,521
10,989
1,260
74
(545)
2,755
14,053
776
4,088
58,327
31,345
3,731
5,236
12,686
1,281
756
11
Total benefits, losses and expenses
44,459
47,132
48,054
52,441
55,046
Income (loss) from continuing operations before income tax
expense
Income tax expense
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of income taxes
Net income (loss)
Net income from continuing operations attributable
to noncontrolling interests
Net income (loss) attributable to AIG
Less: Dividends on preferred stock
5,287
1,166
4,121
48
4,169
821
3,348
22
257
154
103
(42)
61
67
(6)
-
1,466
7,526
(6,060)
4
(6,056)
28
(6,084)
-
(74)
185
(259)
(90)
(349)
500
(849)
-
3,281
1,059
2,222
-
2,222
26
2,196
-
Net income (loss) attributable to AIG common shareholders
$
3,326
$
(6)
$
(6,084)
$
(849)
$
2,196
Income (loss) per common share attributable to AIG
common shareholders:
Basic:
Income (loss) from continuing operations
Income (loss) from discontinued operations
$
Net income (loss) attributable to AIG common shareholders
Diluted:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss) attributable to AIG common shareholders
Dividends declared per common share
3.74
0.05
3.79
3.69
0.05
3.74
1.28
$
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
38 AIG | 2019 Form 10-K
Year-end balance sheet data:
Total investments
Total assets
Long-term debt and debt of consolidated investment entities
Total liabilities
Total AIG shareholders' equity
Total equity
Book value per common share
Book value per common share, excluding Accumulated other
comprehensive income (loss)(a)
Adjusted book value per common share(a)
Return on common equity
Adjusted return on common equity(a)
(in millions)
Other data:
Catastrophe-related losses(b) (c)
Prior year (favorable) unfavorable development(d)
Other-than-temporary impairments
Adjustment to federal deferred tax valuation allowance
Impact of Tax Act
Net positive (negative) adjustment from update of
ITEM 6 | Selected Financial Data
$ 337,615
$ 314,209
$ 322,292
$ 328,175
$ 338,354
525,064
35,350
457,637
65,675
67,427
74.93
491,984
34,540
434,675
56,361
57,309
65.04
498,301
31,640
432,593
65,171
65,708
498,264
30,912
421,406
76,300
76,858
496,842
29,249
406,632
89,658
90,210
72.49
76.66
75.10
69.20
58.89
5.3 %
8.3
2019
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
Years Ended December 31,
2018
2017
2016
2015
$
1,278
$
2,885
$
4,167
$
1,331
$
(294)
174
(44)
-
362
251
21
62
978
260
43
6,687
5,788
559
83
-
731
4,119
671
110
-
3
Life and Retirement actuarial assumptions
$
(10)
$
(228)
$
68
$
(427)
$
(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 common equity – adjusted after-tax income attributable to AIG common shareholders excluding AOCI and DTA (Adjusted
return on common 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 catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and man-made catastrophe losses, such
as terrorism and civil disorders that exceed the $10 million threshold.
(c) Represents catastrophe related losses for General Insurance, net of reinsurance and reinstatement premiums related to catastrophes.
(d) For discussion on prior year development see MD&A – Insurance Reserves – Prior Year Development.
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 Holdings, Ltd. (Validus). On November 6, 2018, we completed the
acquisition of Glatfelter Insurance Group (Glatfelter).
ASSET DISPOSITIONS
In 2015, we sold all of our ordinary shares of AerCap Holdings N.V. received as part of the consideration for the sale of International
Lease Finance Corporation. In 2016, we sold United Guaranty to Arch Capital Group Ltd. 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 2017 and 2018 asset dispositions and the 2018 purchases of Validus and Glatfelter, see Note 1 to the
Consolidated Financial Statements.
On November 13, 2018, we sold 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). On November 25, 2019, we entered into an agreement to sell a controlling
financial interest in Fortitude Holdings. The assets and liabilities related to Fortitude Holdings, which are not eliminated in
consolidation, are classified as held for sale and are reported in Other Assets and Other liabilities in our Consolidated Balance Sheet
since Fortitude Holdings is held for sale.
For further discussion on these Fortitude Holdings transactions, see Note 4 to the Consolidated Financial Statements.
AIG | 2019 Form 10-K 39
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 common share data)
Total AIG shareholders' equity
Preferred equity
Total AIG common shareholders' equity
Accumulated other comprehensive income (loss)
Total AIG common shareholders' equity, excluding AOCI
Deferred tax assets
Adjusted common shareholders' equity
Total common shares outstanding
Book value per common share
Book value per common share, excluding AOCI
Adjusted book value per common share
$
$
2019
65,675 $
485
65,190
4,982
60,208
8,977
51,231
At December 31,
2017
2018
2016
2015
56,361 $
65,171 $
76,300 $
89,658
-
56,361
(1,413)
57,774
10,153
47,621
-
65,171
5,465
59,706
10,492
49,214
-
76,300
3,230
73,070
14,770
58,300
-
89,658
2,537
87,121
16,751
70,370
869,999,031
866,609,429
899,044,657
995,335,841 1,193,916,617
74.93 $
69.20
58.89
65.04 $
72.49 $
76.66 $
66.67
54.95
66.41
54.74
73.41
58.57
75.10
72.97
58.94
The following table presents a reconciliation of Return on common equity to Adjusted return on common 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 common shareholders
Adjusted after-tax income attributable to AIG common shareholders
Average AIG common shareholders' equity
Average AOCI
Average AIG common shareholders' equity, excluding average AOCI
Average DTA
Average adjusted AIG common shareholders' equity
Return on common equity
Adjusted return on common equity
$
$
$
2019
3,326 $
4,084
62,205 $
3,261
58,944
9,605
49,339 $
5.3 %
8.3
2018
2017
2016
(6) $
(6,084) $
(849) $
1,064
2,231
406
2015
2,196
2,872
60,819
$
72,348
$
86,617
$ 101,558
1,193
59,626
10,133
4,675
67,673
13,806
5,722
80,895
15,905
7,598
93,960
15,803
49,493
$
53,867
$
64,990
$
78,157
0.0 %
2.1
(8.4) %
(1.0) %
4.1
0.6
2.2 %
3.7
40 AIG | 2019 Form 10-K
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 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;
• disruptions in the availability of AIG’s electronic data systems
•
the occurrence of catastrophic events, both natural and
man-made, and the effects of climate change;
• AIG’s ability to effectively execute on AIG 200 operational
programs designed to achieve underwriting excellence,
modernization of AIG’s operating infrastructure, enhanced
user and customer experiences and unification of AIG;
• AIG’s ability to consummate the sale of its controlling
interest in Fortitude Holdings and AIG’s ability to
successfully manage Legacy Portfolios;
• changes in judgments concerning potential cost saving
opportunities;
• actions by credit rating agencies;
• changes in judgments concerning insurance underwriting
•
and insurance liabilities;
the impact of potential information technology,
cybersecurity or data security breaches, including as a
result of cyber-attacks or security vulnerabilities;
•
•
or those of third parties;
the effectiveness of strategies to recruit and retain key
personnel and to implement effective succession plans;
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;
• concentrations in AIG’s investment portfolios;
• changes to the valuation of AIG’s investments;
• AIG’s ability to successfully dispose of, monetize and/or
acquire businesses or assets or successfully integrate
acquired businesses;
• 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.
AIG | 2019 Form 10-K 41
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 in 2019
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
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
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45
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60
61
64
67
73
74
86
104
106
109
109
109
109
111
118
122
122
125
134
134
136
137
139
140
141
142
144
144
145
145
145
145
146
146
146
147
149
150
155
156
158
166
167
170
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.
42 AIG | 2019 Form 10-K
ITEM 7 | Use of Non-GAAP Measures
Use of Non-GAAP Measures
In Item 1. Business, Item 6. Selected Financial Data and throughout this MD&A, we present our financial condition and results of
operations in the way we believe will be most meaningful and representative of our business results. Some of the measurements we
use are “non-GAAP financial measures” under Securities and Exchange Commission rules and regulations. GAAP is the acronym for
“generally accepted accounting principles” in the United States. The non-GAAP financial measures we present may not be
comparable to similarly-named measures reported by other companies.
Book value per common share, excluding accumulated other comprehensive income (AOCI) and Book value per common
share, excluding AOCI and deferred tax assets (DTA) (Adjusted book value per common share) are used to show the amount
of our net worth on a per-common share basis. We believe these measures are useful to investors because they eliminate items that
can fluctuate significantly from period to period, including changes in fair value of our available for sale securities portfolio, foreign
currency translation adjustments and U.S. tax attribute deferred tax assets. These measures also eliminate the asymmetrical impact
resulting from changes in fair value of our available for sale securities portfolio wherein there is largely no offsetting impact for certain
related insurance liabilities. We exclude deferred tax assets representing U.S. tax attributes related to net operating loss
carryforwards and foreign tax credits as they have not yet been utilized. Amounts for interim periods are estimates based on
projections of full-year attribute utilization. As net operating loss carryforwards and foreign tax credits are utilized, the portion of the
DTA utilized is included in these book value per common share metrics. Book value per common share, excluding AOCI, is derived by
dividing total AIG common shareholders’ equity, excluding AOCI, by total common shares outstanding. Adjusted book value per
common share is derived by dividing total AIG common shareholders’ equity, excluding AOCI and DTA (Adjusted Common
Shareholders’ Equity), by total common shares outstanding. The reconciliation to book value per common share, the most
comparable GAAP measure, is presented in Item 6. Selected Financial Data.
Return on common equity – Adjusted after-tax income excluding AOCI and DTA (Adjusted return on common equity) is used
to show the rate of return on common shareholders’ equity. We believe this measure is useful to investors because it eliminates items
that can fluctuate significantly from period to period, including changes in fair value of our available for sale securities portfolio, foreign
currency translation adjustments and U.S. tax attribute deferred tax assets. This measure also eliminates the asymmetrical impact
resulting from changes in fair value of our available for sale securities portfolio wherein there is largely no offsetting impact for certain
related insurance liabilities. We exclude deferred tax assets representing U.S. tax attributes related to net operating loss
carryforwards and foreign tax credits as they have not yet been utilized. Amounts for interim periods are estimates based on
projections of full-year attribute utilization. As net operating loss carryforwards and foreign tax credits are utilized, the portion of the
DTA utilized is included in Adjusted return on common equity. Adjusted return on common equity is derived by dividing actual or
annualized adjusted after-tax income attributable to AIG common shareholders by average Adjusted Common Shareholders’ Equity.
The reconciliation to return on common equity, the most comparable GAAP measure, is presented in Item 6. Selected Financial Data.
Adjusted after-tax income attributable to AIG common shareholders is derived by excluding the tax effected adjusted pre-tax
income (APTI) adjustments described below, dividends on preferred stock, and the following tax items from net income attributable to
AIG:
deferred income tax valuation allowance releases and charges;
changes in uncertain tax positions and other tax items related to legacy matters having no relevance to our current businesses or
operating performance; and
net tax charge related to the enactment of the Tax Cuts and Jobs Act (Tax Act);
and by excluding the net realized capital gains (losses) from noncontrolling interests.
We use the following operating performance measures because we believe they enhance the understanding of the underlying
profitability of continuing operations and trends of our business segments. We believe they also allow for more meaningful
comparisons with our insurance competitors. When we use these measures, reconciliations to the most comparable GAAP measure
are provided on a consolidated basis in the Consolidated Results of Operations section of this MD&A.
Adjusted revenues exclude Net realized capital gains (losses), income from non-operating litigation settlements (included in Other
income for GAAP purposes) and changes in fair value of securities used to hedge guaranteed living benefits (included in Net
investment income for GAAP purposes). Adjusted revenues is a GAAP measure for our operating segments.
AIG | 2019 Form 10-K 43
ITEM 7 | Use of Non-GAAP Measures
Adjusted pre-tax income is derived by excluding the items set forth below from income from continuing operations before income
tax. This definition is consistent across our segments. These items generally fall into one or more of the following broad categories:
legacy matters having no relevance to our current businesses or operating performance; adjustments to enhance transparency to the
underlying economics of transactions; and measures that we believe to be common to the industry. APTI is a GAAP measure for our
segments. Beginning in the first quarter of 2019, on a prospective basis, the changes in the fair value of equity securities are excluded
from adjusted pre-tax income (loss). Excluded items include the following:
changes in fair value of securities used to hedge guaranteed
pension expense related to a one-time lump sum payment to
living benefits;
former employees;
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;
changes in the fair value of equity securities;
loss (gain) on extinguishment of debt;
all net realized capital gains and losses except earned
income (periodic settlements and changes in settlement
accruals) on derivative instruments used for non-qualifying
(economic) hedging or for asset replication. Earned income
on such economic hedges is reclassified from net realized
capital gains and losses to specific APTI line items based on
the economic risk being hedged (e.g. net investment income
and interest credited to policyholder account balances);
income or loss from discontinued operations;
net loss reserve discount benefit (charge);
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;
integration and transaction costs associated with acquired
businesses;
losses from the impairment of goodwill; and
non-recurring external costs associated with the
implementation of non-ordinary course legal or regulatory
changes or changes to accounting principles.
General Insurance
– Ratios: We, along with most property and casualty insurance companies, use the loss ratio, the expense ratio and the
combined ratio as measures of underwriting performance. These ratios are relative measurements that describe, for every $100
of net premiums earned, the amount of losses and loss adjustment expenses (which for General Insurance excludes net loss
reserve discount), and the amount of other underwriting expenses that would be incurred. A combined ratio of less than 100
indicates underwriting income and a combined ratio of over 100 indicates an underwriting loss. Our ratios are calculated using
the relevant segment information calculated under GAAP, and thus may not be comparable to similar ratios calculated for
regulatory reporting purposes. The underwriting environment varies across countries and products, as does the degree of
litigation activity, all of which affect such ratios. In addition, investment returns, local taxes, cost of capital, regulation, product
type and competition can have an effect on pricing and consequently on profitability as reflected in underwriting income and
associated ratios.
– Accident year loss and combined ratios, as adjusted: both the accident year loss and combined ratios, as adjusted, exclude
catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of
reserve discounting. Natural catastrophe losses are generally weather or seismic events having a net impact on AIG in excess
of $10 million each and man-made catastrophe losses, such as terrorism and civil disorders that exceed the $10 million
threshold. We believe that as adjusted ratios are meaningful measures of our underwriting results on an ongoing basis as they
exclude catastrophes and the impact of reserve discounting which are outside of management’s control. We also exclude prior
year development to provide transparency related to current accident year results.
Life and Retirement
– Premiums and deposits: includes direct and assumed amounts received and earned on traditional life insurance policies,
group benefit policies and life-contingent payout annuities, as well as deposits received on universal life, investment-type
annuity contracts, Federal Home Loan Bank (FHLB) funding agreements and mutual funds.
Results from discontinued operations are excluded from all of these measures.
44 AIG | 2019 Form 10-K
ITEM 7 | Critical Accounting Estimates
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires the application of accounting policies that often involve a
significant degree of judgment.
The accounting policies that we believe are most dependent on the application of estimates and assumptions,
which are critical accounting estimates, are related to the determination of:
loss reserves;
valuation of future policy benefit liabilities and timing and extent of loss recognition;
valuation of liabilities for guaranteed benefit features of variable annuity products;
valuation of embedded derivatives for fixed index annuity and life products;
estimated gross profits to value deferred acquisition costs for investment-oriented products;
reinsurance assets;
impairment charges, including other-than-temporary impairments on available for sale securities, impairments on other
invested assets, including investments in life settlements, allowances for loan losses, and goodwill impairment;
liability for legal contingencies;
fair value measurements of certain financial assets and liabilities; and
income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax
operating profitability of the character necessary to realize the net deferred tax asset and estimates associated with the Tax
Act.
These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of
estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of
operations and cash flows could be materially affected.
INSURANCE LIABILITIES
Loss Reserves
The estimate of the loss reserves relies on several key judgments:
the determination of the actuarial models used as the basis for these estimates;
the relative weights given to these models by product line;
the underlying assumptions used in these models; and
the determination of the appropriate groupings of similar product lines and, in some cases, the disaggregation of dissimilar losses
within a product line.
We use numerous assumptions in determining the best estimate of reserves for each line of business. The importance of any specific
assumption can vary by both line of business and accident year. Because actual experience can differ from key assumptions used in
establishing reserves, there is potential for significant variation in the development of loss reserves. This is particularly true for long-
tail classes of business.
All of our methods to calculate net reserves include assumptions about estimated reinsurance recoveries and their collectability.
Reinsurance collectability is evaluated independently of the reserving process and appropriate allowances for uncollectible
reinsurance are established.
AIG | 2019 Form 10-K 45
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 2019 for the year-end 2019 loss reserve analysis) and, in some
cases for accident years prior to the latest accident year. The expected loss ratio generally reflects the projected loss ratio from prior accident
years, adjusted for the loss cost trend and the effect of rate changes and other quantifiable factors on the loss ratio. For low-frequency, high-
severity lines of business such as excess casualty, expected loss ratios generally are used for at least the three most recent accident years.
Loss development factors are used to project the reported losses for each accident year to an ultimate basis. Generally, the actual loss
development factors observed from prior accident years would be used as a basis to determine the loss development factors for the
subsequent accident years.
Tail factors are development factors used for certain longer tailed lines of business (for example, excess casualty, workers’ compensation
and general liability),to project future loss development for periods that extend beyond the available development data. The development of
losses to the ultimate loss for a given accident year for these lines may take decades and the projection of ultimate losses for an accident year
is very sensitive to the tail factors selected beyond a certain age.
46 AIG | 2019 Form 10-K
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.
AIG | 2019 Form 10-K 47
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.
48 AIG | 2019 Form 10-K
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.
AIG | 2019 Form 10-K 49
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 2019 loss reserve review.
For excess of deductible business, in our judgment, it is reasonably likely that tail factors beyond twenty years could
vary by four percent below to six percent above those actually indicated in the 2019 loss reserve review.
50 AIG | 2019 Form 10-K
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 2019 loss reserve review for U.S. Excess Casualty may range five percent lower or
higher than this estimated loss trend. The loss cost trend assumption is critical for the U.S. Excess Casualty class of
business due to the long-tail nature of the losses, and is applied across many accident years. Thus, there is the
potential for the loss reserves with respect to a number of accident years (the expected loss ratio years) to be
significantly affected by changes in loss cost trends that were initially relied upon in setting the loss reserves. These
changes in loss trends could be attributable to changes in inflation or in the judicial environment, or in other social or
economic conditions affecting losses.
U.S. Excess Casualty is a long-tail class of business and any deviation in loss development factors might not be
discernible for an extended period of time subsequent to the recording of the initial loss reserve estimates for any
accident year. Mass tort claims in particular may develop over a very extended period and impact multiple accident
years, so we usually select a separate pattern for them. Thus, there is the potential for the loss reserves with respect to
a number of accident years to be significantly affected by changes in loss development factors that were initially relied
upon in setting the reserves.
After evaluating the historical loss development factors from prior accident years since the early 1990s, in our judgment,
it is reasonably likely that the actual loss development factors could vary by an amount equivalent to a six month shift
from those actually utilized in the year-end 2019 reserve review. This would impact projections both for accident years
where the selections were directly based on loss development methods as well as the a priori loss ratio assumptions for
accident years with selections based on Bornhuetter-Ferguson or Cape Cod methods. Similar to loss cost trends, these
changes in loss development factors could be attributable to changes in inflation or in the judicial environment, or in
other social or economic conditions affecting losses.
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. Directors and Officers (D&O) liability business vary by year and subset, but for the most
recent accident years, it is assumed to have been generally close to zero. After evaluating the historical loss cost levels
from prior accident years since the early 1990s, including the potential effect of losses relating to the credit crisis, in our
judgment, it is reasonably likely that the actual variation in loss cost levels for these subsets could vary by
approximately 10 percent lower or higher on a year-over-year basis than the assumptions actually utilized in the year-
end 2019 reserve review. Because U.S. D&O business has exhibited highly volatile loss trends from one accident year
to the next, there is the possibility of an exceptionally high deviation. In our analysis, the effects of loss cost trend
assumptions affect the results through the a priori loss ratio assumptions used for the Bornhuetter-Ferguson and Cape
Cod methods, which impact the projections for the more recent accident years.
The selected loss development factors are also an important assumption, but are less critical than for U.S. Excess
Casualty. Because these classes are written on a claims made basis, the loss reporting and development tail is much
shorter than for U.S. Excess Casualty. However, the high severity nature of the losses does create the potential for
significant deviations in loss development patterns from one year to the next. Similar to U.S. Excess Casualty, after
evaluating the historical loss development factors from prior accident years since the early 1990s, in our judgment, it is
reasonably likely that actual loss development factors could change by an amount equivalent to a shift by six months
from those actually utilized in the year-end 2019 reserve review.
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.
AIG | 2019 Form 10-K 51
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 2019 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, which
includes certain claims adjuster fees and other internal claim management costs.
We determine reserves for legal expenses for each class of business by one or more actuarial or structural driver
methods. For the majority of segments, legal costs are analyzed in conjunction with losses. For segments where they
are separately analyzed the methods used generally include development methods comparable to those described for
loss development methods. The development could be based on either the paid loss adjustment expenses or the ratio
of paid loss adjustment expenses to paid losses, or both. Other methods include the utilization of expected ultimate
ratios of paid loss expense to paid losses, based on actual experience from prior accident years or from similar product
lines of business.
The bulk of adjuster expenses are allocated and charged to individual claim files. For these expenses, we generally
determine reserves based on calendar year ratios of adjuster expenses paid to losses paid for the particular product
line of business. For other internal claim costs, which generally relate to specific claim department expenses that are
not allocated to individual claim files such as technology costs and other broad initiatives, we look at historic and
expected expenditures for these items and project these into the future.
The incidence of LAE is directly related to the frequency, complexity and level of underlying claims. As a result, a key
driver of variability in LAE is the variability in the overall claims, particularly for long tail lines.
The following sensitivity analysis table summarizes the effect on the loss reserve position of using certain alternative loss
cost trend (for accident years where we use expected loss ratio methods) or loss development factor assumptions rather
than the assumptions actually used in determining our estimates in the year-end loss reserve analyses in 2019:
December 31, 2019
(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
$
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
1,150
(850)
955
(550)
$
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
(950)
550
(500)
460
(460)
1,100
(800)
(a) Tail factor increase of 2 percent for guaranteed cost business and 6 percent for deductible business.
(b) Tail factor decrease of 1.5 percent for guaranteed cost business and 4 percent for deductible business.
52 AIG | 2019 Form 10-K
ITEM 7 | Critical Accounting Estimates
FUTURE POLICY BENEFITS FOR LIFE AND ACCIDENT AND HEALTH INSURANCE CONTRACTS
Long-duration traditional products include whole life insurance, term life insurance, accident and health insurance, long-term care
insurance, and certain payout annuities for which the payment period is life-contingent, which include certain of our single premium
immediate annuities and structured settlements.
For long-duration traditional business, a “lock-in” principle applies. The assumptions used to calculate the benefit liabilities and
DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs.
The assumptions include mortality, morbidity, persistency, maintenance expenses, and investment returns. These assumptions are
typically consistent with pricing inputs. The assumptions also include margins for adverse deviation, principally for key assumptions
such as mortality and interest rates used to discount cash flows, to reflect uncertainty given that actual experience might deviate from
these assumptions. Establishing margins at contract inception requires management judgment. The extent of the margin for adverse
deviation may vary depending on the uncertainty of the cash flows, which is affected by the volatility of the business and the extent of
our experience with the product.
Loss recognition occurs if observed changes in actual experience or estimates result in projected future losses under loss recognition
testing. To determine whether loss recognition exists, we determine whether a future loss is expected based on updated current
assumptions. If loss recognition exists, we recognize the loss by first reducing DAC through amortization expense, and, if DAC is
depleted, record additional liabilities through a charge to policyholder benefit expense. Because of the long-term nature of many of
our liabilities subject to the “lock-in” principle, small changes in certain assumptions may cause large changes in the degree of
reserve adequacy. In particular, changes in estimates of future invested asset returns have a large effect on the degree of reserve
deficiency.
For additional information on loss recognition see Note 10 to the Consolidated Financial Statements.
Groupings for loss recognition testing are consistent with our manner of acquiring, servicing, and measuring the profitability of the
business and are applied by product groupings, including traditional life, payout annuities and long-term care insurance. Once loss
recognition has been recorded for a block of business, the old assumption set is replaced and the assumption set used for the loss
recognition would then be subject to the lock-in principle. Key judgments made in loss recognition testing include the following:
To determine investment returns used in loss recognition tests, we typically match liabilities with assets of comparable duration, to
the extent practicable, and then project future cash flows on those assets. Assets supporting insurance liabilities are primarily
comprised of a diversified portfolio of high to medium quality fixed maturity securities, and may also include, to a lesser extent,
alternative investments. Our projections include a reasonable allowance for investment expenses and expected credit losses over
the projection horizon. A critical assumption in the projection of expected investment income is the assumed net rate of investment
return at which excess cash flows are to be reinvested. For products in which asset and liability durations are matched relatively
well, this is less of a consideration since interest on excess cash flows are not a significant component of future cash flows. For the
reinvestment rate assumption, anticipated future changes to the yield curves could have a large effect. Given the interest rate
environment applicable at the date of our most recent loss recognition tests, we assumed a modest and gradual increase in long-
term interest rates over time.
For mortality assumptions, key judgments include the extent of industry versus own experience to base future assumptions as well
as the extent of expected mortality improvements in the future. The latter judgment is based on a combination of historical mortality
trends and advice from industry, public health and demography specialists that were consulted by AIG’s actuaries and published
industry information.
For surrender rates, a key judgment involves the correlation between expected increases/decreases in interest rates and
increases/decreases in surrender rates. To support this judgment, we compare crediting rates on our products to expected rates on
competing products under different interest rate scenarios.
For in-force long-term care insurance, rate increases are allowed but must be approved by state insurance regulators.
Consequently, the extent of rate increases that may be assumed requires judgment. In establishing our assumption for rate
increases for long-term care insurance, we consider historical experience as to the frequency and level of rate increases approved
by state regulators.
AIG | 2019 Form 10-K 53
ITEM 7 | Critical Accounting Estimates
Significant unrealized appreciation on investments in a low interest rate environment may cause DAC to be adjusted and additional
future policy benefit liabilities to be recorded through a charge directly to accumulated other comprehensive income (“shadow loss
recognition”). These charges are included, net of tax, with the change in net unrealized appreciation of investments. In applying
shadow loss recognition, the Company overlays unrealized gains onto loss recognition tests without revising the underlying test.
Accordingly, there is limited additional judgment in this process.
For additional information on shadow loss recognition see Note 10 to the Consolidated Financial Statements.
GUARANTEED BENEFIT FEATURES OF VARIABLE ANNUITY PRODUCTS
Variable annuity products offered by 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 15 to the Consolidated Financial Statements.
The liability for GMDB, which is recorded in Future policyholder benefits, represents the expected value of benefits in excess of the
projected account value, with the excess recognized ratably through Policyholder benefits and losses incurred over the accumulation
period based on total expected fee assessments. The liabilities for GMWB, which are recorded in Policyholder contract deposits, are
accounted for as embedded derivatives measured at fair value, with changes in the fair value of the liabilities recorded in Other
realized capital gains (losses).
Our exposure to the guaranteed amounts is equal to the amount by which the contract holder’s account balance is below the amount
provided by the guaranteed feature. A variable annuity contract may include more than one type of guaranteed benefit feature; for
example, it may have both a GMDB and a GMWB. However, a policyholder can generally only receive payout from one guaranteed
feature on a contract containing a death benefit and a living benefit, i.e., the features are generally mutually exclusive (except a
surviving spouse who has a rider to potentially collect both a GMDB upon their spouse’s death and a GMWB during his or her
lifetime). A policyholder cannot purchase more than one living benefit on one contract. Declines in the equity markets, increased
volatility and a sustained low interest rate environment increase our exposure to potential benefits under the guaranteed features,
leading to an increase in the liabilities for those benefits.
For sensitivity analysis which includes the sensitivity of reserves for guaranteed benefit features to changes in the assumptions for
interest rates, equity market returns, volatility, and mortality see Estimated Gross Profits for Investment-Oriented Products below.
For additional discussion of market risk management related to these product features see Enterprise Risk Management – Insurance
Risks – Life and Retirement Companies’ Key Risks – Variable Annuity, Index Annuity and Universal Life Risk Management and
Hedging Programs.
54 AIG | 2019 Form 10-K
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 15 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 15
to the Consolidated Financial Statements, and for information on fair value measurement of these embedded derivatives,
including how we incorporate our own non-performance risk see Note 6 to the Consolidated Financial Statements.
The fair value of the embedded derivatives is based 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, Index Annuity and Universal Life Risk Management and
Hedging Programs.
ESTIMATED GROSS PROFITS FOR INVESTMENT–ORIENTED PRODUCTS
Policy acquisition costs and policy issuance costs that are incremental and directly related to the successful acquisition of new or
renewal of existing insurance contracts related to universal life and investment-type products (collectively, investment-oriented
products) are generally deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over
the expected lives of the contracts, except in instances where significant negative gross profits are expected in one or more periods.
Estimated gross profits include current and expected interest rates, net investment income and spreads, net realized capital gains and
losses, fees, surrender rates, mortality experience and equity market returns and volatility. In estimating future gross profits, lapse
assumptions require judgment and can have a material impact on DAC amortization. For fixed deferred annuity contracts, the future
spread between investment income and interest credited to policyholders is a significant judgment, particularly in a low interest rate
environment.
AIG | 2019 Form 10-K 55
ITEM 7 | Critical Accounting Estimates
If the assumptions used for estimated gross profits change, DAC and related reserves, including VOBA, SIA, guaranteed benefit
reserves and unearned revenue reserve (URR), are recalculated using the new assumptions, and any resulting adjustment is
included in income. Updating such assumptions may result in acceleration of amortization in some products and deceleration of
amortization in other products.
In estimating future gross profits for variable annuity products as of December 31, 2019, a long-term annual asset growth assumption
of 7.0 percent (before expenses that reduce the asset base from which future fees are projected) was applied to estimate the future
growth in assets and related asset-based fees. In determining the asset growth rate, the effect of short-term fluctuations in the equity
markets is partially mitigated through the use of a reversion to the mean methodology, whereby short-term asset growth above or
below the long-term annual rate assumption impacts the growth assumption applied to the five-year period subsequent to the current
balance sheet date. The reversion to the mean methodology allows us to maintain our long-term growth assumptions, while also
giving consideration to the effect of actual investment performance. When actual performance significantly deviates from the annual
long-term growth assumption, as evidenced by growth assumptions for the five-year reversion to the mean period falling below a
certain rate (floor) or above a certain rate (cap) for a sustained period, judgment may be applied to revise or “unlock” the growth rate
assumptions to be used for both the five-year reversion to the mean period as well as the long-term annual growth assumption
applied to subsequent periods. The use of a reversion to the mean assumption is common within the industry; however, the
parameters used in the methodology are subject to judgment and vary within the industry.
For additional discussion see Insurance Reserves – Life and Annuity Reserves and DAC – DAC – Reversion to the Mean.
The following table summarizes the sensitivity of changes in certain assumptions for DAC and SIA, embedded derivatives
and other reserves related to guaranteed benefits and URR, measured as the related hypothetical impact on December 31,
2019 balances and the resulting hypothetical impact on pre-tax income, before hedging.
December 31, 2019
(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
$
124 $
(155)
(27) $
29
20 $
(27)
(152) $
156
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%
91
(87)
(2)
2
-
-
(13)
12
(121)
124
(34)
43
25
(24)
-
-
50
(50)
(86)
88
-
-
-
-
-
-
(3)
1
(22)
22
Pre-Tax
Income
283
(313)
191
(197)
24
(23)
(66)
67
(51)
49
(2,118)
2,786
2,118
(2,786)
(39)
39
(74)
74
(21)
22
61
(60)
(a) Represents the net impact of a one percent increase or decrease in long-term equity returns for GMDB reserves and net impact of a one percent increase or decrease
in the S&P 500 index on the value of the GMWB embedded derivative.
(b) Represents the net impact of a one percentage point increase or decrease in equity volatility.
(c) Represents the net impact of one percent parallel shift in the yield curve on the value of the GMWB embedded derivative. Does not represent interest rate spread
compression on investment-oriented products.
56 AIG | 2019 Form 10-K
ITEM 7 | Critical Accounting Estimates
The sensitivity ranges of 10 basis points, one percent and 10 percent are included for illustrative purposes only and do not reflect the
changes in net investment spreads, equity return, volatility, interest rate, mortality or lapse used by AIG in its fair value analyses or
estimates of future gross profits to value DAC and related reserves. Changes in excess of those illustrated may occur in any period.
The analysis of DAC, embedded derivatives and other reserves related to guaranteed benefits, and unearned revenue reserve is a
dynamic process that considers all relevant factors and assumptions described above. We estimate each of the above factors
individually, without the effect of any correlation among the key assumptions. An assessment of sensitivity associated with changes in
any single assumption would not necessarily be an indicator of future results. The effects on pre-tax income in the sensitivity analysis
table above do not reflect the related effects from our economic hedging program, which utilizes derivative and other financial
instruments and is designed so that changes in value of those instruments move in the opposite direction of changes in the
guaranteed benefit embedded derivative liabilities.
For a further discussion on guaranteed benefit features of our variable annuities and the related hedging program see Enterprise Risk
Management – Insurance Risks – Life and Retirement Companies’ Key Risks – Variable Annuity, Index Annuity and Universal Life
Risk Management and Hedging Programs, Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed
Benefits and Hedging Results, and Notes 6 and 15 to the Consolidated Financial Statements.
REINSURANCE ASSETS
The estimation of reinsurance recoverable involves a significant amount of judgment, particularly for latent exposures, such as
asbestos, due to their long-tail nature. Reinsurance assets include reinsurance recoverable on unpaid losses and loss adjustment
expenses that are estimated as part of our loss reserving process and, consequently, are subject to similar judgments and
uncertainties as the estimation of gross loss reserves.
We assess the collectability of reinsurance recoverable balances through either detailed reviews of the underlying nature of the
reinsurance balance or comparisons with historical trends of disputes and credit events. We record adjustments to reflect the results
of these assessments through an allowance for uncollectable reinsurance that reduces the carrying amount of reinsurance assets on
the balance sheet. This estimate requires significant judgment for which key considerations include:
paid and unpaid amounts recoverable;
whether the balance is in dispute or subject to legal collection;
whether the reinsurer is financially troubled (i.e., liquidated, insolvent, in receivership or otherwise subject to formal or informal
regulatory restriction); and
whether collateral and collateral arrangements exist.
At December 31, 2019, the allowance for estimated unrecoverable reinsurance was $111 million, or less than one percent of the
consolidated reinsurance recoverable.
Risk transfer
All insurance contracts, including reinsurance contracts, must meet risk transfer requirements in order to use insurance accounting,
principally resulting in the recognition of cash flows under the contract as premiums and losses. If risk transfer requirements are not
met, a contract is to be accounted for as a deposit, typically resulting in the recognition of cash flows under the contract through a
deposit asset or liability and not as revenue or expense. To meet risk transfer requirements, all insurance and reinsurance contracts
must include insurance risk, consisting of underwriting and timing risk; in addition, reinsurance contracts must also include a
reasonable possibility of a significant loss for the assuming entity. We have entered into certain insurance and reinsurance contracts,
primarily in our General Insurance companies, that do not contain sufficient insurance risk to be accounted for as insurance or
reinsurance and are therefore subject to deposit accounting.
For additional information on reinsurance see Note 9 to the Consolidated Financial Statements.
IMPAIRMENT CHARGES
Impairments of Investments
At each balance sheet date, we evaluate our available for sale securities holdings with unrealized losses to determine if an other-
than-temporary impairment has occurred. We also evaluate our other invested assets for impairment; these include equity method
investments in private equity funds, hedge funds and other entities as well as investments in real estate and life settlements.
AIG | 2019 Form 10-K 57
ITEM 7 | Critical Accounting Estimates
An allowance is typically established for the difference between the impaired value of a loan and its current carrying amount.
Additional allowance amounts are established for incurred but not specifically identified impairments, based on statistical models
primarily driven by past due status, debt service coverage, loan-to-value ratio, property type and location, loan term, profile of the
borrower and of the major property tenants, and loan seasoning.
For additional information on the methodology and significant inputs, by investment type, that we use to determine the amount of
impairment and allowances for loan losses see the discussion in Notes 7 and 8 to the Consolidated Financial Statements.
Goodwill Impairment
For a discussion of goodwill impairment see Part I, Item 1A. Risk Factors – Estimates and Assumptions and Note 13 to the
Consolidated Financial Statements. In 2019, 2018 and 2017, for substantially all of the reporting units we elected to bypass the
qualitative assessment of whether goodwill impairment may exist and, therefore, performed quantitative assessments that supported
a conclusion that the fair value of all of the reporting units tested exceeded their book value. To determine fair value, we primarily use
a discounted expected future cash flow analysis that estimates and discounts projected future distributable earnings. Such analysis is
principally based on our business projections that inherently include judgments regarding business trends.
LIABILITY FOR LEGAL CONTINGENCIES
We estimate and record a liability for potential losses that may arise from regulatory and government investigations and actions and
litigation and other forms of dispute resolution to the extent such losses are probable and can be estimated. Determining a
reasonable estimate of the amount of such losses requires significant management judgment. In many cases, it is not possible to
determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the matter is close
to resolution. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases that are in the early
stages of litigation or in which claimants seek substantial or indeterminate damages, we often cannot predict the outcome or estimate
the eventual loss or range of reasonably possible losses related to such matters. Given the inherent unpredictability of such matters,
the outcome of certain matters could, from time to time, have a material adverse effect on the company’s consolidated financial
condition, results of operations or cash flows.
For more information on legal, regulatory and litigation matters see Note 17 to the Consolidated Financial Statements.
FAIR VALUE MEASUREMENTS OF CERTAIN FINANCIAL ASSETS AND FINANCIAL LIABILITIES
For additional information about the measurement of fair value of financial assets and financial liabilities and our accounting policy
regarding the incorporation of credit risk in fair value measurements see Note 6 to the Consolidated Financial Statements.
The following table presents the fair value of fixed maturity and equity securities by source of value determination:
December 31, 2019
(in billions)
Fair value based on external sources(a)
Fair value based on internal sources
Total fixed maturity and equity securities(b)
(a) Includes $16.6 billion for which the primary source is broker quotes.
(b) Includes available for sale and other securities.
Level 3 Assets and Liabilities
Fair
Value
235.7
22.9
258.6
Percent
of Total
91.1 %
8.9
100.0 %
$
$
Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are measured and classified in a hierarchy for
disclosure purposes consisting of three levels based on the observability of inputs available in the marketplace used to measure the
fair value.
For additional information see Note 6 to the Consolidated Financial Statements.
The following table presents the amount of assets and liabilities measured at fair value on a recurring basis and classified
as Level 3:
(in billions)
Assets
Liabilities
58 AIG | 2019 Form 10-K
December 31,
2019
31.2
7.0
$
Percentage
of Total
5.9 % $
1.5
December 31,
2018
33.7
4.4
Percentage
of Total
6.9 %
1.0
ITEM 7 | Critical Accounting Estimates
Level 3 fair value measurements are based on valuation techniques that use at least one significant input that is unobservable. We
consider unobservable inputs to be those for which market data is not available and that are developed using the best information
available about the assumptions that market participants would use when valuing the asset or liability. Our assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment.
We classify fair value measurements for certain assets and liabilities as Level 3 when they require significant unobservable inputs in
their valuation, including contractual terms, prices and rates, yield curves, credit curves, measures of volatility, prepayment rates,
default rates, mortality rates and correlations of such inputs.
For a discussion of the valuation methodologies for assets and liabilities measured at fair value, as well as a discussion of transfers of
Level 3 assets and liabilities see Note 6 to the Consolidated Financial Statements.
INCOME TAXES
Recoverability of Net Deferred Tax Asset
The evaluation of the recoverability of our deferred tax asset and the need for a valuation allowance requires us to weigh all positive
and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be
realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative
evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation
allowance is not needed.
We consider a number of factors to reliably estimate future taxable income so we can determine the extent of our ability to realize net
operating losses, foreign tax credits, realized capital loss and other carryforwards. These factors include forecasts of future income for
each of our businesses and actual and planned business and operational changes, both of which include assumptions about future
macroeconomic and AIG specific conditions and events. We subject the forecasts to stresses of key assumptions and evaluate the
effect on tax attribute utilization. We also apply stresses to our assumptions about the effectiveness of relevant prudent and feasible
tax planning strategies. We have also considered the impact of the Tax Act on our forecasts of taxable income, made certain
assumptions related to interpretation of relevant new rules, and incorporated guidance issued by the U.S. tax authority. Our analysis
also reflects 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, 2019, recent changes in market conditions, including interest rate fluctuations, impacted the
unrealized tax gains and losses in the U.S. Non-Life Companies’ available for sale securities portfolio, resulting in an increase to the
deferred tax liability related to net unrealized tax capital gains. As of December 31, 2019, 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, 2019, 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
liability related to net unrealized tax capital gains. As of December 31, 2019, based on all available evidence, we concluded that no
valuation allowance is required.
For a discussion of our framework for assessing the recoverability of our deferred tax asset see Note 23 to the Consolidated Financial
Statements.
Uncertain Tax Positions
Our accounting for income taxes, including uncertain tax positions, represents management’s best estimate of various events and
transactions, and requires judgment. FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” now incorporated into
Accounting Standards Codification, 740, Income Taxes prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. The standard also
provides guidance on derecognition, classification, interest and penalties and additional disclosures. We determine whether it is more
likely than not that a tax position will be sustained, based on technical merits, upon examination by the relevant taxing authorities
before any part of the benefit can be recognized in the financial statements. A tax position is measured at the largest amount of
benefit that is greater than 50 percent likely to be realized upon settlement.
We classify interest expense and penalties recognized on income taxes as a component of income taxes.
AIG | 2019 Form 10-K 59
ITEM 7 | Critical Accounting Estimates
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.
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.
The Tax Act includes a provision for GILTI under which taxes on foreign income are imposed on the excess of a deemed return on
tangible assets of certain foreign subsidiaries and for BEAT under which taxes are imposed on certain base eroding payments to
affiliated foreign companies. While the U.S. tax authorities issued formal guidance, including recently issued proposed and final
regulations for BEAT and other provisions of the Tax Act, there are still certain aspects of the Tax Act that remain unclear and subject
to substantial uncertainties. Additional guidance is expected in future periods. Such guidance may result in changes to the
interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international
provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period
the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner.
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 November 13, 2018, AIG completed the sale of a 19.9 percent ownership interest in Fortitude Group Holdings, LLC (Fortitude
Holdings) to TC Group Cayman Investments Holdings, L.P. (TCG), an affiliate of The Carlyle Group L.P. (Carlyle) (2018 Fortitude
Sale). Upon completion of the 2018 Fortitude Sale, Fortitude Holdings owned 100 percent of the outstanding common shares of
Fortitude Re and AIG had an 80.1 percent ownership interest in Fortitude Holdings.
On November 25, 2019, AIG entered into a membership interest purchase agreement with Fortitude Holdings, Carlyle, Carlyle FRL,
an investment fund advised by an affiliate of Carlyle (Carlyle FRL), T&D United Capital Co., Ltd. (T&D) and T&D Holdings, Inc.,
pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, Carlyle FRL will purchase from AIG a
51.6 percent ownership interest in Fortitude Holdings and T&D will purchase from AIG a 25 percent ownership interest in Fortitude
Holdings (2019 Fortitude Sale). Upon closing of the 2019 Fortitude Sale, AIG will have a 3.5 percent ownership interest in Fortitude
Holdings. There can be no guarantee that we will receive the required regulatory approvals or that closing conditions will be satisfied
in order to consummate the 2019 Fortitude Sale.
For further discussion on these Fortitude Holdings transactions, see Note 4 to the Consolidated Financial Statements.
60 AIG | 2019 Form 10-K
FINANCIAL PERFORMANCE SUMMARY
Net Income (Loss) Attributable To AIG Common Shareholders
( i n m i l l i o n s )
ITEM 7 | Executive Summary
2019 and 2018 Comparison
Net income attributable to AIG Common Shareholders increased
due to:
•
improvement in accident year losses in General
Insurance as a result of underwriting discipline, increased
use of reinsurance and a change in business mix as well
as lower catastrophe losses and favorable prior year loss
reserve development compared to unfavorable loss
reserve development in the prior year in General
Insurance;
• higher investment returns in our alternative investments
portfolio due to robust equity market returns in 2019,
income from an initial public offering of a holding in the
private equity portfolio, and an increase in income from
fixed maturity securities for which the fair value option
was elected. This compares to the prior year where
returns were lower as a result of an increase in interest
rates and widening credit spreads that occurred, lower
hedge fund performance as well as negative performance
of our fair value option equity securities portfolio;
• net realized capital gains in 2019 compared to net
•
realized capital losses in the prior year; and
lower general and other operating expenses as a result of
ongoing strategic initiatives to reduce costs.
These increases were partially offset by:
• a net loss reserve discount charge in 2019 compared to a
•
loss reserve discount benefit in 2018; and
the impact of noncontrolling interest attributed to Fortitude
Re results in 2019 as discussed in Consolidated Results
of Operations.
For further discussion see Consolidated Results of Operations.
AIG | 2019 Form 10-K 61
ITEM 7 | Executive Summary
2018 and 2017 Comparison
Decrease in Net loss attributable to AIG common shareholders in
2018 compared to 2017. Excluding the $6.7 billion tax charge
related to the enactment of the Tax Act in 2017, we recorded a Net
loss attributable to AIG common shareholders in 2018 compared to
Net income attributable to AIG common shareholders in 2017
primarily due to:
•
lower investment returns primarily driven by lower hedge
fund performance, a decline in income from fixed maturity
securities for which the fair value option was elected
when compared to higher returns on this portfolio in 2017
as a result of significant spread tightening that occurred,
losses on our fair value option equities portfolio, and
lower invested assets resulting from the funding of the
adverse development reinsurance agreement with
National Indemnity Company (NICO), a subsidiary of
Berkshire Hathaway Inc. (Berkshire), late in the first
quarter of 2017;
• a net unfavorable adjustment from the review and update
of Life and Retirement actuarial assumptions compared
to a net favorable adjustment in the prior year; and
• higher general operating and other expenses.
This decrease was partially offset by:
•
•
lower losses incurred from General Insurance operations
driven by significantly lower catastrophe losses and lower
unfavorable prior year loss reserve development, partially
offset by higher severe losses; and
lower net realized capital losses.
For further discussion see Consolidated Results of Operations.
2019 and 2018 Comparison
Adjusted pre-tax income increased primarily due to:
• higher investment returns in our alternative investments
portfolio due to robust equity market returns in 2019,
income from an initial public offering of a holding in the
private equity portfolio, and an increase in income from
fixed maturity securities for which the fair value option
was elected. In the prior year returns were lower as a
result of an increase in interest rates and widening credit
spreads that occurred and lower hedge fund
performance;
lower catastrophe losses and lower accident year losses
as a result of underwriting discipline, increased use of
reinsurance and a change in business mix and favorable
prior year loss reserve development compared to
unfavorable loss reserve development in the prior year;
and
lower general operating and other expenses as a result
of ongoing strategic initiatives to reduce costs.
•
•
Adjusted Pre-Tax Income*
( i n m i l l i o n s )
62 AIG | 2019 Form 10-K
ITEM 7 | Executive Summary
2018 and 2017 Comparison
Adjusted pre-tax income decreased primarily due to:
•
lower investment returns primarily driven by lower hedge
fund performance, a decline in income from fixed maturity
securities for which the fair value option was elected
when compared to higher returns on this portfolio in 2017
as a result of significant spread tightening that occurred,
losses on our fair value option equities portfolio, and
lower invested assets resulting from the funding of the
adverse development reinsurance agreement with NICO
late in the first quarter of 2017;
• a net unfavorable adjustment from the review and update
of Life and Retirement actuarial assumptions compared
to a net favorable adjustment in the prior year; and
• higher general operating and other expenses.
This decrease was partially offset by lower losses incurred from
General Insurance operations driven by significantly lower
catastrophe losses and lower unfavorable prior year loss reserve
development, partially offset by higher severe losses.
For further discussion see Consolidated Results of Operations.
* Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
General Operating and Other Expenses
( i n m i l l i o n s )
General operating and other expenses declined in 2019
compared to 2018 primarily due to lower employee related
expenses and professional fee reductions pertaining to
expense reduction initiatives. The declines were partially
offset by an increase in expenses caused by the
acquisitions of Validus and Glatfelter in the third and fourth
quarters of 2018, respectively. General operating and other
expenses increased in 2018 compared to 2017 due to the
acquisition of Validus, business growth and continued
investments in business platforms.
In keeping with our broad and ongoing efforts to transform for
long-term competitiveness, general operating and other expenses
for 2019, 2018 and 2017 included approximately $218 million,
$395 million and $413 million, respectively, of pre-tax restructuring
and other costs which were primarily comprised of employee
severance charges and other exit costs related to organizational
simplification, operational efficiency, and business rationalization.
AIG | 2019 Form 10-K 63
Return on Common Equity
Adjusted Return on Common Equity*
ITEM 7 | Executive Summary
* Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
Book Value Per Common Share
Adjusted Book Value Per Common Share*
* Non-GAAP measure – for reconciliation of Non-GAAP to GAAP measures see Consolidated Results of Operations.
AIG’S OUTLOOK – INDUSTRY AND ECONOMIC FACTORS
Our business is affected by industry and economic factors such as interest rates, currency exchange rates, credit and equity market
conditions, catastrophic claims events, regulation, tax policy, competition, and general economic, market and political conditions. We
continued to operate under difficult market conditions in 2019, characterized by factors such as the impact of historically low interest
rates, slowing global economic growth, global trade tensions and 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 many benchmark U.S. interest rates had risen to recent period highs in 2018, more recent concerns about global trade and
potential weakness in U.S. economic expansion led to declining interest rates in 2019, with key benchmark rates in the U.S. and in
many developed markets close to historic lows and, in some international jurisdictions, negative. The low interest rate environment
negatively affects sales of interest rate sensitive products in our industry and negatively impacts the profitability of our existing
business as we reinvest cash flows from investments, including increased calls and prepayments of fixed maturity securities and
mortgage loans, at rates below the average yield of our existing portfolios. On the other hand, if rates rise, some of these impacts may
abate while there may be different impacts, some of which are highlighted below. We actively manage our exposure to the interest
rate environment through portfolio selection and asset-liability management, including spread management strategies for our
investment-oriented products and economic hedging of interest rate risk from guarantee features in our variable and fixed index
annuities.
64 AIG | 2019 Form 10-K
ITEM 7 | Executive Summary
Additionally, sustained low interest rates may result in higher pension expense due to the impact on discounting of projected benefit
cash flows.
Annuity Sales and Surrenders
The sustained low interest rate environment has a significant impact on the annuity industry. Low long-term interest rates put pressure
on investment returns, which may negatively affect sales of interest rate sensitive products and reduce future profits on certain
existing fixed rate products. However, our disciplined rate setting has helped to mitigate some of the pressure on investment spreads.
Rapidly rising interest rates could create the potential for increased sales, but may also drive higher surrenders. Customers are,
however, currently buying fixed annuities with surrender charge periods, generally in the three-to-five year range, in pursuit of higher
returns, which may help mitigate increased early surrenders in a rising rate environment. In addition, older contracts that have higher
minimum interest rates and continue to be attractive to the contract holders have driven better than expected persistency in Fixed
Annuities, although the reserves for such contracts have continued to decrease over time in amount and as a percentage of the total
annuity portfolio. We will closely monitor surrenders of Fixed Annuities as contracts with lower minimum interest rates come out of the
surrender charge period in a more attractive rate environment. Low interest rates have also driven growth in our fixed index annuity
products, which provide additional interest crediting, tied to favorable performance in certain equity market indices and the availability
of guaranteed living benefits. Changes in interest rates significantly impact the valuation of our liabilities for annuities with guaranteed
income features and the value of the related hedging portfolio.
Reinvestment and Spread Management
We actively monitor fixed income markets, including the level of interest rates, credit spreads and the shape of the yield curve. We
also frequently review our interest rate assumptions and actively manage the crediting rates used for new and in-force business.
Business strategies continue to evolve to maintain profitability of the overall business in light of the interest rate environment. A low
interest rate environment puts margin pressure on pricing of new business and on existing products, due to the challenge of investing
new money or recurring premiums and deposits, and reinvesting investment portfolio cash flows, in the low interest rate environment.
In addition, there is investment risk associated with future premium receipts from certain in-force business. Specifically, the
investment of these future premium receipts may be at a yield below that required to meet future policy liabilities.
The contractual provisions for renewal of crediting rates and guaranteed minimum crediting rates included in products may reduce
spreads in a sustained low interest rate environment and thus reduce future profitability. Although this interest rate risk is partially
mitigated through the asset-liability management process, product design elements and crediting rate strategies, a sustained low
interest rate environment may negatively affect future profitability.
For additional information on our investment and asset-liability management strategies see Investments.
For investment-oriented products in our Individual Retirement, Group Retirement, Life Insurance and Institutional Markets businesses,
our spread management strategies include disciplined pricing and product design for new business, modifying or limiting the sale of
products that do not achieve targeted spreads, using asset-liability management to match assets to liabilities to the extent practicable,
and actively managing crediting rates to help mitigate some of the pressure on investment spreads. Renewal crediting rate
management is done under contractual provisions that were designed to allow crediting rates to be reset at pre-established intervals
in accordance with state and federal laws and subject to minimum crediting rate guarantees. We will continue to adjust crediting rates
on in-force business to mitigate the pressure on spreads from declining base yields, but our ability to lower crediting rates may be
limited by the competitive environment, contractual minimum crediting rates, and provisions that allow rates to be reset only at pre-
established intervals. As interest rates rise, we may need to raise crediting rates on in-force business for competitive and other
reasons potentially reducing the impact of investing in a higher interest rate environment.
Of the aggregate fixed account values of our Individual Retirement and Group Retirement annuity products, 65 percent were crediting
at the contractual minimum guaranteed interest rate at December 31, 2019. The percentage of fixed account values of our annuity
products that are currently crediting at rates above one percent was 61 percent and 66 percent at December 31, 2019 and 2018,
respectively. These businesses continue to focus on pricing discipline and strategies to manage the minimum guaranteed interest
crediting rates offered on new sales in the context of regulatory requirements and competitive positioning. In the core universal life
business in our Life Insurance business, 63 percent of the account values were crediting at the contractual minimum guaranteed
interest rate at December 31, 2019.
AIG | 2019 Form 10-K 65
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, 2019
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
$
$
$
$
$
$
$
5,835 $
5,437
11,668
9,094
517
34
32,585 $
1,504 $
5,329
14,703
788
7,028
169
29,521 $
- $
94
270
1,460
2,881
200
4,905 $
67,011 $
65 %
2,756 $
90
237
41
-
-
3,124 $
2,514 $
932
4
-
-
-
3,450 $
- $
24
584
483
231
-
1,322 $
7,896 $
8 %
Total
28,403
7,419
11,974
9,141
521
39
57,497
8,558
6,813
14,707
788
7,028
169
38,063
19,812 $
1,892
69
6
4
5
21,788 $
4,540 $
552
-
-
-
-
5,092 $
- $
373
1,068
68
38
-
-
491
1,922
2,011
3,150
200
7,774
28,427 $ 103,334
1,547 $
27 %
100 %
*
Individual Retirement and Group Retirement amounts shown include fixed options within variable annuity products.
General Insurance
The impact of low interest rates on our General Insurance segment is primarily on our long-tail Casualty line of business. We expect
limited impacts on our existing long-tail Casualty business as the duration of our assets is slightly longer than that of our liabilities.
Sustained low interest rates would potentially impact new and renewal business for the long-tail Casualty line as we may not be able
to adjust our future pricing consistent with our profitability objectives to fully offset the impact of investing at lower rates. However, we
will continue to maintain pricing discipline and risk selection.
In addition, for our General Insurance segment and General Insurance Run-Off Lines reported within the Legacy Portfolio, sustained
low interest rates may unfavorably affect the net loss reserve discount for workers’ compensation, and to a lesser extent could
favorably impact assumptions about future medical costs, the combined net effect of which could result in higher net loss reserves.
Standard of Care Developments
In our Life and Retirement business, we and our distributors are subject to laws and regulations regarding the standard of care
applicable to sales of our products and the provision of advice to our customers. In recent years, many of these laws and regulations
have been revised or reexamined while others have been newly adopted. We continue to closely follow these legislative and
regulatory activities. For additional information regarding these legislative and regulatory activities, see Item 1. Business – Regulation
– U.S. Regulation – Standard of Care Developments. Changes in standard of care requirements or new standards issued by
governmental authorities, such as the DOL, the SEC, the NAIC or state regulators and/or legislators, may affect our businesses,
results of operations and financial condition. While we cannot predict the long-term impact of these legislative and regulatory
developments on our Life and Retirement businesses, we believe our diverse product offerings and distribution relationships position
us to compete effectively in this evolving marketplace.
66 AIG | 2019 Form 10-K
ITEM 7 | Executive Summary
Impact of Currency Volatility
Currency volatility remains acute. Such volatility affected line item components of income for those businesses with substantial
international operations. In particular, growth trends in net premiums written reported in U.S. dollars can differ significantly from those
measured in original currencies. The net effect on underwriting results, however, is significantly mitigated, as both revenues and
expenses are similarly affected.
These currencies may continue to fluctuate, in either direction, especially as a result of the UK’s announced exit from the EU, and
such fluctuations will affect net premiums written growth trends reported in U.S. dollars, as well as financial statement line item
comparability.
General Insurance businesses are transacted in most major foreign currencies. The following table presents the average of
the quarterly weighted average exchange rates of the Major Currencies, which have the most significant impact on our
businesses:
Years Ended December 31,
Rate for 1 USD
Currency:
GBP
EUR
JPY
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
Percentage Change
0.79
0.90
109.31
0.75
0.84
110.50
0.78
0.90
112.44
5 %
7 %
(1) %
(4) %
(7) %
(2) %
Unless otherwise noted, references to the effects of foreign exchange in the General Insurance discussion of results of operations are
with respect to movements in the Major Currencies included in the preceding table.
Other Industry Developments
On September 7, 2017, the UK Ministry of Justice announced a proposal to increase the Ogden rate from negative 0.75 percent to
between zero and one percent. Following this announcement, on December 20, 2018 the UK Parliament passed the Civil Liability Act
2018 which implements a new framework for determining the Ogden rate and requires the UK Ministry of Justice to start a review of
the Ogden rate within 90 days of its commencement and review periodically thereafter. The Ministry of Justice concluded a public call
for evidence on January 30, 2019 prior to beginning its first review. On July 15, 2019, the UK Ministry of Justice announced a change
in the Ogden rate from negative 0.75 percent to negative 0.25 percent with an effective date of August 5, 2019.
Consolidated Results of Operations
The following section provides a comparative discussion of our Consolidated Results of Operations on a reported basis for the three-
year period ended December 31, 2019. Factors that relate primarily to a specific business are discussed in more detail within the
business segment operations section.
For a discussion of the Critical Accounting Estimates that affect our results of operations see the Critical Accounting Estimates section
of this MD&A.
AIG | 2019 Form 10-K 67
The following table presents our consolidated results of operations and other key financial metrics:
ITEM 7 | Consolidated Results of Operations
Year Ended December 31,
(in millions)
Revenues:
Premiums
Policy fees
Net investment income
Net realized capital gains (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) loss on sale of divested businesses
Total benefits, losses and expenses
Income from continuing operations before
income tax expense
Current
Deferred
Income tax expense
Income (loss) from continuing operations
Income (loss) from discontinued operations,
net of income taxes
Net income (loss)
Less: Net income attributable to
noncontrolling interests
Net income (loss) attributable to AIG
Less: Dividends on preferred stock
Net income (loss) attributable to AIG common
shareholders
Years Ended December 31,
Return on common equity
Adjusted return on common equity
(in millions, except per common share data)
Balance sheet data:
Total assets
Long-term debt and debt of consolidated investment entities
Total AIG shareholders’ equity
Book value per common share
Book value per common share, excluding AOCI
Adjusted book value per common share
2019
2018
2017 2019 vs. 2018
2018 vs. 2017
Percentage Change
$
30,561 $
3,015
14,619
632
919
49,746
30,614 $ 31,374
2,935
14,179
(1,380)
2,412
49,520
2,791
12,476
(130)
1,638
47,389
25,402
3,832
5,164
8,537
1,417
32
75
44,459
5,287
545
621
1,166
4,121
48
4,169
821
3,348
22
27,412
3,754
5,386
9,302
1,309
7
(38)
47,132
257
336
(182)
154
103
29,972
3,592
4,288
9,107
1,168
(5)
(68)
48,054
1,466
636
6,890
7,526
(6,060)
(42)
61
4
(6,056)
67
(6) $
-
28
(6,084)
-
- %
8
17
NM
(44)
5
(7)
2
(4)
(8)
8
357
NM
(6)
NM
62
NM
NM
NM
NM
NM
NM
NM
NM
$
3,326 $
(6) $
(6,084)
NM %
2019
5.3 %
8.3
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 %
NM
100 %
2017
(8.4) %
4.1
December 31,
December 31,
2019
2018
$
525,064
$
491,984
35,350
65,675
74.93
69.20
58.89
34,540
56,361
65.04
66.67
54.95
68 AIG | 2019 Form 10-K
The following table presents a reconciliation of pre-tax income/net income (loss) attributable to AIG to adjusted pre-tax
income/adjusted after-tax income attributable to AIG:
Year Ended December 31,
2019
2018
2017
ITEM 7 | Consolidated Results of Operations
Total Tax
Non-
(Benefit) controlling
Pre-tax Charge Interests(b)
After
Tax
Total Tax
Non-
(Benefit) controlling
Interests
Pre-tax Charge
After
Tax
Total Tax
Non-
(Benefit) controlling
Interests
Pre-tax Charge
After
Tax
$ 5,287 $ 1,166 $
$ 5,287 $ 1,166 $
- $ 4,169
(821)
(821)
(821) $ 3,348
22
$ 3,326
$
257 $
154 $
- $
(67)
61
(67)
$ 1,466 $ 7,526 $
$
257 $
154 $
(67) $
(6) $ 1,466 $ 7,526 $
(30)
43
-
(194)
(40)
(56)
(158)
(12)
(33)
(267)
32
(448)
75
(2)
955
-
24
218
12
(56)
7
(97)
9
-
201
-
5
46
2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
30
(43)
-
(48)
(21)
-
(154)
154
32
(44)
(125)
(211)
25
(351)
(48)
66
(2)
754
-
19
172
10
(6)
-
(3)
-
675
7
193
(38)
19
(371)
-
124
395
-
142
1
41
(8)
4
(79)
-
26
83
-
-
$
(6)
48
21
-
(488)
(43)
(6,687)
122
(146)
(51)
(3)
-
(303)
-
(106)
-
533
6
152
42
(30)
15
(292)
303
(5)
1,380
(68)
(129)
187
106
(2)
506
(41)
(45)
65
-
60
21
98
312
-
-
413
-
145
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $ (6,056)
(28)
(28)
(28) $ (6,084)
-
$ (6,084)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7
488
43
6,687
(95)
(197)
-
197
(3)
874
(4)
(27)
(84)
122
39
-
268
-
7
(in millions, except per common share data)
Pre-tax income/net income (loss)
including noncontrolling interests
Noncontrolling interests
Pre-tax income/net income (loss)
attributable to AIG
Dividends on preferred stock
Net income (loss) attributable to AIG
common shareholders
Changes in uncertain tax positions and
other tax adjustments
Deferred income tax valuation allowance
(releases) 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)
Changes in the fair value of equity securities
Unfavorable (favorable) prior year development and
related amortization changes ceded under
retroactive reinsurance agreements
(Gain) loss on extinguishment of debt
Net realized capital (gains) losses(a)
(Income) loss from discontinued operations
(Income) loss 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
Professional fees related to regulatory or
accounting changes
Noncontrolling interests primarily related to
net realized capital gains (losses) of
Fortitude Holdings' standalone results(b)
Adjusted pre-tax income/Adjusted
after-tax income attributable to
AIG common shareholders
Weighted average diluted shares outstanding
Income (loss) per common share attributable
to AIG common shareholders (diluted)
Adjusted after-tax income per common
share attributable to AIG common
shareholders (diluted)(c)
660
660
46
46
$ 5,478 $ 1,211 $
(161) $ 4,084
$ 1,409 $
324 $
(21) $ 1,064
$ 3,158 $
906 $
(21) $ 2,231
889.5
$
3.74
$
4.59
910.1
$
(0.01)
$
1.17
930.6
$
(6.54)
$
2.34
(a) Includes all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for
non-qualifying (economic) hedging or for asset replication.
(b) Noncontrolling interests is primarily due to the 19.9 percent investment in Fortitude Holdings by an affiliate of Carlyle, which occurred in the fourth quarter of 2018.
Carlyle is allocated 19.9 percent of Fortitude Holdings’ standalone financial results. Fortitude Holdings’ results are mostly eliminated in AIG’s consolidated income from
continuing operations given that its results arise from intercompany transactions. Noncontrolling interests is calculated based on the standalone financial results of
Fortitude Holdings. The most significant component of Fortitude Holdings’ standalone results includes the change in fair value of the embedded derivatives, which
moved materially in the year due to lower rates and tightening credit spreads, and which are recorded in net realized capital gains and losses of Fortitude Holdings. In
accordance with AIG's adjusted after-tax income definition, realized capital gains and losses are excluded from noncontrolling interests.
AIG | 2019 Form 10-K 69
Fortitude Holdings’ summarized financial information (standalone results) is presented below:
Year Ended December 31, 2019
(in millions)
Revenues
Expenses
Adjusted pre-tax income
Taxes on adjusted pre-tax income
Adjusted after-tax income, excluding realized capital gains
Net realized capital gains
Taxes on realized capital gains
After-tax net realized capital gains
Net income
$
$
ITEM 7 | Consolidated Results of Operations
Fortitude
Holdings
2,359 $
1,890
469
98
371
4,216
886
3,330
3,701 $
AIG Noncontrolling
Interest
470
376
94
20
74
839
179
660
734
(c) For 2017, because we reported a net loss from continuing operations attributable to AIG common shareholders, all common stock equivalents are anti-dilutive and are
therefore excluded from the calculation of diluted shares and diluted per common share amounts. However, because we reported adjusted after-tax income attributable
to AIG common shareholders, the calculation of adjusted after-tax income per diluted common share includes 22,412,682 dilutive shares.
PRE-TAX INCOME COMPARISON FOR 2019 AND 2018
Pre-tax income increased in 2019 compared to 2018 primarily due to:
improvement in accident year losses in General Insurance as a result of underwriting discipline, increased use of reinsurance and
a change in business mix as well as lower catastrophe losses and favorable prior year loss reserve development compared to
unfavorable loss reserve development in the prior year in General Insurance;
higher investment returns in our alternative investments portfolio due to robust equity market returns in 2019, income from an initial
public offering of a holding in the private equity portfolio, and an increase in income from fixed maturity securities for which the fair
value option was elected. This compares to lower returns in the prior year as a result of an increase in interest rates and widening
credit spreads that occurred, lower hedge fund performance, as well as negative performance of our fair value option equity
securities portfolio;
net realized capital gains in 2019 compared to net realized capital losses in the prior year due to gains on the sales of securities
and foreign exchange compared to losses on sales of securities and foreign exchange in 2018, as well as lower impairments in
2019 and losses on private equity sales in 2018. Partially offsetting these gains were derivative losses in 2019 compared to gains
in 2018; and
lower general and other operating expenses as a result of ongoing strategic initiatives to reduce costs.
These increases were partially offset by:
a net loss reserve discount charge in 2019 compared to a loss reserve discount benefit in the prior year.
PRE-TAX INCOME (LOSS) COMPARISON FOR 2018 AND 2017
Pre-tax income decreased in 2018 compared to 2017 primarily due to:
lower investment returns primarily driven by lower hedge fund performance, a decline in income from fixed maturity securities for
which the fair value option was elected compared to higher returns on this portfolio in 2017 as a result of significant spread
tightening that occurred, losses on our fair value option equities portfolio, and lower invested assets resulting from the funding of
the adverse development reinsurance agreement with NICO late in the first quarter of 2017;
a net unfavorable adjustment from the review and update of Life and Retirement actuarial assumptions compared to a net
favorable adjustment in the prior year; and
higher general operating and other expenses due to the acquisition of 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);
70 AIG | 2019 Form 10-K
– 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
ITEM 7 | Consolidated Results of Operations
of 2018 compared to gains in the prior year.
U.S. TAX REFORM OVERVIEW
On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Act. The Tax Act reduced the statutory rate
of U.S. federal corporate income tax to 21 percent and enacted numerous other changes impacting AIG and the insurance industry.
Changes specific to the insurance industry include the calculation of insurance tax reserves and related transition adjustments,
amortization of specified policy acquisition expenses, treatment of separate account dividends received deductions and computation
of pro-ration adjustments. Provisions of the Tax Act with broader application include reductions or elimination of deductions for certain
items, e.g., reductions to corporate dividends received deductions, disallowance of entertainment expenses and limitations on the
deduction of certain executive compensation costs. These provisions, generally, result in an increase in AIG’s taxable income.
The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes are imposed on the excess of a
deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes
are imposed on certain base eroding payments to affiliated foreign companies. While the U.S. tax authorities issued formal guidance,
including recently issued proposed and final regulations for BEAT and other provisions of the Tax Act, there are still certain aspects of
the Tax Act that remain unclear and subject to substantial uncertainties. Additional guidance is expected in future periods. Such
guidance may result in changes to the interpretations and assumptions we made and actions we may take, which may impact
amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we
treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in
a similar manner.
Repatriation Assumptions
As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed are subject to a one-time
deemed repatriation tax. Going forward, foreign earnings not taxed as part of the one-time deemed repatriation (or otherwise taxed
currently under the GILTI or subpart F regimes) will generally be exempt 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 2019, we consider our foreign earnings with respect to certain operations in Canada, South
Africa, the Far East, Latin America, Bermuda as well as the European, Asia Pacific and Middle East regions to be indefinitely
reinvested. These earnings relate to ongoing operations and have been reinvested in active business operations. Deferred taxes, if
necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.
INCOME TAX EXPENSE ANALYSIS
For the year ended December 31, 2019, the effective tax rate on income from continuing operations was 22.1 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:
– $96 million net charge primarily related to the accrual of IRS interest (including interest related to uncertain tax positions),
– $82 million associated with the effect of foreign operations,
– $37 million of tax charges and related interest associated with increases in uncertain tax positions primarily related to open tax
issues and audits in state and local jurisdictions
– $27 million of excess tax charges related to share based compensation payments recorded through the income statement; and
– $15 million of non-deductible transfer pricing charges;
partially offset by tax benefits of:
– $113 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to
the disposal of available for sale securities,
– $65 million of tax exempt income, and
– $44 million of valuation allowance activity related to certain foreign subsidiaries and state jurisdictions.
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.
AIG | 2019 Form 10-K 71
ITEM 7 | Consolidated Results of Operations
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:
– $83 million net charge primarily related to the accrual of IRS interest (including interest related to uncertain tax positions),
– $62 million measurement period adjustment related to the deemed repatriation tax,
– $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 additional information see Note 23 to the Consolidated Financial Statements.
72 AIG | 2019 Form 10-K
ITEM 7 | Business Segment Operations
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: Individual Retirement, Group Retirement, Life Insurance and Institutional Markets. Other Operations consists of
businesses and items not allocated to our other businesses, which are primarily AIG Parent, Blackboard 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
2019
2018
2017
$
$
2,709 $
824
3,533
1,984
937
246
291
3,458
(1,709)
(305)
4,977
501
5,478 $
(8) $
(461)
(469)
(232)
(581)
(813)
1,681
933
330
246
3,190
(1,584)
59
1,196
213
1,409 $
2,289
1,004
274
264
3,831
(1,405)
75
1,688
1,470
3,158
AIG | 2019 Form 10-K 73
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 D&O, mergers and
acquisitions, fidelity, employment practices, fiduciary liability, cyber risk, kidnap and ransom, and errors and omissions insurance
(E&O).
Property: Products include commercial and industrial property insurance products and services that cover exposures to man-made
and natural disasters, including business interruption.
Special Risks: Products include aerospace, political risk, trade credit, portfolio solutions, energy-related property insurance products,
surety, marine and crop insurance.
Personal Lines: Products include personal auto and property in selected markets and insurance for high net worth individuals offered
through AIG Private Client Group in the U.S. that covers auto, homeowners, umbrella, yacht, fine art and collections. In addition, we
offer extended warranty insurance and services covering electronics, appliances, and HVAC.
Accident & Health: Products include voluntary and sponsor-paid personal accident and supplemental health products for individuals,
employees, associations and other organizations, as well as a broad range of travel insurance products and services for leisure and
business travelers.
General Insurance products in North America and International markets are distributed through various channels, including captive
and independent agents, brokers, affinity partners, airlines and travel agents, and retailers. Our distribution network is aided by our
competitive position to write multiple-national and cross-border risks in both Commercial Lines and Personal Insurance.
BUSINESS STRATEGY
Profitable Growth: Deploy capital efficiently to act opportunistically and optimize diversity within the portfolio to grow in profitable
lines, geographies and customer segments. Look to inorganic growth opportunities in profitable markets and segments to expand our
capabilities and footprint.
Reinsurance Optimization: Strategically partner with reinsurers to reduce exposure to losses arising from frequency of large
catastrophic events and the severity from individual risk losses. We strive to optimize our reinsurance program to manage volatility
and protect the balance sheet from tail events and unpredictable net losses in support of our profitable growth objectives.
Underwriting Excellence: Empower and increase accountability of the underwriter and continue to integrate underwriting, claims and
actuarial to enable better decision making. Focus on enhancing risk selection, driving consistent underwriting best practices and
building robust monitoring standards to improve underwriting results.
74 AIG | 2019 Form 10-K
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ITEM 7 | Business Segment Operations | General Insurance
COMPETITION AND CHALLENGES
Operating in a highly competitive industry, General Insurance competes against several hundred companies, specialty insurance
organizations, mutual companies and other underwriting organizations in the U.S. In international markets, we compete for business
with the foreign insurance operations of large global insurance groups and local companies in specific market areas and product
types. Insurance companies compete through a combination of risk acceptance criteria, product pricing, service and terms and
conditions. General Insurance seeks to distinguish itself in the insurance industry primarily based on its well-established brand, global
franchise, multinational capabilities, financial and capital strength, innovative products, claims expertise to handle complex claims,
expertise in providing specialized coverages and customer service.
We serve our business and individual customers on a global basis — from the largest multinational corporations to local businesses
and individuals. Our clients benefit from our substantial underwriting expertise.
Our challenges include:
long-tail Commercial Lines exposures that create added challenges to pricing and risk management;
over capacity in certain lines of business that creates downward market pressure on pricing;
tort environment volatility in certain jurisdictions and lines of business; and
volatility in claims arising from natural and man-made catastrophes.
OUTLOOK—INDUSTRY AND ECONOMIC FACTORS
Below is a discussion of the industry and economic factors impacting our operating segments:
General Insurance – North America
Commercial Lines over recent years has experienced challenging market conditions, with widespread excess capacity increasing
competition and suppressing rates across multiple classes of business. However, in more recent periods we are seeing growing
market support for rate increases in challenged segments where major carriers are reducing their risk appetite and market capacity is
contracting as a result. We are seeing rate increases across U.S. Financial Lines and Liability segments (outside of workers’
compensation), with a common driver being higher industry-wide claims severity trends, as well as within our Property and Specialty
portfolios. We continue to achieve positive rate increases across a number of lines and classes of business as a result of our
disciplined underwriting strategy and focus on risk selection. Further, we continue to achieve growth in several of our Commercial
Lines high margin businesses, although these market segments remain highly competitive.
Personal Insurance growth prospects are supported by the need for full life cycle products and coverage, increases in personal
wealth accumulation, and awareness of insurance protection and risk management. We compete in the high net worth market,
accident and health insurance, travel insurance, and warranty services and will continue to expand our innovative products and
services to distribution partners and clients.
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. Overall, Commercial lines are showing positive rate
increases in selective products and markets where market events or withdrawal of capability have favorably impacted pricing. We are
maintaining our underwriting discipline, reducing gross and net limits, increasing use of reinsurance to reduce volatility, as well as
continuing our risk selection strategy to improve profitability.
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 generally low volatility
of the short-tailed risk in these business lines, although some product classes are exposed to catastrophe losses.
AIG | 2019 Form 10-K 75
ITEM 7 | Business Segment Operations | General Insurance
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
Percentage Change
GENERAL INSURANCE RESULTS
Years Ended December 31,
(in millions)
Underwriting results:
Net premiums written
Decrease in unearned premiums(a)
Net premiums earned
Losses and loss adjustment expenses incurred(b)
Acquisition expenses:
Amortization of deferred policy acquisition costs
Other acquisition expenses
Total acquisition expenses
General operating expenses
Underwriting income (loss)
Net investment income
Adjusted pre-tax income (loss)
Loss ratio(b)
Acquisition ratio
General operating expense ratio
Expense ratio
Combined ratio(b)
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
$ 25,092 $ 26,407 $ 25,438
588
26,026
21,642
1,098
27,505
20,824
1,346
26,438
17,246
4,482
1,292
5,774
3,329
89
3,444
3,533 $
65.2
21.8
12.6
34.4
99.6
$
4,596
1,385
5,981
3,837
(3,137)
2,668
3,765
1,388
5,153
3,712
(4,481)
3,668
75.7
21.7
14.0
35.7
111.4
83.2
19.8
14.3
34.1
117.3
(4.8)
(10.5)
(16.1)
1.1
(1.5)
(4.0)
0.1
61.6
96.0
0.3
64.0
99.7
(0.1)
63.0
97.1
(5) %
23
(4)
(17)
(2)
(7)
(3)
(13)
NM
29
4 %
87
6
(4)
22
-
16
3
30
(27)
(10.5)
0.1
(1.4)
(1.3)
(11.8)
5.7
2.6
(0.2)
(2.4)
(3.7)
(7.5)
1.9
(0.3)
1.6
(5.9)
5.6
2.5
0.4
1.0
2.6
(469) $
(813)
NM %
42 %
(a) In 2018, the underwriting loss included an additional $115 million of net premium earned for multi-year policies related to earlier accident years.
(b) Consistent with our definition of APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have
ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.
The following table presents General Insurance net premiums written by operating segment, showing change on both
reported and constant dollar basis:
Years Ended December 31,
(in millions)
North America(a)(b)
International(a)(c)
2018
2019
2017
$ 12,103 $ 11,383 $ 10,973
14,465
15,024
12,989
Total net premiums written
$ 25,092 $ 26,407 $ 25,438
Percentage Change in
Percentage Change in
U.S. dollars
Original Currency
2019 vs. 2018
2018 vs. 2017
2019 vs. 2018
2018 vs. 2017
6 %
(14)
(5) %
4 %
4
4 %
6 %
(11)
(4) %
4 %
1
3 %
(a) Includes $2,350 million and $500 million of Validus Net premiums written for North America in 2019 and 2018, respectively, and $810 million and $371 million of Validus
Net premiums written for International in 2019 and 2018, respectively.
(b) Includes $321 million and $27 million of Glatfelter Net premiums written for North America in 2019 and 2018, respectively.
(c) As a result of the merger of AIU Insurance Company, Ltd. (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 included approximately $300 million for two additional months of Net premiums written.
76 AIG | 2019 Form 10-K
The following tables present General Insurance accident year catastrophes by geography(a) and number of events:
ITEM 7 | Business Segment Operations | General Insurance
Catastrophes(b)
(in millions)
Year Ended December 31, 2019
Flooding and rainstorms
Windstorms and hailstorms
Wildfire
Civil Disorders
Reinstatement premiums
Total catastrophe-related charges
Year Ended December 31, 2018
Flooding and rainstorms
Windstorms and hailstorms
Wildfire
Earthquakes
Volcanic eruptions
Reinstatement premiums
Total catastrophe-related charges
Year Ended December 31, 2017
Flooding and rainstorms
Windstorms and hailstorms
Wildfire
Earthquakes
Reinstatement premiums
Total catastrophe-related charges
# of
Events
North
America
International
Total
3
26
3
2
-
34
$
20 $
13 $
792
59
-
(8)
340
10
23
29
$
863 $
415 $
33
1,132
69
23
21
1,278
3
$
16 $
154 $
170
23
5
3
1
-
35
1,123
712
19
16
(33)
791
4
82
2
(1)
$
1,853 $
1,032 $
- (c) $
962 $
21
2
1
-
24
1,771
562
-
(23)
$
3,272 $
158 $
682
10
41
-
891 $
1,914
716
101
18
(34)
2,885
1,120
2,453
572
41
(23)
4,163
(a) Geography: North America primarily includes insurance businesses in the United States, Canada and Bermuda. International includes regional insurance businesses in
Japan, the United Kingdom, Europe, Asia Pacific, Latin America and Caribbean, Middle East and Africa, and China. General Insurance results are presented before
consideration of internal reinsurance agreements.
(b) Natural catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and man-made catastrophe losses, such
as terrorism and civil disorders that exceed the $10 million threshold.
(c) Flooding events reported in 2017 are a subset of windstorm events.
AIG | 2019 Form 10-K 77
NORTH AMERICA RESULTS
Years Ended December 31,
(in millions)
Underwriting results:
Net premiums written
(Increase) decrease in unearned premiums(a)
Net premiums earned
Losses and loss adjustment expenses incurred(b)
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(b)
Acquisition ratio
General operating expense ratio
Expense ratio
Combined ratio(b)
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
ITEM 7 | Business Segment Operations | General Insurance
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
Percentage Change
$ 12,103 $ 11,383 $ 10,973
482
931
750
12,853
9,226
12,314
10,776
11,455
11,646
2,008
488
2,496
1,351
(220)
2,929
1,859
515
2,374
1,477
1,305
485
1,790
1,396
(2,313)
(3,377)
2,305
3,145
6 %
(19)
4
(14)
8
(5)
5
(9)
90
27
4 %
93
7
(7)
42
6
33
6
32
(27)
$
2,709 $
(8) $
(232)
NM %
97 %
71.8
19.4
10.5
29.9
101.7
87.5
19.3
12.0
31.3
118.8
101.7
15.6
12.2
27.8
129.5
(6.8)
(15.1)
(28.7)
1.8
(3.1)
(3.6)
0.3
67.1
97.0
0.8
70.1
101.4
(0.3)
69.1
96.9
(15.7)
0.1
(1.5)
(1.4)
(17.1)
8.3
4.9
(0.5)
(3.0)
(4.4)
(14.2)
3.7
(0.2)
3.5
(10.7)
13.6
0.5
1.1
1.0
4.5
(a) In 2018, the underwriting loss included an additional $115 million of net premium earned for multi-year policies related to earlier accident years.
(b) Consistent with our definition of APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have
ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.
Business and Financial Highlights
The North America General Insurance business is focused on making progress towards improved underwriting results and
efficiencies. This includes strengthening our talent base; ongoing investment in pricing and monitoring tools; managing limits on both
a gross and net basis with enhanced focus on portfolio management and individual business strategy; and increased use of
reinsurance to reduce volatility.
We recorded adjusted pre-tax income in 2019 compared to an adjusted pre-tax loss in the prior year, primarily due to lower loss ratio,
higher net investment income and lower general operating expenses as a result of ongoing efforts to reduce expenses. The loss ratio
decreased due to lower catastrophe losses, favorable prior year loss reserve development compared to unfavorable loss reserve
development in the prior year and lower current accident year loss ratio, as adjusted.
Net premiums written increased in the year ended December 31, 2019 compared to the prior year due to the inclusion of the Validus
and Glatfelter acquisitions as well as growth within the Validus business, partially offset by underwriting actions taken to reposition our
portfolio and to maintain pricing discipline and higher ceded premiums due to the changes in 2019 reinsurance programs.
For a discussion of 2019 reinsurance programs see MD&A - Enterprise Risk Management.
78 AIG | 2019 Form 10-K
North America Adjusted Pre-Tax Income (Loss)
(in millions)
North America Adjusted Pre-Tax Income (Loss)
(in millions)
ITEM 7 | Business Segment Operations | General Insurance
2019 and 2018 Comparison
Adjusted pre-tax income in 2019 compared to adjusted pre-tax loss in 2018
reflected:
significantly lower catastrophe losses;
increase in net investment income reflecting higher returns on alternative
investments, change in fair value of equity securities in 2018 and improved
performance of fixed income securities;
favorable prior year loss reserve development in 2019 compared to
unfavorable prior year loss reserve development in 2018;
the lower accident year loss ratio, as adjusted primarily driven by a change
in business mix including the Validus and Glatfelter acquisitions, improved
new business and renewal terms, reduced net severity of loss events and
changes in 2019 reinsurance programs which have reduced volatility; and
lower general operating expenses as a result of ongoing expense reduction
initiatives.
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.
AIG | 2019 Form 10-K 79
North America Net Premiums Written
(in millions)
ITEM 7 | Business Segment Operations | General Insurance
2019 and 2018 Comparison
Net premiums written increased primarily due to the inclusion of the Validus
and Glatfelter acquisitions as well as growth within the Validus business.
This increase was partially offset by:
lower production primarily due to underwriting actions taken to strengthen
our portfolio and to maintain pricing discipline; and
higher ceded premiums due to the changes in 2019 reinsurance
programs.
North America Net Premiums Written
(in millions)
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.
80 AIG | 2019 Form 10-K
North America Combined Ratios
North America Combined Ratios
ITEM 7 | Business Segment Operations | General Insurance
2019 and 2018 Comparison
The decrease in the combined ratio reflected a decrease in both the loss ratio and
the expense ratio.
The decrease in the loss ratio reflected:
lower accident year loss ratio, as adjusted, primarily driven by a change in
business mix including the Validus and Glatfelter acquisitions, improved new
business and renewal terms, reduced net severity of loss events and changes in
2019 reinsurance programs which have reduced volatility;
significantly lower catastrophe losses; and
favorable prior year loss reserve development compared to unfavorable loss
reserve development in the prior year.
The decrease in the expense ratio reflected lower general operating expense ratio
driven by ongoing expense reduction initiatives.
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.
AIG | 2019 Form 10-K 81
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 income (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
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
Percentage Change
$ 12,989 $ 15,024 $ 14,465
106
14,571
9,996
167
15,191
10,048
596
13,585
8,020
2,474
804
3,278
1,978
309
515
824 $
$
59.0
24.1
14.6
38.7
97.7
(2.9)
0.3
-
56.4
95.1
2,737
870
3,607
2,360
(824)
363
(461) $
66.1
23.7
15.5
39.2
105.3
2,460
903
3,363
2,316
(1,104)
523
(581)
68.6
23.1
15.9
39.0
107.6
(6.8)
(0.2)
-
59.1
98.3
(6.1)
(4.3)
-
58.2
97.2
(14) %
257
(11)
(20)
(10)
(8)
(9)
(16)
NM
42
NM %
(7.1)
0.4
(0.9)
(0.5)
(7.6)
3.9
0.5
NM
(2.7)
(3.2)
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
(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 further improving underwriting margins and profits through underwriting
excellence, improved efficiency, and growing in profitable segments and geographies supported by our targeted growth strategy.
We recorded adjusted pre-tax income in 2019 compared to an adjusted pre-tax loss in the prior year primarily due to lower
catastrophe losses, lower accident year loss ratio, as adjusted, lower general operating expenses, higher net investment income and
inclusion of the Validus acquisition.
Net premiums written, excluding the impact of foreign exchange, decreased in 2019 compared to the prior year due to lower Accident
& Health business in Asia Pacific, underwriting actions to maintain pricing discipline, Japan Merger Impact in 2018 and higher ceded
premiums due to changes in 2019 reinsurance programs, partially offset by inclusion of the Validus acquisition and profitable business
growth across lines and geographies.
82 AIG | 2019 Form 10-K
International Adjusted Pre-Tax Income (Loss)
(in millions)
ITEM 7 | Business Segment Operations | General Insurance
International Adjusted Pre-Tax Income (Loss)
(in millions)
2019 and 2018 Comparison
Adjusted pre-tax income in 2019 compared to adjusted pre-tax loss in 2018
primarily reflected:
lower catastrophe losses;
lower general operating expense driven by the Japan Merger Impact in
2018 and ongoing expense optimization initiatives;
lower accident year loss ratio, as adjusted primarily driven by reduced net
severity of loss events;
higher net investment income driven by prior year weaker market
performance of equity securities for which the fair value option was
elected as well as higher income from fixed income securities;
inclusion of the Validus acquisition; and
favorable prior year loss reserve development in 2019 compared to
unfavorable prior year loss reserve development in 2018.
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.
AIG | 2019 Form 10-K 83
ITEM 7 | Business Segment Operations | General Insurance
2019 and 2018 Comparison
Net premiums written, excluding the impact of foreign exchange, decreased
due to:
•
•
lower Accident & Health business in Asia Pacific;
lower production primarily due to underwriting actions taken to strengthen
our portfolio and to maintain pricing discipline, partially offset by profitable
business growth across lines and geographies;
•
the Japan Merger Impact in 2018; and
• higher ceded premiums due to changes in 2019 reinsurance program.
This decrease was partially offset by:
•
inclusion of the Validus acquisition
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.
International Net Premiums Written
(in millions)
International Net Premiums Written
(in millions)
84 AIG | 2019 Form 10-K
International Combined Ratios
ITEM 7 | Business Segment Operations | General Insurance
2019 and 2018 Comparison
The decrease in the combined ratio reflected a decrease in both the loss ratio and
expense ratio.
This decrease in the loss ratio was primarily driven by:
•
•
lower catastrophe losses; and
lower accident year loss ratio, as adjusted primarily driven by reduced net
severity of loss events.
This decrease in the expense ratio reflected a lower general operating expense
ratio driven by ongoing expense optimization initiatives partially offset by a higher
acquisition ratio mainly due to changes in business mix.
International Combined Ratios
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.
AIG | 2019 Form 10-K 85
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. Certain fixed deferred annuity products offer optional income protection features. The Fixed Annuities
product line maintains an industry-leading position in the U.S. bank distribution channel by designing products
collaboratively with banks and offering an efficient and flexible administration platform.
Retail Mutual Funds: Includes our mutual fund offerings and related administration and servicing operations.
Retail Mutual Funds are distributed primarily through broker-dealers.
Group Retirement: Products and services consist of group mutual funds, group annuities, individual annuity and
investment products, and financial planning and advisory services.
Group
Retirement
In March 2019, the products and services marketed by The Variable Annuity Life Insurance Company (VALIC),
which include investment offerings and plan administrative and compliance services, were rebranded under the
AIG Retirement Services name to allow the business to fully leverage the strength and scale of the AIG brand.
Legal entity names, however, remain unchanged: The Variable Annuity Life Insurance Company and its
subsidiaries, VALIC Financial Advisors, Inc. and VALIC Retirement Services Company.
AIG Retirement Services career financial advisors and independent financial advisors provide retirement plan
participants with enrollment support and comprehensive financial planning services.
Life
Insurance
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 UK 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.
86 AIG | 2019 Form 10-K
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ITEM 7 | Business Segment Operations | Life and Retirement
Federal Home Loan Bank (FHLB) Funding Agreements are issued through our Individual Retirement, Group Retirement and
Institutional Markets operating segments. Funding agreements are issued by our U.S. Life and Retirement companies to FHLBs in
their respective districts at fixed or floating rates over specified periods, which can be prepaid at our discretion. Proceeds are
generally invested in fixed income securities and other suitable investments to generate spread income. These investment contracts
do not have mortality or morbidity risk and are similar to GICs.
BUSINESS STRATEGY
Deliver client-centric solutions through our unique franchise by bringing together a broad portfolio of life insurance, retirement
and institutional products offered through an extensive, multichannel distribution network. Life and Retirement focuses on ease of
doing business, offering valuable solutions, and expanding and deepening its distribution relationships across multiple channels.
Position market leading businesses to serve growing needs by continually enhancing product solutions, service delivery and
digital capabilities while using data and analytics in an innovative manner to improve customer experience.
Individual Retirement will continue 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. AIG Retirement Services’
(formerly VALIC) 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 UK, 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 (AUM) 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 efficiency, and diversification of risk, while optimizing capital allocation and efficiency within insurance entities
to enhance return on common equity.
AIG | 2019 Form 10-K 87
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 competitors with
different profitability targets in the pension risk transfer space as well as other product lines;
increasingly complex new and proposed regulatory requirements, which have affected industry growth and costs; and
upgrading our technology and underwriting processes while managing general operating expenses.
OUTLOOK—INDUSTRY AND ECONOMIC FACTORS
Below is a discussion of the industry and economic factors impacting our specific operating segments:
Individual Retirement
Increasing life expectancy and reduced expectations for traditional retirement income from defined benefit programs and fixed income
securities are leading Americans to seek additional financial security as they approach retirement. The strong demand for individual
index and fixed deferred annuities with guaranteed income features has attracted increased competition in this product space. In
response to the continued low interest rate environment, which has added pressure to profit margins, we have developed guaranteed
income benefits for variable, fixed index, and fixed deferred annuities with margins that are less sensitive to the level of interest rates.
Changes in the interest rate environment can have a significant impact on sales, surrender rates, investment returns, guaranteed
income features, and spreads in the annuity industry.
Group Retirement
Group Retirement competes in the defined contribution market under the AIG Retirement Services brand. AIG Retirement Services is a
leading retirement plan provider in 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, AIG Retirement Services is investing in a client-focused technology
platform to support improved compliance and self-service functionality. AIG Retirement Services’ model pairs self-service tools with its
career financial advisors who provide individual plan participants with enrollment support and comprehensive financial planning
services.
Changes in the interest rate environment can have a significant impact on investment returns, guaranteed income features, and
spreads, and a moderate impact on sales and surrender rates.
88 AIG | 2019 Form 10-K
ITEM 7 | Business Segment Operations | Life and Retirement
Life Insurance
Consumers have a significant need for life insurance, whether it is used for income replacement for their surviving family, estate
planning or wealth transfer. Additionally, consumers use life insurance to provide living benefits in case of chronic, critical or terminal
illnesses, and to supplement retirement income.
In response to consumer needs and a sustained low interest rate environment, our Life Insurance product portfolio will continue to
promote products with lower long-duration interest rate risk and mitigate exposure to products that have long-duration interest rate
risk through sales levels and hedging strategies.
As life insurance ownership remains at historical lows in the U.S. and the UK, efforts to expand the reach and increase the
affordability of life insurance are critical. The industry is investing in consumer-centric efforts to reduce traditional barriers to securing
life protection by simplifying the sales and service experience. Digitally enabled processes and tools provide a fast, friendly and
simple path to life insurance protection.
Institutional Markets
Institutional Markets serves a variety of needs for corporate clients. Demand is driven by a number of factors including the
macroeconomic and regulatory environment. We expect to see continued growth in the pension risk transfer market as corporate plan
sponsors look to transfer asset or liability, longevity, administrative and operational risks associated with their defined benefit plans.
Changes in the interest rate environment can have a significant impact on investment returns and net investment spreads, as well as
reduce the tax efficiency associated with institutional life insurance products, dampening organic growth opportunities.
For additional discussion of the impact of market interest rate movement on our Life and Retirement business see Executive
Summary – AIG’s Outlook – Industry and Economic Factors – Impact of Changes in the Interest Rate Environment.
LIFE AND RETIREMENT RESULTS
Years Ended December 31,
(in millions)
Revenues:
Premiums
Policy fees
Net investment income
Advisory fee and other income
Total adjusted 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
Total benefits, losses and expenses
Adjusted pre-tax income
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
Percentage Change
$
3,600 $
2,893
8,461
911
15,865
2,592 $
2,669
7,922
953
14,136
4,046
2,798
7,816
926
15,586
5,528
3,599
650
2,472
158
12,407
4,179
3,513
680
2,412
162
10,946
$
3,458 $
3,190 $
5,247
3,360
743
2,296
109
11,755
3,831
39 %
8
7
(4)
12
32
2
(4)
2
(2)
13
8 %
(36) %
(5)
1
3
(9)
(20)
5
(8)
5
49
(7)
(17) %
*
Includes general operating expenses, non-deferrable commissions, other acquisition expenses, advisory fee expenses and other expenses.
For information on the impact of actuarial assumptions on our Life and Retirement results, see Insurance Reserves – Life and Annuity
Reserves and DAC – Update of Actuarial Assumptions.
Our insurance companies generate significant revenues from investment activities. As a result, the operating segments in Life and
Retirement are subject to variances in net investment income on the asset portfolios that support insurance liabilities and surplus.
For additional information on our investment strategy, asset-liability management process and invested asset composition see
Investments.
AIG | 2019 Form 10-K 89
INDIVIDUAL 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
Fixed Annuities base net investment spread:
Base yield*
Cost of funds
Fixed Annuities base net investment spread
ITEM 7 | Business Segment Operations | Life and Retirement
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
Percentage Change
$
$
104 $
811
4,133
606
409
1,730
449
318
219
468
77
1,984 $
52 $
804
3,827
655
91
767
4,013
643
261
1,679
630
324
238
443
82
1,681 $
161
1,616
415
308
241
426
58
2,289
100 %
1
8
(7)
57
3
(29)
(2)
(8)
6
(6)
18 %
4.54 %
2.68
1.86 %
4.60 %
2.65
1.95 %
4.80 %
2.65
2.15 %
(6) bps
3
(9) bps
(43) %
5
(5)
2
62
4
52
5
(1)
4
41
(27) %
(20) bps
-
(20) bps
*
Includes returns from base portfolio including accretion and income (loss) from certain other invested assets.
Business and Financial Highlights
The market environment continues to reflect uncertainties in the annuity business resulting from a sustained low interest rate
environment. Interest rates declined in 2019 and are near historical lows. Excluding prior year deposits from FHLB funding
agreements, premiums and deposits increased in 2019 compared to the prior year. Net flows in 2019 remained negative but improved
compared to the prior year primarily due to higher deposits driven by increased Fixed and Index Annuities sales, offset by lower sales
for the Variable Annuities and Retail Mutual Funds. Premiums and deposits improved in 2018 compared to 2017. Premiums and
deposits in 2018 included deposits from FHLB funding agreements. Net flows in 2018 deteriorated compared to 2017 and continued
to be negative primarily due to higher surrenders and withdrawals, mainly in Retail Mutual Funds.
Adjusted pre-tax income increased in 2019 compared to the prior year, primarily driven by decreases in Variable Annuity DAC
amortization and reserves due to stronger equity market performances, growth in income from base portfolio due to higher invested
assets, higher gains on securities for which the fair value option was elected, and prior year DAC and reserve model adjustments.
Partially offsetting these increases were lower Variable Annuity policy and advisory fee income, net of expenses due to Variable
Annuity and Retail Mutual Fund negative net flows. Adjusted pre-tax income decreased in 2018 compared to 2017 as a result of
decreased Fixed Annuity base spread income primarily due to lower reinvestment yields and decreased gains on securities for which
the fair value option was elected, and higher Variable Annuity DAC amortization and reserves due to lower equity market
performance. Partially offsetting these decreases were higher policy and advisory fees, and increased base spread income for Index
Annuities.
90 AIG | 2019 Form 10-K
Individual Retirement Adjusted Pre-Tax Income
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
Individual Retirement Adjusted Pre-Tax Income
(in millions)
2019 and 2018 Comparison
Adjusted pre-tax income increased primarily due to:
higher net investment returns including growth in income from base net
investment spread due to higher invested assets, driven by increased
sales, higher gains on securities for which the fair value option was
elected, and income from an initial public offering of a holding in the
private equity portfolio, partially offset by lower affordable housing
returns, and prior-year non-recurring payments on structured
securities; and
stronger equity market performance, which contributed to decreases in
Variable Annuity DAC amortization and reserves, prior year DAC and
reserve model adjustment, and lower Fixed Annuity DAC amortization
due to lower surrenders, partially offset by higher Index Annuity DAC
amortization and reserves driven by growth in sales and DAC model
adjustments.
Partially offsetting these increases were:
lower policy and advisory fee income net of expenses due to negative
Variable Annuity and Retail Mutual Fund net flows and a decrease in
Variable Annuity and Retail Mutual Fund average AUM related to the
equity market decline at the end of 2018.
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.
AIG | 2019 Form 10-K 91
ITEM 7 | Business Segment Operations | Life and Retirement
INDIVIDUAL RETIREMENT GAAP PREMIUMS, PREMIUMS AND DEPOSITS, SURRENDERS AND NET
FLOWS
For Individual Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums increased in
2019 compared to the prior year. Premiums decreased in 2018 compared to 2017, primarily due to increased market rates
competition.
Premiums and deposits is a non-GAAP financial measure that includes, in addition to direct and assumed premiums, deposits
received on investment-type annuity contracts, FHLB funding agreements and mutual funds under administration.
Net flows for annuity products in Individual Retirement represent premiums and deposits less death, surrender and other withdrawal
benefits. Net flows for mutual funds represent deposits less withdrawals. Deposits from FHLB funding agreements were excluded
from net flows of Individual Retirement, as net flows from these funding agreements are not considered part of the metric to measure
Individual Retirement’s core recurring performance.
The following table presents a reconciliation of Individual Retirement GAAP premiums to premiums and deposits:
Years 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
$
2019
104 $
14,804
(9)
2018
52 $
15,577
(8)
$
14,899 $
15,621 $
2017
91
11,819
(4)
11,906
2019
2018
2017
7.3 %
6.4
8.2 %
6.5
6.7 %
6.0
The following table presents reserves for Fixed Annuities and Variable and Index Annuities by surrender charge category:
At December 31,
2019
2018
(in millions)
No surrender charge
Greater than 0% - 2%
Greater than 2% - 4%
Greater than 4%
Non-surrenderable
Total reserves
Fixed
Annuities
$
27,804 $
2,059
3,209
16,453
1,664
$
51,189 $
Variable
and Index
Annuities
24,393
9,397
15,296
31,833
525
81,444
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
Individual Retirement annuities are typically subject to a four- to seven-year surrender charge period, depending on the product. For
Fixed Annuities, the proportion of reserves subject to surrender charge at December 31, 2019 has increased compared to December
31, 2018 due to improved net flows driven by higher Fixed Annuity sales, combined with fewer policyholders reaching the end of the
surrender charge period in 2019 compared to 2018. The increase in reserves with no surrender charge for Variable and Index
Annuities at December 31, 2019 compared to December 31, 2018 is due to normal aging of business.
92 AIG | 2019 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
2019 and 2018 Comparison
Fixed Annuities premiums and deposits increased primarily
due to higher broker dealer and Independent Market
Organization (IMO) distribution sales driven by increased
sales of products with living benefit features. Net flows
improved primarily due to higher premiums and deposits, and
lower surrenders.
Variable and Index Annuities premiums and deposits
increased primarily due to higher index annuity sales driven
by growth in all key distribution channels partially offset by a
decline in variable annuity premiums and deposits driven by
lower broker dealer and bank distribution sales. Index annuity
net flows increased primarily due to higher sales partially
offset by higher surrenders. Variable annuity net flows
remained negative and deteriorated primarily due to a decline
in sales.
Funding Agreements premiums and deposits in 2018
reflected deposits from the FHLB funding agreements, which
were excluded from reported net flows.
Retail Mutual Funds net flows remained negative and
deteriorated reflecting lower deposits, offset by lower
surrenders and withdrawals due to industry trends in the U.S.
and the impact of underperformance within our largest fund.
AIG | 2019 Form 10-K 93
Individual Retirement Premiums and Deposits 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.
94 AIG | 2019 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
ITEM 7 | Business Segment Operations | Life and Retirement
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
Percentage Change
$
16 $
34 $
429
2,240
262
446
2,172
239
65
1,147
81
114
103
456
44
937 $
85
1,122
95
117
91
406
42
933 $
$
27
427
2,164
230
74
1,115
84
108
83
348
32
1,004
(53) %
(4)
3
10
(24)
2
(15)
(3)
13
12
5
- %
4.53 %
2.72
1.81 %
4.50 %
2.73
1.77 %
4.53 %
2.76
1.77 %
3 bps
(1)
4 bps
26 %
4
-
4
15
1
13
8
10
17
31
(7) %
(3) bps
(3)
- bps
*
Includes returns from base portfolio including accretion and income (loss) from certain other invested assets.
Business and Financial Highlights
Group Retirement is focused on implementing initiatives to grow its business. However, external factors, including increased
competition and the consolidation of healthcare providers and other employers in target markets, continue to impact Group
Retirement’s customer retention. Excluding deposits from FHLB funding agreement, premiums and deposits decreased in 2019
compared to the prior year. Net flows remained negative but improved in 2019 compared to the prior year primarily due to lower
surrenders partially offset by decreased deposits. Premiums and deposits increased in 2018 compared to 2017. Premiums and
deposits in 2018 included deposits from FHLB funding agreement. Net flows deteriorated in 2018 compared to 2017 and continued to
be negative primarily due to higher surrenders, partially offset by increased premiums and deposits in 2018.
Adjusted pre-tax income remained relatively flat in 2019 compared to the prior year. The slight increase was primarily driven by an
increase in base net investment spread primarily due to higher average invested assets, lower Variable Annuity DAC amortization and
reserves due to stronger equity market performance and higher investment returns in our alternative investment portfolio due to gains
from an initial public offering of a holding in the private equity portfolio in the second quarter of 2019 and gains on securities for which
the fair value option was elected. Partially offsetting these increases were higher general operating expenses, prior year receipt of
non-recurring payments on structured securities, and a net unfavorable adjustment from the review and update of actuarial
assumptions compared to a net favorable adjustment in the prior year. Adjusted pre-tax income decreased in 2018 compared to 2017
due to increases in general operating expenses and higher variable annuity DAC amortization and reserves due to lower equity
market performance partially offset by higher policy fees and net investment income.
AIG | 2019 Form 10-K 95
Group Retirement Adjusted Pre-Tax Income
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
2019 and 2018 Comparison
Adjusted pre-tax income increased primarily due to:
• an increase in base net investment spread primarily due to higher
average invested assets;
•
lower variable annuity DAC amortization and reserves due to stronger
equity market performance; and
• higher net investment returns in our alternative investment portfolio,
including income from an initial public offering of a holding in the
private equity portfolio and higher gains on securities for which the fair
value option was elected, partially offset by the prior year receipt of
non-recurring payments on structured securities and lower returns on
affordable housing income.
Partially offsetting these increases were:
• a net unfavorable adjustment from the review and update of actuarial
assumptions compared to a net favorable adjustment in the prior year;
and
• higher general operating expenses primarily due to continued
investment in people and technology.
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.
Group Retirement Adjusted Pre-Tax Income
(in millions)
96 AIG | 2019 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 2019, which
primarily represents immediate annuities, decreased compared to 2018 and 2017. Overall, premiums are not a significant driver of the
Group Retirement results.
Premiums and deposits is a non-GAAP financial measure that includes, in addition to direct and assumed premiums, deposits
received on investment-type annuity contracts and mutual funds under administration. Premiums and deposits included FHLB funding
agreement in 2018.
Net flows for annuity products included in Group Retirement represent premiums and deposits less death, surrender and other
withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals. Deposits from FHLB funding agreement was
excluded from net flows of Group Retirement in 2018, as net flows from this funding agreement is not considered part of the metric to
measure Group Retirement’s core recurring performance.
The following table presents a reconciliation of Group Retirement GAAP premiums to premiums and deposits:
Years Ended December 31,
(in millions)
Premiums
Deposits
Premiums and deposits
2019
16 $
8,330
8,346 $
$
$
2018
34 $
8,605
8,639 $
2017
27
7,523
7,550
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
2019
10.7 %
2018
11.3 %
2017
8.6 %
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
2019 (a)
2018 (a)
$
$
71,912
1,140
672
6,038
614
80,376
$
$
65,500
650
1,115
5,868
612
73,745
(a) Excludes mutual fund assets under administration of $21.7 billion and $17.9 billion at December 31, 2019 and 2018, respectively.
(b) Group Retirement amounts in this category include General Account reserves of approximately $6.2 billion and $6.3 billion at December 31, 2019 and 2018,
respectively, which are subject to 20 percent annual withdrawal limitations at the participant level and General Account reserves of $5.4 billion and $4.7 billion at
December 31, 2019 and 2018, respectively, which are subject to 20 percent annual withdrawal limitations at the plan level.
Group Retirement annuities are typically subject to a five- to seven-year surrender charge period, depending on the product. At
December 31, 2019, Group Retirement annuity reserves increased compared to December 31, 2018 primarily due to higher equity
market performance. The surrender rate in 2019 decreased due to fewer large plan surrenders compared to the prior year.
AIG | 2019 Form 10-K 97
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
2019 and 2018 Comparison
Net flows remained negative but improved primarily due to
lower surrenders partially offset by decreased deposits. There
were approximately $1.3 billion of large plan surrenders for
2019 compared to approximately $1.6 billion of large plan
surrenders for 2018. External factors including consolidation of
healthcare providers and other employers in target markets
continue to impact Group Retirement customer retention.
Premiums and deposits in 2018 reflected deposits from FHLB
funding agreement, which were excluded from reported net
flows.
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)
98 AIG | 2019 Form 10-K
LIFE INSURANCE RESULTS
Years Ended December 31,
(in millions)
Revenues:
Premiums
Policy fees
Net investment income
Other income
Benefits and expenses:
ITEM 7 | Business Segment Operations | Life and Retirement
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
Percentage Change
$
1,619 $
1,488
1,203
42
1,554 $ 1,530
1,430
1,258
1,044
1,137
52
58
4 %
18
6
(28)
10
(1)
NM
4
(1)
4
(25) %
2 %
(12)
9
12
7
(1)
NM
(18)
3
92
20 %
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
2,892
369
115
93
611
26
246 $
2,619
374
(50)
89
620
25
330 $
2,444
376
239
109
601
13
274
Life Insurance is focused on selling profitable new products through strategic channels to enhance future returns. Results for 2019
reflect growth in international life, health and group premiums primarily due to the acquisition of Ellipse in the UK. 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. Adjusted pre-tax income decreased in 2019 compared to the prior year primarily due to prior year favorable
actuarial adjustments to universal life and prior year favorable ceded premium reinsurance adjustments, current period unfavorable
reinsurance valuation allowance adjustment and less favorable mortality. Partially offsetting these decreases were higher gains on
calls and higher net investment income including gains on alternative investments due to higher private equity income. Results for
2018 reflect growth in universal life deposits, and growth in term and international life and health premiums, offset by lower group
benefits premiums. Adjusted pre-tax income increased in 2018 compared to 2017 primarily due to higher net investment income
driven by growth in invested assets, favorable mortality, and actuarial reserve and reinsurance refinements, offset by higher general
operating expenses.
Life Insurance Adjusted Pre-Tax Income
(in millions)
2019 and 2018 Comparison
Adjusted pre-tax income decreased primarily due to:
• prior year favorable U.S. reserve and reinsurance adjustments and an
unfavorable reinsurance valuation allowance adjustment in 2019; and
•
less favorable mortality experience in the U.S.
Partially offsetting these decreases were:
• higher investment income primarily due to higher base portfolio income
driven by growth in invested assets, higher returns in our alternative
investment portfolio, including income from an initial public offering of a
holding in the private equity portfolio, and higher gains on calls.
AIG | 2019 Form 10-K 99
Life Insurance Adjusted Pre-Tax Income
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
2018 and 2017 Comparison
Adjusted pre-tax income increased primarily due to:
•
favorable reserve and reinsurance refinements;
• higher net investment income primarily due to increases in base portfolio
income driven by growth in invested assets and higher alternative returns;
and
•
favorable mortality.
Partially offsetting these increases were:
• a net unfavorable adjustment from the annual review and update of
actuarial assumptions of $63 million compared to a net favorable
adjustment in the prior year for $29 million; and
• higher general operating expenses primarily due to growth in international
life offset by a reduction in group benefits expenses. In addition, prior-year
general operating expenses were reduced by the impact of new business
reinsurance.
LIFE INSURANCE GAAP PREMIUMS AND PREMIUMS AND DEPOSITS
Premiums for Life Insurance represent amounts received on traditional life insurance policies, primarily term life, international life and
health and group benefits. Premiums, excluding the effect of foreign exchange, increased in 2019 compared to 2018 and 2017.
Premiums for 2018 included favorable ceded premium reinsurance refinements in domestic life business. Premiums and deposits for
Life Insurance is a non-GAAP financial measure that includes direct and assumed premiums as well as deposits received on
universal life insurance.
The following table presents a reconciliation of Life Insurance GAAP premiums to premiums and deposits:
Years Ended December 31,
(in millions)
Premiums
Deposits
Other
Premiums and deposits
2019
1,619 $
1,659
808
4,086 $
$
$
2018
1,554 $
1,649
711
3,914 $
2017
1,530
1,518
707
3,755
100 AIG | 2019 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 2019 compared to 2018 primarily due to growth in
domestic term life and international life, including the acquisition
of Ellipse in the U.K. These increases were partially offset by
lower U.S. group premiums as a result of the strategic decision to
refocus the business at the end of 2016.
Premiums and deposits, excluding the effect of foreign exchange,
increased in 2018 compared to 2017, primarily due to growth in
universal life, term life and international life and health, including
assumed premiums on business distributed by Laya Healthcare.
This increase was partially offset by lower group benefits
premiums.
INSTITUTIONAL MARKETS RESULTS
Years Ended December 31,
(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
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
Percentage Change
$
$
1,861 $
165
885
1
2,162
353
5
28
62
11
291 $
952 $ 2,398
174
161
595
786
1
1
1,214
338
5
28
56
13
246 $
2,568
253
5
28
44
6
264
95 %
2
13
-
78
4
-
-
11
(15)
18 %
(60) %
(7)
32
-
(53)
34
-
-
27
117
(7) %
Institutional Markets continued to opportunistically grow its portfolio, which drove the increase in net investment income over recent
years. Product distribution continues to be strong and the business is focused on maintaining pricing discipline to achieve attractive
risk adjusted returns.
AIG | 2019 Form 10-K 101
Institutional Markets Adjusted Pre-Tax Income
(in millions)
ITEM 7 | Business Segment Operations | Life and Retirement
2019 and 2018 Comparison
Increase in premiums and policyholder benefits were primarily due to pension
risk transfer business written during 2018 and 2019. Growth in reserves and
AUM drove the increase in net investment income with similar impact to
policyholder benefits and interest credited.
Adjusted pre-tax income increased primarily due to:
higher net investment income due to higher invested assets resulting from
growth in pension risk transfer and GICs.
Institutional Markets Adjusted Pre-Tax Income
(in millions)
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.
102 AIG | 2019 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 increased in 2019 compared to the prior year primarily driven by the pension risk transfer business
written in 2019. Premiums decreased in 2018 compared to 2017 primarily driven by the pension risk transfer business written in 2017.
Premiums and deposits for Institutional Markets is a non-GAAP financial measure that includes direct premiums as well as deposits
received on investment-type annuity contracts, including GICs. Deposits also include FHLB funding agreements.
The following table presents a reconciliation of Institutional Markets GAAP premiums to premiums and deposits:
Years Ended December 31,
(in millions)
Premiums
Deposits
Other
Premiums and deposits
2019
1,861 $
867
30
2,758 $
$
$
2018
952 $
2,015
65
3,032 $
2017
2,398
1,821
28
4,247
A discussion of the significant variances in premiums and deposits follows:
Institutional Markets Premiums and Deposits
(in millions)
Premiums and deposits decreased in 2019 compared to the prior
year due to lower deposits offset by higher pension risk transfer
sales. Deposits in 2018 include $1.4 billion of FHLB agreements.
The shift in premium and deposit mix is consistent with
Institutional Markets’ strategy to opportunistically grow and
diversify its portfolio.
Premiums and deposits decreased in 2018 compared to 2017 due
to lower sales in pension risk transfer and structured settlements,
partially offset by $1.4 billion in FHLB funding agreements.
AIG | 2019 Form 10-K 103
ITEM 7 | Business Segment Operations | Ot he r Op er at io n s
Other Operations
Other Operations consists of income from assets held by AIG Parent and other corporate subsidiaries, general operating expenses
not attributable to AIG reporting segments, certain compensation expenses attributable to Other Operations and reporting segments,
amortization of value of distribution network acquired related to the Validus and Glatfelter acquisitions, and interest expense
attributable to AIG long-term debt as well as debt associated with consolidated investment entities. Other Operations also includes
Blackboard – a subsidiary focused on delivering commercial insurance solutions using digital technology, data analytics and
automation. The results of Fuji Life, which consisted of term insurance, life insurance, endowment policies and annuities, are
included in our results through April 30, 2017, the date on which it was sold.
OTHER OPERATIONS RESULTS
Years Ended December 31,
(in millions)
Revenues:
Premiums
Net investment income(a)(b)
Other income(b)
Total adjusted revenues
Benefits, losses and expenses:
Policyholder benefits and losses incurred
Acquisition expenses:
Amortization of deferred policy acquisition costs
Other acquisition expenses
Total acquisition expenses
General operating expenses
Interest expense:
Interest – corporate
Interest – other(c)
Total interest expense
Total benefits, losses and expenses
Adjusted pre-tax income (loss) before consolidation and
eliminations
Consolidation, eliminations and other adjustments
Adjusted pre-tax loss
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
Percentage Change
39 $
45
552
636
726
53
634
1,413
28 %
NM
(23)
33
39
603
(5)
$
50 $
370
425
845
37
16
2
18
1,253
1,043
203
1,246
2,554
10
1
11
1,104
1,013
53
1,066
2,220
(9)
19
10
1,237
967
1
968
2,818
(1,709)
(305)
(2,014) $
(1,584)
59
(1,525) $
(1,405)
75
(1,330)
$
60
100
64
13
3
283
17
15
(8)
NM
(32) %
(95) %
(15)
(13)
(55)
(94)
NM
(95)
10
(11)
5
NM
10
(21)
(13)
(21)
(15) %
(a) Beginning in the first quarter of 2019, on a prospective basis, changes in the fair value of equity securities are excluded from adjusted pre-tax loss. For 2018 and 2017,
this amount was immaterial.
(b) Beginning in the first quarter of 2019, on a prospective basis, within Other Operations, investment income from our non-insurance subsidiaries is reported in Net
investment income instead of Other income to align reporting with General Insurance and Life and Retirement reporting segments. The impact of this reclassification for
the twelve-months ended December 31, 2019 was $262 million. For the twelve-months ended December 31, 2018, the amount included in Other income was $165
million.
(c) Interest expense-other primarily represents interest expense on consolidated investment entities of $158 million, $11 million and $0 in 2019, 2018 and 2017,
respectively, and costs of derivatives used to economically hedge foreign denominated debt of $37 million, $34 million and $0 in 2019, 2018 and 2017, respectively.
2019 AND 2018 COMPARISON
Adjusted pre-tax loss increased primarily due to:
higher corporate general operating expenses due to higher compensation and technology costs; and
higher interest expenses driven by corporate debt issuances in the first quarter of 2019 and 2018, and debt associated with
consolidated investment entities.
The increase in adjusted pre-tax loss was partially offset by:
higher net investment income associated with consolidated investment entities.
104 AIG | 2019 Form 10-K
ITEM 7 | Business Segment Operations | Ot he r Op er at io n s
2018 AND 2017 COMPARISON
Blackboard began operations in 2018 and Fuji Life was sold on April 30, 2017. Excluding these results, adjusted pre-tax loss
increased primarily due to:
higher interest expense due to corporate debt issuances totaling $2.5 billion at the end of the first quarter of 2018; and
lower other income as a result of income on securities for which we elected the fair value option and available for sale investments.
The increase in adjusted pre-tax loss was partially offset by:
lower general operating expenses related to one-time payments to executive leadership in 2017.
AIG | 2019 Form 10-K 105
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, 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.
• Enhanced insured policyholder options and claims resolution strategies.
• Enhanced asset liability management and expense management.
For Legacy investments, our business strategy is to maximize liquidity to AIG Parent and minimize book value impairments while
sourcing for our insurance companies attractive assets for their portfolios.
SALE OF FORTITUDE HOLDINGS
Fortitude Re was established during the first quarter of 2018 in connection with a series of affiliated reinsurance transactions related
to our Legacy Portfolio. Those reinsurance transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines
into a single legal entity. As of December 31, 2019, the affiliated transactions included the cession of approximately $30.2 billion of
reserves from our Legacy Life and Retirement Run-Off Lines and approximately $3.9 billion of reserves from our Legacy General
Insurance Run-Off Lines related to business written by multiple wholly-owned AIG subsidiaries. Fortitude Re has approximately $2.5
billion of total assets after elimination of intercompany balances, primarily managed by AIG, and is AIG’s main run-off reinsurer with its
own dedicated management team. In the second quarter of 2018, we formed Fortitude Holdings to act as a holding company for
Fortitude Re.
On November 13, 2018, AIG completed the sale of a 19.9 percent ownership interest in Fortitude Holdings to TCG, an affiliate of
Carlyle. Upon completion of the 2018 Fortitude Sale, Fortitude Holdings owned 100 percent of the outstanding common shares of
Fortitude Re and AIG had an 80.1 percent ownership interest in Fortitude Holdings. AIG received $381 million in cash and will receive
up to $95 million of deferred compensation which is subject to certain purchase price adjustments. To the extent AIG does not receive
all or a portion of the planned distributions within 18 months of the 2018 Fortitude Sale, TCG will pay us up to an additional $100
million. In connection with the 2018 Fortitude Sale, we agreed to certain investment commitment targets into various Carlyle
strategies and to certain minimum investment management fee payments within thirty-six months following the closing. AIG also will
be required to pay a proportionate amount of an agreed make-whole fee to the extent we fail to satisfy such investment commitment
targets.
On November 25, 2019, AIG entered into a membership interest purchase agreement with Fortitude Holdings, Carlyle, Carlyle FRL,
T&D and T&D Holdings, Inc., pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, Carlyle
FRL will purchase from AIG a 51.6 percent ownership interest in Fortitude Holdings and T&D will purchase from AIG a 25 percent
ownership interest in Fortitude Holdings. Upon closing of the 2019 Fortitude Sale, AIG will have a 3.5 percent ownership interest in
Fortitude Holdings. In connection with the 2019 Fortitude Sale agreement, AIG, Fortitude Holdings and an affiliate of Carlyle FRL have
agreed that, effective as of the closing of the 2019 Fortitude Sale, (i) AIG’s aforementioned investment commitment targets will be
assumed by Fortitude Holdings and AIG will be released therefrom, and (ii) Carlyle will remain obligated to pay AIG $95 million of
deferred compensation and up to an additional $100 million to the extent AIG does not receive all or a portion of the planned
106 AIG | 2019 Form 10-K
ITEM 7 | Business Segment Operations | Le g a c y P o r t f ol io
distributions within 18 months of the closing of the 2018 Fortitude Sale. We expect to contribute approximately $1.45 billion of the
proceeds of the 2019 Fortitude Sale to certain of our insurance company subsidiaries for a period of time following the closing of the
transaction. There can be no guarantee that we will receive the required regulatory approvals or that closing conditions will be
satisfied in order to consummate the 2019 Fortitude Sale.
The affiliated reinsurance transactions executed in the first quarter of 2018 with Fortitude Re resulted in prepaid insurance assets on
the ceding subsidiaries’ balance sheets of approximately $2.5 billion (after-tax) and related deferred acquisition costs of $0.5 billion
(after-tax) at inception of the contract. The prepaid insurance assets have been eliminated in AIG’s consolidated financial statements
since the counterparties were wholly owned.
Upon closing of the 2019 Fortitude Sale, AIG will recognize a loss for the portion of the unamortized balance of these assets that are
not recoverable, if any, when we are no longer a controlling shareholder in Fortitude Holdings. As of December 31, 2019, the
unamortized balances of the aforementioned prepaid insurance assets and related deferred acquisition costs were $2.3 billion (after-
tax) and $0.4 billion (after-tax), respectively. This combined loss of $2.7 billion would be incremental to any gain or loss recognized on
the 2019 Fortitude Sale. The incremental gain or loss we will recognize on the 2019 Fortitude Sale would be impacted, perhaps
significantly, by market conditions existing at the time the 2019 Fortitude Sale closes.
LEGACY PORTFOLIO RESULTS
Years Ended December 31,
(in millions)
Revenues:
Premiums
Policy fees
Net investment income(a) (b)
Other income (loss) (b)
Total adjusted revenues
Benefits, losses and expenses:
2019
2018
2017
2019 vs. 2018
2018 vs. 2017
Percentage Change
$
481 $
122
2,480
(67)
3,016
480 $
120
2,325
114
3,039
590
137
2,776
888
4,391
Policyholder benefits and losses and loss adjustment
expenses incurred
1,909
2,057
1,998
Interest credited to policyholder account balances
Amortization of deferred policy acquisition costs
General operating and other expenses
Interest expense
Total benefits, losses 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
(in millions)
Selected Balance Sheet Data
Legacy Investments, net of related debt
Legacy General Insurance run-off reserves
Legacy Life and Retirement run-off reserves
$
$
$
213
68
306
19
236
105
398
30
2,515
2,826
501 $
213 $
77 $
244
180
501 $
76 $
17
120
213 $
1,470
241
76
484
122
2,921
1,470
221
406
843
- %
(19) %
2
7
NM
(1)
(7)
(10)
(35)
(23)
(37)
(11)
(12)
(16)
(87)
(31)
3
(2)
38
(18)
(75)
(3)
135 %
(86) %
1 %
NM
50
135 %
(66) %
(96)
(86)
(86) %
December 31,
December 31,
2019
2018
$
2,002 $
5,409
38,728
2,529
5,498
36,614
(a) Beginning in the first quarter of 2019, on a prospective basis, changes in the fair value of equity securities are excluded from adjusted pre-tax loss. For 2018 and 2017,
this amount was immaterial.
(b) Beginning in the first quarter of 2019, on a prospective basis, within Legacy Portfolio, investment income from our non-insurance subsidiaries is reported in Net
investment income and Net realized gain (loss) instead of Other income to align reporting with General Insurance and Life and Retirement reporting segments. The
impact of this reclassification for the twelve-months ended December 31, 2019 was $124 million. For the twelve-months ended December 31, 2018, the amount
included in other income was $152 million.
AIG | 2019 Form 10-K 107
ITEM 7 | Business Segment Operations | Le g a c y P o r t f ol io
Business and Financial Highlights
Legacy insurance lines, including those ceded to Fortitude Re, continue to run-off as anticipated for Legacy General Insurance and
Legacy Life and Retirement Run-Off Lines. Legacy investments have been reduced significantly over the last several years declining
from $6.7 billion at December 31, 2016 to $2.0 billion at December 31, 2019. The remaining Legacy investments primarily include
structured credit junior notes for which we have elected the fair value option and real estate investments.
Legacy Portfolio Adjusted Pre-Tax Income
(in millions)
2019 and 2018 Comparison
Adjusted pre-tax income increased due to:
Higher Legacy Life and Retirement earnings due to an increase in net
investment income and a decrease in policyholder benefits and
losses incurred due to non-recurring loss recognition incurred on
accident and health business (other than long-term care) in 2018.
Higher Legacy Investment earnings due to an increase in gains on
fair value option portfolios
Legacy General Insurance earnings in 2019 were consistent compared
to 2018.
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.
Legacy Portfolio Adjusted Pre-Tax Income
(in millions)
108 AIG | 2019 Form 10-K
ITEM 7 | Investments
Investments
OVERVIEW
Our investment strategies are tailored to the specific business needs of each operating unit by targeting an asset allocation mix that
provides diversification from an asset class, sector, issuer, and geographic perspective. The primary objectives are generation of
investment income, preservation of capital, liquidity management and growth of surplus. The majority of assets backing our insurance
liabilities consist of fixed maturity securities.
Investment Highlights in 2019
A drop in interest rates and narrowing credit spreads resulted in a net unrealized gain in our investment portfolio. Net unrealized
gains in our available for sale portfolio increased to approximately $17.9 billion as of December 31, 2019 from approximately $3.6
billion as of December 31, 2018.
We continued to make investments in structured securities and other fixed maturity securities and increased lending activities in
mortgage loans with favorable risk compared to return characteristics to improve yields and increase net investment income.
We experienced higher investment returns in our alternative investments portfolio due to robust equity market returns in 2019,
income from an initial public offering of a holding in the private equity portfolio, and an increase in income from fixed maturity
securities for which the fair value option was elected. This compares to the prior year where returns were lower as a result of an
increase in interest rates and widening credit spreads that occurred, lower hedge fund performance, as well as negative
performance of our fair value option equity securities portfolio.
During the first quarter of 2019, we sold our remaining investment in People’s Insurance Company (Group) of China Limited and
PICC Property & Casualty Company Limited (collectively, our PICC Investment).
Blended investment yields on new investments were lower than blended rates on investments that were sold, matured or called.
Investment Strategies
Investment strategies are assessed at the business segment level and involve considerations that include local and general market
conditions, duration and cash flow management, risk appetite and volatility constraints, rating agency and regulatory capital
considerations, tax and legal investment limitations.
Some of our key investment strategies are as follows:
• Our fundamental strategy across the portfolios is to seek investments with similar characteristics to the associated insurance
liabilities to the extent practicable. AIG embeds Environmental, Social and Governance (ESG) considerations in its fundamental
investment analysis of the companies or projects we invest in to ensure that they have sustainable earnings over the full term of
our investment. AIG considers internal and external factors and evaluates changes in consumer behavior, industry trends related
to ESG factors as well as the ability of the management of companies to respond appropriately to these changes in order to
maintain their competitive advantage.
• We seek to originate investments that offer enhanced yield through liquidity premiums, such as private placements and
commercial mortgage loans, which also add portfolio diversification. These assets typically afford credit protections through
covenants, ability to customize structures that meet our insurance liability needs, and deeper due diligence given information
access.
• Given our global presence, we have access to assets that provide diversification from local markets. To the extent we purchase
these investments, we generally hedge the currency risk using derivatives, which could provide opportunities to earn higher risk
adjusted returns compared to risk assets in the functional currency.
• AIG Parent, included in Other Operations, actively manages its assets and liabilities in terms of products, counterparties and
duration. AIG Parent’s liquidity sources are held primarily in the form of cash, short-term investments and publicly traded,
investment grade rated fixed maturity securities. Based upon an assessment of its immediate and longer-term funding needs, AIG
Parent purchases publicly traded, investment grade rated fixed maturity securities that can be readily monetized through sales or
repurchase agreements. These securities allow us to diversify sources of liquidity while reducing the cost of maintaining sufficient
liquidity.
• Within the U.S., the Life and Retirement and General Insurance investments are generally split between reserve backing and
surplus portfolios.
AIG | 2019 Form 10-K 109
ITEM 7 | Investments
‒
Insurance reserves are backed by mainly investment grade fixed maturity securities that meet our current risk-return, tax,
liquidity, credit quality and diversification objectives. We assess fixed maturity asset classes based on their fundamental risk,
including credit (public and private), commercial mortgages and residential mortgages regardless of whether such investments
are bonds, loans, or structured products.
‒ Surplus accounts seek to enhance portfolio returns through a mix of fixed maturity (investment grade and high yield) and
various alternative asset classes, including private equity, real estate equity, and hedge funds. Over the past few years, hedge
fund investments have been reduced with more emphasis given to private equity, real estate and leveraged capital (for
example, we are currently focused on purchasing directly originated, middle market loans with strong covenant packages).
• Outside of the U.S., fixed maturity securities held by insurance companies consist primarily of high-grade securities generally
denominated in the currencies of the countries in which we operate.
Asset Liability Management
The investment strategy within the General Insurance companies focuses on growth of surplus, maintenance of sufficient liquidity for
unanticipated insurance claims, and preservation of capital. Assets with varying degrees of liquidity and volatility are allocated based
on whether backing reserves, required surplus or excess surplus, subject to capital, liquidity, and regulatory constraints. General
Insurance invests primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies;
structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans.
Fixed maturity securities of the General Insurance companies’ domestic operations have an average duration of 3.5 years. Fixed
maturity securities of the General Insurance companies’ foreign operations have an average duration of 3.6 years.
While invested assets backing reserves of the General Insurance companies are primarily invested in conventional liquid fixed
maturity securities, we have continued to allocate to asset classes that offer higher yields through structural and liquidity premiums,
particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments
to manage our exposure to potential changes in interest rates and inflation. We seek to diversify the portfolio across asset classes,
sectors, and issuers to mitigate idiosyncratic portfolio risks.
In addition, a portion of the surplus of General Insurance is invested in a diversified portfolio of alternative investments which seek to
balance liquidity, volatility and growth. There is a higher allocation to equity-oriented investments in General Insurance relative to
other AIG portfolios given the underlying inflation risks inherent in that business. Although these alternative investments are subject
to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have
provided added diversification to the broader portfolio.
The investment strategy of the Life and Retirement companies is to provide net investment income to back liabilities that result in
stable distributable earnings and enhance portfolio value for surplus accounts, subject to asset liability management, capital, and
regulatory constraints.
The Life and Retirement companies use asset-liability management as a primary tool to monitor and manage risk in their businesses.
The Life and Retirement companies maintain a diversified, high to medium quality portfolio of fixed maturity securities issued by
corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential
and commercial real estate; and commercial mortgage loans that, to the extent practicable, match the duration characteristics of the
liabilities. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a
result, duration varies between distinct portfolios. The interest rate environment has a direct impact on the asset liability management
profile of the businesses, and an extended low interest rate environment may result in a lengthening of liability durations from initial
estimates, primarily due to lower lapses, which may require us to further extend the duration of the investment portfolio. A further
lengthening of the portfolio will be assessed in the context of available market opportunities as longer duration markets may not
provide similar diversification benefits as shorter duration markets.
Fixed maturity securities of the Life and Retirement companies’ domestic operations have an average duration of 8.0 years. We seek
to diversify the portfolio across asset class, sectors, and issuers to mitigate idiosyncratic portfolio risks.
In addition, the Life and Retirement companies seek to enhance surplus portfolio returns through investments in a diversified portfolio
of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically
achieved yields in excess of the fixed maturity portfolio yields.
NAIC Designations of Fixed Maturity Securities
The Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (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,
110 AIG | 2019 Form 10-K
ITEM 7 | Investments
while NAIC Designations of ‘3’ through ‘6’ generally include fixed maturity securities referred to as below investment grade. The NAIC
has adopted revised rating methodologies for certain structured securities, including non-agency RMBS and CMBS, which are
intended to enable a more precise assessment of the value of such structured securities and increase the accuracy in assessing
expected losses to better determine the appropriate capital requirement for such structured securities. These methodologies result in
an improved NAIC Designation for such securities compared to the rating typically assigned by the three major rating agencies. The
following tables summarize the ratings distribution of AIG subsidiaries fixed maturity security portfolio by NAIC Designation, and the
distribution by composite AIG credit rating, which is generally based on ratings of the three major rating agencies.
For a full description of the composite AIG credit ratings see Credit Ratings.
The following table presents the fixed maturity security portfolio categorized by NAIC Designation, at fair value:
December 31, 2019
(in millions)
NAIC Designation
Other fixed maturity securities
Mortgage-backed, asset-backed and collateralized
Total*
1
2
$ 94,855 $ 74,024 $
62,600
3,523
$ 157,455 $ 77,547 $
Total
Investment
Grade
168,879
66,123
235,002
3
4
5
$
$
7,759 $
394
8,153 $
6,937 $ 1,184 $
159
59
7,096 $ 1,243 $
6
198 $
3,573
3,771 $
Total
Below
Investment
Grade
Total
16,078 $ 184,957
70,308
20,263 $ 255,265
4,185
* Excludes $2.5 billion of fixed maturity securities for which no NAIC Designation is available.
The following table presents the fixed maturity security portfolio categorized by composite AIG credit rating, at fair value:
December 31, 2019
(in millions)
Composite AIG Credit Rating
Other fixed maturity securities
Mortgage-backed, asset-backed and collateralized
Total*
$
AAA/AA/A
$
94,094 $
51,809
145,903 $
Total
Investment
Grade
169,268 $
56,061
225,329 $
BBB
75,174 $
4,252
79,426 $
BB
7,526 $
721
8,247 $
B
7,026 $
406
7,432 $
Total
Below
Investment
Grade
15,689 $
14,247
29,936 $
CCC and
Lower
1,137 $
13,120
14,257 $
Total
184,957
70,308
255,265
* Excludes $2.5 billion of fixed maturity securities for which no NAIC Designation is available.
Credit Ratings
At December 31, 2019, approximately 89 percent of our fixed maturity securities were held by our domestic entities. Approximately 16
percent of these securities were rated AAA by one or more of the principal rating agencies, and approximately 13 percent were rated
below investment grade or not rated. Our investment decision process relies primarily on internally generated fundamental analysis
and internal risk ratings. Third-party rating services’ ratings and opinions provide one source of independent perspective for
consideration in the internal analysis.
Moody’s Investors Service Inc. (Moody’s), Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc. (S&P), or
similar foreign rating services rate a significant portion of our foreign entities’ fixed maturity securities portfolio. Rating services are not
available for some foreign-issued securities. Our Credit Risk Management department closely reviews the credit quality of the foreign
portfolio’s non-rated fixed maturity securities. At December 31, 2019, approximately 24 percent of such investments were either rated
AAA or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities rated AAA, and approximately 6
percent were below investment grade or not rated. Approximately 29 percent of the foreign entities’ fixed maturity securities portfolio is
comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance.
AIG | 2019 Form 10-K 111
ITEM 7 | Investments
Composite AIG Credit Ratings
With respect to our fixed maturity securities, the credit ratings in the table below and in subsequent tables reflect: (a) a composite of
the ratings of the three major rating agencies, or when agency ratings are not available, the rating assigned by the NAIC SVO (99
percent of total fixed maturity securities), or (b) our equivalent internal ratings when these investments have not been rated by any of
the major rating agencies or the NAIC. The “Non-rated” category in those tables consists of fixed maturity securities that have not
been rated by any of the major rating agencies, the NAIC or us.
For a discussion of credit risks associated with Investments see Enterprise Risk Management.
The following table presents the composite AIG credit ratings of our fixed maturity securities calculated on the basis of their
fair value:
(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,
2018
2019
December 31,
December 31,
December 31,
December 31,
2019
2018
2019
2018
11,821 $
31,141
11,170 $
27,766
2,121 $
-
2,619 $
106
13,942 $
31,141
49,437
75,598
15,905
40,142
69,564
14,511
11
-
7
1,356
300
-
49,448
75,598
15,912
1,301
185,203 $
1,333
164,486 $
-
2,139 $
-
4,381 $
1,301
187,342 $
29,419 $
14,816
28,859 $
12,019
365 $
201
481 $
911
29,784 $
15,017
6,861
4,154
10,575
6,964
4,058
12,923
165
98
3,630
290
152
5,096
7,026
4,252
14,205
58
65,883 $
82
64,905 $
84
4,543 $
104
7,034 $
142
70,426 $
41,240 $
45,957
40,029 $
39,785
2,486 $
201
3,100 $
1,017
43,726 $
46,158
56,298
79,752
26,480
47,106
73,622
27,434
176
98
3,637
1,646
452
5,096
56,474
79,850
30,117
1,359
251,086 $
1,415
229,391 $
84
6,682 $
104
11,415 $
1,443
257,768 $
13,789
27,872
41,498
69,864
14,511
1,333
168,867
29,340
12,930
7,254
4,210
18,019
186
71,939
43,129
40,802
48,752
74,074
32,530
1,519
240,806
112 AIG | 2019 Form 10-K
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*
ITEM 7 | Investments
Fair Value at
December 31,
2019
Fair Value at
December 31,
2018
$
$
5,380
15,318
14,869
149,636
32,805
14,430
18,648
65,883
251,086
$
$
3,260
16,001
14,525
130,700
34,377
12,701
17,827
64,905
229,391
* At December 31, 2019 and 2018, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $27.8 billion and
$28.8 billion, respectively.
The following table presents the fair value of our aggregate credit exposures to non-U.S. governments for our fixed maturity
securities:
(in millions)
Japan
France
Canada
United Kingdom
Germany
Indonesia
United Arab Emirates
Norway
Israel
Chile
Other
Total
December 31,
2019
1,651
1,013
989
638
593
589
494
410
399
353
7,740
14,869
$
$
December 31,
2018
1,645
905
1,038
794
783
453
454
380
316
304
7,498
14,570
$
$
AIG | 2019 Form 10-K 113
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, 2019
Non-
Sovereign
Financial
Institution
Financial Structured
Products
Corporates
Total
$
$
$
$
$
1,013 $
593
317
62
179
40
2
-
101
160
510
2,977 $
638 $
30
137
410
190
92
1,497 $
4,474 $
1,788 $
155
1,105
123
122
286
93
27
51
3
78
3,831 $
4,059 $
1,169
320
45
39
38
5,670 $
9,501 $
1,503 $
2,581
1,100
435
953
796
387
354
40
-
238
8,387 $
8,622 $
680
125
94
196
132
9,849 $
18,236 $
- $
-
104
1,512
-
-
-
-
-
1
-
1,617 $
2,479 $
-
-
-
-
-
2,479 $
4,096 $
4,304
3,329
2,626
2,132
1,254
1,122
482
381
192
164
826
16,812
15,798
1,879
582
549
425
262
19,495
36,307
December 31,
2018
Total
$
$
$
$
$
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
114 AIG | 2019 Form 10-K
Investments in Municipal Bonds
At December 31, 2019, 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
Virginia
Ohio
Georgia
Washington
Pennsylvania
Florida
Washington, D.C.
New Jersey
All other states(a)
Total(b)(c)
State
General
Obligation
December 31, 2019
Local
General
Obligation
Revenue
Total
Fair
Value
December 31,
2018
Total Fair Value
$
$
7 $
712
105
75
426
9
47
105
166
125
10
11
-
453
2,251 $
396 $
389
524
145
-
-
1
71
-
1
-
-
2
277
1,806 $
2,656 $
1,827
883
852
319
484
434
283
239
269
345
305
276
2,089
3,059 $
2,928
1,512
1,072
745
493
482
459
405
395
355
316
278
2,819
11,261 $ 15,318 $
3,134
2,813
1,692
979
811
541
485
445
473
353
542
340
224
3,169
16,001
(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 $496 million of pre-refunded municipal bonds.
AIG | 2019 Form 10-K 115
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,
2019
Fair Value at
December 31,
2018
$
10,701 $
659
3,166
334
5,492
6,825
13,608
19,424
9,939
19,997
8,006
13,379
10,989
5,617
21,500
$
149,636 $
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
* At both December 31, 2019 and December 31, 2018, approximately 89 percent of these investments were rated investment grade.
Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, was 5.3 percent
and 5.4 percent at December 31, 2019 and December 31, 2018, respectively. While the energy investments are primarily investment
grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair
value.
Investments in RMBS
The following table presents AIG’s RMBS available for sale securities:
(in millions)
Agency RMBS
Alt-A RMBS
Subprime RMBS
Prime non-agency
Other housing related
Total RMBS(a)(b)
Fair Value at
December 31,
2019
15,721 $
$
8,484
2,654
4,451
1,495
$
32,805 $
Fair Value at
December 31,
2018
14,695
9,780
2,982
6,211
709
34,377
(a) Includes approximately $8.7 billion and $10.3 billion at December 31, 2019 and December 31, 2018, respectively, of certain RMBS that had experienced deterioration in
credit quality since their origination. For additional discussion on Purchased Credit Impaired (PCI) Securities see Note 7 to the Consolidated Financial Statements.
(b) The weighted average expected life was six years at December 31, 2019 and seven years at December 31 2018.
Our underwriting practices for investing in RMBS, other asset-backed securities (ABS) and CDOs take into consideration the quality
of the originator, the manager, the servicer, security credit ratings, underlying characteristics of the mortgages, borrower
characteristics, and the level of credit enhancement in the transaction.
116 AIG | 2019 Form 10-K
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,
2019
11,250 $
2,051
1,129
14,430 $
Fair Value at
December 31,
2018
9,975
2,047
679
12,701
$
$
The fair value of CMBS holdings remained stable throughout 2019. The majority of our investments in CMBS are in tranches that
contain substantial protection features through collateral subordination. The majority of CMBS holdings are traditional conduit
transactions, broadly diversified across property types and geographical areas.
Investments in CDOs
The following table presents our CDO available for sale securities by collateral type:
(in millions)
Collateral Type:
Bank loans (CLO)
Other
Total
Commercial Mortgage Loans
Fair value at
December 31,
2019
Fair value at
December 31,
2018
$
$
9,330 $
44
9,374 $
8,164
56
8,220
At December 31, 2019, we had direct commercial mortgage loan exposure of $36.2 billion. All commercial mortgage loans were
current or performing according to their restructured terms.
The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized
cost:
(dollars in millions)
December 31, 2019
State:
New York
California
New Jersey
Texas
Florida
Massachusetts
Illinois
Washington, D.C.
Pennsylvania
Ohio
Other states
Foreign
Total*
Number
of
Class
Loans Apartments
Offices
Retail
Industrial
Hotel
Others
Total
Percent
of
Total
99
74
48
52
74
13
19
13
23
25
215
85
740
$
2,377 $ 4,913 $
1,341
44
1,163
234
245
441
302
20
10
740
1,189
$ 13,699 $ 10,642 $ 5,332 $
457 $
249
370
174
544
549
10
-
528
188
1,276
987
736
1,635
501
393
540
505
447
81
174
2,073
4,237
98 $
376 $
572
81
141
218
25
18
-
46
269
740
1,177
3,663 $ 2,312 $
817
27
145
217
-
-
18
25
-
401
564
- $
8,221
3,756
41
2,190
33
2,124
-
1,616
10
1,359
-
996
22
767
-
700
-
646
5
5,274
44
8,521
367
522 $ 36,170
23 %
10
6
6
3
4
3
2
2
2
15
24
100 %
AIG | 2019 Form 10-K 117
December 31, 2018
State:
New York
California
Texas
New Jersey
Florida
Massachusetts
Illinois
Pennsylvania
Washington, D.C.
Ohio
Other states
Foreign
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
ITEM 7 | Investments
393 $
535
102
41
224
26
19
47
-
235
773
679
100 $
831
125
28
218
-
-
25
19
-
460
717
3,074 $ 2,523 $
- $
7,096
3,495
48
2,017
5
1,618
33
1,583
35
1,453
-
952
22
740
-
731
-
628
5
5,291
73
7,278
359
580 $ 32,882
22 %
11
6
5
5
4
3
2
2
2
16
22
100 %
* Does not reflect allowance for credit losses.
For additional discussion on commercial mortgage loans see Note 8 to the Consolidated Financial Statements.
Impairments
The following table presents impairments by investment type:
Years Ended December 31,
(in millions)
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
2019
2018
2017
$
$
174 $
-
-
174
-
12
34
220 $
251 $
-
-
251
-
-
79
330 $
216
11
33
260
360
20
61
701
(a) Upon the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer required to be evaluated for
other-than-temporary impairments.
(b) Impairments include $360 million related to investments in our life settlements portfolio that were sold in 2017.
Our investments in life settlements are monitored for impairment on a contract-by-contract basis quarterly. An investment in life
settlements is considered impaired if the undiscounted cash flows resulting from the expected proceeds would not be sufficient to
recover our estimated future carrying amount. This amount is defined as the current carrying amount for the investment in life
settlements plus anticipated undiscounted future premiums and other capitalizable future costs, if any. Impaired investments in life
settlements are written down to their estimated fair value. This is determined on a discounted cash flow basis, incorporating current
market mortality assumptions and market yields or by repricing to the anticipated sale price as appropriate.
Impairments on life settlements in 2017 were mainly attributable to write-downs of the policies to the purchase price as agreed in the
sale of the life settlements portfolio. We sold the remaining portion of our life settlements portfolio in 2017.
118 AIG | 2019 Form 10-K
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, 2019
Impairment Type:
Change in intent
Foreign currency declines
Issuer-specific credit events
Adverse projected cash flows
Total
Year Ended December 31, 2018
Impairment Type:
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
RMBS
CDO/ABS
CMBS
Other Fixed
Maturity
Equities/Other
Invested Assets*
Total
$
$
$
$
$
$
- $
-
24
6
30 $
- $
-
62
2
64 $
- $
-
-
24
4
28 $
- $
-
1
-
1 $
- $
-
9
-
9 $
- $
-
-
41
-
41 $
- $
-
16
-
16 $
- $
-
20
-
20 $
- $
-
-
32
-
32 $
3
18
106
-
127 $
87
15
56
-
158 $
- $
9
11
95
-
115 $
- $
-
-
-
- $
- $
-
-
-
- $
2 $
-
-
42
-
44 $
3
18
147
6
174
87
15
147
2
251
2
9
11
234
4
260
*
Includes other-than-temporary impairment charges on private equity funds, hedge funds and direct private equity investments. Upon the adoption of the Financial
Instruments Recognition and Measurement Standard on January 1, 2018, equity securities are no longer required to be evaluated for other-than-temporary
impairments.
We recorded other-than-temporary impairment charges in the years ended December 31, 2019, 2018 and 2017 related to:
issuer-specific credit events;
securities that we intend to sell or for which it is more likely than not that we will be required to sell;
declines due to foreign exchange rates;
adverse changes in estimated cash flows on certain structured securities; and
securities that experienced severe market valuation declines.
In addition, impairments are recorded on real estate and investments in life settlements.
In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities
that is not foreign-exchange related, we generally prospectively accrete into earnings the difference between the new amortized cost
and the expected undiscounted recoverable value over the remaining life of the security. The accretion that was recognized for these
securities in earnings was $440 million in 2019, $530 million in 2018 and $669 million in 2017.
For a discussion of our other-than-temporary impairment accounting policy see Note 7 to the Consolidated Financial Statements.
AIG | 2019 Form 10-K 119
December 31, 2019
Aging(a)
(dollars in millions)
Investment grade
bonds
0-6 months
7-11 months
12 months or more
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
The following table shows the aging of the unrealized losses of fixed maturity securities, the extent to which the fair value is
less than amortized cost or cost, and the number of respective items in each category:
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)
Items(e)
Total
$ 25,487 $
$ 17,462 $
234
2,491 $
13 $
1,633
6,392
$
5,026 $
380
1,017
40
160
434
90
15
46
319
877
1
62
3,687 $
76 $
1,347 $
21 $
245
324
280
173
5
-
16
21
6
97
72
1 $
3 $
1
8
1
16
10 $
20 $
12 $
1 $
16
26
3
24
$
6,423 $
151
1,916 $
474 $
175
54 $
28 $
$ 22,488 $
324
3,838 $
34 $
2,013
7,409
564
1,201
281
235
55
206
585
11
97
88
13 $
4 $
17
34
4
40
Total(e)
$ 31,910 $
5,603 $
550 $
196
64 $
48 $
3
-
12
15
1
2
16
19
4
2
28
34
1 $
17,478 $
242
2,493
1
5
1,635
6,470
7 $
25,583 $
40
188
470
321
890
3,704
3 $
5,048 $
97
1,362
4
14
663
1,214
21 $
6,925 $
4 $
22,526 $
5
19
2,298
7,684
28 $
32,508 $
114
134
345
339
154
322
815
265
364
1,991
3,855
586
1,254
5,695
(a) Represents the number of consecutive months that fair value has been less than cost by any amount.
(b) Represents the percentage by which fair value is less than cost at December 31, 2019.
(c) For bonds, represents amortized cost.
(d) The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the
amortization of certain DAC.
(e) Item count is by CUSIP by subsidiary.
Change in Unrealized Gains and Losses on Investments
The change in net unrealized gains and losses on investments in 2019 was primarily attributable to increases in the fair value of fixed
maturity securities. For 2019, net unrealized gains related to fixed maturity securities increased by $14.2 billion due primarily to a
decrease in rates and a narrowing of credit spreads.
The change in net unrealized gains and losses on investments in 2018 was primarily attributable to decreases in the fair value of fixed
maturity securities. For 2018, net unrealized losses related to fixed maturity securities decreased by $9.9 billion due primarily to an
increase in rates and a widening of credit spreads.
For further discussion of our investment portfolio see also Note 7 to the Consolidated Financial Statements.
120 AIG | 2019 Form 10-K
Net Realized Capital Gains and Losses
The following table presents the components of Net realized capital gains (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 gains (losses)
ITEM 7 | Investments
2019
320 $
-
-
(3)
(18)
(147)
(6)
(46)
227
(294)
(22)
-
-
621
632 $
2018
(145) $
16
-
(87)
(15)
(147)
(2)
(92)
(182)
304
338
-
(321)
203
(130) $
2017
425
88
(2)
(9)
(11)
(234)
(4)
(50)
489
(1,374)
(368)
(360)
-
30
(1,380)
$
$
(a) Upon the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, the change in fair value of all equity securities is included
in Net investment income.
(b) In 2019, includes $200 million from the sale and concurrent leaseback of our corporate headquarters and $300 million as a result of sales in investment real estate
properties. In 2018, primarily includes $96 million and $49 million of realized gains on the sale of shares of OneMain Holdings, Inc. and an investment in Castle
Holdings LLC’s aircraft assets, respectively.
Net realized capital gains in 2019 compared to net realized capital losses in the prior year due to gains on the sales of securities and
foreign exchange compared to losses on sales of securities and foreign exchange in 2018, as well as lower impairments in 2019 and
losses on private equity sales in 2018. Partially offsetting these gains were derivative losses in 2019 compared to gains in the prior
year.
Net realized capital losses in 2018 decreased compared to 2017 due primarily to derivative gains in 2018 compared to derivative
losses in 2017. Net realized capital losses in 2018 were primarily related to a loss on the sale of a portion of our private equity
portfolio, foreign exchange losses, and other-than-temporary impairment charges, which more than offset derivative gains.
Net realized capital losses in 2017 consisted primarily of losses on variable annuity embedded derivatives, net of related hedges, and
impairments, which were partially offset by gains on the sales of securities and foreign exchange gains.
Variable annuity embedded derivatives, net of related hedges, reflected losses in 2019 compared to gains in the prior year primarily
due to changes in the non-performance or “own credit” risk adjustment used in the valuation of the variable annuities with GMWB
embedded derivative, which are not hedged as part of our economic hedging program.
For additional discussion of market risk management related to these product features see Enterprise Risk Management – Insurance
Risks – Life and Retirement Companies’ Key Risks – Variable Annuity, Index Annuity and Universal Life Risk Management and
Hedging Programs. For more information on the economic hedging target and the impact to pre-tax income of this program see
Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and Hedging Results in this
MD&A.
For further discussion of our investment portfolio see also Note 7 to the Consolidated Financial Statements.
AIG | 2019 Form 10-K 121
ITEM 7 | Insurance Reserves
Insurance Reserves
LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (LOSS RESERVES)
The following table presents the components of our gross and net loss reserves by segment and major lines of business*:
At December 31,
2019
2018
(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
Net liability for
Reinsurance
Gross liability
Net liability for
Reinsurance
Gross liability
unpaid losses
recoverable on
for unpaid
unpaid losses
recoverable on
for unpaid
and loss unpaid losses and
losses and
and loss unpaid losses and
losses and
adjustment
loss adjustment
loss adjustment
adjustment
loss adjustment
loss adjustment
expenses
expenses
expenses
expenses
expenses
expenses
$
4,330 $
5,494 $
4,285
4,064
5,154
4,950
1,287
6,234
2,573
1,962
6,238
1,824
5,073
4,695
2,221
2,807
988
1,268
1,191
519
2,053
882
9,824
9,358
8,759
7,375
7,757
2,275
7,502
3,764
2,481
8,291
2,706
$
4,772 $
5,318 $
10,090
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
Total General Insurance
42,901
27,191
70,092
47,543
27,686
75,229
Legacy Portfolio - Run-Off Lines:
U.S. Run-Off Long Tail Insurance Lines
(net of discount)
Other run-off product lines
Unallocated loss adjustment expenses
Total Legacy Portfolio - Run-Off Lines
Other Operations (Blackboard)
3,769
164
377
4,310
48
3,587
66
115
3,768
110
7,356
230
492
8,078
158
3,862
104
397
4,363
43
3,689
66
115
3,870
134
7,551
170
512
8,233
177
Total
$
47,259 $
31,069 $
78,328
$
51,949 $
31,690 $
83,639
* Includes net loss reserve discount of $1.5 billion and $2.0 billion for the years ended December 31, 2019, and 2018, respectively. For discussion of loss reserve discount
see Note 14 to the Consolidated Financial Statements.
Prior Year Development
The following table summarizes incurred (favorable) unfavorable prior year development net of reinsurance by segment:
Years Ended December 31,
(in millions)
General Insurance:
North America*
International
Total General Insurance
Legacy Portfolio - Run-Off Lines
Total prior year (favorable) unfavorable development
2019
2018
2017
$
$
$
(247) $
(47)
(294) $
-
(294) $
328 $
38
366 $
(4)
362 $
371
628
999
(21)
978
*
Includes the amortization attributed to the deferred gain at inception from the NICO adverse development reinsurance agreement of $232 million, $233 million and $228
million in the year ended December 31, 2019 and 2018 and 2017, respectively. Consistent with our definition of APTI, prior year development excludes the portion of
(favorable) unfavorable prior year reserve development for which we have ceded the risk under the NICO reinsurance agreements of $(278) million, $834 million and
$359 million for the year ended December 31, 2019, 2018 and 2017, respectively, and related changes in amortization of the deferred gain of $(13) million, $162 million
and $56 million over those same periods.
122 AIG | 2019 Form 10-K
ITEM 7 | Insurance Reserves
Net Loss Development – 2019
During 2019, we recognized favorable prior year loss reserve development of $294 million. The development was primarily driven by:
North America
Favorable development on 2017 Hurricanes and 2017 California Wildfires subrogation recoverables in Commercial Property and
Personal Lines;
Favorable development from amortization of the deferred gain on the adverse development reinsurance agreement with NICO for
accident years 2015 and prior;
Favorable development on U.S. Workers’ Compensation business, both guaranteed cost business and large deductible and
Defense Base Act business (covering government contractors serving at military bases overseas) where we reacted to favorable
loss trends in recent accident years;
Unfavorable development in U.S. Financial Lines, notably Directors and Officers (D&O), Employment Practices Liability (EPLI) and
Non-Medical Professional Errors & Omissions business where we reacted to increasing frequency and severity in recent accident
years; and
Unfavorable development in Primary General Liability where we reacted to adverse frequency and severity trends especially in
Construction.
International
Favorable development on Europe Property and Special Risks, Europe and Japan Personal Insurance and Other product lines;
and
Unfavorable development on European Casualty & Financial Lines, notably Commercial Auto, Employers Liability, Directors &
Officers, and Financial Institutions business.
Our analyses and conclusions about prior year reserves also help inform our judgments about the current accident year loss and loss
adjustment expense ratios we selected.
For further details of prior year development by line of business, see Note 14 to the Consolidated Financial Statements. For a
discussion of actuarial methods employed for major classes of business, see also Critical Accounting Estimates.
The following tables summarize incurred (favorable) unfavorable prior year development net of reinsurance, by segment and
major lines of business, and by accident year groupings:
Year Ended December 31, 2019
(in millions)
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
UK/Europe and Japan Personal insurance
Other product lines
Total General Insurance International
Legacy Portfolio - Run-Off Lines
Total prior year (favorable) unfavorable development
Total
2018 2017 & Prior
$
$
$
$
$
(442) $
26
160
290
(187)
(104)
10
(247) $
161 $
(108)
(119)
19
(47) $
-
15 $
(1)
53
139
47
13
36
302 $
46 $
5
(85)
(8)
(42) $
48
(294) $
308 $
(457)
27
107
151
(234)
(117)
(26)
(549)
115
(113)
(34)
27
(5)
(48)
(602)
AIG | 2019 Form 10-K 123
ITEM 7 | Insurance Reserves
Net Loss Development – 2018
During 2018, we recognized adverse prior year net loss reserve development of $362 million. This unfavorable development was
primarily a result of the following:
Unfavorable development in U.S. Excess Casualty, driven by the combination of construction Defect and construction wrap claims
from accident year 2015 and prior where we reacted to significant increases in severity and longer claim reporting patterns, as well
as higher than expected loss severity in accident years 2016 and 2017, which led to an increase in estimates for these accident
years;
Unfavorable development in U.S. Financial Lines, primarily from D&O and Employment Practices Liability (EPLI) policies covering
Corporate and National Insureds as well as Private and Not-for-Profit insureds. This development was predominantly in accident
years 2014-2017 and resulted largely from increases in severity as the frequency of class action lawsuits increased in those years.
Favorable development in U.S. Commercial Property and Specialty Lines due to reductions in our estimates for 2017 Catastrophes
and favorable development from the attritional losses in Commercial Property and Specialty.
Unfavorable development in U.S. 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.
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 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.
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 has provided a parental guarantee to secure NICO’s obligations
under the agreement.
For a description of AIG’s catastrophe reinsurance protection for 2019, see Enterprise Risk Management – Insurance Risks –Natural
Catastrophe Risk.
124 AIG | 2019 Form 10-K
The table below shows the calculation of the deferred gain on the adverse development reinsurance agreement as of
December 31, 2019 and 2018, showing the effect of discounting of loss reserves and amortization of the deferred gain.
ITEM 7 | Insurance Reserves
(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, December 31,
2017
2018
2019
$
$
$
$
19,064 $
22,954
(25,000)
17,018 $
13,614 $
(10,188)
3,426
(1,251)
2,175
(693)
(101)
1,381 $
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, 2019, the accretion of discount and a reduction in effective interest rates was offset by changes in estimates of the
amount and timing of future recoveries under the adverse development reinsurance agreement.
(b) Excluded from our definition of APTI.
The following table presents the rollforward of activity in the deferred gain from the adverse development reinsurance
agreement:
Years Ended December 31,
(in millions)
Balance at beginning of year, net of discount
Gain at inception
(Favorable) 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
2019
1,382 $
-
(277)
(232)
39
469
1,381 $
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 majority of the lines of business which experienced adverse prior year development have been subject to the adverse
development reinsurance agreement. This agreement has resulted in lower capital charges for reserve risks at 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 Enterprise Risk Management – Insurance Risks – Reinsurance Activities – Reinsurance
Recoverable.
LIFE AND ANNUITY RESERVES AND DAC
The following section provides discussion of life and annuity reserves and deferred policy acquisition costs.
Update of Actuarial Assumptions
The life insurance companies review and update actuarial assumptions at least annually, generally in the third quarter. Assumption
setting standards vary between investment-oriented products and traditional long-duration products.
AIG | 2019 Form 10-K 125
ITEM 7 | Insurance Reserves
Investment-oriented products
The Life Insurance Companies review and update estimated gross profit projections used to amortize DAC and related items (which
may include VOBA, SIA, guaranteed benefit reserves and unearned revenue reserves) for investment-oriented products at least
annually. Estimated gross profit projections include assumptions for investment-related returns and spreads, product-related fees and
expenses, mortality gains and losses, policyholder behavior and other factors. In estimating future gross profits, lapse and other
assumptions require judgment and can have a material impact on DAC amortization. If the assumptions used for estimated gross
profits change significantly, DAC and related reserves are recalculated using the updated assumptions, and any resulting adjustment
is included in income. Updating such assumptions may result in acceleration of amortization in some products and deceleration of
amortization in other products.
The Life Insurance Companies also review assumptions related to their respective GMWB living benefits that are accounted for as
embedded derivatives and measured at fair value. The fair value of these embedded derivatives is based on actuarial assumptions,
including policyholder behavior, as well as capital market assumptions.
Various assumptions were updated, including the following effective September 30, 2019:
• We increased our reversion to the mean rates of return (gross of fees) to 3.62 percent from 2.92 percent for the Variable Annuity
product line in Individual Retirement and to 3.29 percent from 1.90 percent for the Variable Annuity product line in Group
Retirement primarily due to the recent strong returns in equity markets. Our separate account long-term asset growth rate
assumption related to equity market performance remained unchanged at 7.0 percent; and
• Our ultimate projected yields on invested assets changed on most annuity deposits with some increased by up to 9 basis points
and others decreased by up to 34 basis points and lowered by up to 40 basis points on some life insurance deposits. Projected
yields are graded from a weighted average net GAAP book yield of existing assets supporting the business based on the value of
the assets to a weighted average yield based on the duration of the assets excluding assets that mature during the grading period.
The grading period is three years for deferred annuity products and five years for life insurance products due to deferred annuities
having a shorter duration than life products.
Traditional long-duration products
For long-duration traditional products discussed below, which include whole life insurance, term life insurance, accident and health
insurance, long-term care insurance, and life-contingent single premium immediate annuities and structured settlements, a “lock-in”
principle applies. The assumptions used to calculate the benefit liabilities and DAC are set when a policy is issued and do not change
with changes in actual experience, unless a loss recognition event occurs. Loss recognition occurs if observed changes in actual
experience or estimates result in projected future losses under loss recognition testing. Underlying assumptions are reviewed
periodically and updated as appropriate.
The net increases (decreases) to adjusted pre-tax income and pre-tax income as a result of the update of actuarial assumptions for
2019, 2018 and 2017 are shown in the following tables.
The following table presents the increase (decrease) in adjusted pre-tax income resulting from the update of actuarial
assumptions for the domestic life insurance companies, by segment and product line:
Years Ended December 31,
(in millions)
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 $
2019
2018
2017
82 $
(145)
(63)
(17)
(63)
-
(143)
(30)
(173) $
40 $
(92)
(52)
17
(63)
-
(98)
(110)
(208) $
130
112
242
13
29
-
284
(14)
270
126 AIG | 2019 Form 10-K
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:
ITEM 7 | Insurance Reserves
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
2019
(32) $
19
203
(363)
(173)
(17)
180
(10) $
2018
(237) $
-
273
(244)
(208)
35
(55)
(228) $
2017
(2)
49
184
39
270
44
(246)
68
$
$
In 2019, adjusted pre-tax income included a net unfavorable adjustment of $173 million, primarily in Index Annuities driven by an
update to lapse assumptions, and in Life Insurance primarily due to methodology enhancements related to projected premium, certain
riders and death benefit features, and reinsurance reserving. The unfavorable adjustments were partially offset by favorable updates
to full surrender assumptions in Individual Retirement Fixed Annuities.
In 2018, adjusted pre-tax income included a net unfavorable adjustment of $208 million, primarily in Variable Annuities driven by
reductions to the GMWB full surrender assumption, in Life Insurance primarily due to strengthening of reserves for certain riders and
interest crediting model refinements, and in Legacy Accident & Health Insurance loss recognition. The unfavorable adjustments were
partially offset by favorable adjustments in Life Insurance primarily due to lower lapse and mortality assumptions and a reduction in
IBNR reserves and in Individual Retirement due to lower lapse assumptions in Fixed Annuities and refinements to partial withdrawal
assumptions in Variable Annuities.
In 2017, adjusted pre-tax income included a net favorable adjustment of $270 million, primarily driven by lower lapse assumptions in
Fixed Annuities, improved mortality assumptions in Life Insurance, and an increase in the reversion to the mean rates in Variable
Annuities. The favorable adjustments were partially offset by lower spread assumptions in Fixed Annuities and a loss recognition
expense on long-term care business in the Legacy Life and Retirement Run-Off Lines.
The adjustments related to the update of actuarial assumptions in each period are discussed by segment below.
Update of Actuarial Assumptions by Segment
Individual Retirement
The update of actuarial assumptions resulted in net favorable (unfavorable) adjustments to adjusted pre-tax income of Individual
Retirement of $(63) million, $(52) million and $242 million in 2019, 2018 and 2017, respectively.
In Fixed Annuities, the update of estimated gross profit assumptions resulted in a net favorable adjustment of $82 million, $40 million
and $130 million in 2019, 2018 and 2017, respectively, which reflected lower lapse assumptions including the economic impact to
competitor rate on the interest sensitive lapse component, partially offset by lower interest spread assumptions.
In Variable and Index Annuities, the update of estimated gross profit assumptions resulted in a net unfavorable adjustment of $145
million in 2019, primarily due to lapse updates in Index Annuities and updated general account earned rates on Variable Annuities.
The unfavorable adjustments were partially offset by updated lapse assumptions in Variable Annuities. In 2018, a net unfavorable
adjustment of $92 million primarily due to refinements to the guaranteed benefit partial withdrawal assumptions in Variable Annuities
and the multi-year index strategy crediting parameters in Index Annuities. The unfavorable adjustments were partially offset by lower
guaranteed benefit lapse assumptions in Variable Annuities. In 2017, a net favorable adjustment of $112 million was primarily due to
an increase in the reversion to the mean rate used for projecting future estimated gross profit for variable annuity products and
changes in volatility assumptions. The net favorable adjustment was partially offset by a decrease in the separate account long-term
asset growth rate assumption from 7.5 percent to 7.0 percent (before expenses that reduce the asset base from which future fees are
projected) and an unfavorable adjustment in connection with the conversion to a new modeling platform for Index Annuities.
AIG | 2019 Form 10-K 127
ITEM 7 | Insurance Reserves
Group Retirement
In Group Retirement, the update of estimated gross profit assumptions resulted in an unfavorable adjustment of $17 million in 2019,
primarily due to lapse updates in Index Annuities and Variable Annuities. In 2018, a favorable adjustment of $17 million was primarily
due to improved premium persistency assumptions. In 2017, a net favorable adjustment of $13 million was primarily due to an
increase in the reversion to the mean rate used for projecting future estimated gross profit for variable annuity products and changes
in maintenance expense assumptions. The net favorable adjustment was partially offset by a decrease in the separate account long-
term asset growth rate assumption from 7.5 percent to 7.0 percent (before expenses that reduce the asset base from which future
fees are projected) and decreases in fixed annuity spread and separate account fee assumptions.
Life Insurance
In Life Insurance, the update of actuarial assumptions resulted in a net unfavorable adjustment of $63 million in 2019, primarily due to
methodology enhancements related to projected premium, certain riders and death benefit features, and reinsurance reserving. The
unfavorable adjustments were partially offset by favorable adjustments driven by updates to mortality assumptions. In 2018, a net
unfavorable adjustment of $63 million primarily due to additional reserves for certain riders, decreased lapses and interest crediting
model refinements. The unfavorable adjustments were partially offset by favorable adjustments driven by updates to mortality
assumptions and a reduction to IBNR reserves. In 2017, a net favorable adjustment of $29 million was primarily due to improved
mortality assumptions, partially offset by lower spread assumptions.
Legacy Portfolio
In the Legacy Portfolio, the update of actuarial assumptions resulted in a net unfavorable adjustment of $30 million in 2019, reflecting
updates to loss recognition reserves and methodology enhancements for universal life insurance. In 2018, a net unfavorable
adjustment of $110 million in 2018, primarily due to $105 million of loss recognition expense on accident and health business (other
than long-term care) in the Legacy Life and Retirement Run-Off Lines resulting from assumption and model refinements. In 2017, a
net unfavorable adjustment of $14 million was primarily due to $13 million of loss recognition expense on long-term care business in
the Legacy Life and Retirement Run-Off Lines resulting from model enhancements.
Variable Annuity Guaranteed Benefits and Hedging Results
Our Individual Retirement and Group Retirement businesses offer variable annuity products with GMWB riders that provide
guaranteed living benefit features. The liabilities for GMWB are accounted for as embedded derivatives measured at fair value. The
fair value of the embedded derivatives may fluctuate significantly based on market interest rates, equity prices, credit spreads, market
volatility, policyholder behavior and other factors.
In addition to risk-mitigating features in our variable annuity product design, we have an economic hedging program designed to
manage market risk from GMWB, including exposures to changes in interest rates, equity prices, credit spreads and volatility. The
hedging program utilizes derivative instruments, including but not limited to equity options, futures contracts and interest rate swap
and swaption contracts, as well as fixed maturity securities with a fair value election.
For additional discussion of market risk management related to these product features see Enterprise Risk Management – Insurance
Risks – Life and Retirement Companies’ Key Risks – Variable Annuity, Index Annuity and Universal Life Risk Management and
Hedging Programs.
Differences in Valuation of Embedded Derivatives and Economic Hedge Target
The variable annuity hedging program utilizes an economic hedge target, which represents an estimate of the underlying economic
risks in our GMWB riders. The economic hedge target differs from 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.
128 AIG | 2019 Form 10-K
ITEM 7 | Insurance Reserves
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 6 to the
Consolidated Financial Statements.
The market value of the hedge portfolio compared to the economic hedge target at any point in time may be different and is not
expected to be fully offsetting. In addition to the derivatives held in conjunction with the variable annuity hedging program, the Life and
Retirement companies have cash and invested assets available to cover future claims payable under these guarantees. The primary
sources of difference between the change in the fair value of the hedging portfolio and the economic hedge target include:
• Basis risk due to the variance between expected and actual fund returns, which may be either positive or negative;
• Realized volatility versus implied volatility;
• Actual versus expected changes in the hedge target driven by assumptions not subject to hedging, particularly policyholder
behavior; and
• Risk exposures that we have elected not to explicitly or fully hedge.
The following table presents a reconciliation between the fair value of the U.S. GAAP embedded derivatives and the value of
our economic hedge target:
(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,
2019
December 31,
2018
$
$
2,474 $
(2,504)
4,978
(2,394)
2,584 $
1,943
(2,615)
4,558
(2,377)
2,181
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.
AIG | 2019 Form 10-K 129
ITEM 7 | Insurance Reserves
The following table presents the net increase (decrease) to consolidated pre-tax income (loss) from changes in the fair value
of the GMWB embedded derivatives and related hedges, excluding related DAC amortization:
Years Ended December 31,
(in millions)
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)
2019
2018
2017
$
(156) $
(244) $
1,423
194
1,029
(1,274)
(51)
(207)
(314)
202
219
107
(100) $
194 $
(294)
(100) $
$
$
$
(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)
* Beginning in July 2019, the fixed maturity securities portfolio used in the hedging program was rebalanced to reposition the portfolio from a duration, sector, and issuer
perspective. As part of this rebalancing fixed maturity securities where we elected the fair value option were sold. Later in the quarter, as new fixed maturity securities
were purchased they were classified as available for sale. The change in fair value of available-for-sale fixed maturity securities recognized as a component of other
comprehensive income was $57 million for 2019.
The net impact on pre-tax income from the GMWB embedded derivatives and related hedges in 2019 (excluding related DAC
amortization) was driven by tightening of credits spreads on the NPA spread, and impact of lower interest rates on the change in the
fair value of embedded derivatives excluding NPA, net of the hedging portfolio, offset by impact of lower interest rates that resulted in
NPA volume gains from higher expected GMWB payments, and gains from the review and update of actuarial assumptions. In 2018,
the net impact on pre-tax income was primarily driven by gains from the impact of widening credit spreads on the NPA spread, and
higher interest rates, partially offset by losses from the impact of the change in credit spreads and the move from an economic to a
U.S. GAAP discount basis. In 2017, the net impact on pre-tax income was primarily driven by losses from actuarial assumption
updates to lapse and volatility assumptions, tightening credit spreads on the NPA spread and the impact on the NPA volume of lower
expected GMWB payments, driven by higher equity markets.
The change in the fair value of the GMWB embedded derivatives, excluding NPA and update of actuarial assumptions, in 2019
reflected losses from decreases in interest rates and tightening crediting spreads, offset by gains from higher equity markets. The
change in the fair value of the GMWB embedded derivatives, excluding NPA and update of actuarial assumptions, in 2018 reflected
losses from lower equity markets and the impact of moving from an economic to a GAAP discount basis, offset by increases in
interest rates and widening credit spreads. In 2018, the hedge losses were driven by losses from higher interest rates and widening
credit spreads, offset by gains from lower equity markets. In 2017, the change in the fair value of embedded derivatives, excluding
update of actuarial assumptions and NPA, was largely offset by the related hedging portfolio.
Fair value gains or losses in the hedging portfolio are typically not fully offset by increases or decreases in liabilities on 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 increase in the economic hedge target liability in 2019 was primarily due to lower interest rates, offset by higher equity markets
and gains from the review and update of actuarial assumptions. The decrease in the economic hedge target liability in 2018 was
primarily due to higher interest rates and widening of credit spreads, offset by lower equity markets.
130 AIG | 2019 Form 10-K
ITEM 7 | Insurance Reserves
Change in Fair Value of the Hedging Portfolio
The changes in the fair value of the economic hedge target and, to a lesser extent, the embedded derivative valuation under 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, are used as a capital-efficient way to economically
hedge interest rate and credit spread-related risk. Beginning in July 2019, the change in the fair value of available-for-sale hedging
bonds is reported as a component of comprehensive income in the Condensed Consolidated Statements of Comprehensive
Income (Loss). Prior to July 2019, the change in the fair value of the hedging bonds, which was excluded from the adjusted pre-
tax income of the Individual Retirement and Group Retirement segments, was reported in net investment income on the
Consolidated Statements of Income (Loss). The change in the fair value of the corporate bond hedging program in 2019 reflected
gains due to decreases in interest rates, and tightening credit spreads. The net losses in 2018 reflected the impact of increases in
interest rates, and widening of credit spreads. The net gains in 2017 were primarily due to tightening of credit spreads.
Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions and futures, resulted in gains
driven by lower interest rates in 2019 compared to losses in the prior year, which was driven by higher interest rates. The small net
loss in 2017 reflected increases in rates in the latter half of 2017, partially offset by the impact of interest rate declines in the first
half of 2017.
The change in the fair value of equity derivative contracts, which included futures and options, reflected losses in 2019, gains in
2018 and losses in 2017, which varied based on the relative change in equity market returns in the respective periods.
DAC
The following table summarizes the major components of the changes in DAC, including VOBA, within the Life and
Retirement companies, excluding DAC of the Legacy Portfolio:
Years Ended December 31,
(in millions)
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*
2019
9,046 $
1,180
203
51
(853)
18
(1,744)
7,901 $
$
$
2018
7,585 $
1,129
307
5
(987)
(22)
1,029
9,046 $
2017
7,551
938
194
293
(937)
26
(480)
7,585
* DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $10.0 billion, $9.3 billion and $8.9 billion at December 31, 2019,
2018 and 2017, respectively.
The net adjustments to DAC amortization from the update of actuarial assumptions for estimated gross profits, including those
reported within change in DAC related to net realized capital gains (losses), represented two percent, four percent and two percent of
the DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments as of December 31, 2019,
2018 and 2017, respectively.
Reversion to the Mean
The reversion to the mean rate is updated quarterly based on market returns and can change dramatically in periods where market
returns move significantly. The five-year reversion to the mean period did not meet the criteria for adjustment in 2019 which would
have otherwise required a reset of the start date used in the calculation of the average gross long-term return rate. The long-term
growth assumption used in our reversion to the mean methodology remained unchanged at 7.0 percent in 2019 and 2018.
In 2017, we updated the long-term annual growth assumption applied to subsequent periods used in our reversion to the mean
methodology for estimating future estimated gross profits for variable annuity products, from 7.5 percent to 7.0 percent (before
expenses that reduce the asset base from which future fees are projected). The five-year reversion to the mean period met the criteria
for adjustment in 2017. As a result, the average gross long-term return measurement start date was reset to December 31, 2011 for
Individual Retirement and June 30, 2013 for Group Retirement; the reversion to the mean rates (gross of fees) were increased to 3.74
percent in Individual Retirement and 3.78 percent in Group Retirement. Sustained favorable equity market performance in excess of
long-term assumptions could result in additional unlocking in the Individual Retirement or Group Retirement variable annuity product
lines in the future, with a positive effect on pre-tax income in the period of the unlocking.
AIG | 2019 Form 10-K 131
ITEM 7 | Insurance Reserves
For additional discussion of assumptions related to our reversion to the mean methodology see Critical Accounting Estimates –
Estimated Gross Profits for Investment-Oriented Products.
DAC and Reserves Related to Unrealized Appreciation of Investments
DAC and Reserves for universal life and investment-type products (collectively, investment-oriented products) are adjusted at each
balance sheet date to reflect the change in DAC, unearned revenue, and benefit reserves with an offset to Other comprehensive
income (OCI) as if securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at
current yields (shadow Investment-Oriented Adjustments). Similarly, for long-duration traditional products, significant unrealized
appreciation of investments in a sustained low interest rate environment may cause additional future policy benefit liabilities (shadow
Loss Adjustments) with an offset to OCI to be recorded.
Shadow adjustments to DAC and unearned revenue generally move in the opposite direction of the change in unrealized appreciation
of the available for sale securities portfolio, reducing the reported DAC and unearned revenue balance when market interest rates
decline. Conversely, shadow adjustments to benefit reserves generally move in the same direction as the change in unrealized
appreciation of the available for sale securities portfolio, increasing reported future policy benefit liabilities balance when market
interest rates decline.
Market interest rates decreased in 2019, which drove a $12.6 billion increase in the unrealized appreciation of fixed maturity securities
held to support businesses in the Life and Retirement companies at December 31, 2019 compared to December 31, 2018. At
December 31, 2019, the shadow Investment-Oriented Adjustments reflected decreases in DAC and unearned revenues and an
increase in future policy benefit liabilities compared to December 31, 2018, while the shadow Loss Adjustments reflected an increase
in future policy benefit liabilities.
Reserves
The following table presents a rollforward of insurance reserves by operating segments for Life and Retirement, including
future policy benefits, policyholder contract deposits, other policy funds, and separate account liabilities, as well as Retail
Mutual Funds and Group Retirement mutual fund assets under administration:
Years Ended December 31,
(in millions)
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
132 AIG | 2019 Form 10-K
2019
2018
2017
$
$
$
$
132,729 $
14,899
(13,161)
(3,204)
(1,466)
138,571 $
15,621
(14,081)
(3,316)
(1,776)
11,491
1,666
508
144,928
(308)
144,620 $
(5,302)
1,540
(304)
132,729
(318)
132,411 $
91,685 $
8,346
(10,317)
(675)
(2,646)
97,306 $
8,639
(10,652)
(606)
(2,619)
11,939
1,128
(57)
102,049
102,049 $
(4,106)
1,106
(2)
91,685
91,685 $
129,321
11,906
(10,943)
(3,089)
(2,126)
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
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
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
$
$
$
$
$
$
19,719 $
3,737
(575)
(524)
2,638
(1,138)
370
507
22,096
(1,150)
20,946 $
19,839 $
2,758
(913)
(1,102)
743
605
353
48
21,588
(43)
21,545 $
19,424 $
3,559
(943)
(465)
2,151
(1,124)
374
(1,106)
19,719
(1,216)
18,503 $
18,580 $
3,032
(1,745)
(655)
632
179
338
110
19,839
(43)
19,796 $
18,397
3,484
(569)
(575)
2,340
(889)
376
(800)
19,424
(1,055)
18,369
15,385
4,247
(1,291)
(343)
2,613
245
253
84
18,580
(3)
18,577
263,972 $
29,740
(24,966)
(5,505)
(731)
273,881 $
30,851
(27,421)
(5,042)
(1,612)
22,897
3,517
1,006
290,661
(1,501)
289,160 $
(10,353)
3,358
(1,302)
263,972
(1,577)
262,395 $
251,725
27,187
(20,822)
(4,569)
1,796
18,071
3,255
(966)
273,881
(1,380)
272,501
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.
December 31,
2019
17,963 $
$
147,545
271
91,222
257,001
33,660
290,661 $
$
December 31,
2018
14,739
137,718
295
79,960
232,712
31,260
263,972
AIG | 2019 Form 10-K 133
ITEM 7 | Liquidity and Capital Resources
Liquidity and Capital Resources
OVERVIEW
Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations. It is defined as cash and
unencumbered assets that can be monetized in a short period of time at a reasonable cost. We endeavor to manage our liquidity
prudently through various risk committees, policies and procedures, and a stress testing and liquidity risk framework established by
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.
Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth, and
cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital generation is
derived from the profitability of our insurance subsidiaries. We must comply with numerous constraints on our minimum capital
positions. These constraints drive the requirements for capital adequacy at AIG and the individual businesses and are based on
internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual capital
levels are monitored on a regular basis, and using ERM’s stress testing methodology, we evaluate the capital impact of potential
macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of both AIG and our insurance
subsidiaries.
We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to
policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or events.
Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable capital
resources. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher
surrenders of annuities and other policies, downgrades in credit ratings, or catastrophic losses may result in significant additional cash
or capital needs and loss of sources of liquidity and capital. In addition, regulatory and other legal restrictions could limit our ability to
transfer funds freely, either to or from our subsidiaries.
Depending on market conditions, regulatory and rating agency considerations and other factors, we may take various liability and
capital management actions. Liability management actions may include, but are not limited to, repurchasing or redeeming outstanding
debt, issuing new debt or engaging in debt exchange offers. Capital management actions may include, but are not limited to, issuing
preferred stock, paying dividends to our shareholders and AIG Common Stock and/or warrant repurchases.
134 AIG | 2019 Form 10-K
ITEM 7 | Liquidity and Capital Resources
LIQUIDITY AND CAPITAL RESOURCES HIGHLIGHTS
SOURCES
AIG Parent Funding from Subsidiaries
During 2019, AIG Parent received $3.8 billion in dividends from subsidiaries. Of this amount, $2.2 billion consisted of dividends in
the form of cash and fixed maturity securities from our General Insurance companies and $1.6 billion consisted of dividends and
loan repayments in the form of cash from our Life and Retirement companies.
AIG Parent also received a net amount of $1.2 billion in tax sharing payments in the form of cash and fixed maturity securities from
our insurance businesses in 2019, including $134 million of such payments in the fourth quarter of 2019. The tax sharing payments
may be subject to further adjustment in future periods.
Preferred Stock Issuance
In March 2019, we issued 20,000 shares of Series A Preferred Stock, with a par value of $5.00 per share and a liquidation
preference of $25,000 per share, for net proceeds of approximately $485 million.
Debt Issuance
In March 2019, we issued $600 million aggregate principal amount of 4.250% Notes Due 2029.
USES
Debt Reduction*
We made repurchases of and repayments on debt instruments of approximately $3.3 billion during 2019, including the repayment
of $1.0 billion aggregate principal amount of our 2.300% Notes Due 2019. AIG Parent made interest payments on our debt
instruments totaling $941 million during 2019.
Dividend
We paid a cash dividend of $369.6875 per share, $365.625 per share and $365.625 per share on AIG’s Series A Preferred Stock
during the second, third and fourth quarters of 2019, respectively, totaling $22 million.
We paid a cash dividend of $0.32 per share on AIG Common Stock during each quarter of 2019 totaling $1.1 billion.
AIG Parent Funding to Subsidiaries
In February 2019, AIG Parent made a capital contribution of $300 million to our General Insurance companies.
* On February 13, 2020, AIG announced that it will redeem all of its outstanding 4.35% Callable Notes Due 2045 (the Notes) on March 20, 2020, for a redemption price of
100% of the principal amount plus accrued and unpaid interest. As of February 13, 2020, $350 million aggregate principal amount of the Notes were outstanding.
AIG | 2019 Form 10-K 135
ITEM 7 | Liquidity and Capital Resources
ANALYSIS OF SOURCES AND USES OF CASH
The following table presents selected data from AIG's Consolidated Statements of Cash Flows:
Years Ended December 31,
(in millions)
Sources:
Net cash provided by operating activities
Net cash provided by other investing activities
Changes in policyholder contract balances
Issuance of long-term debt and debt of consolidated investment entities
Issuance of preferred stock, net of issuance costs
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
Net cash used in other investing activities
Repayments of long-term debt and debt of consolidated investment entities
Purchase of common stock
Dividends paid on preferred stock
Dividends paid on common stock
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
2019
2018
2017
$
- $
-
4,751
3,881
485
1,600
10,717
(928)
-
(5,475)
(3,202)
-
(22)
61 $
-
5,494
6,179
4,734
-
-
14,041
2,123
3,356
-
-
16,468
19,520
-
(5,717)
-
(3,672)
(1,739)
-
(7,818)
-
-
(3,698)
(6,275)
-
(1,114)
(1,138)
(1,172)
-
-
(11)
(3,559)
(3)
(28)
(10,741)
(15,836)
(18,994)
$
16
(8) $
(11)
621 $
(29)
497
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
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
Operating Cash Flow Activities
2019
2018
2017
$
$
(928) $
(5,475)
6,379
16
(8)
3,358
(63)
3,287 $
61 $
(223)
794
(11)
621
2,737
-
3,358 $
(7,818)
14,041
(5,697)
(29)
497
2,107
133
2,737
Insurance companies generally receive most premiums in advance of the payment of claims or policy benefits. The ability of
insurance companies to generate positive cash flow is affected by the frequency and severity of losses under their insurance policies,
policy retention rates and operating expenses.
Interest payments totaled $1.3 billion in 2019 compared to $1.3 billion in 2018 and $1.2 billion in 2017. Excluding interest payments,
AIG had operating cash inflows of $399 million in 2019 compared to operating cash inflows of $1.4 billion in 2018 and operating cash
outflows of $6.6 billion in 2017. The operating cash outflows in 2017 were primarily due to payment for the adverse development
reinsurance agreement entered into with NICO.
136 AIG | 2019 Form 10-K
ITEM 7 | Liquidity and Capital Resources
Investing Cash Flow Activities
Net cash used in investing activities in 2019 was $5.5 billion compared to net cash used in investing activities of $0.2 billion in 2018
and net cash provided by investing activities of $14.0 billion in 2017. Net cash used in investing activities in 2018 included our
acquisition 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.
Financing Cash Flow Activities
Net cash provided by financing activities in 2019 reflected:
• approximately $1.1 billion in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each quarter of 2019;
• approximately $22 million to pay a dividend of $369.6875 per share, $365.625 per share and $365.625 per share on AIG’s Series A
Preferred Stock in the second, third and fourth quarters of 2019, respectively;
• approximately $679 million in net inflows from the issuance and repayment of long-term debt and debt of consolidated investment
entities; and
• approximately $485 million inflow from the issuance of preferred stock.
Net cash used in financing activities in 2018 reflected:
• approximately $1.1 billion in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each quarter of 2018;
• approximately $1.7 billion to repurchase approximately 36.5 million shares of AIG Common Stock; and
• approximately $1.1 billion in net inflows from the issuance and repayment of long-term debt and debt of consolidated investment
entities.
Net cash used in financing activities in 2017 included:
• approximately $1.2 billion in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each quarter of 2017;
• approximately $6.3 billion to repurchase approximately 100 million shares of AIG Common Stock; and
• approximately $342 million in net outflows from the issuance and repayment of long-term debt and debt of consolidated investment
entities.
LIQUIDITY AND CAPITAL RESOURCES OF AIG PARENT AND SUBSIDIARIES
AIG Parent
As of December 31, 2019, AIG Parent had approximately $12.1 billion in liquidity sources. AIG Parent’s liquidity sources are primarily
held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities and also include
a committed, revolving syndicated credit facility. Fixed maturity securities primarily 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 and preferred equity
markets from time to time to meet funding requirements as needed.
We utilize our capital resources to support our businesses, with the majority of capital allocated to our insurance operations. Should
we have or generate more capital than is needed to support our business strategies (including organic growth or acquisition
opportunities) or mitigate risks inherent to our business, we may develop plans to distribute such capital to shareholders via dividends
or AIG Common Stock repurchase authorizations or deploy such capital towards liability management.
In the normal course, it is expected that a portion of the capital released by our insurance operations, by our other operations or
through the utilization of AIG’s deferred tax assets may be available to support our business strategies, for distribution to shareholders
or for liability management.
AIG | 2019 Form 10-K 137
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.
ITEM 7 | Liquidity and Capital Resources
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 committed, syndicated credit facility(c)
Total AIG Parent liquidity sources
$
As of
As of
December 31, 2019 December 31, 2018
626
3,168
3,794
4,500
8,294
2,804
4,777
7,581
4,500
12,081
$
$
$
(a) Cash and short-term investments include reverse repurchase agreements totaling $2.1 billion and $22 million as of December 31, 2019 and 2018, respectively.
(b) Unencumbered securities consist of publicly traded, investment grade rated fixed maturity securities. Fixed maturity securities primarily include 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 committed, syndicated credit facility see Credit Facilities below.
Insurance Companies
We expect that our insurance companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and
meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations
and, to the extent necessary, monetization of invested assets. Our insurance companies’ liquidity resources are primarily held in the
form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities.
Each of our material insurance companies’ liquidity is monitored through various internal liquidity risk measures. The primary sources
of liquidity are premiums, fees, reinsurance recoverables and investment income and maturities. The primary uses of liquidity are paid
losses, reinsurance payments, benefit claims, surrenders, withdrawals, interest payments, dividends, expenses, investment
purchases and collateral requirements.
Our General Insurance companies may require additional funding to meet capital or liquidity needs under certain circumstances.
Large catastrophes may require us to provide additional support to our affected operations. Downgrades in our credit ratings could put
pressure on the insurer financial strength ratings of our subsidiaries, which could result in non-renewals or cancellations by
policyholders and adversely affect a subsidiary’s ability to meet its own obligations. Increases in market interest rates may adversely
affect the financial strength ratings of our subsidiaries, as rating agency capital models may reduce the amount of available capital
relative to required capital. Other potential events that could cause a liquidity strain include an economic collapse of a nation or region
significant to our operations, nationalization, catastrophic terrorist acts, pandemics or other events causing economic or political
upheaval.
Management believes that because of the size and liquidity of our Life and Retirement companies’ investment portfolios, normal
deviations from projected claim or surrender experience would not create significant liquidity risk. Furthermore, our Life and
Retirement companies’ products contain certain features that mitigate surrender risk, including surrender charges. However, in times
of extreme capital markets disruption, liquidity needs could outpace resources. As part of their risk management framework, our Life
and Retirement companies continue to evaluate and, where appropriate, pursue strategies and programs to improve their liquidity
position and facilitate their ability to maintain a fully invested asset portfolio.
Certain of our U.S. insurance companies are members of the FHLBs in their respective districts. Borrowings from FHLBs are used to
supplement liquidity or for other uses deemed appropriate by management. Our U.S. General Insurance companies had no
outstanding borrowings from FHLBs at December 31, 2019 and aggregate outstanding borrowings of approximately $115 million at
December 31, 2018. Our U.S. Life and Retirement companies had $3.5 billion and $3.4 billion which were due to FHLBs in their
respective districts at December 31, 2019 and 2018, respectively, under funding agreements issued through our Individual
Retirement, Group Retirement and Institutional Markets operating segments, which were reported in Policyholder contract deposits. In
addition, our U.S. Life and Retirement companies had no outstanding borrowings in the form of cash advances from FHLBs at both
December 31, 2019 and 2018.
138 AIG | 2019 Form 10-K
ITEM 7 | Liquidity and Capital Resources
Certain of our U.S. Life and Retirement companies have programs, which began in 2012, that lend securities from their investment
portfolio to supplement liquidity or for other uses as deemed appropriate by management. Under these programs, these U.S. Life and
Retirement companies lend securities to financial institutions and receive cash as collateral equal to 102 percent of the fair value of
the loaned securities. Cash collateral received is invested in short-term investments or partially used for short-term liquidity purposes.
Additionally, the aggregate amount of securities that a Life and Retirement company is able to lend under its program at any time is
limited to five percent of its general account statutory-basis admitted assets. Our U.S. Life and Retirement companies had $2.8 billion
and $884 million of securities subject to these agreements at December 31, 2019 and 2018, respectively, and $2.9 billion and
$904 million of liabilities to borrowers for collateral received at December 31, 2019 and 2018, respectively.
AIG generally manages capital between AIG Parent and our insurance companies through internal, Board-approved policies and
limits, as well as management standards. In addition, AIG Parent has unconditional capital maintenance agreements (CMAs) in place
with certain subsidiaries. Nevertheless, regulatory and other legal restrictions could limit our ability to transfer capital freely, either to
or from our subsidiaries.
In February 2018, AIG Parent entered into a CMA with Fortitude Re. Among other things, the CMA provides that AIG Parent will
maintain available statutory capital and surplus in each of Fortitude Re’s long term business fund and general business account at or
above a stress threshold percentage of its projected enhanced capital requirement in respect of the applicable fund, as defined under
Bermuda law. As of December 31, 2019, the stress threshold percentage under this CMA was 125 percent.
AIG Parent and/or certain subsidiaries are parties to several letter of credit agreements with various financial institutions, which issue
letters of credit from time to time in support of our insurance companies. These letters of credit are subject to reimbursement by AIG
Parent and/or certain subsidiaries in the event of a drawdown by our insurance companies. Letters of credit issued in support of the
General Insurance companies totaled approximately $3.9 billion at December 31, 2019. Letters of credit issued in support of the Life
and Retirement companies totaled approximately $859 million at December 31, 2019. Letters of credit issued in support of Fortitude
Re totaled $550 million at December 31, 2019.
In 2019, our General Insurance companies collectively paid a total of approximately $2.2 billion in dividends in the form of cash and
fixed maturity securities to AIG Parent. The fixed maturity securities primarily included U.S. agency mortgage-backed securities,
municipal bonds and certain other highly rated securities.
In 2019, our Life and Retirement companies collectively paid a total of approximately $1.6 billion in dividends and loan repayments in
the form of cash to AIG Parent.
Tax Matters
If the settlement agreements in principle are concluded in our ongoing dispute related to the disallowance of foreign tax credits
associated with cross border financing transactions, we will be required to make a payment to the U.S. Treasury. Although we can
provide no assurance regarding whether the non-binding settlements will be finalized, the amount we currently expect to pay based
on current proposed settlement terms is approximately $1.7 billion, including obligations of AIG Parent and subsidiaries. This amount
is net of payments previously made with respect to cross border financing transactions involving matters dating back to 1997 and
other matters largely related to the same tax years. There remains uncertainty with regard to whether the settlements in principle will
ultimately be approved by the relevant authorities as well as the amount and timing of any potential payment(s) or prepayment(s), one
or more of which could be made as early as the first quarter of 2020.
For additional information regarding this matter see Note 23 to the Consolidated Financial Statements.
CREDIT FACILITIES
We maintain a committed, revolving syndicated credit facility (the Facility) as a potential source of liquidity for general corporate
purposes. The Facility provides for aggregate commitments by the bank syndicate to provide unsecured revolving loans and/or
standby letters of credit of up to $4.5 billion without any limits on the type of borrowings and is scheduled to expire in June 2022.
As of December 31, 2019, a total of $4.5 billion remains available under the Facility. Our ability to utilize the Facility is not contingent
on our credit ratings. However, our ability to utilize the Facility is conditioned on the satisfaction of certain legal, operating,
administrative and financial covenants and other requirements contained in the Facility. These include covenants relating to our
maintenance of a specified total consolidated net worth and total consolidated debt to total consolidated capitalization. Failure to
satisfy these and other requirements contained in the Facility would restrict our access to the Facility and could have a material
adverse effect on our financial condition, results of operations and liquidity. We expect to utilize the Facility from time to time, and may
use the proceeds for general corporate purposes.
AIG | 2019 Form 10-K 139
ITEM 7 | Liquidity and Capital Resources
CONTRACTUAL OBLIGATIONS
The following table summarizes contractual obligations in total, and by remaining maturity:
December 31, 2019
(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(b)
Other long-term obligations(c)
Total(d)
Total
Payments
$
81,128 $
264,409
1,340
803
733
-
348,413 $
24,092 $
14,347
631
439
39,509 $
81,128 $
264,409
25,432
15,150
1,364
439
387,922 $
$
$
$
$
$
2020
21,601 $
16,649
119
50
196
-
38,615 $
1,380 $
1,040
54
132
2,606 $
21,601 $
16,649
1,499
1,090
250
132
41,221 $
Payments due by Period
2021 -
2022
2023 -
2024
Thereafter
22,194 $
32,988
225
99
244
-
55,750 $
3,210 $
1,838
98
185
5,331 $
22,194 $
32,988
3,435
1,937
342
185
61,081 $
11,670 $
30,099
-
99
136
-
42,004 $
2,868 $
1,617
75
97
4,657 $
11,670 $
30,099
2,868
1,716
211
97
46,661 $
25,663
184,673
996
555
157
-
212,044
16,634
9,852
404
25
26,915
25,663
184,673
17,630
10,407
561
25
238,959
(a) Represents loss reserves, undiscounted and gross of reinsurance.
(b) The company also procured additional office space via operating lease contracts for which lease commencement will occur in 2020. Future undiscounted obligations
stemming from those contracts total $507 million, which excludes the effect of renewal options.
(c) Primarily includes contracts to purchase future services and other capital expenditures.
(d) Does not reflect unrecognized tax benefits of $4.8 billion. See Note 23 to the Consolidated Financial Statements for additional information.
Loss Reserves
Loss reserves relate to our General Insurance companies and represent estimates of future loss and loss adjustment expense
payments based on historical loss development payment patterns. Due to the significance of the assumptions used, the payments by
period presented above could be materially different from actual required payments. We believe that our General Insurance
companies maintain adequate financial resources to meet the actual required payments under these obligations.
Insurance and Investment Contract Liabilities
Insurance and investment contract liabilities, including GIC liabilities, relate to our Life and Retirement companies. These liabilities
include various investment-type products with contractually scheduled maturities, including periodic payments. These liabilities also
include benefit and claim liabilities, of which a significant portion represents policies and contracts that do not have stated contractual
maturity dates and may not result in any future payment obligations. For these policies and contracts (i) we are not currently making
payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or
(iii) payment may occur due to a surrender or other non-scheduled event beyond our control.
We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits.
These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by
expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts
presented could be materially different from actual required payments. The amounts presented in this table are undiscounted and
exceed the future policy benefits and policyholder contract deposits included in the Consolidated Balance Sheets.
140 AIG | 2019 Form 10-K
ITEM 7 | Liquidity and Capital Resources
We believe that our Life and Retirement companies have adequate financial resources to meet the payments actually required under
these obligations. These subsidiaries have substantial liquidity in the form of cash and short-term investments. In addition, our Life
and Retirement companies maintain significant levels of investment grade rated fixed maturity securities, including substantial
holdings in government and corporate bonds, and could seek to monetize those holdings in the event operating cash flows are
insufficient. We expect liquidity needs related to GIC liabilities to be funded through cash flows generated from maturities and sales of
invested assets.
Borrowings
Our borrowings exclude those incurred by consolidated investments and include hybrid financial instrument liabilities recorded at fair
value. We expect to repay the long-term debt maturities and interest accrued on borrowings by AIG through maturing investments and
dispositions of invested assets, future cash flows from operations, cash flows generated from invested assets, future debt or preferred
stock issuance and other financing arrangements. Borrowings supported by assets of AIG include various notes and bonds payable
as well as GIAs that are supported by cash and investments held by AIG Parent and certain non-insurance subsidiaries for the
repayment of those obligations.
OFF-BALANCE SHEET ARRANGEMENTS AND COMMERCIAL COMMITMENTS
The following table summarizes Off-Balance Sheet Arrangements and Commercial Commitments in total, and by remaining
maturity:
December 31, 2019
Amount of Commitment Expiring
(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
2020
2021 -
2022
2023 -
2024
Thereafter
$
$
$
$
$
$
271 $
67
28
7,186
3,817
3
11,372 $
74 $
82
407
175
-
11
749 $
252 $
53
9
2,676
1,177
3
4,170 $
- $
82
407
49
-
11
549 $
74 $
- $
353
67
435
7,361
3,817
14
12,121 $
334
53
416
2,725
1,177
14
4,719 $
8 $
14
19
3,182
1,488
-
4,711 $
- $
-
-
1,173
851
-
2,024 $
- $
-
-
71
-
-
71 $
- $
8
14
19
- $
-
-
29
-
-
29 $
- $
-
-
-
3,253
1,488
-
4,782 $
1,202
851
-
2,053 $
11
-
-
155
301
-
467
74
-
-
26
-
-
100
74
11
-
-
181
301
-
567
(a) Excludes potential amounts for indemnification obligations included in asset sales agreements. For further information on indemnification obligations see Note 17 to the
Consolidated Financial Statements.
AIG | 2019 Form 10-K 141
ITEM 7 | Liquidity and Capital Resources
(b) Includes commitments to invest in private equity funds, hedge funds and other funds and commitments to purchase and develop real estate in the United States and
abroad. The commitments to invest in private equity funds, hedge funds and other funds are called at the discretion of each fund, as needed for funding new
investments or expenses of the fund. The expiration of these commitments is estimated in the table above based on the expected life cycle of the related fund,
consistent with past trends of requirements for funding. Investors under these commitments are primarily insurance and real estate subsidiaries.
(c) Does not include guarantees, CMAs or other support arrangements among AIG consolidated entities.
(d) Primarily represents liquidity facilities provided in connection with certain municipal swap transactions and collateralized bond obligations.
(e) Excludes commitments with respect to pension plans. The annual pension contribution for 2020 is expected to be approximately $65 million for U.S. and non-U.S. plans.
Arrangements with Variable Interest Entities
We enter into various arrangements with variable interest entities (VIEs) in the normal course of business, and we consolidate a VIE
when we are the primary beneficiary of the entity.
For a further discussion of our involvement with VIEs see Note 11 to the Consolidated Financial Statements.
Indemnification Agreements
We are subject to financial guarantees and indemnity arrangements in connection with our sales of businesses. These arrangements
may be triggered by declines in asset values, specified business contingencies, the realization of contingent liabilities, litigation
developments, or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to
time limitations, defined by contract or by operation of law, such as by prevailing statutes of limitation. Depending on the specific
terms of the arrangements, the maximum potential obligation may or may not be subject to contractual limitations.
For additional information regarding our indemnification agreements see Note 17 to the Consolidated Financial Statements.
We have recorded liabilities for certain of these arrangements where it is possible to estimate them. These liabilities are not material
in the aggregate. We are unable to develop a reasonable estimate of the maximum potential payout under some of these
arrangements. Overall, we believe that it is unlikely we will have to make any material payments under these arrangements.
DEBT
The following table provides the rollforward of AIG’s total debt outstanding:
Balance at
December 31,
Maturities
Effect of
Balance at
and
Foreign
Other
December 31,
2018
Issuances Repayments Exchange
Changes
2019
$
20,467
1,542
$
20,853 $
595 $
(1,000) $
(14) $
1,548
331
282
361
359
-
-
-
-
-
(6)
-
-
-
-
(1)
13
-
-
-
23,734
595
(1,006)
(2)
21
2,164
49
2,234
25,968
168
26,136
-
135
-
135
730
4
734
-
(467)
(3)
(470)
(1,476)
(126)
(1,602)
-
-
-
-
(2)
-
(2)
8,404
3,147
(1,698)
12
33
1
-
-
-
(6)
28
-
171 (b)
13 (b)
184
212
1
213
6 (e)
$
34,540 $
3,881 $
(3,300) $
10 $
219
$
344
282
361
353
23,349
21
2,003
59
2,083
25,432
47
25,479
9,871
35,350
Year Ended December 31, 2019
(in millions)
Debt issued or guaranteed by AIG:
AIG general borrowings:
Notes and bonds payable
Junior subordinated debt
AIG Japan Holdings Kabushiki Kaisha
AIGLH notes and bonds payable
AIGLH junior subordinated debt
Validus notes and bonds payable
Total AIG general borrowings
AIG borrowings supported by assets:(a)
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 and
mortgages payable - not guaranteed by AIG(c)
Total long-term debt
Debt of consolidated investment entities - not
guaranteed by AIG(d)
Total debt
142 AIG | 2019 Form 10-K
ITEM 7 | Liquidity and Capital Resources
(a) AIG Parent guarantees all such debt, except for Series AIGFP matched notes and bonds payable, which are direct obligations of AIG Parent. Collateral posted to third
parties was $1.5 billion at both December 31, 2019 and December 31, 2018. This collateral primarily consists of securities of the U.S. government and government
sponsored entities and generally cannot be repledged or resold by the counterparties.
(b) Primarily represents adjustments to the fair value of debt.
(c) Includes primarily borrowings with Federal Home Loan Banks by our U.S. insurance companies. These borrowings are short term in nature and related activity is
presented net of issuances and maturities and repayments.
(d) At December 31, 2019, includes debt of consolidated investment entities related to real estate investments of $3.2 billion, affordable housing partnership investments of
$2.1 billion and other securitization vehicles of $4.6 billion. At December 31, 2018, includes debt of consolidated investment entities related to real estate investments of
$3.7 billion, affordable housing partnership investments of $1.8 billion and other securitization vehicles of $2.9 billion.
(e) Includes the effect of consolidating previously unconsolidated partnerships and the effect of deconsolidating previously consolidated partnerships.
TOTAL DEBT OUTSTANDING
(in millions)
Debt Maturities
The following table summarizes maturing debt at December 31, 2019 of AIG (excluding $9.9 billion of borrowings of
consolidated investment entities) for the next four quarters:
(in millions)
AIG general borrowings
AIG borrowings supported by assets
Other subsidiaries' notes, bonds, loans and
mortgages payable
Total
First
Quarter
2020
119 $
1
36
156 $
Second
Quarter
2020
- $
12
-
12 $
$
$
Third
Quarter
2020
638 $
18
Fourth
Quarter
2020
708 $
3
Total
1,465
34
1
657 $
-
711 $
37
1,536
See Note 16 to the Consolidated Financial Statements for additional details on debt outstanding.
AIG | 2019 Form 10-K 143
CREDIT RATINGS
Credit ratings estimate a company’s ability to meet its obligations and may directly affect the cost and availability of
financing to that company. The following table presents the credit ratings of AIG and certain of its subsidiaries as of the date of this
filing. Figures in parentheses indicate the relative ranking of the ratings within the agency’s rating categories; that ranking refers only
to the major rating category and not to the modifiers assigned by the rating agencies.
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)
American International Group, Inc.
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
Stable Outlook
Negative Outlook
Stable Outlook
Stable Outlook
Stable Outlook
(a) Moody’s appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within the rating categories.
(b) S&P ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(c) Fitch ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(d) AIG guarantees all obligations of AIG Financial Products Corp.
These credit ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the
rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be
withdrawn at our request.
We are party to some agreements that contain “ratings triggers.” Depending on the ratings maintained by one or more rating
agencies, these triggers could result in (i) the termination or limitation of credit availability or a requirement for accelerated repayment,
(ii) the termination of business contracts or (iii) a requirement to post collateral for the benefit of counterparties.
In the event of a downgrade of AIG’s long-term senior debt ratings, AIGFP and certain other AIG entities would be required to post
additional collateral under some derivative and other transactions, or certain of the counterparties of AIGFP or of such other AIG
entities would be permitted to terminate such transactions early.
The actual amount of collateral that we would be required to post to counterparties in the event of such downgrades, or the aggregate
amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected
transactions and other factors prevailing at the time of the downgrade.
For a discussion of the effects of downgrades in our credit ratings see Note 12 to the Consolidated Financial Statements and Part I,
Item 1A. Risk Factors – Liquidity, Capital and Credit.
FINANCIAL STRENGTH RATINGS
Financial Strength ratings estimate an insurance company’s ability to pay its obligations under an insurance policy. The
following table presents the ratings of our significant insurance subsidiaries as of the date of this filing.
National Union Fire Insurance Company of Pittsburgh, Pa.
Lexington Insurance Company
American Home Assurance Company (U.S.)
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
NR
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 12 to the Consolidated Financial Statements
and Part I, Item 1A. Risk Factors – Liquidity, Capital and Credit.
144 AIG | 2019 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
On February 13, 2019, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March
29, 2019 to shareholders of record on March 15, 2019. On May 6, 2019, our Board of Directors declared a cash dividend on AIG
Common Stock of $0.32 per share, payable on June 28, 2019 to shareholders of record on June 14, 2019. On August 7, 2019, our
Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on September 30, 2019 to
shareholders of record on September 17, 2019. On October 31, 2019, our Board of Directors declared a cash dividend on AIG
Common Stock of $0.32 per share, payable on December 26, 2019 to shareholders of record on December 12, 2019.
On February 12, 2020, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March
30, 2020 to shareholders of record on March 16, 2020.
On May 21, 2019, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $369.6875 per share,
payable on June 17, 2019 to holders of record on May 31, 2019. On August 7, 2019, our Board of Directors declared a cash dividend
on AIG’s Series A Preferred Stock of $365.625 per share, payable on September 16, 2019 to holders of record on August 30, 2019.
On October 31, 2019, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share,
payable on December 16, 2019 to holders of record on November 29, 2019.
On February 12, 2020, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share,
payable on March 16, 2020 to holders of record on February 28, 2020.
The payment of any future dividends will be at the discretion of our Board of Directors and will depend on various factors, as
discussed further in Note 18 to the Consolidated Financial Statements.
REPURCHASES OF AIG COMMON STOCK
Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG
Common Stock through a series of actions. On February 13, 2019, our Board of Directors authorized an additional increase to its
previous repurchase authorization of AIG Common Stock of approximately $1.5 billion. As of February 12, 2020, $2.0 billion remained
under the authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward,
derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through the purchase of warrants).
Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase
plans. The timing of any future share repurchases will depend on market conditions, our business and strategic plans, financial
condition, results of operations, liquidity and other factors, as discussed further in Note 18 to the Consolidated Financial Statements.
We did not repurchase any shares of AIG Common Stock during 2019.
DIVIDEND RESTRICTIONS
Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by regulatory authorities.
For a discussion of restrictions on payments of dividends by our subsidiaries see Note 20 to the Consolidated Financial Statements.
AIG | 2019 Form 10-K 145
ITEM 7 | Enterprise Risk Management
Enterprise Risk Management
Risk management includes the identification and measurement of various forms of risk, the establishment of risk thresholds and the
creation of processes intended to maintain risks within these thresholds while optimizing returns. We consider risk management an
integral part of managing our core businesses and a key element of our approach to corporate governance.
OVERVIEW
We have an integrated process for managing risks throughout our organization in accordance with our firm-wide risk appetite. Our
Board of Directors has oversight responsibility for the management of risk. Our Enterprise Risk Management (ERM) Department
supervises and integrates the risk management functions in each of our business units, providing senior management with a
consolidated view of AIG’s major risk positions. Within each business unit, senior leaders and executives approve risk-taking policies
and targeted risk tolerance within the framework provided by ERM. ERM supports our businesses and management by embedding
risk management in our key day-to-day business processes and in identifying, assessing, quantifying, monitoring, reporting, and
mitigating the risks taken by our businesses and AIG overall. Nevertheless, our risk management efforts may not always be
successful and material adverse effects on our business, results of operations, cash flows, liquidity or financial condition may occur.
AIG employs a Three Lines of Defense model. AIG’s business leaders assume full accountability for the risks and controls in their
operating units, and ERM performs a review, challenge and oversight function. The third line consists of our Internal Audit Group that
provides independent assurance for AIG’s Board.
RISK GOVERNANCE STRUCTURE
Our risk governance structure fosters the development and maintenance of a risk and control management culture that encompasses
all significant risk categories impacting our lines of business and functions. Accountability for the implementation of risk policies is
aligned with individual corporate executives, with the risk committees receiving regular reports regarding compliance with each policy
to support risk governance at our corporate level as well as in each business unit. We review our governance and committee structure
on a regular basis and make changes as appropriate to continue to effectively manage and govern both our risks and risk-taking
activities.
Our Board of Directors oversees the management of risk through its Risk and Capital Committee (RCC) and Audit Committee. These
committees regularly interact with other committees of the Board of Directors which are further described below. Our Chief Risk
Officer (CRO) reports to both the RCC and our Chief Executive Officer.
The Group Risk Committee (GRC): The GRC is the senior management group responsible for assessing all significant risk issues
on a global basis to protect our financial strength and reputation. The GRC is chaired by our CRO and includes members of the
Executive Leadership Team (ELT). Our CRO reports periodically on behalf of the GRC to both the RCC and the Audit Committee of
the Board of Directors. Our CRO is also a member of the ELT providing ERM the opportunity to contribute to, review, monitor and
consider the impact of changes in strategy.
Management committees that support the GRC are described below. These committees are comprised of senior executives and
experienced business representatives from a range of functions and business units throughout AIG and its subsidiaries. These
committees are charged with identifying, analyzing and reviewing specific risk matters within their respective mandates. In addition,
various working groups (e.g. reputational risk, control agenda) are in place in support of the GRC to manage and monitor the various
risks across the organization.
Financial Risk Group (FRG): The FRG is responsible for the oversight of financial risks taken by AIG and our subsidiaries. Its
mandate includes overseeing our aggregate credit, market, interest rate, capital, liquidity and model risks, as well as asset-liability
management, derivatives activity, and foreign exchange transactions. It provides the primary corporate-level review function for all
proposed transactions and business practices that are significant in size, complex in scope, or that present heightened legal,
reputational, accounting or regulatory risks. The FRG is chaired by our CRO. Membership of the FRG also includes our CFO, Chief
Investment Officer and Treasurer.
146 AIG | 2019 Form 10-K
Business Unit Risk Committees: Each of our major insurance businesses has established a risk committee that serves as the
senior management committee responsible for risk oversight at the individual business unit level. The risk committees are responsible
for the identification, assessment and monitoring of all sources of risk within their respective portfolios. Specific responsibilities include
setting risk tolerances, reviewing the capital allocation framework, insurance portfolio optimization, and providing oversight of risk-
adjusted metrics. In performing these responsibilities, the business unit risk committees may leverage input provided by other
business unit committees and working groups.
ITEM 7 | Enterprise Risk Management
RISK APPETITE, LIMITS, IDENTIFICATION, AND MEASUREMENT
Risk Appetite Framework
Our Risk Appetite Framework integrates stakeholder interests, strategic business goals and available financial resources. We balance
these by seeking to take measured risks that are expected to generate repeatable, sustainable earnings and create long-term value
for our shareholders. The framework includes our risk appetite statement approved by the Board of Directors and a set of supporting
tools, including risk tolerances, risk limits and policies, which we use to manage our risk profile and financial resources.
We articulate our aggregate risk-taking by setting risk tolerances and thresholds on capital and liquidity measures. These measures
are set at the AIG Parent level as well as the legal entity level and cover consolidated and insurance company capital and liquidity
ratios. We must comply with standards for capital adequacy and maintain sufficient liquidity to meet all our obligations as they come
due in accordance with our capital management and liquidity policies. Our risk tolerances take into consideration regulatory
requirements, rating agency expectations, and business needs. The GRC routinely reviews the level of risk taken by the consolidated
organization in relation to the established risk tolerances. A consolidated risk report is also presented periodically to the RCC by our
CRO.
AIG | 2019 Form 10-K 147
ITEM 7 | Enterprise Risk Management
Risk Limits
A key component of our Risk Appetite Framework is having a process in place that establishes and maintains appropriate limits on the
material risks identified for our core businesses and facilitates the monitoring and meeting of both internal and external stakeholder
expectations. Our objectives include:
Establishing risk monitoring, providing early warning indicators, and ensuring timely oversight and enforceability of limits;
Defining a consistent and transparent approach to limits governance; and
Aligning our business activities with our risk appetite statement.
To support the monitoring and management of AIG’s and its business units’ material risks, ERM has an established limits framework
that employs a three-tiered hierarchy:
Board-level risk tolerances are AIG’s aggregate consolidated capital and parent liquidity limits. They define the minimum level of
capital and liquidity that we should maintain. These board-level risk tolerances require RCC and Board approval.
AIG management level limits are risk type specific limits at the AIG consolidated level. These limits are defined and calibrated to
constrain our concentration in specific risk types, to protect against taking risks that exceed the amount of overall capital AIG has
available, and to protect against excess earnings volatility. These limits are approved by our CRO with consultation from the GRC.
Business unit and legal entity level limits are set to address key risks identified for the business unit and legal entities, protect
capital and liquidity at legal entities and/or meet legal entity specific requirements of regulators and rating agencies. These limits
are defined by the business unit and legal entity Risk Officers.
All limits are reviewed by the GRC or relevant business unit risk committees on a periodic basis and revisions, if applicable, are
approved by those committees.
The business units are responsible for measuring and monitoring their risk exposures. ERM is responsible for monitoring compliance
with limits and providing regular, timely reporting to our senior management and risk committees. Limit breaches are required to be
reported in a timely manner and are documented and escalated in accordance with their level of severity or materiality.
Risk Identification and Measurement
We conduct risk identification through a number of processes at the business unit and corporate level focused on capturing our
material risks. A key initiative is our integrated bottom-up risk identification and assessment process which is conducted down to the
product-line level. In addition, we perform an annual top-down risk assessment to identify top risks and assign owners to ensure these
risks are appropriately addressed and managed. These processes are used as a critical input to enhance and develop our analytics
for measuring and assessing risks across the organization.
We employ various approaches to measure and monitor risk exposures, including the utilization of a variety of metrics and early
warning indicators. We use a proprietary internal capital and stress testing framework to measure our quantifiable risks for both
insurance and non-insurance operations.
The internal capital framework quantifies our aggregate economic risk at a given confidence interval, after taking into account
diversification benefits between risk factors and business lines. We leverage the internal capital framework to help inform our
consolidated risk consumption and profile as well as risk and capital allocation for our businesses.
The stress testing framework assesses our aggregate exposure to our most significant financial and insurance risks, including the
risks in each of our key insurance company subsidiaries in relation to its capital needs under stress, risks inherent in our non-
insurance company subsidiaries, and risks to AIG consolidated capital. The framework measures risk over multiple time horizons and
under different levels of stress, and includes multi-factor stresses as well as single factor sensitivities that are designed to reflect
AIG’s risk characteristics. We use this information to support the assessment of resources needed at the AIG Parent level to support
our subsidiaries and capital resources required to maintain consolidated company target capitalization levels.
We evaluate and manage risk in material topics as shown below. These topics are discussed in further detail in
the following pages:
Credit Risk Management
Liquidity Risk Management
Insurance Risks
Market Risk Management
Operational Risk Management
Other Business Risks
148 AIG | 2019 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 and retrocessional insurance recoverables, counterparty
risk arising from derivatives activities, collateral extended to counterparties, insurance risk cessions to third parties, financial
guarantees, letters of credit, and certain General Insurance businesses.
Governance
Our credit risks are managed by teams of credit professionals, subject to ERM oversight and various control processes. Their primary
role is to ensure appropriate credit risk management in accordance with our credit policies and procedures relative to our credit risk
parameters. Our Chief Credit Officer (CCO) and credit executives are primarily responsible for the development, implementation and
maintenance of a risk management framework, which includes the following elements related to our credit risks:
developing and implementing our company-wide credit policies and procedures;
approving delegated credit authorities to our credit executives and qualified credit professionals;
developing methodologies for quantification and assessment of credit risks, including the establishment and maintenance of our
internal risk rating process;
managing a system of credit and program limits, as well as the approval process for credit transactions, above limit exposures, and
concentrations of risk that may exist or be incurred;
evaluating, monitoring, reviewing and reporting of credit risks and concentrations regularly with senior management; and
approving appropriate credit reserves, credit-related other-than-temporary impairments and corresponding methodologies for all
credit portfolios.
We monitor and control our company-wide credit risk concentrations and attempt to avoid unwanted or excessive risk accumulations,
whether funded or unfunded. To minimize the level of credit risk in some circumstances, we may require mitigants, such as third-party
guarantees, reinsurance or collateral, including commercial bank-issued letters of credit and trust collateral accounts. We treat these
guarantees, reinsurance recoverables, and letters of credit as credit exposure and include them in our risk concentration exposure
data. We also closely monitor the quality of any trust collateral accounts.
For further information on our credit concentrations and credit exposures see Investments – Available-for-Sale Investments.
AIG | 2019 Form 10-K 149
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 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,(ii) CECL reserves
and (iii) other-than-temporary impairments for securities portfolios
MARKET RISK MANAGEMENT
Overview
Market risk is defined as the risk of adverse impact due to systemic movements in one or more of the following market risk drivers:
equity and commodity prices, residential and commercial real estate values, interest rates, credit spreads, foreign exchange, inflation,
and their respective levels of volatility.
We are engaged in a variety of insurance, investment and other financial services businesses that expose us to market risk, directly
and indirectly. We are exposed to market risks primarily within our insurance and capital markets activities, on both the asset and the
liability sides of our balance sheet through on- and off-balance sheet exposures. Within each business, the Risk Officer is responsible
for creating a framework for proper identification of market risks, and ensuring that the risks are appropriately measured, monitored
and managed, and are in accordance with the risk governance framework established by the Chief Market Risk Officer (CMRO).
The scope and magnitude of our market risk exposures is managed under a robust framework that contains defined risk limits and
minimum standards for managing market risk in a manner consistent with our risk appetite statement. Our market risk management
framework focuses on quantifying the financial repercussions of changes in the above mentioned market risk drivers.
Many of our market risk exposures, including exposures to changes in levels of interest rates and equity prices, are associated with
the asset and liability exposures of our Life and Retirement companies. These exposures are generally long-term in nature. Examples
of liability-related exposures include interest rate sensitive surrenders in our fixed deferred annuity product portfolio. Also, we have
equity market risk sensitive surrenders in our variable annuity product portfolio. These interactive asset-liability types of risk
exposures are regularly monitored in accordance with the risk governance framework noted above.
Governance
Market risk is overseen at the corporate level within ERM through the CMRO. The CMRO is supported by a dedicated team of
professionals within ERM. Market Risk is managed by our finance, treasury and investment management corporate functions,
collectively, and in partnership with ERM. The CMRO is primarily responsible for the development and maintenance of a risk
management framework that includes the following key components:
written policies that define the rules for our market risk-taking activities and provide clear guidance regarding their execution and
management;
a limit framework that aligns with our Board-approved risk appetite statement;
independent measurement, monitoring and reporting for line of business, business unit and enterprise-wide market risks; and
clearly defined authorities for all individuals and committee roles and responsibilities related to market risk management.
These components facilitate the CMRO’s identification, measurement, monitoring, reporting and management of our market risks.
150 AIG | 2019 Form 10-K
ITEM 7 | Enterprise Risk Management
Risk Identification
Market risk focuses on quantifying the financial repercussions of changes in broad, external, predominantly market-observable
variables. Financial repercussions can include an adverse impact on results of operations, financial condition, liquidity and capital of
AIG.
Each of the following systemic risks is considered a market risk:
Equity prices
Residential and
commercial real
estate values
Interest rates
Credit spreads
Foreign exchange
(FX) rates
Commodity prices
We are exposed to changes in equity market prices affecting a variety of instruments. Changes in equity
prices can affect the valuation of publicly traded equity shares, investments in private equity, hedge funds,
mutual funds, exchange-traded funds, alternative risk premia investment strategies, and other equity-linked
capital market instruments as well as equity-linked insurance products, including but not limited to index
annuities, variable annuities, indexed universal life insurance and variable universal life insurance.
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 through Other comprehensive income, and the
offsetting decrease in the value of certain liabilities may not be recognized. Changes in interest rates can
affect the valuation of fixed maturity securities, financial liabilities, insurance contracts including but not
limited to universal life, fixed rate annuities, variable annuities and derivative contracts. Additionally, for
Variable Annuity, Index Annuity, and Equity Indexed Universal Life products, deviations in actual versus
expected policyholder behavior can be driven by fluctuations in various market variables, including interest
rates. Policies with guaranteed living benefit options or riders are also subject to the risk of actual benefit
utilization being different than expected.
Credit spreads measure an instrument’s risk premium or yield relative to that of a comparable duration,
default-free instrument. Changes in credit spreads can affect the valuation of fixed maturity securities,
including but not limited to corporate bonds, asset backed securities, mortgage-backed securities, AIG-
issued debt obligations, credit derivatives, derivative credit valuation adjustments and economic valuation of
insurance liabilities. Much like higher interest rates, wider credit spreads paired with unchanged
expectations about default losses imply higher investment income in the long term. In the short term, quickly
rising spreads will cause a loss in the value of existing fixed maturity securities, which is largely reported
through Other comprehensive income. A precipitous widening of credit spreads may also signal a
fundamental weakness in the credit worthiness of bond obligors, potentially resulting in default losses.
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, derivatives on commodities and commodity indices, and other commodity-
linked investments and insurance contracts. We are exposed to commodity prices primarily through their
impact on the prices and credit quality of commodity producers’ debt and equity securities in our investment
portfolio.
Inflation
Changes in inflation can affect the valuation of fixed maturity securities, including AIG-issued debt
obligations, derivatives and other contracts explicitly linked to inflation indices, and insurance contracts
where the claims are linked to inflation either explicitly, via indexing, or implicitly, through medical costs or
wage levels.
AIG | 2019 Form 10-K 151
ITEM 7 | Enterprise Risk Management
Risk Measurement
Our market risk measurement framework was developed with the main objective of communicating the range and scale of our market
risk exposures. At the firm-wide level, market risk is measured in a manner that is consistent with AIG’s risk appetite statement. This is
designed to ensure that we remain within our stated risk tolerance levels and can determine how much additional market risk taking
capacity is available within our framework. The framework measures our overall exposure to change in each of the systemic market
risk factors on an economic basis.
In addition, we monitor risks through multiple lenses that include economic, GAAP and statutory reporting frameworks at various
levels of business consolidation. This process aims to establish a comprehensive coverage of potential implications from adverse
market risk developments.
We use a number of approaches to measure our market risk exposure, including:
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.
152 AIG | 2019 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 $169.4 billion and $168.9 billion as of December
31, 2019 and December 31, 2018, respectively, of insurance liabilities. AIG believes that the interest rate sensitivities of these
insurance and other liabilities serve as an offset to the net interest rate risk of the financial assets presented in the table
below.
Balance Sheet Exposure
Economic Effect
(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) (c)
Total interest rate sensitive liabilities
Sensitivity factor
Derivatives:
Equity contracts(d)
Equity and alternative investments:
Real estate investments
Private equity
Hedge funds
Common equity
PICC Investment
Other investments
December 31,
2019
December 31,
2018
December 31,
2018
100 bps parallel increase in all yield curves
December 31,
2019
$
$
255,743
43,441
$
237,460
39,656
$
451
630
(64)
300,201 (b) $
867
383
80
278,446 (b) $
(16,644)
(2,385)
(1,530)
(360)
28
(20,891)
$
$
(13,831)
(1,993)
(1,196)
21
26
(16,973)
$
(126,137)
$
(120,602)
$
8,553
$
6,217
$
$
(6,909)
(24,092)
(157,138)
(4,116)
(24,635)
$
(149,353)
2,118
2,127
12,798
$
20% decline in stock prices and
alternative investments
$
1,537
1,807
9,561
630
$
383
$
426
$
862
8,491
5,531
3,314
827
-
913
8,935
4,787
4,179
792
448
903
(1,698)
(1,106)
(663)
(165)
-
(183)
(1,787)
(957)
(836)
(158)
(90)
(181)
Total derivatives, equity and alternative
investments
$
19,706
$
20,427
$
(3,389)
$
(3,147)
Policyholder contract deposits:
Variable annuity and other
embedded derivatives(d)
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(e)
$
$
$
(6,909)
(6,909)
$
$
(4,116)
(4,116)
(655)
$
$
(655)
10% depreciation of all foreign currency
exchange rates against the U.S. dollar
(215)
(215)
$
$
$
1,812
253
35
1,829
1,861
1,330
585
1,587
$
$
(181)
(25)
(4)
(183)
(186)
(133)
(58)
(159)
$
3,929
$
5,363
$
(393)
$
(536)
AIG | 2019 Form 10-K 153
ITEM 7 | Enterprise Risk Management
(a) The economic effect is the difference between the estimated fair value and the effect of a 100 bps parallel increase in all yield curves on the estimated fair value. The
estimated fair values for Mortgage and other loans receivable, Policyholder contract deposits (Investment-type contracts) and Long-term debt were $43,783 million,
$133,246 million and $26,427 million at December 31, 2019, respectively. The estimated fair values for Mortgage and other loans receivable, Policyholder contract
deposits (Investment-type contracts) and Long-term debt were $40,152 million, $121,374 million and $23,929 million at December 31, 2018, respectively.
(b) At December 31, 2019, the analysis covered $300.2 billion of $306.3 billion interest-rate sensitive assets. Excluded were $3.5 billion of loans. In addition, $2.6 billion of
assets across various asset categories were excluded due to modeling limitations. At December 31, 2018, the analysis covered $278.4 billion of $285.8 billion interest-
rate sensitive assets. Excluded were $3.5 billion of loans. In addition, $3.9 billion of assets across various asset categories were excluded due to modeling limitations.
(c) At December 31, 2019, the analysis excluded $643 million of AIGLH borrowings, $353 million of Validus borrowings, $47 million of borrowings from Glatfelter and $344
million of AIG Japan Holdings loans. At December 31, 2018, the analysis excluded $643 million of AIGLH borrowings, $359 million of Validus borrowings, $168 million of
borrowings from FHLB and $331 million of AIG Japan Holdings loans.
(d) The balance sheet exposures for equity contracts and variable annuity and other embedded derivatives are also reflected under “Interest rate sensitive liabilities” above,
and are not additive.
(e) The majority of the foreign currency exposure is reported on a one quarter lag.
The sensitivity analysis is an estimate and should not be viewed as predictive of our future financial performance. We cannot ensure
that actual financial impacts in any particular period will not exceed the amounts indicated above.
Interest rate sensitivity is defined as change in value with respect to a 100 basis point parallel shift up in the interest rate environment,
calculated as: scenario value minus base value, where base value is the value under the yield curves as of the period end and
scenario value is the value reflecting a 100 basis point parallel increase in all yield curves.
We evaluate our interest rate risk without considering effects of correlation of changes in levels of interest rate with other key market
risks or other assumptions used for calculating the values of our financial assets and liabilities. This scenario does not measure
changes in values resulting from non-parallel shifts in the yield curves, which could produce different results.
We evaluate our equity price risk without considering effects of correlation of changes in equity prices with other key market risks or
other assumptions used for calculating the values of our financial assets and liabilities. The stress scenario does not reflect the impact
of basis risk, such as projections about the future performance of the underlying contract holder funds and actual fund returns, which
we use as a basis for developing our hedging strategy.
Foreign currency-denominated net asset position reflects our aggregated non-U.S. dollar assets less our aggregated non-U.S dollar
liabilities on a GAAP basis, with certain adjustments. We use a bottom-up approach in managing our foreign currency exchange rate
exposures with the objective of protecting statutory surplus at the regulated insurance entity level. At the AIG consolidated level, we
monitor our foreign currency exposures against single currency and aggregate currency portfolio limits.
Our three largest foreign currency-denominated net asset positions at December 31, 2019 are Great Britain pound ($1.8 billion),
South Korean won ($331 million), and Australian dollar ($276 million).
Our foreign currency-denominated net asset position at December 31, 2019, decreased by $1.4 billion compared to December 31,
2018. The decrease was primarily due to a $1.1 billion decrease in our Euro position. The reduction in our Euro position is principally
due to currency conversions associated with internal reinsurance agreements and the rebalancing of net assets across European
operations due to Brexit. Our Hong Kong dollar position also decreased $550 million, primarily due to the sale of our PICC
investment. Offsetting these decreases was a $299 million increase in our Canadian dollar position, primarily due to hedging actions
designed to protect statutory surplus at the regulated insurance entity level.
For illustrative purposes, we modeled our sensitivities based on a 100 basis point parallel increase in yield curves, a 20 percent
decline in equity prices and prices of alternative assets, and a 10 percent depreciation of all foreign currency exchange rates against
the U.S. dollar. The estimated results presented in the table above should not be taken as a prediction, but only as a demonstration of
the potential effects of such events.
The sensitivity factors utilized for 2019 and presented above were selected based on historical data from 1999 to 2019, as follows
(see the table below):
a 100 basis point parallel shift in the yield curve is consistent with a one standard deviation movement of the benchmark ten-year
treasury yield;
a 20 percent drop for equity and alternative investments is broadly consistent with a one standard deviation movement in the S&P
500; and
a 10 percent depreciation of foreign currency exchange rates is consistent with a one standard deviation movement in the U.S.
dollar (USD)/Japanese yen (JPY) exchange rate.
154 AIG | 2019 Form 10-K
ITEM 7 | Enterprise Risk Management
Standard
Suggested
a Multiple of
Change/
of Standard
on Standard Deviation for
2019 Scenario as
2019 2019 as a Multiple Original 2018 Scenario (based
Period Deviation 2019 Scenario Standard Deviation
10-Year Treasury
1999-2019
S&P 500
USD/JPY
1999-2019
1999-2019
0.01
0.18
0.11
0.01
0.20
0.10
1.18
1.14
0.94
Return
(0.01)
0.29
0.01
Deviation
1998-2018 Period)
0.95
1.64
0.09
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.
LIQUIDITY RISK MANAGEMENT
Overview
Liquidity risk is defined as the risk that our financial condition will be adversely affected by the inability or perceived inability to meet
our short-term cash, collateral or other financial obligations. Failure to appropriately manage liquidity risk can result in insolvency,
reduced operating flexibility, increased costs, reputational harm and regulatory action.
AIG and its legal entities seek to maintain sufficient liquidity both during the normal course of business and under defined liquidity
stress scenarios to ensure that sufficient cash will be available to meet the obligations as they come due.
AIG Parent liquidity risk tolerance levels are designed to allow us to meet our financial obligations for a minimum of six months under
a liquidity stress scenario. We maintain liquidity limits and minimum coverage ratios designed to ensure that funding needs are met
under varying stress conditions. If we project that we could breach these tolerances, we assess and determine appropriate liquidity
management actions. However, the market conditions in effect at that time may not permit us to achieve an increase in liquidity
sources or a reduction in liquidity requirements.
Governance
Liquidity risk is overseen at the corporate level within ERM. The CRO has responsibility for the oversight of the Liquidity Risk
Management Framework and delegates the day-to-day implementation of this framework to the AIG Treasurer. Our corporate treasury
function manages liquidity risk, subject to ERM oversight and various control processes.
The Liquidity Risk Management Framework is guided by the liquidity risk tolerance as set forth in the Board-approved risk appetite
statement. The principal objective of this framework is to establish minimum liquidity requirements that protect our long-term viability
and ability to fund our ongoing business, and to meet short-term financial obligations in a timely manner in both normal and stressed
conditions.
Our Liquidity Risk Management Framework includes a number of liquidity and funding policies and monitoring tools to address AIG-
specific, broader industry and market-related liquidity events.
AIG | 2019 Form 10-K 155
ITEM 7 | Enterprise Risk Management
Risk Identification
The following sources of liquidity and funding risks could impact our ability to meet short-term financial obligations as they
come due.
Market/Monetization
Risk
Assets may not be readily transformed into cash due to unfavorable market conditions. Market liquidity risk
may limit our ability to sell assets at reasonable values to meet liquidity needs.
Cash Flow Mismatch
Risk
Discrete and cumulative cash flow mismatches or gaps over short-term horizons under both expected and
adverse business conditions may create future liquidity shortfalls.
Event Funding Risk
Additional funding may be required as the result of a trigger event. Event funding risk comes in many forms
and may result from a downgrade in credit ratings, a market event, or some other event that creates a
funding obligation or limits existing funding options.
Financing Risk
We may be unable to raise additional cash on a secured or unsecured basis due to unfavorable market
conditions, AIG-specific issues, or any other issue that impedes access to additional funding.
Risk Measurement
Comprehensive cash flow projections under normal conditions are the primary component for identifying and measuring liquidity risk.
We produce comprehensive liquidity projections over varying time horizons that incorporate all relevant liquidity sources and uses and
include known and likely cash inflows and outflows. In addition, we perform stress testing by identifying liquidity stress scenarios and
assessing the effects of these scenarios on our cash flow and liquidity.
We use a number of approaches to measure our liquidity risk exposure, including:
Minimum 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.
156 AIG | 2019 Form 10-K
ITEM 7 | Enterprise Risk Management
Governance
AIG and its consolidated subsidiaries establish and maintain operational risk and controls governance forums that include
representatives from the relevant business units and functions to appropriately manage significant operational risk exposures.
Operational risk is overseen at the corporate level within ERM through the Head of Governance and Operational Controls. The Head
of Governance and Operational Controls is responsible for the development and maintenance of the operational risk framework that
includes policies, standards and deployment of systems.
Risk Identification, Measurement and Monitoring
The Operational Risk Management (ORM) function within ERM oversees adherence to the operational risk policy and risk and control
framework, which includes risk identification, assessment, measurement, management and monitoring of operational risk exposures.
ORM supports the Head of Governance and Operational Controls and has responsibility to provide an aggregate view of our
operational risk profile. In line with the Three Lines of Defense Model, the ORM program includes, but is not limited to, several key
components outlined below:
Risk Event Capture – enables every employee to identify, document, and escalate operational risk events, with a view to
enhancing processes, promoting lessons learned and embedding a culture of risk management.
Risk Assessments – allows for the assessment, measurement and management of the key operational risks within our business
units and helps inform on the efficacy of our control environment.
Key Risk Indicators – enhances the ongoing monitoring and mitigation of operational risks and facilitate risk reporting.
Issues Management – enables a consistent tracking of issues across the firm, including policy and process exceptions, control
deficiencies and findings from risk and control assessment activities.
Scenario Analyses – executed by first- and second-line professionals to identify potential risks that could result in financial losses
to the firm and support the prioritization of operational risk treatment.
ORM, working together with other control and assurance functions (e.g., Compliance, Financial Controls Unit / Sarbanes Oxley,
Global Business Continuity, and Internal Audit) through the risk and control framework, provides an independent view of operational
risks for each business, and works with the business unit and corporate function CRO and Owner of the Control Agenda, whose
responsibilities include coordinating identification, assessment, control and mitigation of risks to the operating environment and
promoting awareness, to facilitate implementation of the above programs. This includes coverage of operational risks related to core
insurance activities, corporate functions, investing, model risk, technology, third-party providers, as well as compliance and regulatory
matters. Based on the results of the risk identification and assessment efforts above, business leaders are accountable for tracking
and remediating identified issues in line with our risk-monitoring procedures. Governance committees support these efforts and
promote transparency enabling improved management decision making.
The risk and control framework facilitates the identification and mitigation of operational risk issues and is
designed to:
ensure first line accountability and ownership of risks and controls;
promote role clarity among the business and risk and control functions;
enhance transparency, risk management governance and culture;
foster greater consistency in identifying, measuring and ranking material risks;
proactively address potential risk issues and assign clear ownership and accountability for risk treatment; and
manage the development of technology solutions that support the objectives above.
Cybersecurity Risk
Cybersecurity risk is an important, constant, and evolving focus for AIG and the insurance and financial services industries in general.
The goal of unauthorized parties, using a variety of attack methods, is to gain access to AIG’s data and systems to obtain confidential
information, destroy data, disrupt or degrade service, sabotage systems or cause other damage. One such example, is the increased
sophistication and activities of unauthorized parties using phishing in an attempt to access our systems, usually in an effort to obtain
sensitive information, which is an ever-present and increasing attack vector against AIG. Cybersecurity risks may also derive from
human error, fraud or malice on the part of AIG employees or third parties who have authorized access to AIG’s systems or
information.
AIG | 2019 Form 10-K 157
ITEM 7 | Enterprise Risk Management
ERM works closely with and supports the risk management practices of Information Technology and the Information Security Office
and the business units and functions that form the first line of defense against the cybersecurity risks that we face, including the risks
that emerge as a result of the execution of our business strategies and our corresponding exposure to new products, clients, industry
segments and regions, through initiatives such as investments in technological infrastructure, education and training for employees
and vendors, and monitoring of industry developments. As part of our overarching cybersecurity strategy, ERM monitors and
assesses the programs designed to remediate our exposures and enhance our systems and applications security.
AIG’s Board of Directors and its Technology Committee are regularly briefed by management on AIG’s cybersecurity matters,
including threats, policies, practices and ongoing efforts to improve security. As part of our disclosure controls and procedures, the
Cyber Incident Management team, a cross functional group, is responsible for ensuring that the members of management responsible
for disclosure controls are informed in a timely manner of known cybersecurity risks and incidents that may materially impact our
operations so that timely notifications and public disclosures can be made as appropriate. There is no guarantee that the measures
AIG takes and the resources AIG devotes to protect against cybersecurity risk will provide absolute security or recoverability of AIG’s
systems given the complexity and frequency of the risk which AIG may not always be able to anticipate or adequately address. For
additional information regarding the data protection and cybersecurity regulations to which we are subject, see Item 1. Business –
Regulation – U.S. Regulation – Privacy, Data Protection and Cybersecurity and – International Regulation – Privacy, Data Protection
and Cybersecurity. For additional discussion of cybersecurity risks, see Part I, Item 1A. Risk Factors – Business and Operations.
INSURANCE RISKS
Overview
Insurance risk is defined as the risk of actual claims experience and/or policyholder behavior being materially different than initially
expected at the inception of an insurance contract. Uncertainties related to insurance risk include the amount and timing of cash flows
from premiums, commissions, expenses, claims and claim settlement expenses paid or received under a contract.
Except as described above, we manage our business risk oversight activities through our insurance operations. A primary goal in
managing our insurance operations is to achieve an acceptable risk-adjusted return on equity. To achieve this goal, we must be
disciplined in risk selection, premium adequacy, and appropriate terms and conditions to cover the risk accepted.
We operate our insurance businesses on a global basis, and we are exposed to a wide variety of risks with different time horizons.
We manage these risks throughout the organization, both centrally and locally, through a number of processes and procedures:
pre-launch approval of product design, development and distribution;
underwriting approval processes and authorities;
exposure limits with ongoing monitoring;
pricing and risk selection models;
price approval processes;
modeling and reporting of aggregations and limit concentrations at multiple levels (policy, line of business, product group, country,
individual/group, correlation and catastrophic risk events);
risk transfer tools such as reinsurance, both internal and third-party;
review and challenge of reserves to ensure comprehensive analysis with established escalation procedures to provide appropriate
transparency in reserving decisions and judgments made in the establishment of reserves;
business line actuarial briefings and actuarial financial judgment regular reviews with ERM and business management;
management of relationship between assets and liabilities, including hedging;
model risk management and validation processes;
experience monitoring and assumption updates; and
pricing model monitoring.
We closely manage insurance risk by monitoring and controlling the nature and geographic location of the risks in each line of
business underwritten, concentrations in industries, the terms and conditions of the underwriting and the premiums we charge for
taking on the risk. We analyze concentrations of risk using various modeling techniques, including both probability distributions
(stochastic) and/or single-point estimates (deterministic) approaches.
158 AIG | 2019 Form 10-K
ITEM 7 | Enterprise Risk Management
Governance
Insurance risks are monitored at the business unit level and overseen by the business unit risk officer. As part of our established
governance practices, key decisions and considerations related to insurance risks can be raised and deferred for discussion and
consideration to business unit risk committees that are chaired by the business unit’s chief risk officer. In addition, in some business
units, pricing committees review insurance risk considerations associated with pricing of new insurance products. The insurance risk
oversight framework includes the following key components:
written policies that define the rules for our insurance risk-taking activities;
a limit framework focused on key insurance risks that aligns with our Board-approved risk appetite statement; and
clearly defined authorities for all individuals and committee roles and responsibilities related to insurance risk management.
Risk Identification
General Insurance companies — risks covered include property, casualty, fidelity/surety, accident and health, aviation, and
management liability. We manage risks in the General Insurance business through aggregations and limitations of concentrations
at multiple levels: policy, line of business, geography, industry and legal entity.
Life and Retirement companies — risks include mortality and morbidity in the individual life, individual health-care and group
life insurance products, longevity risk in the individual retirement, group retirement and institutional markets products, and
policyholder behavior across all product lines. We manage risks through product design, sound medical and non-medical
underwriting.
We purchase reinsurance for our insurance and reinsurance operations. Reinsurance facilitates insurance risk
management (retention, volatility, concentrations) and capital planning. We may purchase reinsurance on a pooled basis. Pooling of
our reinsurance risks enables us to purchase reinsurance more efficiently at a consolidated level, manage global counterparty risk
and relationships and manage global catastrophe risks.
Risk Measurement, Monitoring and Limits
We use a number of approaches to measure our insurance risk exposure, including:
Sensitivity analysis. Deterministic analyses are used to measure statistical variances from best estimate assumptions on
important risk factors, as well as different distributions risk categories.
Stochastic methods. Stochastic methods are used to measure and monitor risks including natural catastrophe, reserve and
premium risk. We develop probabilistic estimates of risk based on our exposures, historical observed volatility or industry-
recognized models in the case of catastrophe risk.
Scenario analysis. Scenario or deterministic analysis is used to measure and monitor risks such as terrorism and pandemic or to
estimate losses due to man-made catastrophic scenarios.
Experience studies. Ongoing assessment of mortality, longevity, morbidity and policyholder behavior experience relative to that
assumed in pricing and valuation and that experienced in the general market.
Additionally, there are risk specific assessment tools in place to better manage the variety of insurance risks to which we are exposed.
We monitor concentrations of exposure through insurance limits aggregated along dimensions such as geography, industry, or
counterparty.
The risk monitoring responsibilities of the business units include ensuring compliance with insurance risk limits and escalation and
remediation of limit breaches. Such activities are reported to management by the relevant business unit for informative decision-
making on a regular basis. This monitoring approach is aligned with our overall risk limits framework.
Risk limits have a consistent framework used across AIG, its business units, and legal entities. This includes escalation thresholds in
cases where measurement is particularly challenging.
For further information on our three-tiered hierarchy of limits see Risk Appetite, Limits, Identification, and Measurement – Risk Limits.
AIG | 2019 Form 10-K 159
ITEM 7 | Enterprise Risk Management
General Insurance Companies’ Key Risks
We manage our risks through risk review and selection processes, exposure limitations, exclusions, deductibles, self-insured
retentions, coverage limits, attachment points, and reinsurance. This management is supported by sound underwriting practices,
pricing procedures and the use of actuarial analysis to help determine overall adequacy of provisions for insurance. Underwriting
practices and pricing procedures incorporate historical experience, changes in underlying exposure, current regulation and judicial
decisions as well as proposed or anticipated regulatory changes or societal trends.
For General Insurance companies, risks primarily include the following:
Loss Reserves – The potential inadequacy of the liabilities we establish for unpaid losses and loss adjustment expenses is a key
risk faced by the General Insurance companies. There is significant uncertainty in factors that may drive the ultimate development
of losses compared to our estimates of losses and loss adjustment expenses. We manage this uncertainty through internal
controls and oversight of the loss reserve setting process, as well as reviews by external experts. For further information see
Critical Accounting Estimates – Insurance Liabilities – Loss Reserves.
Underwriting – The potential inadequacy of premiums charged for future risk periods on risks underwritten in our portfolios can
impact the General Insurance companies’ ability to achieve an underwriting profit. We develop pricing based on our estimates of
losses and expenses, but factors such as market pressures and the inherent uncertainty and complexity in estimating losses may
result in premiums that are inadequate to generate underwriting profit. This may be driven by adverse economic conditions,
unanticipated emergence of risks or increase in frequency of claims, or unexpected or increased costs or expenses.
Catastrophe Exposure – Our business is exposed to various catastrophic events in which multiple losses can occur and affect
multiple lines of business in any calendar year. Natural disasters, such as hurricanes, earthquakes and other catastrophes, have
the potential to adversely affect our operating results. Other risks, such as man-made catastrophes or pandemic disease, could
also adversely affect our business and operating results to the extent they are covered by our insurance products. Concentration of
exposure in certain industries or geographies may cause us to suffer disproportionate losses.
Single Risk Loss Exposure – Our business is exposed to loss events that have the potential to generate losses from a single
insured client. Events such as fires or explosions can result in loss activity for our clients. The net risk to us is managed to
acceptable limits established by the Chief Underwriting Officer through a combination of internal underwriting standards and
external reinsurance. Furthermore, single risk loss exposure is managed and monitored on both a segregated and aggregated
basis.
Reinsurance – Since we use reinsurance to limit our losses, we are exposed to risks associated with reinsurance including the
unrecoverability of expected payments from reinsurers due to either an inability or unwillingness to pay, contracts that do not
respond properly to the event or actual reinsurance coverage that is different than anticipated. The inability or unwillingness to pay
is considered credit risk and is monitored through our credit risk management framework.
Natural Catastrophe Risk
We manage catastrophe exposure with multiple approaches such as setting risk limits based on aggregate Probable Maximum Loss
(PML) modeling, monitoring overall exposures and risk accumulations, modifying our gross underwriting standards, and purchasing
catastrophe reinsurance through both the traditional reinsurance and capital markets in addition to other reinsurance protections.
We use third-party catastrophe risk models and other tools to evaluate and simulate frequency and severity of catastrophic events
and associated losses to our portfolios of exposures. We apply proprietary multi-model approaches, making adjustments to modeled
losses to account for loss adjustment expenses, model biases, data quality and non-modeled risks.
We perform post-catastrophe event studies to identify model inefficiencies, underwriting gaps, and improvement opportunities.
Lessons learned from post-catastrophe event studies are incorporated into the modeling and underwriting processes of risk pricing
and selection. The majority of policies exposed to catastrophic risks are one-year contracts that allow us to adjust our underwriting
guidelines, pricing and exposure accumulation in a relatively short period.
We recognize that climate change has implications for insurance industry exposure to natural catastrophe risk. With multiple levels of
risk management processes in place, we actively analyze the latest climate science and policies to anticipate potential changes to our
risk profile, pricing models and strategic planning. For example, we continually consider changes in climate and weather patterns as
an integral part of the underwriting process. In addition, we provide insurance products and services to help our clients be proactive
against the threat of climate change. Our internal product development, underwriting, and modeling, will continue to adapt to and
evolve with the developing risk exposures attributed to climate change.
Our natural catastrophe exposure to primary modeled perils is principally driven by the U.S. and secondarily Japan, though our overall
exposure is diversified across multiple countries and perils. For example, we have exposures to additional perils such as European
windstorms and wildfire exposures across multiple countries. Within the U.S., we have significant hurricane exposure in Florida, the
160 AIG | 2019 Form 10-K
ITEM 7 | Enterprise Risk Management
Gulf of Mexico, the Northeast U.S. and mid-Atlantic regions. Within the U.S., we have significant earthquake exposure in California
and the Pacific Northwest regions. Earthquakes impacting the Pacific Northwest region may result in a higher share of industry losses
than other regions primarily due to our relative share of exposure in these regions.
The table below details our modeled estimates of PML, net of reinsurance, on an annual aggregate basis. The 1-in-100 and 1-in-250
PMLs are the annual aggregate probable maximum losses with probability of 1 percent and 0.4 percent in a year, respectively.
Estimates as of December 31, 2019 reflect our in-force portfolio for exposures as of October 1, 2019 and all inuring reinsurance
covers as of December 31, 2019, except for the catastrophe reinsurance programs, which are as of January 1, 2020.
The following table presents an overview of annual aggregate modeled losses for world-wide all perils and exposures
arising from our largest primarily modeled perils:
At December 31, 2019
(in millions)
Exposures:
World-wide all peril (1-in-250)(a)
U.S. Hurricane (1-in-100)(b)
U.S. Earthquake (1-in-250)(c)
Japanese Typhoon (1-in-100)(d)
Japanese Earthquake (1-in-250)(e)
Net of
Reinsurance
Net of
Reinsurance, After Tax(f)
Percent of Total
Shareholder Equity
$
5,119 $
1,737
1,411
564
632
4,044
1,372
1,115
446
499
6.2 %
2.1
1.7
0.7
0.8
(a) The world-wide all peril loss estimate includes wildfire exposure.
(b) The U.S. hurricane loss estimate includes losses to Commercial and Personal Property from hurricane hazards of wind and storm surge.
(c) The U.S. earthquake loss estimates represent exposure to Commercial and Personal Property, Workers’ Compensation (U.S.) and A&H business lines.
(d) Japan Typhoon loss estimate represents exposure to Commercial and Personal Property.
(e) Japan Earthquake loss estimate represents exposure to Commercial and Personal Property and A&H business lines.
(f) Taxed at the statutory tax rate of 21 percent for both the U.S. and Japanese modeled losses. The majority of Japan exposures are ceded to our U.S. Pool.
AIG, along with other property casualty insurance and reinsurance companies, uses industry-recognized catastrophe models and
applies proprietary modeling processes and assumptions to arrive at loss estimates. The use of different methodologies and
assumptions could materially change the projected losses. Since there is no industry standard for assumptions and preparation of
insured data for use in these models, our modeled losses may not be comparable to estimates made by other companies.
Also, the modeled results are based on the assumption that all reinsurers fulfill their obligations to us under the terms of the
reinsurance arrangements. However, reinsurance recoverables may not be fully collectible. Therefore, these estimates are inherently
uncertain and may not accurately reflect our net exposure, inclusive of credit risk, to these events.
Our 2020 property catastrophe reinsurance program is a worldwide program providing both aggregate and per occurrence protection,
with differing per occurrence and aggregate attachment points for North America, Japan, and Rest of World (with some additional
regional/country variations). The program includes $2.5 billion of aggregate limit that is shared across the regional towers.
Our coverage for North America includes:
$1.525 billion of per occurrence protection covering our U.S and Caribbean high net worth personal lines business, with varying
attachment points in specific geographies ranging from $50 million to $150 million
Per occurrence protection of up to $1 billion excess of $500 million, primarily covering commercial exposures but also personal
lines exposures not covered by the above high net worth personal lines protection
Aggregate protection utilizing the $2.5 billion of shared limit attaching excess $750 million with per occurrence deductibles of $25
million, $50 million or $75 million, depending on region/event, primarily covering commercial exposures but also covering our U.S.
and Caribbean high net worth personal lines exposure to earthquakes
Our coverage for exposure outside North America includes:
Japan per occurrence coverage of $550 million excess of $200 million and includes both personal and commercial exposure
Rest of World per occurrence coverage of $300 million excess of $100 million, including both personal and commercial exposure
Rest of World and Japan $2.5 billion of aggregate shared limit attaching excess of $160 million and $250 million, respectively, with
per occurrence deductibles of $20 million
Although the shared limit coverage for North America, Japan and Rest of World has varying retentions per region, the maximum
aggregate retention globally is $1.0 billion for 2020.
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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 Ltd., our catastrophe protection comes from a variety of reinsurance protections but is largely providing $400
million of limit excess $300 million of retention from world-wide exposure via an aggregate excess of loss cover with an additional
$450 million of limit excess $700 million via the Tailwind Re Cat Bond for U.S., Puerto Rico and Canada named storm losses.
Actual results in any period are likely to vary, perhaps materially, from the modeled scenarios. The occurrence of one or more severe
events could have a material adverse effect on our financial condition, results of operations and liquidity.
For additional information see also Item 1A. Risk Factors — Reserves and Exposures.
Terrorism Risk
We actively monitor terrorism risk and manage exposures to losses from terrorist attacks. We have set risk limits based on modeled
losses from certain terrorism attack scenarios. Terrorism risks are modeled using a third-party vendor model for various terrorism
attack modes and scenarios. Adjustments are made to account for vendor model gaps and the nature of the General Insurance
companies’ exposures. Examples of modeled scenarios are conventional bombs of different sizes, anthrax attacks and nuclear
attacks.
Our largest terrorism concentrations are in New York City, and estimated losses are largely driven by the Property and Workers’
Compensation lines of business. At our largest exposure location, modeled losses for a five-ton bomb attack net of the Terrorism Risk
Insurance Program Reauthorization Act (TRIPRA) and reinsurance recoveries are estimated to be $2.4 billion based on the
exposures as of October 1, 2019.
Our exposure to terrorism risk in the U.S. is mitigated by TRIPRA in addition to limited private reinsurance protections. TRIPRA covers
terrorist attacks within the United States or U.S. missions and against certain U.S. carriers or vessels and excludes certain lines of
business as specified by applicable law. In 2020, TRIPRA covers 80 percent of insured losses above a deductible. The current
estimate of our deductible is approximately $2.0 billion for 2019.
We offer terrorism coverage in many other countries through various insurance products and participate in country terrorism pools
when applicable. International terrorism exposure is estimated using scenario-based modeling and exposure concentration is
monitored routinely. Targeted reinsurance purchases are made for some lines of business to cover potential losses due to terrorist
attacks. We also rely on the government-sponsored and government-arranged terrorism reinsurance programs, including pools, in
force in applicable non-U.S. jurisdictions.
Life and Retirement Companies’ Key Risks
We manage risk through product design, experience monitoring, pricing and underwriting discipline, risk limits, reinsurance and active
monitoring and management of the relationships between assets and liabilities, including hedging.
For Life and Retirement companies, risks include the following:
Longevity risk – represents the risk of an increase in value of an annuity policy or a payout benefit as a result of actual mortality
experience being lower than the expected mortality experience. This risk could arise from medical advancement and longer-term
societal health changes. This risk exists in a number of our product lines but is most significant for our annuity products.
Morbidity risk – represents the risk arising from actual morbidity (e.g. illness, disability or disease) incidence rate being higher
than expected or the length of the claims extending longer than expected resulting in a higher overall benefit payout. This risk
could arise from longer-term medical advances in detection and treatment for various diseases and medical conditions. This risk
exists in a number of our product lines such as accident and health and long –term care businesses which for the most part are in
run-off, and ceded to Fortitude Re and U.S. group benefits which AIG has almost fully exited.
Mortality risk – represents the risk of loss arising from actual mortality experience being higher than expected mortality
experience. This risk could arise from pandemics or other events, including longer-term societal changes that cause higher-than-
expected mortality. This risk exists in a number of our product lines, but is most significant for our life insurance products.
162 AIG | 2019 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 revised expectations
would require an adjustment to DAC and benefit reserves, which could have a material adverse effect on our consolidated results of
operations for a particular period.
For additional discussion of the impact of actual and expected experience on DAC and benefit reserves see Critical Accounting
Estimates – Future Policy Benefits for Life and Accident and Health Insurance Contracts and Critical Accounting Estimates –
Guaranteed Benefit Features of Variable Annuity Products. For additional discussion of business risks see Item 1A. Risk Factors —
Business and Operations.
Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs
Our Individual and Group Retirement businesses offer variable annuity products with guaranteed living benefit (GLB) riders that
guarantee a certain level of lifetime benefits. GLBs are accounted for as embedded derivatives measured at fair value, with changes
in the fair value recorded in Other realized capital gains (losses). GLB features subject the Life and Retirement companies to market
risk, including exposure to changes in levels of interest rates, equity prices, credit spreads and market volatility.
Variable annuity product design is the first step in managing our exposure to these market risks. Risk mitigation features of our
variable annuity product design include GLB rider fees indexed to an equity market volatility index, which can provide additional fee
assessments in periods of increased market volatility, required minimum allocations to fixed accounts to reduce overall equity
exposure, and for some of the variable annuity products, the utilization of volatility control funds, which have an ability to reduce
equity exposures in the funds in response to changes in market volatility, even under sudden or extreme market movements.
After reflecting our product risk-mitigating features, we hedge our remaining economic exposure to market risk within GLB features
through our variable annuity hedging program, which is designed to offset certain changes in the economic value of these GLB
embedded derivatives, within established thresholds. The hedging program is designed to provide additional protection against large
and combined movements in levels of interest rates, equity prices, credit spreads and market volatility under multiple scenarios.
Our hedging program utilizes an economic hedge target, which represents our estimate of the underlying economic risks in our GLB
riders, based on the present value of the future expected benefit payments for the GLB, less the present value of future GLB rider
fees, over numerous stochastic scenarios. This stochastic projection method uses best estimate assumptions for policyholder
behavior (including mortality, lapses, withdrawals and benefit utilization) in conjunction with market scenarios calibrated to observable
equity and interest rate option prices. Policyholder behaviors are regularly evaluated to compare current assumptions to actual
experience and, if appropriate, changes are made to the policyholder behavior assumptions. The risk of changes in policyholder
behavior is not explicitly hedged, and such differences between expected and actual policyholder behaviors will result in hedge
ineffectiveness.
Due to differences between the calculation of the value of the economic hedge target and the U.S. GAAP valuation of the embedded
derivative, which include differences in the treatment of rider fees and exclusion of certain risk margins and other differences in
discount rates, we expect relative movements in the value of the economic hedge target and the U.S. GAAP embedded derivative
valuation will vary over time with changes in levels of equity markets, interest rates, credit spreads and volatility.
For information on the impact on our consolidated pre-tax income from the change in fair value of the embedded derivatives and the
hedging portfolio, as well as additional discussion of differences between the economic hedge target and the valuation of the
embedded derivatives see Insurance Reserves – Life and Annuity Reserves and DAC – Variable Annuity Guaranteed Benefits and
Hedging Results.
In designing the hedging portfolio for our variable annuity hedging program, we make assumptions and projections about the future
performance of the underlying contract mutual funds. To project future account value changes, we use these assumptions about how
each of the underlying mutual funds will perform. We map the mutual funds to a set of publicly traded indices that we believe best
represent the liability to be hedged. Basis risk exists due to the variance between fund returns projected under these assumptions
and actual fund returns, which may result in variances between changes in the value of the hedging portfolio and changes in the
economic value of the hedge target. Net hedge results and the associated cost of hedging are also impacted by differences between
realized volatility and implied volatility.
AIG | 2019 Form 10-K 163
ITEM 7 | Enterprise Risk Management
Our hedging programs associated with index annuity and index universal life products, are designed to manage market risk
associated with the index crediting strategies offered on these product platforms. These hedging programs are designed to offset
economic risk arising in conjunction with index returns, associated with the crediting strategies that will be occurring during the current
crediting rate reset period. These programs utilize derivative instruments, including but not limited to equity index options and futures
contracts. Similarly, as with the variable annuities, there are differences between the calculation of the value of the economic hedge
target and the U.S. GAAP valuation of the index annuity and index life embedded derivatives, which can lead to variances in their
relative movements.
To manage the capital market exposures embedded within the economic hedge target, we identify and hedge market sensitivities to
changes in equity markets, interest rates, volatility and for variable annuities, credit spreads. Each hedge program purchases
derivative instruments or securities having sensitivities that offset corresponding sensitivities in the associated economic hedge
targets, within internally defined threshold limits. Since the relative movements of the hedging portfolio and the economic hedge target
vary over time or with market changes, the net exposure can be outside the threshold limits, and adjustments to the hedging portfolio
are made periodically to return the net exposure to within the threshold limits.
Our hedging programs utilize various derivative instruments, including but not limited to equity options, futures contracts, interest rate
swaps and swaptions, as well as other hedging instruments. In addition, within the variable annuities hedging program, we purchase
certain fixed income securities. The majority of these securities are classified as available for sale, with a relatively small portion for
which we elect the fair value option. To minimize counterparty credit risk the majority of the derivative instruments utilized within the
hedging programs are cleared through global exchanges. Over the counter derivatives utilized within the hedging programs are highly
collateralized.
The hedging programs are monitored on a daily basis to ensure that the economic hedge targets and the associated derivative
portfolios are within the threshold limits, pursuant to the approved hedging strategies. Daily risk monitoring verifies that the net risk
exposures are within the approved net risk exposure threshold limits. In addition, monthly stress tests are performed to determine the
program’s effectiveness relative to the applicable limits, under an array of combined severe market stresses in equity prices, interest
rates, volatility and credit spreads. Finally, hedging strategies are reviewed regularly to gauge their effectiveness in managing our
market exposures in the context of our overall risk appetite.
Reinsurance Activities
Reinsurance is used primarily to manage overall capital adequacy and mitigate the insurance loss (Life and Non-Life) exposure
related to certain events, such as natural and man-made catastrophes, death events, or single policy level events. Our subsidiaries
operate worldwide primarily by underwriting and accepting risks for their direct account on a gross basis and reinsuring a portion of
the exposure on either an individual risk or an aggregate basis to the extent those risks exceed the desired retention level. In addition,
as a condition of certain direct underwriting transactions, we may be required by clients, agents or regulation to cede all or a portion of
risks to specified reinsurance entities, such as captives, other insurers, local reinsurers and compulsory pools.
Reinsurance markets include:
Traditional local and global reinsurance markets including those in the United States, Bermuda, London and Europe, accessed
directly and through reinsurance intermediaries;
Capital markets through insurance-linked securities and collateralized reinsurance transactions, such as catastrophe bonds,
sidecars and similar vehicles; and
Other insurers that engage in both direct and assumed reinsurance.
The form of reinsurance we may choose from time to time will generally depend on whether we are seeking:
proportional reinsurance, whereby we cede a specified percentage of premiums and losses to reinsurers;
non-proportional or excess of loss reinsurance, whereby we cede all or a specified portion of losses in excess of a specified
amount on a per risk, per occurrence (including catastrophe reinsurance) or aggregate basis; or
facultative contracts that reinsure individual policies.
We continually evaluate the relative attractiveness of different forms of reinsurance contracts and different markets that may be used
to achieve our risk and profitability objectives.
Reinsurance contracts do not relieve our subsidiaries from their direct obligations to insureds. However, an effective reinsurance
program substantially mitigates our exposure to potentially significant losses.
In certain markets, we are required to participate on a proportional basis in reinsurance pools based on our relative share of direct
writings in those markets. Such mandatory reinsurance generally covers higher-risk consumer exposures such as assigned-risk
automobile and earthquake, as well as certain commercial exposures such as workers’ compensation.
164 AIG | 2019 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 and policyholder contract deposits).
At December 31, 2019, total reinsurance recoverable assets were $38.0 billion. These assets include general reinsurance paid losses
recoverable of $1.8 billion, ceded loss reserves of $31.4 billion including reserves for IBNR claims, and ceded reserves for unearned
premiums of $3.2 billion, as well as life reinsurance recoverable of $1.5 billion. The methods used to estimate IBNR and to establish
the resulting ultimate losses involve projecting the frequency and severity of losses over multiple years. These methods are
continually reviewed and updated by management. Any adjustments are reflected in income. We believe that the amount recorded for
ceded loss reserves at December 31, 2019 reflects a reasonable estimate of the ultimate losses recoverable. Actual losses may,
however, differ from the reserves currently ceded.
The Reinsurance Credit Department (RCD) conducts periodic detailed assessments of the financial strength and condition of current
and potential reinsurers, both foreign and domestic. The RCD monitors both the financial condition of reinsurers as well as the total
reinsurance recoverable ceded to reinsurers, and sets limits with regard to the amount and type of exposure we are willing to take
with reinsurers. As part of these assessments, we attempt to identify whether a reinsurer is appropriately licensed, assess its financial
capacity and liquidity, and evaluate the local economic and financial environment in which a foreign reinsurer operates. The RCD
reviews the nature of the risks ceded and the need for measures, including collateral to mitigate credit risk. For example, in our treaty
reinsurance contracts, we frequently include provisions that require a reinsurer to post collateral or use other measures to reduce
exposure when a referenced event occurs. Furthermore, we limit our unsecured exposure to reinsurers through the use of credit
triggers such as insurer financial strength rating downgrades, declines in regulatory capital, or relevant risk-based capital (RBC) ratios
fall below certain levels. We also set maximum limits for reinsurance recoverable exposure, which in some cases is the recoverable
amount plus an estimate of the maximum potential exposure from unexpected events for a reinsurer. In addition, credit executives
within ERM review reinsurer exposures and credit limits and approve reinsurer credit limits above specified levels. Finally, even where
we conclude that uncollateralized credit risk is acceptable, we require collateral from active reinsurance counterparties where it is
necessary for our subsidiaries to recognize the reinsurance recoverable assets for statutory accounting purposes. At December 31,
2019, we held $23.1 billion of collateral, in the form of funds withheld, securities in reinsurance trust accounts and/or irrevocable
letters of credit, in support of reinsurance recoverable assets from unaffiliated reinsurers.
The following table presents information for each reinsurer representing in excess of five percent of our total reinsurance
recoverable assets:
At December 31, 2019
(in millions)
Reinsurer:
S&P
Rating(a) Rating(a)
A.M.
Gross
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+ $
14,561 (d)
4,437
38.3 % $
11.7 % $
14,403
1,797
$
$
158
2,640
(a) The financial strength ratings reflect the ratings of the various reinsurance subsidiaries of the companies listed as of January 28, 2020.
(b) Total reinsurance assets include both Property Casualty and Life and Retirement reinsurance recoverable.
(c) Excludes collateral held in excess of recoverable balances.
(d) Includes $13.9 billion recoverable under the 2011 retroactive asbestos reinsurance transaction and the 2017 adverse development reinsurance agreement.
At December 31, 2019, we had no significant reinsurance recoverable due from any individual reinsurer that was financially troubled.
Reduced profitability associated with lower rates could potentially result in reduced capacity or rating downgrades for some
reinsurers. The RCD, in conjunction with the credit executives within ERM, reviews these developments, monitors compliance with
credit triggers that may require the reinsurer to post collateral, and seeks to use other appropriate means to mitigate any material
risks arising from these developments.
For further discussion of reinsurance recoverable see Critical Accounting Estimates – Reinsurance Assets.
AIG | 2019 Form 10-K 165
ITEM 7 | Enterprise Risk Management
OTHER BUSINESS RISKS
Derivative Transactions
We utilize derivatives principally to enable us to hedge exposure associated with changes in levels of interest rates, currencies, credit,
commodities, equity prices and other risks. Credit risk associated with derivative counterparties exists for a derivative contract when
that contract has a positive fair value to us. The maximum potential exposure will increase or decrease during the life of the derivative
commitments as a function of maturity and market conditions. All derivative transactions must be transacted within counterparty limits
that have been approved by ERM.
We evaluate counterparty credit quality via an internal analysis that is consistent with the AIG Credit Policy. We utilize various credit
enhancements, including letters of credit, guarantees, collateral, credit triggers, credit derivatives, margin agreements and
subordination to reduce the credit risk related to outstanding financial derivative transactions. We require credit enhancements in
connection with specific transactions based on, among other things, the creditworthiness of the counterparties, and transaction size
and maturity. Furthermore, we enter into certain agreements that have the benefit of set-off and close-out netting provisions, such as
ISDA Master Agreements. These provisions provide that, in the case of an early termination of a transaction, we can set off
receivables from a counterparty against payables to the same counterparty arising out of all covered transactions. As a result, where
a legally enforceable netting agreement exists, the fair value of the transaction with the counterparty represents the net sum of
estimated fair values.
The fair value of our interest rate, currency, credit, commodity and equity swaps, options, swaptions, and forward commitments,
futures, and forward contracts reported as a component of Other assets, was approximately $0.8 billion at December 31, 2019 and
$0.9 billion at December 31, 2018. Where applicable, these amounts have been determined in accordance with the respective master
netting agreements.
The following table presents the fair value of our derivatives portfolios in asset positions by internal counterparty credit
rating:
At December 31,
(in millions)
Rating:
AAA
AA
A
BBB
Below investment grade*
Total
* Below investment grade includes not rated.
2019
2018
45
19
145
553
31
793
$
$
37
4
81
619
174
915
$
$
For additional discussion related to derivative transactions see Note 12 to the Consolidated Financial Statements.
166 AIG | 2019 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). Adjusted revenues is a GAAP measure for our operating segments.
Assets under administration include assets under management and Retail Mutual Funds and Group Retirement mutual fund assets
that we sell or administer.
Assets under management include assets in the general and separate accounts of our subsidiaries that support liabilities and
surplus related to our life and annuity insurance products and the notional value of stable value wrap contracts.
Base Spread Net investment income excluding income from alternative investments and other enhancements, less interest credited
excluding amortization of sales inducement assets.
Base Yield Net investment income excluding income from alternative investments and other enhancements, as a percentage of
average base invested asset portfolio, which excludes alternative investments, other bond securities and certain other investments for
which the fair value option has been elected. Base yield includes returns from base portfolio including accretion and income (loss)
from certain other invested assets.
Book value per common share, excluding accumulated other comprehensive income (AOCI) and Book value per common
share, excluding AOCI and deferred tax assets (DTA) (Adjusted book value per common share) are non-GAAP measures and
are used to show the amount of our net worth on a per-common share basis. Book value per common share, excluding AOCI, is
derived by dividing total AIG common shareholders’ equity, excluding AOCI, by total common shares outstanding. Adjusted book value
per common share is derived by dividing total AIG common shareholders’ equity, excluding AOCI and DTA (Adjusted Common
Shareholders’ Equity), by total common shares outstanding.
Casualty insurance Insurance that is primarily associated with the losses caused by injuries to third persons, i.e., not the insured,
and the legal liability imposed on the insured as a result.
Combined ratio Sum of the loss ratio and the acquisition and general operating expense ratios.
CSA Credit Support Annex A legal document generally associated with an ISDA Master Agreement that provides for collateral
postings which could vary depending on ratings and threshold levels.
CVA Credit Valuation Adjustment The CVA adjusts the valuation of derivatives to account for nonperformance risk of our
counterparty with respect to all net derivative assets positions. Also, the CVA reflects the fair value movement in AIGFP's asset
portfolio that is attributable to credit movements only, without the impact of other market factors such as interest rates and foreign
exchange rates. Finally, the CVA also accounts for our own credit risk in the fair value measurement of all derivative net liability
positions and liabilities where AIG has elected the fair value option, when appropriate.
DAC Deferred Policy Acquisition Costs Deferred costs that are incremental and directly related to the successful acquisition of new
business or renewal of existing business.
AIG | 2019 Form 10-K 167
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.
Loan-to-Value Ratio Principal amount of loan amount divided by appraised value of collateral securing the loan.
Loss Ratio Losses and loss adjustment expenses incurred divided by net premiums earned.
Loss reserve development The increase or decrease in incurred losses and loss adjustment expenses related to prior years as a
result of the re-estimation of loss reserves at successive valuation dates for a given group of claims.
Loss reserves Liability for unpaid losses and loss adjustment expenses. The estimated ultimate cost of settling claims relating to
insured events that have occurred on or before the balance sheet date, whether or not reported to the insurer at that date.
Master netting agreement An agreement between two counterparties who have multiple derivative contracts with each other that
provides for the net settlement of all contracts covered by such agreement, as well as pledged collateral, through a single payment, in
a single currency, in the event of default on or upon termination of any one such contract.
Natural catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and
man-made catastrophe losses, such as terrorism and civil disorders that exceed the $10 million threshold.
Net premiums written represent the sales of an insurer, adjusted for reinsurance premiums assumed and ceded, during a given
period. Net premiums earned are the revenue of an insurer for covering risk during a given period. Net premiums written are a
measure of performance for a sales period, while Net premiums earned are a measure of performance for a coverage period.
168 AIG | 2019 Form 10-K
G l o s s a r y
Noncontrolling interests The portion of equity ownership in a consolidated subsidiary not attributable to the controlling parent
company.
Policy fees An amount added to a policy premium, or deducted from a policy cash value or contract holder account, to reflect the cost
of issuing a policy, establishing the required records, sending premium notices and other related expenses.
Pool A reinsurance arrangement whereby all of the underwriting results of the pool members are combined and then shared by each
member in accordance with its pool participation percentage.
Premiums and deposits – Life and Retirement includes direct and assumed amounts received and earned on traditional life
insurance policies, group benefit policies and life-contingent payout annuities, as well as deposits received on universal life,
investment-type annuity contracts, FHLB funding agreements and mutual funds.
Prior year development See Loss reserve development.
RBC Risk-Based Capital A formula designed to measure the adequacy of an insurer’s statutory surplus compared to the risks
inherent in its business.
Reinstatement premiums Additional premiums payable to reinsurers or receivable from insurers to restore coverage limits that have
been reduced or exhausted as a result of reinsured losses under certain excess of loss reinsurance treaties.
Reinsurance The practice whereby one insurer, the reinsurer, in consideration of a premium paid to that insurer, agrees to indemnify
another insurer, the ceding company, for part or all of the liability of the ceding company under one or more policies or contracts of
insurance which it has issued.
Retroactive Reinsurance See Deferred Gain on Retroactive Reinsurance.
Return on common equity – Adjusted after-tax income excluding AOCI and DTA (Adjusted return on common equity) is a
non-GAAP measure and is used to show the rate of return on common shareholders’ equity. Adjusted return on common equity is
derived by dividing actual or annualized adjusted after-tax income attributable to AIG common shareholders by average Adjusted
Common Shareholders’ Equity.
Return premium represents amounts given back to the insured in the case of a cancellation, an adjustment to the rate or an
overpayment of an advance premium.
Severe losses are defined as non-catastrophic individual first-party losses, surety and trade credit losses greater than $10 million,
net of related reinsurance and salvage and subrogation.
SIA Sales Inducement Asset Represents enhanced crediting rates or bonus payments to contract holders on certain annuity and
investment contract products that meet the criteria to be deferred and amortized over the life of the contract.
Solvency II Legislation in the European Union which reforms the insurance industry’s solvency framework, including minimum capital
and solvency requirements, governance requirements, risk management and public reporting standards. The Solvency II Directive
(2009/138/EEC) was adopted on November 25, 2009 and became effective on January 1, 2016.
Subrogation The amount of recovery for claims we have paid our policyholders, generally from a negligent third party or such party’s
insurer.
Surrender charge A charge levied against an investor for the early withdrawal of funds from a life insurance or annuity contract, or
for the cancellation of the agreement.
Surrender rate represents annualized surrenders and withdrawals as a percentage of average reserves and Group Retirement
mutual fund assets under administration.
Unearned premium reserve Liabilities established by insurers and reinsurers to reflect unearned premiums, which are usually
refundable to policyholders if an insurance or reinsurance contract is canceled prior to expiration of the contract term.
VOBA Value of Business Acquired Present value of projected future gross profits from in-force policies of acquired businesses.
AIG | 2019 Form 10-K 169
A c r o n y m s
Acronyms
A&H Accident and Health Insurance
GMWB Guaranteed Minimum Withdrawal Benefits
ABS Asset-Backed Securities
AUM Assets Under Management
ISDA International Swaps and Derivatives Association, Inc.
Moody's Moody's Investors’ Service Inc.
CDO Collateralized Debt Obligations
NAIC National Association of Insurance Commissioners
CDS Credit Default Swap
CMA Capital Maintenance Agreement
NM Not Meaningful
OTC Over-the-Counter
CMBS Commercial Mortgage-Backed Securities
OTTI Other-Than-Temporary Impairment
EGPs Estimated gross profits
RMBS Residential Mortgage-Backed Securities
FASB Financial Accounting Standards Board
S&P Standard & Poor’s Financial Services LLC
FRBNY Federal Reserve Bank of New York
SEC Securities and Exchange Commission
GAAP Accounting principles generally accepted in the United
States of America
URR Unearned revenue reserve
GMDB Guaranteed Minimum Death Benefits
VIE Variable Interest Entity
170 AIG | 2019 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 | 2019 Form 10-K 171
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, 2019 and 2018
Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
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, 2019 and 2018 and for the years ended December 31,
Basis of Presentation
Summary of Significant Accounting Policies
Segment Information
Held-For-Sale Classification
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 Common Share
Statutory Financial Data and Restrictions
Share-Based Compensation Plans
Employee Benefits
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, 2019
2019, 2018 and 2017
SCHEDULE III Supplementary Insurance Information at December 31, 2019 and 2018 and for the years ended December 31, 2019,
2018 and 2017
SCHEDULE IV Reinsurance at December 31, 2019, 2018 and 2017 and for the years then ended
SCHEDULE V Valuation and Qualifying Accounts for the years ended December 31, 2019, 2018 and 2017
172 AIG | 2019 Form 10-K
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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, 2019 and 2018, 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, 2019, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2019 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, 2019, 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.
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the
consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical
audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
AIG | 2019 Form 10-K 173
ITEM 8 | Report of Independent Registered Public Accounting Firm
Valuation of Certain Level 3 Fixed Maturity Securities
As described in Note 6 to the consolidated financial statements, as of December 31, 2019, the total fair value of the Company’s level 3 fixed maturity
securities, including bonds available for sale and other bond securities, was $29.7 billion, comprised of residential mortgage backed securities,
commercial mortgage backed securities, collateralized debt obligations, other asset-backed securities, and fixed maturity securities issued by
corporations (including private placements), municipalities, and other governmental agencies. As the volume or level of market activity for these
securities is limited, management determines fair value either by requesting brokers who are knowledgeable about the particular security to provide a
price quote, which according to management is generally non-binding, or by employing market accepted valuation models. In both cases, certain
inputs used to determine fair value may not be observable in the market. For certain private placement securities, 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. For other level 3 securities, such assumptions may include loan delinquencies and defaults, loss severity, and prepayments. As disclosed by
management, fair value estimates are subject to management review to ensure valuation models and related inputs are reasonable.
The principal considerations for our determination that performing procedures relating to the valuation of certain level 3 fixed maturity securities is a
critical audit matter are (i) the valuation involved the application of significant judgment by management to determine the fair value of these securities,
which led to a high degree of auditor subjectivity and judgment in performing the audit procedures relating to the aforementioned assumptions that are
used to determine the fair value, (ii) there was significant audit effort and judgment in evaluating the audit evidence related to the valuation, and (iii) the
audit effort involved the use of professionals with specialized skill and knowledge to assist in performing procedures and evaluating the audit evidence
obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the
consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of level 3 fixed maturity
securities, including controls related to (i) management’s review over the pricing function and (ii) identifying and resolving pricing exceptions. These
procedures also included, among others, obtaining independent third party vendor pricing, where available, and the involvement of professionals with
specialized skill and knowledge to assist in developing an independent range of prices for a sample of securities. Developing the independent range of
prices involved testing the completeness and accuracy of data used by management on a sample basis and evaluating management’s assumptions
noted above. The independent third party vendor pricing and the independently developed ranges were compared to management’s recorded fair
value estimates.
Valuation of Insurance Liabilities - Unpaid Losses and Loss Adjustment Expenses (Loss Reserves)
As described in Note 14 to the consolidated financial statements, loss reserves represent the accumulation of estimates of unpaid claims, including
estimates for claims incurred but not reported and loss adjustment expenses, less applicable discount. As of December 31, 2019, the Company’s total
liability for unpaid losses and loss adjustment expenses was $78.3 billion, of which the net liability for unpaid losses and loss adjustment expenses
was $47.3 billion, and reinsurance recoveries were $31.0 billion. Management’s estimate of the loss reserves relies on several key judgments,
including (i) actuarial methods, (ii) relative weights given to these methods by product line, (iii) underlying actuarial assumptions, and (iv) groupings of
similar product lines. Actuarial assumptions include (i) expected loss ratios, (ii) loss development factors, and (iii) loss cost trend factors. During
management’s actuarial reviews, various factors are considered, including economic conditions; the legal, regulatory, judicial and social environment;
medical cost trends; policy pricing and terms; changes in the claims handling process; and the impact of reinsurance. As described in Note 14 to the
consolidated financial statements, management uses a combination of actuarial methods to project ultimate losses for both long-tail and short-tail
exposures.
The principal considerations for our determination that performing procedures relating to the valuation of loss reserves is a critical audit matter are (i)
the valuation involved the application of significant judgment by management when developing their estimate, which led to a high degree of auditor
subjectivity and judgment in performing the audit procedures related to the evaluation, (ii) there was significant audit effort and judgment in evaluating
the audit evidence related to the actuarial methods, weights given to these methods by product line, groupings of similar product lines, and the
aforementioned actuarial assumptions, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in
performing procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the
consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of unpaid losses and loss
adjustment expenses and reinsurance recoveries, including controls over the selection of actuarial methods and development of significant
assumptions, as well as controls designed to identify and address management bias and contrary evidence. These procedures also included, among
others, the involvement of professionals with specialized skill and knowledge to assist in performing one or a combination of procedures for a sample
of product lines, including (i) independently estimating reserves using actual historical data and loss development patterns, as well as industry data
and other benchmarks, and comparing management’s actuarially determined reserves to these independent estimates, and (ii) evaluating
management’s actuarial reserving methods and aforementioned factors, including actuarial assumptions and judgments impacting loss reserves and
the consistency of management’s approach period-over-period. Performing these procedures involved testing the completeness and accuracy of data
used by management on a sample basis.
174 AIG | 2019 Form 10-K
ITEM 8 | Report of Independent Registered Public Accounting Firm
Amortization and Recoverability of Deferred Policy Acquisition Costs for Investment-Oriented Products
As described in Note 10 to the consolidated financial statements, as of December 31, 2019, deferred policy acquisition costs (DAC) related to
universal life and investment-type products (collectively, investment-oriented products) were approximately $6.1 billion. Policy acquisition costs and
policy issuance costs related to 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. As disclosed by management, estimated gross profits are affected by a number of
factors, including current and expected interest rates, net investment income and spreads, net realized capital gains and losses, fees, surrender rates,
mortality experience, policyholder behavior experience, equity market returns, and volatility. If the assumptions used for estimated gross profits
change, DAC is recalculated using the updated assumptions, and any resulting adjustment is included in income. DAC for investment-oriented
products is reviewed by management for recoverability, which involves estimating the future profitability of the current business. If actual profitability is
substantially lower than previously estimated profitability, DAC may be subject to an impairment charge.
The principal considerations for our determination that performing procedures relating to amortization and recoverability of DAC for investment-
oriented products is a critical audit matter are (i) there was significant judgment by management to determine the assumptions including mortality,
surrender rates, policyholder behavior, interest rates and equity market return, which led to a high degree of auditor subjectivity and judgment in
performing the audit procedures related to the significant assumptions used in the estimate, (ii) there was significant audit effort and judgment in
evaluating the audit evidence relating to the significant estimated gross profit assumptions, and (iii) the audit effort involved the use of professionals
with specialized skill and knowledge to assist in evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the
consolidated financial statements. These procedures included testing the effectiveness of controls relating to the amortization and recoverability of
DAC for investment-oriented products, including controls over the development of significant assumptions. These procedures also included, among
others, the involvement of professionals with specialized skill and knowledge to assist in evaluating the appropriateness of management’s
methodology and the reasonableness of management’s assumptions used in the calculation of estimated gross profits, including mortality, surrender
rates, policyholder behavior, interest rates and equity market return. The evaluation of the reasonableness of the assumptions included consideration
of the consistency of the assumptions across products in relation to prior periods and in relation to management’s historical experience or observed
industry practice. Procedures were performed to test the completeness and accuracy of data used by management in developing the assumptions on
a sample basis.
Valuation of Guaranteed Benefit Features of Certain Life and Annuity Products
As described in Notes 6, 14 and 15 to the consolidated financial statements, certain variable annuity and equity-indexed annuity contracts contain
embedded derivatives which are bifurcated from the host contracts and accounted for separately at fair value in policyholder contract deposits. As of
December 31, 2019, the fair value of these embedded derivatives was $3.9 billion and $2.5 billion for equity-indexed annuity and variable annuities
with guaranteed minimum withdrawal benefits, respectively. The fair value of embedded derivatives contained in certain variable annuity and equity-
indexed annuity contracts is measured based on policyholder behavior and capital market assumptions related to projected cash flows over the
expected lives of the contracts. The policyholder behavior assumptions for these liabilities include mortality, lapses, withdrawals, and benefit utilization,
along with an explicit risk margin to reflect a market participant’s estimates of projected cash flows. Estimates of future policyholder behavior
assumptions are subjective and based primarily on the Company’s historical experience. The capital market assumptions related to the embedded
derivatives for variable annuity contracts involves judgments regarding expected market rates of return, market volatility, credit spreads, correlations of
certain market variables, fund performance, and discount rates. With respect to embedded derivatives for equity-indexed annuity contracts, option
pricing models are used to estimate fair value, taking into account the capital market assumptions for future equity index growth rates, volatility of the
equity index, future interest rates, and management’s ability to adjust the participation rate and the cap on equity-indexed credited rates in light of
market conditions and policyholder behavior assumptions. Additional policyholder liabilities are also established for universal life policies with
secondary guarantees. As of December 31, 2019, the liability for universal life secondary guarantees was $2.7 billion, which is included within
policyholder contract deposits. The policyholder behavior assumptions for these liabilities include mortality, lapses and premium persistency. The
capital market assumptions used for the liability for universal life secondary guarantees include discount rates and net earned rates.
The principal considerations for our determination that performing procedures relating to the valuation of guaranteed benefit features of certain life and
annuity products is a critical audit matter are (i) there was significant judgment by management in developing the aforementioned assumptions for the
embedded derivatives and the additional policyholder liabilities, which led to a high degree of auditor subjectivity and judgment in performing the audit
procedures related to the significant assumptions used in the estimate, (ii) there was significant audit effort and judgment in evaluating the audit
evidence relating to the models and significant assumptions used by management in the valuation of the embedded derivatives and additional
policyholder liabilities, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit
evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the
consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of guaranteed benefit
features of certain life and annuity products, including controls over the development of models and assumptions. These procedures also included,
among others, the involvement of professionals with specialized skill and knowledge to assist in performing an evaluation of the appropriateness of
management’s methodology and the reasonableness of management’s judgments used in developing policyholder behavior and capital market
assumptions used in estimating the valuation of guaranteed benefit features. These procedures considered the consistency of the assumptions across
products, in relation to prior periods, and in relation to management’s historical experience or observed industry practice, and the continued
appropriateness of unchanged assumptions. Procedures were performed to test the completeness and accuracy of data provided by management on
a sample basis.
AIG | 2019 Form 10-K 175
ITEM 8 | Report of Independent Registered Public Accounting Firm
Recoverability of Net U.S. Federal Deferred Tax Asset
As described in Note 23 to the consolidated financial statements, as of December 31, 2019, the Company had a net U.S. federal deferred tax asset of
$12.5 billion. Management evaluates the recoverability of the net deferred tax asset and the need for a valuation allowance based on the weight of all
positive and negative evidence to reach a conclusion of whether it is more likely than not that all or some portion of the deferred tax asset will not be
realized. In assessing the recoverability of the net deferred tax asset, management considers a number of factors, which include forecasts of future
income for each of the businesses and actual and planned business and operational changes, using assumptions about future macroeconomic and
company specific conditions and events. Management subjects the forecasts to changes in key assumptions and evaluates the effect on tax attribute
utilization. Management also applies changes to assumptions about the effectiveness of relevant prudent and feasible tax planning strategies. As of
December 31, 2019, management determined that it is more likely than not that the U.S. federal net operating loss and foreign tax credit carryforwards
will be utilized prior to expiration, and, thus, no valuation allowance has been established.
The principal considerations for our determination that performing procedures relating to the recoverability of the net U.S. federal deferred tax asset is
a critical audit matter are (i) there was significant judgment by management when developing their estimate of the recoverability, which led to a high
degree of auditor subjectivity and judgment in performing the audit procedures relating to the forecasts of future income for each of the businesses,
assumptions about future macroeconomic and company specific conditions and events, tax attribute carryforward periods, and tax planning strategies,
(ii) there was significant audit effort and judgment in evaluating the audit evidence related to the recoverability of the net U.S. federal deferred tax
asset, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the
consolidated financial statements. These procedures included testing the effectiveness of controls relating to the recoverability of the net U.S. federal
deferred tax asset, including controls over the accuracy of input data relevant to the analysis, such as cumulative loss measurement, reversal of
temporary differences, adjustments to forecasted pre-tax income to calculate future taxable income, and enacted and effective tax law considerations.
These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in (i) evaluating
management’s assessment of the recoverability of the net U.S. federal deferred tax asset, including the reasonableness of the application of tax law,
(ii) testing management’s process for forecasting future income for each of the businesses, which included evaluating the impact of actual and planned
business and operational changes, the reasonableness of assumptions about future macroeconomic and company specific conditions and events, as
well as considering whether management demonstrated their ability and intent in executing planned strategies, (iii) testing the tax attribute
carryforward periods, and (iv) evaluating the prudence and feasibility of the implementation of available tax planning strategies that impact the
recoverability of the net U.S. federal deferred tax asset.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 21, 2020
We have served as the Company’s auditor since 1980.
176 AIG | 2019 Form 10-K
American International Group, Inc.
Consolidated Balance Sheets
(in millions, except for share data)
Assets:
Investments:
Fixed maturity securities:
December 31,
December 31,
2019
2018
Bonds available for sale, at fair value (amortized cost: 2019 - $233,230; 2018 - $225,780)
$
251,086
$
229,391
Other bond securities, at fair value (See Note 7)
Equity securities, at fair value (See Note 7)
Mortgage and other loans receivable, net of allowance
Other invested assets (portion measured at fair value: 2019 - $6,827; 2018 - $5,894)
Short-term investments, including restricted cash of $188 in 2019 and $142 in 2018
(portion measured at fair value: 2019 - $5,343; 2018 - $3,015)
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 $243 in 2019 and $343 in 2018
(portion measured at fair value: 2019 - $3,151; 2018 - $973)
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: 2019 - $6,910; 2018 - $4,116)
Other policyholder funds
Other liabilities (portion measured at fair value: 2019 - $1,100; 2018 - $1,265)
Long-term debt (portion measured at fair value: 2019 - $2,062; 2018 - $2,213)
Debt of consolidated investment entities
Separate account liabilities
Total liabilities
Contingencies, commitments and guarantees (See Note 17)
AIG shareholders’ equity:
6,682
841
46,984
18,792
13,230
337,615
2,856
2,334
10,274
37,977
13,146
11,207
16,383
93,272
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
$
$
525,064
$
491,984
78,328
$
18,269
50,512
151,869
3,428
26,609
25,479
9,871
93,272
83,639
19,248
44,935
142,262
3,568
24,636
26,136
8,404
81,847
457,637
434,675
-
-
Series A Non-cumulative preferred stock and additional paid in capital, $5.00 par value; 100,000,000 shares
authorized; shares issued: 2019 - 20,000 and 2018 - 0; liquidation preference $500
485
-
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2019 - 1,906,671,492 and
2018 - 1,906,671,492
Treasury stock, at cost; 2019 - 1,036,672,461 shares; 2018 - 1,040,062,063 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.
4,766
(48,987)
81,345
23,084
4,982
65,675
1,752
67,427
$
525,064
$
4,766
(49,144)
81,268
20,884
(1,413)
56,361
948
57,309
491,984
AIG | 2019 Form 10-K 177
American International Group, Inc.
Consolidated Statements of Income
(dollars in millions, except per common share data)
Revenues:
Premiums
Policy fees
Net investment income
Net realized capital gains (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 gains (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) loss on sale of divested businesses
Total benefits, losses and expenses
Income from continuing operations before income tax expense
Income tax expense (benefit):
Current
Deferred
Income tax expense
Income (loss) from continuing operations
Income (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
Less: Dividends on preferred stock
Net income (loss) attributable to AIG common shareholders
Income (loss) per common share attributable to AIG common shareholders:
Basic:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss) attributable to AIG common shareholders
Diluted:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss) attributable to AIG common shareholders
Weighted average shares outstanding:
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
178 AIG | 2019 Form 10-K
$
$
$
$
$
$
$
Years Ended December 31,
2019
2018
2017
$
30,561 $
3,015
14,619
30,614 $
2,791
12,476
(172)
(2)
(174)
806
632
919
49,746
25,402
3,832
5,164
8,537
1,417
32
75
44,459
5,287
545
621
1,166
4,121
48
4,169
821
3,348
22
3,326 $
3.74 $
0.05 $
3.79 $
3.69 $
0.05 $
3.74 $
(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
67
(6)
-
(6) $
0.04 $
(0.05) $
(0.01) $
0.04 $
(0.05) $
(0.01) $
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)
28
(6,084)
-
(6,084)
(6.54)
-
(6.54)
(6.54)
-
(6.54)
876,750,264
889,511,946
898,405,537
910,141,242
930,561,286
930,561,286
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 income (loss) attributable to AIG
See accompanying Notes to Consolidated Financial Statements.
Years Ended December 31,
2019
4,169 $
$
2018
61 $
2017
(6,056)
661
5,689
104
(36)
(3)
6,415
10,584
841
9,743 $
(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)
$
AIG | 2019 Form 10-K 179
American International Group, Inc.
Consolidated Statements of Equity
(in millions)
Balance, January 1, 2017
Common stock issued under stock plans
Purchase of common stock
Net income (loss) attributable to AIG or
noncontrolling interests
Dividends on common stock
Other comprehensive income
Current and deferred income taxes
Net increase due to acquisitions
and consolidations
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Other
Preferred
Stock and
Additional
Accumulated
Total AIG
redeemable
Non-
Additional
Other
Share-
Non-
Paid-in Common
Treasury
Paid-in Retained Comprehensive
holders'
controlling
Capital
Stock
Stock
Capital Earnings
Income (Loss)
Equity
Interests
Total
Equity
$
- $
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
Balance, December 31, 2017
$
- $
4,766 $ (47,595) $
81,078 $ 21,457 $
5,465 $
65,171 $
537 $
65,708
Cumulative effect of change in accounting
principle, net of tax
Common stock issued under stock plans
Purchase of common stock
Net income (loss) attributable to AIG or
noncontrolling interests
Dividends on common stock
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, 2018
Preferred stock issued
Common stock issued under stock plans
Purchase of common stock
Net income attributable to AIG or
noncontrolling interests
Dividends on preferred stock
Dividends on common stock
Other comprehensive income
Current and deferred income taxes
Net increase due to acquisitions
and consolidations
Contributions from noncontrolling interests
Distributions to noncontrolling interests
Other
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
189
(1,739)
-
-
-
-
-
-
-
1
-
568
(576)
(344)
-
-
-
-
-
-
-
-
534
-
-
(6)
(1,138)
-
-
-
-
-
3
-
-
-
-
(6,302)
-
-
-
-
-
(8)
(155)
(1,739)
(6)
(1,138)
(6,302)
-
-
-
-
538
-
-
-
67
-
9
-
63
373
(96)
(5)
(8)
(155)
(1,739)
61
(1,138)
(6,293)
-
63
373
(96)
533
$
- $
4,766 $ (49,144) $
81,268 $ 20,884 $
(1,413) $
56,361 $
948 $
57,309
485
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
156
-
(236)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,348
(22)
(1,114)
-
-
-
-
-
1
313
(12)
-
-
-
-
-
-
6,395
-
-
-
-
-
485
(80)
-
3,348
(22)
(1,114)
6,395
-
-
-
-
302
-
-
-
485
(80)
-
821
4,169
-
-
20
-
65
19
(22)
(1,114)
6,415
-
65
19
(131)
10
(131)
312
Balance, December 31, 2019
$
485 $
4,766 $ (48,987) $
81,345 $ 23,084 $
4,982 $
65,675 $
1,752 $
67,427
See accompanying Notes to Consolidated Financial Statements.
180 AIG | 2019 Form 10-K
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) loss 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 and debt of consolidated investment entities
Repayments of long-term debt and debt of consolidated investment entities
Issuance of preferred stock, net of issuance costs
Purchase of common stock
Dividends paid on preferred stock
Dividends paid on common stock
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
Years Ended December 31,
2019
2018
2017
$
4,169 $
(48)
61 $
42
(6,056)
(4)
(862)
75
32
207
260
5,006
299
(5,224)
437
217
(5,403)
912
(1,005)
(5,049)
(928)
22,145
7,918
4,185
2
25,488
5,826
(54,410)
(1,638)
(3,346)
(9,515)
-
(3,633)
1,503
(5,475)
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)
22,307
(17,556)
3,881
(3,202)
485
-
(22)
(1,114)
1,600
6,379
16
(8)
3,358
(63)
3,287 $
24,178
(17,999)
4,734
(3,672)
-
(1,739)
-
(1,138)
(3,570)
794
(11)
621
2,737
-
3,358 $
$
(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
17,908
(15,785)
3,356
(3,698)
-
(6,275)
-
(1,172)
(31)
(5,697)
(29)
497
2,107
133
2,737
AIG | 2019 Form 10-K 181
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 activities:
Fixed maturity securities available for sale received in connection with pension risk
transfer transactions
Non-cash financing activities:
Interest credited to policyholder contract deposits included in financing activities
$
Years Ended December 31,
2019
2,856 $
188
243
2018
2017
2,873 $
2,362
142
343
58
317
$
3,287 $
3,358 $
2,737
$
$
$
$
1,326 $
252 $
1,312 $
154 $
1,282
544
1,072 $
- $
-
3,305 $
3,392 $
3,309
*
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.
182 AIG | 2019 Form 10-K
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). 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 the basis of 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 (U.S. 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 5.
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 UK AIG Life and Retirement company, completed the acquisition of Ellipse, a specialist
provider of group life risk protection in the UK.
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 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.
AIG | 2019 Form 10-K 183
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.
Fortitude Holdings
On November 13, 2018, AIG completed the sale of a 19.9 percent ownership interest in Fortitude Group Holdings, LLC (Fortitude
Holdings) to TC Group Cayman Investments Holdings, L.P. (TCG), an affiliate of The Carlyle Group L.P. (Carlyle) (2018 Fortitude
Sale). Upon completion of the 2018 Fortitude Sale, Fortitude Holdings owned 100 percent of the outstanding common shares of
Fortitude Reinsurance Company Ltd (Fortitude Re) and AIG had 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 closing of the 2018
Fortitude Sale, TCG will pay us up to an additional $100 million. In connection with the 2018 Fortitude Sale, we agreed to certain
investment commitment targets into various Carlyle strategies and to certain minimum investment management fee payments within
36 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 25, 2019, AIG entered into a membership interest purchase agreement with Fortitude Holdings, Carlyle, Carlyle FRL,
an investment fund advised by an affiliate of Carlyle (Carlyle FRL), T&D United Capital Co., Ltd. (T&D) and T&D Holdings, Inc.,
pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, Carlyle FRL will purchase from AIG a
51.6 percent ownership interest in Fortitude Holdings and T&D will purchase from AIG a 25 percent ownership interest in Fortitude
Holdings (2019 Fortitude Sale). Upon closing of the 2019 Fortitude Sale, AIG will have a 3.5 percent ownership interest in Fortitude
Holdings. In connection with the 2019 Fortitude Sale agreement, AIG, Fortitude Holdings and an affiliate of Carlyle FRL have agreed
that, effective as of the closing of the 2019 Fortitude Sale, (i) AIG’s aforementioned investment commitment targets will be assumed
by Fortitude Holdings and AIG will be released therefrom, and (ii) Carlyle will remain obligated to pay AIG $95 million of deferred
compensation and up to an additional $100 million to the extent AIG does not receive all or a portion of the planned distributions
within 18 months of the closing of the 2018 Fortitude Sale. We expect to contribute approximately $1.45 billion of the proceeds of the
2019 Fortitude Sale to certain of our insurance company subsidiaries for a period of time following the closing of the transaction.
There can be no guarantee that we will receive the required regulatory approvals or that closing conditions will be satisfied in order to
consummate the 2019 Fortitude Sale.
For further details on this transaction see Note 4 to the Consolidated Financial Statements.
USE OF ESTIMATES
The preparation of financial statements in accordance with U.S. 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);
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;
reinsurance assets;
impairment charges, including other-than-temporary impairments on available for sale securities, impairments on other invested
assets, including investments in life settlements, allowances for loan losses, and goodwill impairment;
liability for legal contingencies;
fair value measurements of certain financial assets and liabilities; and
income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating
profitability of the character necessary to realize the net deferred tax asset and estimates associated with the Tax Act.
These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of
estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of
operations and cash flows could be materially affected.
184 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 1. B as is o f P re se n t at io n
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 year ended
December 31, 2017 would have increased by $95 million.
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 7. 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 8. Lending Activities
Mortgage and other loans receivable – net of allowance
Note 9. Reinsurance
Reinsurance assets – net of allowance
Retroactive reinsurance
Note 10. Deferred Policy Acquisition Costs
Deferred policy acquisition costs
Amortization of deferred policy acquisition costs
Note 11. Variable Interest Entities
Note 12. Derivatives and Hedge Accounting
Derivative assets and liabilities, at fair value
Note 13. Goodwill and Other Intangible Assets
Note 14. Insurance Liabilities
Liability for unpaid losses and loss adjustment expenses
Discounting of reserves
Future policy benefits
Policyholder contract deposits
Other policyholder funds
Note 15. Variable Life and Annuity Contracts
Note 16. Debt
Long-term debt
Note 17. Contingencies, Commitments and Guarantees
Legal contingencies
Note 19. Earnings Per Common Share
Note 23. Income Taxes
AIG | 2019 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
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.
Other income includes advisory fee income from the Life and Retirement broker dealer business.
Cash represents cash on hand and demand deposits.
Short-term investments Short-term investments include highly liquid securities and other investments with remaining maturities of
one year or less, but greater than three months, at the time of purchase. Securities included within short-term investments are stated
at estimated fair value, while other investments included within short-term investments are stated at amortized cost, which
approximates estimated fair value.
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 $178 million and $216 million at
December 31, 2019 and 2018, respectively.
Deposit assets and liabilities: 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. When we receive premiums
on such contracts, the premiums received, 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.
When we pay premiums on such contracts, the premiums paid are recorded as deposits within Other assets in the Consolidated
Balance Sheets. The deposit asset or liability is adjusted as amounts are paid, consistent with the underlying contracts.
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, derivative assets and assets of businesses
classified as held-for-sale.
We offer sales inducements which include enhanced crediting rates or bonus payments to contract holders (bonus interest) on certain
annuity and investment contract products. Such amounts are deferred and amortized over the life of the contract using the same
methodology and assumptions used to amortize DAC (see Note 10 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 $430 million and
$752 million at December 31, 2019 and 2018, 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
$79 million, $156 million and $94 million for the years ended December 31, 2019, 2018 and 2017, respectively.
186 AIG | 2019 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
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 ten 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 15 herein.
Other liabilities consist of other funds on deposit, other payables, securities sold under agreements to repurchase, securities sold
but not yet purchased, derivative liabilities, deferred gains on retroactive reinsurance agreements and liabilities of businesses
classified as held-for-sale. 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) and net income (loss) in a subsidiary not attributable,
directly or indirectly, to AIG.
ACCOUNTING STANDARDS ADOPTED DURING 2019
Leases
In February 2016, the Financial Accounting Standards Board (FASB) issued an accounting standard that requires 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.
We adopted the standard on its effective date of January 1, 2019, using a modified retrospective approach and did not adjust prior
comparative periods in accordance with the standard’s transition guidance. The majority of the Company’s lease obligations pertain to
real estate utilized in the operation of our businesses. Consequently, the primary impact of adoption resulted in the recognition of
discounted lease liabilities of $823 million and corresponding right-of-use assets of $724 million as of January 1, 2019 for operating
leases pertaining to our real estate portfolio, which are reflected in Other Liabilities and Other Assets, respectively. The standard did
not have a material effect on our reported consolidated financial condition, results of operations, cash flows or required disclosures.
For additional information on our leases see Note 17 to the Consolidated Financial Statements.
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.
AIG | 2019 Form 10-K 187
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 using a modified retrospective approach on its effective date of January 1, 2019. The standard did not have
a material impact on our reported consolidated financial condition, results of operations, cash flows or required disclosures.
Derivatives and Hedging
In August 2017, the FASB issued an accounting standard that improves and expands hedge accounting for both financial and
commodity risks. The provisions of the standard 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 disclosures, and
simplify the application of hedge accounting treatment.
We adopted the standard on its effective date of January 1, 2019. The standard did not have a material impact on our reported
consolidated financial condition, results of operations, cash flows or required disclosures.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
Financial Instruments - Credit Losses
In June 2016, the FASB issued an accounting standard that will change how entities account for current expected credit losses
(CECL) for most financial assets, premiums receivable, off-balance sheet exposures and reinsurance receivables. The standard
requires an allowance for credit losses based on the expectation of lifetime credit losses related to such 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, is 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 allow for reversals of credit impairments in the event that the credit of an issuer
improves. The standard also requires additional disclosures.
We adopted the standard on its effective date of January 1, 2020 using a modified retrospective method, which requires a cumulative
effect adjustment to retained earnings. As of December 31, 2019, the impact of the adoption of the standard will be a reduction in
opening retained earnings of approximately $650 million (pre-tax) primarily driven by commercial mortgage loans, and, to a lesser
extent, reinsurance receivables and recoverables.
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.
We adopted the standard on its effective date of January 1, 2020.
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 policy 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.
188 AIG | 2019 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
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.
In October 2019, the FASB affirmed its decision to defer the effective date of the standard to January 1, 2022. We plan to adopt the
standard on its updated effective date. We have started our implementation efforts and 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.
Income Tax
On December 18, 2019, the FASB issued guidance that simplifies the accounting for income taxes by eliminating certain exceptions
to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of
deferred tax liabilities for outside basis differences. The amendments also simplified other areas including the accounting for franchise
taxes and enacted tax laws or rates, and clarified the accounting for transactions that result in the step-up in the tax basis of goodwill.
The standard Is effective on January 1, 2021, with early adoption permitted. We are assessing the impact on our consolidated
financial condition, results of operations and cash flows.
RECLASSIFICATIONS
In the first quarter of 2019, we began reporting investment income from our non-insurance subsidiaries in Net investment income
instead of Other income on a prospective basis to be consistent with how we report investment income from our General Insurance
and Life and Retirement reporting segments. This reclassification has no impact to our consolidated statements of operations.
GOODWILL
Effective July 1, 2019, we changed the date of our annual goodwill impairment testing from December 31 to July 1. This change does
not represent a material change to our method of applying current accounting guidance and is preferable as it better aligns with our
strategic planning and forecasting process. This change did not delay, accelerate or avoid any impairment charge and was applied
prospectively. We performed our annual goodwill impairment tests of all reporting units using a combination of both qualitative and
quantitative assessments and concluded that our goodwill was not impaired. Our goodwill balance was $4.0 billion at December 31,
2019. For further information on goodwill see Note 13 to the Consolidated Financial Statements.
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., Western World Insurance Group, Inc. and Glatfelter Insurance Group as of their respective acquisition
dates.
International — consists of regional insurance businesses in Japan, the United Kingdom, Europe, Asia Pacific, Latin America and
Caribbean, Middle East and Africa, and China. This also includes the results of Talbot Holdings, Ltd. as of its 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.
AIG | 2019 Form 10-K 189
ITEM 8 | Notes to Consolidated Financial Statements | 3. Segment Information
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 annuities, individual annuity and investment products, and 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 consists primarily of:
Income from assets held by AIG Parent and other corporate subsidiaries.
General operating expenses not attributable to AIG reporting segments.
Certain compensation expenses attributable to Other Operations and reporting segments.
Amortization of value of distribution network acquired (VODA) related to the Validus and Glatfelter acquisitions.
Interest expense attributable to AIG long-term debt as well as debt associated with consolidated investment entities.
Results also include:
Blackboard — a subsidiary focused on delivering commercial insurance solutions using digital technology, data analytics and
automation.
Fuji Life — consists of term insurance, life insurance, endowment policies and annuities. The sale of this business was completed
on April 30, 2017.
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), is included in our Legacy Portfolio.
Legacy Life and Retirement Run-Off Lines — Reserves consist of certain structured settlements, pension risk transfer annuities
and single premium immediate annuities written prior to April 2012. Also includes exposures to whole life, long-term care and
exited accident & health product lines.
Legacy General Insurance Run-Off Lines — Reserves consist of excess workers’ compensation, environmental exposures and
exposures to other products within General Insurance that are no longer actively marketed. Also includes the remaining reserves
in Eaglestone Reinsurance Company (Eaglestone).
Legacy Investments — Includes investment classes that we have placed into run-off including holdings in direct investments as
well as investments in global capital markets and global real estate.
We evaluate segment performance based on adjusted revenues and adjusted pre-tax income (loss). Adjusted revenues and adjusted
pre-tax income (loss) are derived by excluding certain items from total revenues and net income (loss) attributable to AIG,
respectively. 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. Beginning in the first quarter of 2019, on a prospective basis, the changes in
the fair value of equity securities are excluded from adjusted pre-tax income (loss). For the items excluded from adjusted revenues
and adjusted pre-tax income (loss) see the table below.
190 AIG | 2019 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)
2019
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)
$
15,782 $
14,100
29,882
2,929 $
515
3,444
- $
-
-
2,008 $
2,474
4,482
5,654
2,947
4,352
2,912
15,865
845
3,016
(691)
4,133
2,240
1,203
885
8,461
370
2,480
(365)
77
44
26
11
158
1,246
19
(53)
449
81
115
5
650
16
68
-
2,709
824
3,533
1,984
937
246
291
3,458
(1,709)
501
(305)
pre-tax income
$
48,917 $
14,390 $
1,370 $
5,216 $
5,478
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 (losses)
Changes in the fair value of equity securities
Professional fees related to regulatory or accounting changes
Other income (expense) - net
Loss on extinguishment of debt
Net realized capital gains (losses)*
Loss from divested businesses
Non-operating litigation reserves and settlements
Unfavorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements
Net loss reserve discount 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
228
-
158
-
46
-
388
-
9
-
-
-
-
-
228
-
158
-
85
-
(242)
-
-
-
-
-
-
-
-
-
-
-
85
-
(38)
-
-
-
-
-
-
-
Revenues and Pre-tax income
$
49,746 $
14,619 $
1,417 $
-
(52)
-
-
-
-
-
-
-
-
-
-
-
-
5,164 $
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
pre-tax income
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 (losses)
Changes in the fair value of equity securities
Professional fees related to regulatory or accounting changes
Other income (expense) - net
Loss on extinguishment of debt
Net realized capital losses*
$
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
-
$
47,813 $
12,728 $
1,343 $
5,391 $
1,409
(128)
(128)
-
-
-
(53)
-
(254)
-
-
-
-
-
(124)
-
-
-
-
-
-
(34)
-
(5)
-
-
-
-
-
(154)
6
-
-
-
(7)
(193)
AIG | 2019 Form 10-K 191
194
56
158
(12)
-
(32)
448
(75)
2
267
(955)
-
(24)
(218)
5,287
(8)
(461)
(469)
1,681
933
330
246
3,190
(1,584)
213
59
ITEM 8 | Notes to Consolidated Financial Statements | 3. Segment Information
38
(19)
(675)
371
-
(124)
(395)
257
(232)
(581)
(813)
2,289
1,004
274
264
3,831
(1,405)
1,470
75
Income from divested businesses
Non-operating litigation reserves and settlements
Unfavorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements
Net loss reserve discount benefit
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
-
11
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Revenues and Pre-tax income
$
47,389 $
12,476 $
1,309 $
-
-
-
-
-
-
-
5,386 $
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
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 (losses)
Changes in the fair value of equity securities
Professional fees related to regulatory or accounting changes
Other income (expense) - net
Gain on extinguishment of debt
Net realized capital losses*
Income from divested businesses
Non-operating litigation reserves and settlements
Unfavorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements
Net loss reserve discount 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
$
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
146
146
-
-
-
(49)
-
(1,380)
-
27
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
146
(291)
-
-
-
-
-
-
-
-
-
-
-
-
4,288 $
303
-
-
-
5
(1,380)
68
129
(303)
(187)
(60)
-
(413)
1,466
Revenues and Pre-tax income
$
49,520 $
14,179 $
1,168 $
*
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.
192 AIG | 2019 Form 10-K
The following table presents AIG’s year-end identifiable assets and capital expenditures by legal entity category:
ITEM 8 | Notes to Consolidated Financial Statements | 3. Segment Information
(in millions)
General Insurance companies
Life and Retirement companies
Other
AIG Consolidation and Elimination
Total Assets
Year-End Identifiable Assets
Capital Expenditures
2019
109,871
280,721
142,745
(8,273)
525,064
$
$
2018
110,007
247,219
140,428
(5,670)
491,984
$
$
2019
105
104
95
-
304
$
$
2018
171
94
103
-
368
$
$
The following table presents AIG’s consolidated total revenues and real estate and other fixed assets, net of accumulated
depreciation, by major geographic area:
(in millions)
North America
International
Consolidated
Total Revenues*
2018
31,003 $
16,386
47,389 $
2019
36,862 $
12,884
49,746 $
$
$
Real Estate and Other Fixed Assets,
Net of Accumulated Depreciation
2017
34,149
15,371
49,520
$
$
2019
1,333 $
620
1,953 $
2018
1,479 $
693
2,172 $
2017
1,630
892
2,522
* 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. Held-For-Sale Classification
HELD-FOR-SALE CLASSIFICATION
We report and classify a business as held-for-sale (Held-For-Sale Business) when management has approved the sale or received
approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being
actively marketed, the sale is anticipated to occur during the next 12 months and certain other specified criteria are met. A Held-For-
Sale Business is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the
business exceeds its estimated fair value, a loss is recognized.
Assets and liabilities related to Held-For-Sale Business are reported in Other assets and Other liabilities, respectively, in our
Consolidated Balance Sheets beginning in the period in which the business is classified as held-for-sale.
At December 31, 2019, the following business was reported and classified as held-for-sale:
Fortitude Holdings
Fortitude Re was established during the first quarter of 2018 in connection with a series of affiliated reinsurance transactions related
to our Legacy Portfolio. Those reinsurance transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines
into a single legal entity. As of December 31, 2019, the affiliated transactions included the cession of approximately $30.2 billion of
reserves from our Legacy Life and Retirement Run-Off Lines and approximately $3.9 billion of reserves from our Legacy General
Insurance Run-Off Lines related to business written by multiple wholly-owned AIG subsidiaries. Fortitude Re has approximately $2.5
billion of total assets after elimination of intercompany balances, primarily managed by AIG, and is AIG’s main run-off reinsurer with its
own dedicated management team. In the second quarter of 2018, the Company formed Fortitude Holdings as the holding company
for Fortitude Re.
On November 13, 2018, AIG completed the sale of a 19.9 percent ownership interest in Fortitude Holdings to TCG, an affiliate of
Carlyle. Upon completion of the 2018 Fortitude Sale, Fortitude Holdings owned 100 percent of the outstanding common shares of
Fortitude Re and AIG had an 80.1 percent ownership interest in Fortitude Holdings. 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 2018 Fortitude Sale, TCG will pay us up to an additional $100 million.
In connection with the 2018 Fortitude Sale, we agreed to certain investment commitment targets into various Carlyle strategies and to
certain minimum investment management fee payments within thirty-six months following the closing. 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 | 2019 Form 10-K 193
ITEM 8 | Notes to Consolidated Financial Statements | 4. H el d -F or -S al e Cl ass i fic a ti o n
On November 25, 2019, AIG entered into a membership interest purchase agreement with Fortitude Holdings, Carlyle, Carlyle FRL,
T&D and T&D Holdings, Inc., pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, Carlyle
FRL will purchase from AIG a 51.6 percent ownership interest in Fortitude Holdings and T&D will purchase from AIG a 25 percent
ownership interest in Fortitude Holdings. Upon closing of the 2019 Fortitude Sale, AIG will have a 3.5 percent ownership interest in
Fortitude Holdings. In connection with the 2019 Fortitude Sale agreement, AIG, Fortitude Holdings and an affiliate of Carlyle FRL have
agreed that, effective as of the closing of the 2019 Fortitude Sale, (i) AIG’s aforementioned investment commitment targets will be
assumed by Fortitude Holdings and AIG will be released therefrom, and (ii) Carlyle will remain obligated to pay AIG $95 million of
deferred compensation and up to an additional $100 million to the extent AIG does not receive all or a portion of the planned
distributions within 18 months of the closing of the 2018 Fortitude Sale. We expect to contribute approximately $1.45 billion of the
proceeds of the 2019 Fortitude Sale to certain of our insurance company subsidiaries for a period of time following the closing of the
transaction. There can be no guarantee that we will receive the required regulatory approvals or that closing conditions will be
satisfied in order to consummate the 2019 Fortitude Sale.
We recorded a loss of $98 million which has been recorded as a contra-asset within assets held for sale line below.
The transaction is expected to close in mid-2020, subject to required regulatory approvals and other customary closing conditions.
The following table summarizes the components of assets and liabilities held-for-sale on the Consolidated Balance Sheets
at December 31, 2019 after elimination of intercompany balances:
(in millions)
Assets:
Bonds available for sale
Other bond securities
Other invested assets
Short-term investments
Cash
Accrued investment income
Deferred income taxes
Other assets
Assets of business held for sale
Less: Loss Accrual
Total assets held for sale
Liabilities:
Other liabilities
Total liabilities held for sale
December 31,
2019
$
$
$
$
2,187
13
45
107
63
19
(22)
106
2,518
(98)
2,420
15
15
The affiliated reinsurance transactions executed in the first quarter of 2018 with Fortitude Re resulted in prepaid insurance assets on
the ceding subsidiaries’ balance sheets of approximately $2.5 billion (after-tax) and related deferred acquisition costs of $0.5 billion
(after-tax) at inception of the contract. The prepaid insurance assets have been eliminated in AIG’s consolidated financial statements
since the counterparties were wholly owned.
Upon closing of the 2019 Fortitude Sale, AIG will recognize a loss for the portion of the unamortized balance of these assets that are
not recoverable, if any, when we are no longer a controlling shareholder in Fortitude Holdings. As of December 31, 2019, the
unamortized balances of the aforementioned prepaid insurance assets and related deferred acquisition costs were $2.3 billion (after-
tax) and $0.4 billion (after-tax), respectively. This combined loss of $2.7 billion would be incremental to any gain or loss recognized on
the 2019 Fortitude Sale. The incremental gain or loss we will recognize on the 2019 Fortitude Sale would be impacted, perhaps
significantly, by market conditions existing at the time the 2019 Fortitude Sale closes.
194 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 5. B u s in es s Co m bi na ti o n
5. 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.
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 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 $124 million and $116 million at December 31, 2019 and December 31, 2018, respectively, in
Other Invested Assets in the Consolidated Balance Sheets.
The following unaudited summarized pro forma consolidated income statement information assumes that the acquisition of
Validus occurred as of January 1, 2017. The pro forma amounts are for comparative purposes only and may not necessarily
reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the
applicable period and may not be indicative of the results that will be attained in the future.
Years Ended December 31,
(dollars in millions, except per common share data)
Total revenues
Net income (loss)
Net loss attributable to AIG common shareholders
Loss per common share attributable to AIG common shareholders:
Basic:
Net loss attributable to AIG common shareholders
Diluted:
Net loss attributable to AIG common shareholders
$
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.
6. 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.
AIG | 2019 Form 10-K 195
ITEM 8 | Notes to Consolidated Financial Statements | 6. F ai r Val u e Me as u re me n ts
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.
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
credit default swaps (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.
196 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 6. F ai r Val u e Me as u re me n ts
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.
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.
AIG | 2019 Form 10-K 197
ITEM 8 | Notes to Consolidated Financial Statements | 6. F ai r Val u e Me as u re me n ts
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.
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.
198 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 6. F ai r Val u e Me as u re me n ts
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.
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 the capital market assumptions related to expected market
rates of return, market volatility, credit spreads, correlations of certain market variables, fund performance and discount rates.
Additionally, estimating the underlying cash flows for these products also involves judgments regarding 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 the capital market 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 (NPA) 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.
AIG | 2019 Form 10-K 199
ITEM 8 | Notes to Consolidated Financial Statements | 6. F ai r Val u e Me as u re me n ts
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.
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:
December 31, 2019
(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
Other invested assets(b)
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
Other assets
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
Other liabilities
Long-term debt
Total
200 AIG | 2019 Form 10-K
Level 1
Level 2
Counterparty
Netting(a)
Level 3
Cash
Collateral
Total
135 $
-
60
-
-
-
-
195
5,245 $
13,197
14,809
147,973
19,397
13,377
10,962
224,960
-
-
-
-
-
-
-
756
-
2,121
-
18
346
272
187
2,944
77
86
-
2,121
-
1,663
13,408
1,053
7,686
25,931
-
-
-
143
50
3,545
3,738
8
1,192
1
-
5
-
-
-
6
2,299
57
89,069
-
6
171
3
14
-
194
-
89
-
$ 92,382 $ 242,352 $ 31,152
3,199
1,034
593
-
-
-
4,826
3,044
2,212
4,203
$
$
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
-
-
-
-
-
-
-
5,380
15,318
14,869
149,636
32,805
14,430
18,648
251,086
-
-
-
-
-
-
-
-
-
2,121
-
18
489
322
3,732
6,682
841
1,278
-
-
-
-
-
(2,427)
(2,427)
-
-
-
(2,427) $
-
-
-
-
-
(1,806)
(1,806)
-
-
-
3,200
1,040
769
3
14
(4,233)
793
5,343
2,358
93,272
(1,806) $ 361,653
$
- $
- $
6,910
$
- $
- $
6,910
4
-
8
-
-
-
12
-
-
12 $
2,745
1,025
111
24
-
-
3,905
45
2,062
6,012 $
-
-
20
65
7
-
92
-
-
7,002
$
-
-
-
-
-
(2,427)
(2,427)
-
-
(2,427) $
-
-
-
-
-
(527)
(527)
-
-
(527) $
2,749
1,025
139
89
7
(2,954)
1,055
45
2,062
10,072
$
December 31, 2018
(in millions)
Assets:
Bonds available for sale:
ITEM 8 | Notes to Consolidated Financial Statements | 6. 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
U.S. government and government sponsored entities
$
53 $
3,207 $
-
$
- $
- $
3,260
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
Other invested assets(b)
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
Other assets
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
Other liabilities
Long-term debt
Total
-
69
-
-
-
-
14,001
14,445
129,836
20,178
11,784
8,725
2,000
11
864
14,199
917
9,102
122
202,176
27,093
11
-
-
-
-
-
11
1,213
-
2
-
133
-
-
-
135
2,416
-
2,654
45
1,671
424
311
454
5,559
13
341
2,888
1,159
190
-
-
-
4,237
599
-
77,202
4,645
-
-
-
1,290
77
4,478
5,845
27
587
-
5
75
1
15
-
96
-
58
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,713)
(1,713)
(1,840)
(1,840)
-
-
-
-
-
-
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
2,890
1,164
398
1
15
(3,553)
915
3,015
58
81,847
$ 81,099 $ 217,570 $ 33,706
$
(1,713) $
(1,840) $ 328,822
$
- $
- $
4,116
$
- $
- $
4,116
4
-
12
-
-
-
16
16
-
2,004
858
3
8
-
-
2,873
11
2,213
15
-
-
228
6
-
249
-
-
-
-
-
-
-
(1,713)
(1,713)
-
-
-
-
-
-
-
(187)
(187)
-
-
$
32 $
5,097 $
4,365
$
(1,713) $
(187) $
2,023
858
15
236
6
(1,900)
1,238
27
2,213
7,594
(a) Represents netting of derivative exposures covered by qualifying master netting agreements.
(b) Excludes investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent), which totaled $5.5 billion and $5.0 billion as of
December 31, 2019 and December 31, 2018, respectively.
AIG | 2019 Form 10-K 201
ITEM 8 | Notes to Consolidated Financial Statements | 6. F ai r Val u e Me as u re me n ts
CHANGES IN LEVEL 3 RECURRING FAIR VALUE MEASUREMENTS
The following tables present changes during the years ended December 31, 2019 and 2018 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, 2019 and 2018:
Net
Realized and
Unrealized
Purchases,
Changes in
Unrealized Gains
(Losses) Included
Fair Value Gains (Losses)
Other
Sales,
Gross
Gross Reclassification
Fair Value
in Income on
Beginning
Included Comprehensive
Issuances and
Transfers
Transfers
of Year
in Income
Income (Loss) Settlements, Net
In
Out
of Held
for Sale(a)
End
Instruments Held
Acquisition
of Year
at End of Year
(in millions)
December 31, 2019
Assets:
Bonds available for sale:
Obligations of states,
municipalities and
political subdivisions
$
2,000 $
(2) $
247 $
282 $
51 $
(457) $
- $
- $
2,121 $
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
11
864
14,199
917
9,102
Total bonds available for sale
27,093
-
1,290
77
4,478
5,845
27
-
587
58
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
(in millions)
Liabilities:
5
(7)
782
24
33
835
-
80
5
361
446
-
-
20
-
1
88
55
47
116
554
-
-
-
-
-
-
-
2
-
(6)
5
(540)
1,513
(1,403)
448
112
83
58
(16)
(255)
(287)
(441)
120
(1,780)
(1,107)
1,830
(3,236)
-
(1,227)
(18)
(1,198)
(2,443)
(20)
-
(33)
(7)
-
-
-
-
-
2
-
616
-
-
-
(14)
(96)
(110)
(1)
-
-
-
-
-
(21)
-
(17)
(38)
-
-
-
-
-
-
-
-
38
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,663
13,408
1,053
7,686
25,931
-
143
50
3,545
3,738
8
-
1,192
89
-
-
-
-
-
-
-
-
2
6
149
157
1
-
22
-
180
$ 33,610 $
1,301 $
556 $
(3,610) $ 2,448 $ (3,347) $
- $
- $ 30,958 $
Net
Realized and
Unrealized
Purchases,
Changes in
Unrealized Gains
(Losses) Included
Fair Value
(Gains) Losses
Other
Sales,
Gross
Gross Reclassification
Fair Value
in Income on
Beginning
Included Comprehensive
Issuances and
Transfers
Transfers
of Year
in Income
Income (Loss) Settlements, Net
In
Out
of Held
for Sale(a)
End
Instruments Held
Acquisition
of Year
at End of Year
Policyholder contract deposits $
4,116 $
1,947 $
- $
847 $
- $
- $
- $
- $
6,910 $
(1,307)
Derivative liabilities, net:
Interest rate contracts
Foreign exchange contracts
Equity contracts
Credit contracts
Other contracts
Total derivative liabilities,
net(b)
15
(5)
(75)
227
(9)
153
3
(7)
(43)
(84)
(67)
(198)
-
-
-
-
-
-
(18)
6
(33)
(81)
69
(57)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(6)
(151)
62
(7)
(102)
1
3
51
46
66
167
Total
$
4,269 $
1,749 $
- $
790 $
- $
- $
- $
- $
6,808 $
(1,140)
202 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 6. 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 Reclassification
Fair Value
in Income on
Beginning
Included Comprehensive
Issuances and
Transfers
Transfers
of Held
End
Instruments Held
of Year
in Income
Income (Loss) Settlements, Net
In
Out
for Sale(a)
Acquisition
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
8
1,173
16,136
624
8,651
Total bonds available for sale
28,996
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
18
1,464
74
4,956
6,512
-
5
250
-
(9)
(74)
838
23
40
818
-
56
(2)
428
482
(2)
-
47
-
5
(2)
(300)
(29)
(42)
(520)
-
-
-
-
-
-
-
2
-
(1)
(207)
(2,424)
207
(371)
(2,862)
(18)
(280)
(5)
(905)
(1,208)
24
(5)
288
58
13
780
8
111
(5)
(806)
(66)
(20)
1,783
2,749
(1,123)
(2,260)
-
50
10
-
60
5
-
-
-
-
-
-
(9)
(9)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7
1
164
172
-
-
-
8
8
-
-
-
-
11
864
14,199
917
9,102
27,093
-
1,290
77
4,478
5,845
27
-
587
58
Total
$
35,763 $
1,345 $
(518) $
(3,705) $
2,814 $
(2,269) $
- $
180 $
33,610 $
-
-
-
-
-
-
-
-
(10)
(5)
208
193
-
-
71
-
264
Net
Realized and
Unrealized
Purchases,
Changes in
Unrealized Gains
(Losses) Included
Fair Value
(Gains) Losses
Other
Sales,
Gross
Gross Reclassification
Fair Value
in Income on
Beginning
Included Comprehensive
Issuances and
Transfers
Transfers
of Held
End
Instruments Held
of Year
in Income
Income (Loss) Settlements, Net
In
Out
for Sale(a)
Acquisition
of Year
at End of Year
(in millions)
Liabilities:
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)
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 $
(a) Reported in Other assets in the Consolidated Balance Sheet.
(b) Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.
1
3
(35)
31
62
62
557
AIG | 2019 Form 10-K 203
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:
ITEM 8 | Notes to Consolidated Financial Statements | 6. F ai r Val u e Me as u re me n ts
(in millions)
December 31, 2019
Assets:
Bonds available for sale
Other bond securities
Equity securities
Other invested assets
December 31, 2018
Assets:
Bonds available for sale
Other bond securities
Equity securities
Other invested assets
(in millions)
December 31, 2019
Liabilities:
Policyholder contract deposits
Derivative liabilities, net
December 31, 2018
Liabilities:
Policyholder contract deposits
Derivative liabilities, net
Net
Investment
Income
Net Realized
Capital
Gains (Losses)
Other
Income
862 $
226
-
20
987 $
92
(2)
57
(27) $
220
-
-
(165) $
(3)
-
-
- $
-
-
-
(4) $
393
-
(10)
Net
Investment
Income
Net Realized
Capital
(Gains) Losses
Other
Income
Total
835
446
-
20
818
482
(2)
47
Total
- $
-
- $
-
1,947 $
(134)
- $
(64)
1,947
(198)
(334) $
5
- $
(133)
(334)
(128)
$
$
$
$
204 AIG | 2019 Form 10-K
The following table presents the gross components of purchases, sales, issuances and settlements, net, shown above, for
years ended December 31, 2019 and 2018 related to Level 3 assets and liabilities in the Consolidated Balance Sheets:
ITEM 8 | Notes to Consolidated Financial Statements | 6. F ai r Val u e Me as u re me n ts
(in millions)
December 31, 2019
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
Total liabilities
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
Total liabilities
(a) There were no issuances during the years ended December 31, 2019 and 2018.
Purchases
Sales
Issuances
and
Settlements(a)
Purchases, Sales,
Issuances and
Settlements, Net(a)
$
$
$
$
$
$
$
$
362 $
-
172
1,418
539
2,145
4,636
-
-
18
-
18
8
-
97
-
4,759 $
- $
(44)
(44) $
105 $
5
280
715
277
1,865
3,247
-
1
-
90
91
49
-
350
-
3,737 $
- $
(52)
(52) $
(19) $
-
(129)
(27)
-
(561)
(736)
-
(1,101)
(33)
(386)
(1,520)
-
-
-
-
(2,256) $
852 $
-
852 $
(8) $
-
(216)
(20)
(2)
(1,073)
(1,319)
-
(34)
-
(4)
(38)
-
(5)
(29)
-
(1,391) $
533 $
80
613 $
(61) $
(6)
(583)
(2,794)
(91)
(1,472)
(5,007)
-
(126)
(3)
(812)
(941)
(28)
-
(130)
(7)
(6,113) $
(5) $
(13)
(18) $
(163) $
(6)
(271)
(3,119)
(68)
(1,163)
(4,790)
(18)
(247)
(5)
(991)
(1,261)
(25)
-
(33)
58
(6,051) $
(219) $
64
(155) $
282
(6)
(540)
(1,403)
448
112
(1,107)
-
(1,227)
(18)
(1,198)
(2,443)
(20)
-
(33)
(7)
(3,610)
847
(57)
790
(66)
(1)
(207)
(2,424)
207
(371)
(2,862)
(18)
(280)
(5)
(905)
(1,208)
24
(5)
288
58
(3,705)
314
92
406
AIG | 2019 Form 10-K 205
ITEM 8 | Notes to Consolidated Financial Statements | 6. 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, 2019 and 2018 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
The Net realized and unrealized gains (losses) included in income (loss) or Other comprehensive income (loss) as shown in the table
above excludes $(46) million and $33 million of net gains (losses) related to assets and liabilities transferred into Level 3 during 2019
and 2018, respectively, and includes $30 million and $(18) million of net gains (losses) related to assets and liabilities transferred out
of Level 3 during 2019 and 2018, respectively.
Transfers of Level 3 Assets
During the years ended December 31, 2019 and 2018, 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 diminished
market transparency and liquidity for individual security types. Additionally, during 2019, a consolidated investment company acquired
certain real estate investments.
During the years ended December 31, 2019 and 2018, 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, 2019 and
2018.
206 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 6. 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,
2019
Valuation
Technique
Unobservable Input(b)
Range
(Weighted Average)
$
1,633 Discounted cash flow
Yield
3.35% - 3.95% (3.65%)
Corporate debt
1,087 Discounted cash flow
Yield
3.48% - 6.22% (4.85%)
RMBS(a)
11,746 Discounted cash flow
Constant prepayment rate
4.00% - 12.89% (8.44%)
Loss severity 33.68% - 76.91% (55.29%)
1.68% - 6.17% (3.93%)
2.52% - 4.53% (3.52%)
Constant default rate
Yield
6,025 Discounted cash flow
Yield
2.92% - 4.91% (3.91%)
476 Discounted cash flow
Yield
2.77% - 5.18% (3.97%)
CDO/ABS(a)
CMBS
Liabilities:
Embedded derivatives
within Policyholder
contract deposits:
Guaranteed minimum
withdrawal benefits
(GMWB)
2,474 Discounted cash flow
Index Annuities
3,895 Discounted cash flow
Indexed Life
510 Discounted cash flow
Equity volatility
Base lapse rate
Dynamic lapse multiplier
Mortality multiplier(c)
Utilization
Equity / interest rate correlation
NPA(d)
Lapse rate
Mortality multiplier(c)
Option Budget
NPA(d)
Base lapse rate
Mortality rate
NPA(d)
6.15% - 48.85%
0.16% - 12.60%
50.00% - 143.00%
38.00% - 147.00%
90.00% - 100.00%
20.00% - 40.00%
0.12% - 1.53%
0.31% - 50.00%
24.00% - 180.00%
1.00% - 4.00%
0.12% - 1.53%
0.00% - 37.97%
0.00% - 100.00%
0.12% - 1.53%
AIG | 2019 Form 10-K 207
ITEM 8 | Notes to Consolidated Financial Statements | 6. F ai r Val u e Me as u re me n ts
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%)
(in millions)
Assets:
Obligations of states,
municipalities and
political subdivisions
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:
GMWB
1,943 Discounted cash flow
Index Annuities
1,778 Discounted cash flow
Indexed Life
374 Discounted cash flow
Equity volatility
Base lapse rate
Dynamic lapse multiplier
Mortality multiplier(c)
Utilization
Equity / interest rate correlation
NPA(d)
Lapse rate
Mortality multiplier(c)
Option Budget
NPA(d)
Base lapse rate
Mortality rate
NPA(d)
6.05% - 47.65%
0.16% - 12.60%
20.00% - 180.00%
40.00% - 153.00%
90.00% - 100.00%
20.00% - 40.00%
0.25% - 1.77%
0.50% - 40.00%
42.00% - 162.00%
1.00% - 3.00%
0.25% - 1.77%
0.00% - 13.00%
0.00% - 100.00%
0.25% - 1.77%
(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.
(d) NPA applied as a spread over risk-free curve for discounting.
208 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 6. 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.
Interrelationships Between 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
significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact
on the fair value measurements. 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.
Fixed Maturity Securities
The significant unobservable input used in the fair value measurement of fixed maturity securities is yield. The yield is affected by the
market movements in credit spreads and U.S. Treasury yields. The discount rate may be affected by other factors including constant
prepayment rates (CPR), loss severity, and constant default rates (CDR). In general, increases in the yield would decrease the fair
value of investments, conversely the inverse is also true.
Embedded derivatives within Policyholder contract deposits
Embedded derivatives reported within Policyholder contract deposits include interest crediting rates based on market indices within
index annuities, indexed life, and GICs as well as GMWB within variable annuity and certain index annuity products. 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 | 2019 Form 10-K 209
ITEM 8 | Notes to Consolidated Financial Statements | 6. 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, 2019
December 31, 2018
Fair Value
Using NAV
Fair Value
Using NAV
Per Share (or
Unfunded
Per Share (or
Unfunded
(in millions)
Investment Category Includes
its equivalent) Commitments
its equivalent) Commitments
Investment Category
Private equity funds:
Leveraged buyout
Debt and/or equity investments made as part of a
transaction in which assets of mature companies are
acquired from the current shareholders, typically with the
use of financial leverage
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
$
1,189 $
1,543
$
847 $
1,327
400
290
190
83
111
422
325
155
57
414
126
362
211
127
28
75
773
3,220
206
2,665
514
2,250
307
1,947
727
539
894
1
168
2,329
-
-
-
-
1
1
787
863
887
21
158
2,716
-
-
-
8
1
9
$
5,549 $
2,666
$
4,966 $
1,956
210 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 6. 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.
The hedge fund investments included above, which are carried at fair value, are generally redeemable subject to the redemption
notices period. The majority of our hedge fund investments are redeemable monthly or quarterly.
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 12 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 7
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:
Other liabilities
Long-term debt(b)
Total gain
Gain (Loss)
2019
2018
2017
$
$
1,046 $
591
-
-
(181)
1,456 $
343 $
213
-
-
(1)
555 $
1,646
509
1
(2)
(49)
2,105
(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. Prior to 2019, for the investments of AIG’s Other Operations, such activities were
reported 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 7
herein.
During 2017, we recognized a $4 million gain 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. 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.
AIG | 2019 Form 10-K 211
ITEM 8 | Notes to Consolidated Financial Statements | 6. F ai r Val u e Me as u re me n ts
The following table presents the difference between fair values and the aggregate contractual principal amounts of long-
term debt for which the fair value option was elected:
(in millions)
Liabilities:
Long-term debt*
December 31, 2019
Outstanding
December 31, 2018
Outstanding
Fair Value
Principal Amount Difference
Fair Value Principal Amount Difference
$
2,062
$
1,502 $
560
$ 2,213
$
1,653 $
560
*
Includes GIAs, notes, bonds, loans and mortgages payable.
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 and commercial 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 7 and 8 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, 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 periods ended December 31, 2018 and 2019 primarily relate to real estate investments as well as commercial loans and
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.
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, 2019
Other investments
Investments in life settlements
Other assets
Total
December 31, 2018
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
2019
2018
2017
- $
- $
329 $
329
$
-
-
-
-
-
1
-
1
- $
- $
330 $
330
$
76 $
-
74
150 $
97 $
-
64
161 $
77
360
157
594
- $
- $
315 $
315
-
-
-
-
-
11
-
11
- $
- $
326 $
326
(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.
212 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 6. F ai r Val u e Me as u re me n ts
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 the Other invested assets that are not measured at fair value 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 and debt of consolidated investment entities: 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.
Separate Account Liabilities—Investment Contracts: Only the portion of separate account liabilities related to products that are
investment contracts are reflected in the table below. Separate account liabilities are recorded at the amount credited to the
contractholder, which reflects the change in fair value of the corresponding separate account assets including contractholder
deposits less withdrawals and fees; therefore, carrying value approximates fair value.
AIG | 2019 Form 10-K 213
ITEM 8 | Notes to Consolidated Financial Statements | 6. 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, 2019
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 and debt of consolidated investment entities
Separate account liabilities - investment contracts
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 and debt of consolidated investment entities
Separate account liabilities - investment contracts
7. Investments
FIXED MATURITY AND EQUITY SECURITIES
Estimated Fair Value
Level 1
Level 2
Level 3
Total
Carrying
Value
$
$
- $
-
-
2,856
291
101 $
735
7,887
-
20
48,904 $
6
-
-
-
49,005 $
741
7,887
2,856
311
46,984
742
7,887
2,856
311
-
15
-
-
255
3,048
27,024
88,770
132,991
-
8,883
-
133,246
3,063
35,907
88,770
126,137
3,063
33,288
88,770
- $
-
-
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
77,651
121,035
-
8,775
-
121,374
1,154
31,597
77,651
120,602
1,154
32,327
77,651
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, 2019 or 2018.
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 net investment income.
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.
214 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 7. I n ves t me n ts
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
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:
(in millions)
December 31, 2019
Bonds available for sale:
Amortized
Gross
Gross
Cost or
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
Other-Than-
Temporary
Impairments
in AOCI(a)
U.S. government and government sponsored entities
$
5,108 $
316 $
(44) $
5,380 $
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(b)
December 31, 2018
Bonds available for sale:
13,960
14,042
138,046
29,802
13,879
18,393
62,074
1,390
884
12,090
3,067
576
348
3,991
(32)
(57)
15,318
14,869
(500)
149,636
(64)
(25)
(93)
(182)
32,805
14,430
18,648
65,883
$
233,230 $
18,671 $
(815) $
251,086 $
U.S. government and government sponsored entities
$
3,170 $
132 $
(42) $
3,260 $
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(b)
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 $
-
-
(18)
7
1,149
34
14
1,197
1,186
-
4
-
4
1,155
31
17
1,203
1,211
(a) 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.
(b) At December 31, 2019 and 2018, bonds available for sale held by us that were below investment grade or not rated totaled $27.8 billion and $28.8 billion, respectively.
AIG | 2019 Form 10-K 215
ITEM 8 | Notes to Consolidated Financial Statements | 7. 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:
(in millions)
December 31, 2019
Bonds available for sale:
Less than 12 Months
12 Months or More
Total
Gross
Fair Unrealized
Losses
Value
Gross
Fair Unrealized
Losses
Value
Fair
Value
Gross
Unrealized
Losses
U.S. government and government sponsored entities $
Obligations of states, municipalities and political
1,461 $
44
$
63 $
-
$
1,524 $
subdivisions
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
Total bonds available for sale
December 31, 2018
Bonds available for sale:
672
1,105
11,868
3,428
1,877
3,920
$ 24,331 $
21
12
319
28
16
53
493
246
343
2,405
1,367
367
2,571
7,362 $
$
11
45
181
36
9
40
322
918
1,448
14,273
4,795
2,244
6,491
$ 31,693 $
44
32
57
500
64
25
93
815
U.S. government and government sponsored entities $
Obligations of states, municipalities and political
574 $
13
$
873 $
29
$
1,447 $
42
subdivisions
Non-U.S. governments
Corporate debt
RMBS
CMBS
CDO/ABS
Total bonds available for sale
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
At December 31, 2019, we held 5,695 individual fixed maturity securities that were in an unrealized loss position, of which 1,254
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, 2019 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 | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 7. 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, 2019
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
$
$
10,268 $
44,017
42,074
74,797
62,074
233,230 $
10,441
45,226
44,858
84,678
65,883
251,086
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
2019
Years Ended December 31,
2018
2017
Gross
Realized
Gains
Gross
Realized
Losses
Gross
Realized
Gains
Gross
Realized
Losses
Gross
Realized
Gains
$
$
650 $
-
650 $
330 $
-
330 $
331 $
16
347 $
476 $
-
476 $
725 $
107
832 $
Gross
Realized
Losses
300
19
319
For the years ended December 31, 2019, 2018 and 2017, the aggregate fair value of available for sale securities sold was
$22.0 billion, $25.1 billion and $31.3 billion, respectively, which resulted in net realized capital gains (losses) of $320 million, $(129)
million and $0.5 billion, respectively.
OTHER SECURITIES MEASURED AT FAIR VALUE
The following table presents the fair value of fixed maturity securities measured at fair value based on our election of the
fair value option and equity securities measured at fair value:
(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, 2019
Fair
Value
Percent
of Total
December 31, 2018
Fair
Value
Percent
of Total
$
$
2,121
-
18
489
322
3,732
4,543
6,682
841
7,523
$
28 %
-
-
7
4
50
61
89
11
100 %
$
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 %
AIG | 2019 Form 10-K 217
OTHER INVESTED ASSETS
The following table summarizes the carrying amounts of other invested assets:
ITEM 8 | Notes to Consolidated Financial Statements | 7. I n ves t me n ts
(in millions)
Alternative investments(a) (b)
Investment real estate(c)
All other investments
Total
December 31,
2019
8,845
8,491
1,456
18,792
$
$
December 31,
2018
8,966
8,935
1,440
19,341
$
$
(a) At December 31, 2019, included hedge funds of $3.3 billion, private equity funds of $5.2 billion, and affordable housing partnerships of $331 million. 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.
(b) At December 31, 2019, approximately 88 percent of our hedge fund portfolio is available for redemption in 2020. The remaining 12 percent will be available for
redemption between 2021 and 2027.
(c) Net of accumulated depreciation of $703 million and $598 million in 2019 and 2018, 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. Prior to 2019, for the investments of AIG’s Other
Operations, such changes were 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.
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. Prior to 2019, for the investments of AIG’s Other Operations, such changes were 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. Hedge funds are reported as of the balance sheet date. Private equity
funds are generally reported on a one-quarter lag. The financial statements of these investees are generally audited annually.
218 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 7. I n ves t me n ts
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
2019
2018
2017
$
$
8,045
(3,115)
4,930
$
$
$
$
15,310
(3,200)
12,110
$
$
13,066
(6,835)
6,231
2019
2018
93,773
(14,218)
$
$
96,915
(21,063)
The following table presents the carrying amount and ownership percentage of equity method investments at December 31,
2019 and 2018:
(in millions)
Equity method investments
2019
2018
Carrying
Value
5,911
Ownership
Percentage
Various
$
Carrying
Value
6,520
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, income recognized on investments in life settlements was $266 million 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 | 2019 Form 10-K 219
ITEM 8 | Notes to Consolidated Financial Statements | 7. 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
2019
10,768 $
1,015
159
2,030
1,088
304
(220)
15,144
525
14,619 $
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
$
$
(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 are recorded as of the balance sheet date. 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 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 | 2019 Form 10-K
The following table presents the components of Net realized capital gains (losses):
ITEM 8 | Notes to Consolidated Financial Statements | 7. 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 gains (losses)
2019
320 $
-
-
(3)
(18)
(147)
(6)
(46)
227
(294)
(22)
-
-
621
632 $
2018
(145) $
16
-
(87)
(15)
(147)
(2)
(92)
(182)
304
338
-
(321)
203
(130) $
2017
425
88
(2)
(9)
(11)
(234)
(4)
(50)
489
(1,374)
(368)
(360)
-
30
(1,380)
$
$
(a) Upon the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, the change in fair value of all equity securities is included
in Net investment income.
(b) In 2019, includes $200 million from the sale and concurrent leaseback of our corporate headquarters and $300 million as a result of sales in investment real estate
properties. In 2018, primarily includes $96 million and $49 million of realized gains on the sale of shares of OneMain Holdings, Inc. and an investment in Castle
Holdings LLC’s aircraft assets, respectively.
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
Other investments
Total increase (decrease) in unrealized appreciation (depreciation) of investments*
* Excludes net unrealized gains and losses attributable to businesses held for sale at December 31, 2019.
Years Ended
December 31,
2019
2018
$
$
14,245 $
(70)
14,175 $
(9,920)
(88)
(10,008)
The following table summarizes the unrealized gains and losses recognized in Net Investment Income during the reporting
period on equity securities still held at the reporting date:
Years Ended December 31,
(in millions)
Net gains and losses recognized during the year on equity securities
Less: Net gains and losses recognized during the year on equity
2019
Other
Invested
Assets
Equities
2018
Other
Invested
Assets
Total
Total
Equities
$
159 $
744 $
903
$
(184) $
342 $
158
securities sold during the year
39
159
198
56
23
79
Unrealized gains and losses recognized during the reporting
period on equity securities still held at the reporting date
$
120 $
585 $
705
$
(240) $
319 $
79
AIG | 2019 Form 10-K 221
ITEM 8 | Notes to Consolidated Financial Statements | 7. 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 | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 7. 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*
Balance, end of year
2019
$
- $
2018
526 $
2017
1,098
136
17
59
90
122
74
(64)
(20)
69 $
(145)
(530)
- $
(99)
(669)
526
$
* 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
standard required equity securities to be measured at fair value with changes in fair value recognized in earnings each reporting
period. As a result of the standard, equity securities with readily determinable fair values were 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 had met any of the
following criteria:
The security had 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 had 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 had 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 | 2019 Form 10-K 223
ITEM 8 | Notes to Consolidated Financial Statements | 7. 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
At Date of Acquisition
35,139
$
28,720
19,382
$
December 31,
2019
10,476 $
6,970
8,664
December 31,
2018
12,495
8,646
10,280
224 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 7. I n ves t me n ts
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
Activities related to businesses reclassified to held for sale
Balance, end of year
PLEDGED INVESTMENTS
Secured Financing and Similar Arrangements
2019
7,210 $
17
-
(624)
(541)
(350)
(7)
5,705 $
2018
7,501
33
(21)
(722)
207
212
-
7,210
$
$
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, 2019
$
$
3,030 $
- $
December 31, 2018
1,050
122
At December 31, 2019 and 2018, amounts borrowed under repurchase and securities lending agreements totaled $3.1 billion and
$1.2 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, 2019
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
$
$
2 $
22
-
-
-
24 $
71 $
55
-
-
-
126 $
- $
82
-
-
-
82 $
- $
-
-
-
-
- $
- $
-
-
-
-
- $
73
159
-
-
-
232
AIG | 2019 Form 10-K 225
ITEM 8 | Notes to Consolidated Financial Statements | 7. I n ves t me n ts
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
$
$
25 $
51
35 $
55
11
-
17
104 $
-
3
38
131 $
- $
-
-
-
53
53 $
- $
-
-
-
-
- $
- $
-
-
-
-
- $
60
106
11
3
108
288
The following table presents the fair value of securities pledged under our securities lending agreements by collateral type
and by remaining contractual maturity:
(in millions)
December 31, 2019
Bonds available for sale:
Obligations of states, municipalities and political
subdivisions
Non-U.S. governments
Corporate debt
RMBS
Total
December 31, 2018
Bonds available for sale:
Obligations of states, municipalities and political
subdivisions
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
- $
-
1,071
-
- $
-
-
-
- $ 1,071 $ 1,333 $
386 $
-
947
-
- $
-
-
394
394 $
- $
-
-
- $
50 $
21
330
401 $
130 $
8
345
483 $
- $
-
-
- $
- $
-
-
-
- $
- $
-
-
- $
386
-
2,018
394
2,798
180
29
675
884
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, 2019
$
2,567 $
121
December 31, 2018
426
106
At December 31, 2019 and December 31, 2018, amounts loaned under reverse repurchase agreements totaled $2.6 billion and
$426 million, 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 $8.7 billion
and $7.9 billion at December 31, 2019 and 2018, respectively.
226 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 7. 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 $194 million and $202 million of stock in FHLBs at December 31, 2019 and 2018,
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 $4.3 billion and $1.8 billion, respectively, at December 31, 2019 and
$4.2 billion and $2.1 billion, respectively, at December 31, 2018.
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 $1.5 billion and $1.6 billion at December 31, 2019 and 2018,
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 $330 million and $273 million, comprised
of bonds available for sale and short term investments at December 31, 2019 and 2018, respectively.
8. 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,
2018
32,882
6,532
2,147
1,971
43,532
(397)
43,135
2019
36,170 $
6,683
2,065
2,504
47,422
(438)
46,984 $
$
$
* 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 23 percent and 10 percent, respectively, at December 31, 2019, and 22 percent and 11 percent, respectively, at
December 31, 2018).
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 | 2019 Form 10-K 227
CREDIT QUALITY OF COMMERCIAL MORTGAGES
ITEM 8 | Notes to Consolidated Financial Statements | 8. L e n di n g Ac t i vi t i es
The following table presents debt service coverage ratios and loan-to-value ratios for commercial mortgages:
(in millions)
December 31, 2019
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
$
23,013 $
2,440 $
245 $
9,007
200
184
899
6
2
40
-
134
Total
25,698
9,946
206
320
Total commercial mortgages
$
32,404 $
3,347 $
419 $
36,170
December 31, 2018
Loan-to-Value Ratios(b)
Less than 65%
65% to 75%
76% to 80%
Greater than 80%
$
19,204 $
2,543 $
250 $
9,060
476
596
300
20
103
203
15
112
21,997
9,563
511
811
Total commercial mortgages
$
29,336 $
2,966 $
580 $
32,882
(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 2.0X and 1.9X at December 31, 2019 and 2018, 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 56 percent and 58 percent at December 31, 2019, and 2018, respectively.
The following table presents the credit quality performance indicators for commercial mortgages:
(dollars in millions)
December 31, 2019
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
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
Number
of
Class
Loans Apartments Offices
Retail
Industrial
Hotel Others
Percent
of
Total(c) Total $
736
$ 13,698 $ 10,553 $ 5,332 $
3,663 $
2,211 $
522 $ 35,979
99 %
3
1
-
-
1
-
89
-
-
-
-
-
-
-
-
101
-
-
-
-
-
190
1
-
1
-
-
740
$ 13,699 $ 10,642 $ 5,332 $
3,663 $
2,312 $
522 $ 36,170
100 %
$
$
- $
2 $
1 $
- $
6 $
81
153
44
30
14
81 $
155 $
45 $
30 $
20 $
- $
5
5 $
9
327
336
- %
1
1 %
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 %
$
$
- $
2 $
- $
- $
1 $
122
104
51
13
19
122 $
106 $
51 $
13 $
20 $
- $
6
6 $
3
315
318
- %
1
1 %
228 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 8. 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:
Years Ended December 31,
2019
(in millions)
Commercial
Mortgages
Other
Loans
Allowance, beginning of year
$
318
$
79 $
Loans charged off
Recoveries of loans previously
charged off
Net charge-offs
Provision for loan losses
Allowance, end of year
$
(2)
-
(2)
20
336 * $
(3)
-
(3)
26
-
(5)
46
102 $
438 $
Commercial
Mortgages
247
Total
397 $
(5)
2018
Other
Loans
$
75 $
Commercial
Mortgages
194
Total
322 $
2017
Other
Loans
Total
$
103 $
297
(17)
(2)
(19)
(22)
(3)
(25)
-
(17)
88
318 * $
1
(1)
5
1
(18)
93
79 $
397 $
-
(22)
75
247 * $
1
(2)
(26)
1
(24)
49
75 $
322
* Of the total allowance at the end of the year, $10 million, $3 million and $5 million relate to individually assessed credit losses on $148 million, $54 million and
$82 million of commercial mortgages as of December 31, 2019, 2018 and 2017, 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.
During the year ended December 31, 2019, loans with a carrying value of $86 million were modified in TDRs. Loans that had been
modified in TDRs during the year ended December 31, 2018 have been fully paid off.
AIG | 2019 Form 10-K 229
ITEM 8 | Notes to Consolidated Financial Statements | 9. R ei ns ur a nce
9. 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 $111 million and $140 million at
December 31, 2019 and 2018, 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
Policyholder contract deposits
Reserve for unearned premiums
Reinsurance assets(a)
2019
2018
$
As
Net of
Reported Reinsurance
(47,259)
(78,328) $
(49,670)
(50,512)
(150,944)
(151,869)
(18,269)
(15,067)
36,038
$
As
Net of
Reported Reinsurance
(51,949)
(83,639) $
(43,936)
(44,935)
(141,407)
(142,262)
(19,248)
(16,300)
36,492
(a) Reinsurance assets excludes (i) allowance for doubtful accounts of $111 million and $140 million for the years ended December 31, 2019 and 2018, respectively, and
(ii) paid loss recoveries of $2,050 million and $1,820 million for the years ended December 31, 2019 and 2018, respectively.
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 | 2019 Form 10-K
The following table presents short-duration insurance premiums written and earned:
ITEM 8 | Notes to Consolidated Financial Statements | 9. R ei ns ur a nce
(in millions)
Premiums written:
Direct
Assumed
Ceded
Net
Premiums earned:
Direct
Assumed
Ceded
Net
Years Ended December 31,
2019
2018
2017
$
29,338 $
5,808
(9,692)
25,454 $
30,017 $
6,395
(9,526)
26,886 $
$
$
$
30,368 $
4,186
(7,757)
26,797 $
31,450 $
4,638
(8,164)
27,924 $
30,229
3,065
(7,535)
25,759
30,928
3,374
(7,904)
26,398
For the years ended December 31, 2019, 2018 and 2017, reinsurance recoveries, which reduced losses and loss adjustment
expenses incurred, amounted to $4.7 billion, $9.8 billion and $1.5 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 $13.9 billion and $13.8 billion, and the deferred gain liability was $1.8 billion and
$1.8 billion, as of December 31, 2019 and 2018, respectively. The effect on income from amortization of the deferred gain was
$219 million, $394 million and $316 million for the years ended December 31, 2019, 2018 and 2017, 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 earned and policy fees for our long-duration life insurance and annuity operations:
Years Ended December 31,
(in millions)
Premiums
Direct
Assumed
Ceded
Net
Policy Fees
Direct
Assumed
Ceded
Net
2019
2018
2017
$
4,363 $
228
(916)
3,675 $
3,489 $
56
(855)
2,690 $
3,016 $
-
(1)
3,015 $
2,792 $
-
(1)
2,791 $
$
$
$
5,771
15
(810)
4,976
2,936
-
(1)
2,935
AIG | 2019 Form 10-K 231
Long-duration reinsurance recoveries, which reduced Policyholder benefits and losses incurred, was approximately $1.0 billion, $778
million and $1.0 billion for the years ended December 31, 2019, 2018 and 2017, respectively.
ITEM 8 | Notes to Consolidated Financial Statements | 9. R ei ns ur a nce
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
2019
264,732 $
2018
228,846 $
2017
202,402
$
Long-duration insurance in-force assumed as a percentage of gross long-duration insurance in-force was 0.02 percent at December
31, 2019, and 0.03 percent at 2018 and 2017; and premiums assumed represented 5 percent, 1.6 percent and 0.2 percent of gross
premiums for the years ended December 31, 2019, 2018 and 2017, 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 U.S. 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, 2019,
this subsidiary had two bilateral letters of credit totaling $400 million, which were issued on February 7, 2014 and expire on
February 7, 2023. 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 20.
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 $19.0 billion and
$18.9 billion at December 31, 2019 and 2018, respectively, of which approximately $2.8 billion and $3.7 billion at December 31, 2019
and 2018, respectively, was not secured by collateral.
232 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 10 . De fer r e d P o li c y Ac q u i si ti o n Co s ts
10. 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.
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. DAC on investment-oriented contracts were
approximately $6.1 billion and $7.5 billion at December 31, 2019 and 2018, respectively. Estimated gross profits are affected by a
number of factors, including levels of current and expected interest rates, net investment income and spreads, net realized capital
gains and losses, fees, surrender rates, mortality experience, policyholder behavior experience and equity market returns and
volatility. 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.
AIG | 2019 Form 10-K 233
ITEM 8 | Notes to Consolidated Financial Statements | 10 . De fer r e d P o li c y Ac q u i si ti o n Co s ts
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 rising 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.
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.
234 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 10 . De fer r e d P o li c y Ac q u i si ti o n Co s ts
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)
2019
12,694 $
$
-
-
5,403
(5,164)
(1,768)
42
-
11,207 $
$
$
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
171 $
317
243 $
438
20
381
(a) Net of reductions in DAC of $1.8 billion, $1.0 billion and $1.3 billion at December 31, 2019, 2018 and 2017, 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 in 2018, the majority of which was amortized in 2019.
The percentage of the unamortized balance of VOBA at December 31, 2019 expected to be amortized in 2020 through 2024 by year
is: 8.5 percent, 7.6 percent, 7.0 percent, 7.0 percent and 6.6 percent, respectively, with 63.3 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.
11. 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.
AIG | 2019 Form 10-K 235
ITEM 8 | Notes to Consolidated Financial Statements | 11 . V a ria bl e I n te re s t E n ti ti es
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, 2019
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, 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
$
$
$
$
$
$
$
$
Real Estate and
Investment
Entities(d)
Securitization
Vehicles(e)
Affordable
Housing
Partnerships
Other
Total
177 $
7,239 $
-
-
5,231
615
6,023 $
2,810 $
236
3,046 $
- $
-
-
5,212
580
5,792 $
2,577 $
227
2,804 $
3,324
3,860
-
1,996
- $
-
-
3,464
469
- $
1
-
42
42
7,416
3,325
3,860
8,737
3,122
16,419 $
3,933 $
85 $
26,460
4,356 $
359
4,715 $
7,662 $
3,923
3,693
-
1,581
2,074 $
195
2,269 $
- $
-
-
3,142
394
4 $
24
28 $
- $
2
-
24
70
9,244
814
10,058
7,662
3,925
3,693
8,378
2,625
16,859 $
3,536 $
96 $
26,283
3,154 $
165
3,319 $
1,834 $
159
1,993 $
4 $
24
28 $
7,569
575
8,144
(a) Comprised primarily of Short-term investments and Other assets at December 31, 2019 and 2018.
(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, 2019 and 2018.
(d) At December 31, 2019 and 2018, off-balance sheet exposure primarily consisting of commitments to real estate and investment entities was $2.6 billion and $1.4 billion,
respectively.
(e) At December 31, 2019 and 2018, the company had contributed total assets of $15.6 billion and $16.0 billion, respectively, into consolidated securitization vehicles.
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.
236 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 11 . V a ria bl e I n te re s t E n ti ti es
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, 2019
Real estate and investment entities(a)
Affordable housing partnerships
Other
Total
December 31, 2018
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
$ 283,349
3,351
5,320
$ 292,020
$ 309,598
4,116
2,813
$ 316,527
$
$
$
$
6,519
453
310
7,282
6,820
607
284
7,711
$
$
$
$
3,286
-
- (c)
3,286
2,501
-
1,222 (c)
3,723
$
$
$
$
Total
9,805
453
310
10,568
9,321
607
1,506
11,434
(a) Comprised primarily of hedge funds and private equity funds.
(b) At December 31, 2019 and 2018, $7.0 billion and $7.4 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 Investment Corp., 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.
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.
AIG | 2019 Form 10-K 237
ITEM 8 | Notes to Consolidated Financial Statements | 11 . V a ria bl e I n te re s t E n ti ti es
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 6 and 7 herein.
12. 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 swaps) are
used to economically mitigate risk associated with non-U.S. dollar denominated debt, net capital exposures, foreign currency
transactions, and foreign denominated investments. Equity derivatives are used to mitigate financial risk embedded in certain
insurance liabilities and economically hedge certain investments. 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 6 and 15 herein.
238 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 1 2. 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, 2019
December 31, 2018
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
(in millions)
Derivatives designated as
hedging instruments:(a)
Interest rate contracts
19
147
$
495 $
3
$
410 $
7
$
10 $
-
$
866 $
Foreign exchange contracts
4,328
342
5,230
162
6,357
363
2,536
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
52,437
8,133
18,533
8,457
40,582
3,197
698
769
3
14
35,231
12,093
7,539
923
56
2,742
863
139
89
7
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
$ 132,965 $
5,026
$
61,482 $
4,009
$ 117,207 $
4,468
$
40,028 $
3,138
(2,427)
(1,806)
(2,427)
(527)
(1,713)
(1,840)
(1,713)
(187)
consolidated balance sheets(f)
$
793
$
1,055
$
915
$
1,238
(a) Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.
(b) As of December 31, 2019 and 2018, included CDSs on super senior multi-sector CDOs with a net notional amount of $152 million and $592 million (fair value liability of
$48 million and $224 million), respectively. The net notional amount represents the maximum exposure to loss on the portfolio.
(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, 2019 and December 31, 2018. Fair value of liabilities related to bifurcated
embedded derivatives was $6.9 billion and $4.1 billion, respectively, at December 31, 2019 and December 31, 2018. 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 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.
AIG | 2019 Form 10-K 239
ITEM 8 | Notes to Consolidated Financial Statements | 1 2. 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 $2.2 billion and $1.7 billion at December 31, 2019 and 2018,
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 $2.2 billion
and $2.1 billion at December 31, 2019 and 2018, 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, 2019, 2018 and 2017, we recognized gains (losses) of $116 million, $34 million and $(106) 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.
240 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 1 2. 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, 2019
Interest rate contracts:
Realized capital gains/(losses)
Interest credited to policyholder account balances
Net investment income
Foreign exchange contracts:
Realized capital gains/(losses)
Other income
Equity contracts:
Realized capital gains/(losses)
Year ended December 31, 2018
Interest rate contracts:
$
$
Realized capital gains/(losses)
Interest credited to policyholder account balances
Net investment 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)
Interest credited to policyholder account balances
Net investment income
Foreign exchange contracts:
Realized capital gains/(losses)
Other income
Equity contracts:
Realized capital gains/(losses)
Gains/(Losses) Recognized in Earnings for:
Hedged
Hedging
Excluded
Derivatives(a)
Components(b)
Items
Net Impact
$
- $
16
(1)
(31)
-
-
(2) $
-
-
365
-
-
(4) $
-
-
(393)
-
(42)
- $
-
-
91
-
-
- $
-
-
106
-
-
- $
-
-
(26)
-
(5)
$
$
$
-
(16)
1
31
-
-
2
-
-
(365)
-
-
4
-
-
393
4
42
-
-
-
91
-
-
-
-
-
106
-
-
-
-
-
(26)
4
(5)
(a) Gains and losses on derivative instruments designated and qualifying in fair value hedges that are included in the assessment of hedge effectiveness.
(b) Gains and losses on derivative instruments designated and qualifying in fair value hedges that are excluded from the assessment of hedge effectiveness and
recognized in earnings on a mark-to-market basis.
AIG | 2019 Form 10-K 241
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
ITEM 8 | Notes to Consolidated Financial Statements | 1 2. 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
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
2019
2018
2017
$
$
$
$
1,319 $
(25)
(316)
61
64
(1,464)
(361) $
68 $
(125)
(316)
-
12
(361) $
(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)
CREDIT RISK-RELATED CONTINGENT FEATURES
We estimate that at December 31, 2019, 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 $62 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 $336 million and $423 million at December 31, 2019 and 2018, respectively. The aggregate fair
value of assets posted as collateral under these contracts at December 31, 2019 and 2018, was approximately $381 million and $453
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 $3.3 billion and $3.9 billion at
December 31, 2019 and 2018, respectively. These securities have par amounts of $7.4 billion and $8.5 billion at December 31, 2019
and 2018, respectively, and have remaining stated maturity dates that extend to 2052.
242 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 1 3 . G o o dw i l l a n d Ot her I n ta n gi bl e As s e ts
13. 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, 2019, 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.
Effective July 1, 2019, we changed the date of our annual goodwill impairment testing from December 31 to July 1. This change does
not represent a material change to our method of applying current accounting guidance and is preferable as it better aligns with our
strategic planning and forecasting process. This change did not delay, accelerate or avoid any impairment charge and was applied
prospectively. We performed our annual goodwill impairment tests of all reporting units using a combination of both qualitative and
quantitative assessments and concluded that our goodwill was not impaired.
AIG | 2019 Form 10-K 243
ITEM 8 | Notes to Consolidated Financial Statements | 1 3 . 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, 2017:
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(a)
Other
Balance at December 31, 2018:
Goodwill - gross
Accumulated impairments
Net goodwill
Increase (decrease) due to:
Acquisitions
Other(b)
Balance at December 31, 2019:
Goodwill - gross
Accumulated impairments
Net goodwill
General Insurance
North
America
International
Life
Insurance
Other
Operations
Legacy
Portfolio
Total
$
1,878 $
(1,264)
614
2,807 $
(2,136)
671
77 $
-
77
27 $
-
27
216 $
(77)
139
5,005
(3,477)
1,528
-
(10)
-
1,868
(1,264)
604
2,332
(12)
4,188
(1,264)
2,924
-
-
-
(7)
74
2,874
(2,136)
738
157
(48)
2,983
(2,136)
847
20
26
-
(6)
13
84
-
84
46
(5)
125
-
125
-
8
4
-
-
31
-
31
9
9
49
-
49
-
-
-
(2)
-
214
(77)
137
-
-
214
(77)
137
-
(98)
4
(25)
87
5,071
(3,477)
1,594
2,544
(56)
7,559
(3,477)
4,082
20
(64)
4,188
(1,264)
2,924 $
3,029
(2,136)
893 $
133
-
133 $
$
49
-
49 $
116
(77)
39 $
7,515
(3,477)
4,038
(a) Includes goodwill of $2.0 billion, $492 million and $46 million relating to the acquisitions of Validus, Glatfelter and Ellipse, respectively.
(b) Reflects $98 million of goodwill that has been reclassified to assets held for sale.
Indefinite lived intangible assets are not subject to amortization. Indefinite lived intangible assets primarily include Lloyd’s syndicate
capacity and brand names. Finite lived intangible assets are amortized over their useful lives. Finite lived intangible assets primarily
include distribution networks and are recorded net of accumulated amortization. The Company tests intangible assets for impairment
on an annual basis or whenever events or circumstances suggest that the carrying value of an intangible asset may exceed the sum
of the undiscounted cash flows expected to result from its use and eventual disposition. If this condition exists and the carrying value
of an intangible asset exceeds its fair value, the excess is recognized as an impairment and is recorded as a charge against net
income.
The Other intangible assets and VODA resulted primarily from the acquisition of Validus.
244 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 1 3 . 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 other intangible assets and the VODA by operating segment:
(in millions)
Other intangible assets
Balance at January 1, 2018
Increase (decrease) due to:
Acquisitions
Amortization
Other
Balance at December 31, 2018
Increase (decrease) due to:
Acquisitions
Amortization
Other
Balance at December 31, 2019:
Value of distribution network acquired
Balance at January 1, 2018
Increase (decrease) due to:
Acquisitions
Amortization
Other
Balance at December 31, 2018
Increase (decrease) due to:
Acquisitions
Amortization
Other
Balance at December 31, 2019:
General Insurance
North
America
International
Life
Other
Insurance Operations
Legacy
Portfolio
$
27 $
8 $
34 $
37 $
61
(2)
-
86 $
-
(1)
(3)
82 $
- $
-
-
-
- $
-
-
-
- $
207
(3)
-
212 $
-
(1)
-
211 $
- $
-
-
-
- $
-
-
-
- $
16
(4)
-
46 $
-
(4)
(18)
24 $
- $
-
-
-
- $
-
-
-
- $
-
(2)
(19)
16 $
-
(2)
2
16 $
- $
582
(15)
2
569 $
-
(39)
6
536 $
$
$
$
$
$
- $
-
-
-
- $
-
-
-
- $
- $
-
-
-
- $
-
-
-
- $
Total
106
284
(11)
(19)
360
-
(8)
(19)
333
-
582
(15)
2
569
-
(39)
6
536
The percentage of the unamortized balance of Other intangible assets and VODA at December 31, 2019 expected to be amortized in
2020 through 2024 by year is 7.9 percent, 7.9 percent, 7.9 percent, 7.9 percent and 7.9 percent, respectively, with 60.5 percent being
amortized after five years.
AIG | 2019 Form 10-K 245
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
14. 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 IBNR claims, 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 $12.2 billion and $12.3 billion at December 31, 2019 and 2018, 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, 2019 and 2018, we held collateral of approximately $8.9 billion and
$9.2 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)
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
$
2019
83,639 $
(31,690)
51,949
2018
78,393 $
(26,708)
51,685
17,596
(340)
1,063
(219)
18,100
(4,894)
(18,020)
(22,914)
(6)
-
-
130
124
20,534
1,429
(252)
(395)
21,316
(5,754)
(17,768)
(23,522)
(677)
3,284
-
(137)
2,470
2017
77,077
(15,532)
61,545
21,079
1,565
187
(284)
22,547
(5,323)
(16,241)
(21,564)
788
23
(360)
(11,294)
(10,843)
47,259
31,069
78,328 $
51,949
31,690
83,639 $
51,685
26,708
78,393
$
(a) Includes $27 million, $51 million and $25 million for the retroactive reinsurance agreement with NICO covering U.S. asbestos exposures for the year ended December
31, 2019, 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.
(d) Includes benefit (charge) from change in discount on retroactive insurance in the amount of $469 million, $(180) million and $(1.5) billion for the periods ended
December 31, 2019, 2018 and 2017, respectively.
246 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
Prior Year Development
During 2019, we recognized favorable prior year loss reserve development of $340 million excluding discount and amortization of
deferred gain. The development was primarily driven by:
Favorable development on U.S. Workers’ Compensation business, both guaranteed cost business and large deductible and
Defense Base Act business (covering government contractors serving at military bases overseas) where we reacted to favorable
loss trends in recent accident years;
Favorable development on 2017 Hurricanes (Harvey, Irma and Maria) and favorable development due to 2017 California Wildfire
subrogation recoverables in Commercial Property and Personal Lines.
Unfavorable development in Primary General Liability where we reacted to adverse frequency and severity trends especially in
Construction Wrap business in recent accident years.
Unfavorable development in U.S. Financial Lines, notably Directors and Officers (D&O), Employment Practices Liability (EPLI) and
Non-Medical Professional Errors & Omissions business where we reacted to increasing frequency and severity in recent accident
years.
Unfavorable development on European Casualty & Financial Lines, notably Commercial Auto, Employers Liability, Directors &
Officers, and Financial Institutions business; and
Favorable development on Europe Property and Special Risks, Europe and Japan Personal Insurance and Other product lines.
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 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 U.S. Excess Casualty, driven by the combination of construction defect and construction wrap claims
from accident year 2015 and prior where we reacted to significant increases in severity and longer claim reporting patterns, as well
as higher than expected loss severity in accident years 2016 and 2017, which led to an increase in estimates for these accident
years;
Unfavorable development 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 U.S. 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 U.S. 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 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.
AIG | 2019 Form 10-K 247
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, 2019:
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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
5,213
4,285
4,064
5,154
4,950
1,287
6,234
2,573
1,962
$
Reinsurance recoverable
on unpaid losses and loss
adjustment expenses
included in the
disaggregated tables
below
6,745
5,073
4,695
2,221
2,807
988
1,268
1,191
519
4,435
40,157
$
3,587
29,094
$
$
Gross liability for
unpaid losses and loss
adjustment expenses
11,958
9,358
8,759
7,375
7,757
2,275
7,502
3,764
2,481
8,022
69,251
(2,800)
8,679
3,198
78,328
$
$
(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, 2019, 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.
248 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
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.
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
how the business is coded by profit center and line of business.
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 | 2019 Form 10-K 249
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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. The additional table
presented after discussion of prior year development by line of business 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, 2019. 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, 2019 and the related historical claims payout percentage disclosure is unaudited and is presented as supplementary
information.
250 AIG | 2019 Form 10-K
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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 2019, we recognized $699 million of favorable prior year development, net of external reinsurance but before ADC
cessions.
During 2018, we recognized $51 million of unfavorable 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, (in millions)
December 31, 2019
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Unaudited
2019 Prior
Year
Development
Excluding the
Impact of
Adverse
Development
Reinsurance
Agreement
Total of IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Cumulative
Number of
Reported
Claims
Incurred
Impact of
Adverse
Development
Reinsurance
Agreement
IBNR Impact
of Adverse
Development
Reinsurance
Agreement
2019 (Net of
Impact of
Adverse
Development
Reinsurance
Agreement)
Total of IBNR
Liabilities Net
of Impact of
Adverse
Development
Reinsurance
Agreement
2010
$ 2,706 $ 3,049 $ 3,125 $ 3,148 $ 3,211 $ 3,214 $ 3,286 $ 3,267 $ 3,278
$ 3,238 $
(40) $
2,901
2,953
3,091
3,158
3,113
3,152
3,156
2,382
2,194
2,286
2,260
2,334
2,308
1,932
1,880
1,950
2,060
2,032
1,729
1,764
1,866
1,862
1,708
1,864
1,866
1,299
1,346
789
3,177
2,259
1,974
1,794
1,814
1,318
850
998
3,141
2,247
1,916
1,709
1,722
1,140
776
1,021
887
(36)
(12)
(58)
(85)
(92)
(178)
(74)
23
334
414
380
353
397
558
403
352
641
639
133,623 $
(437) $
(276) $
2,801 $
125,122
71,128
47,066
40,075
35,838
30,588
26,538
21,034
13,919
(458)
(443)
(458)
(380)
(588)
-
-
-
-
(311)
(307)
(311)
(238)
(442)
-
-
-
-
2,683
1,804
1,458
1,329
1,134
1,140
776
1,021
887
58
103
73
42
159
116
403
352
641
639
$ 17,797 $
(552)
$
(2,764) $
$
15,033
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
(11,354)
-
-
(11,354)
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2010, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
4,505
(210)
63
(2,971)
1,534
development, net of reinsurance
$ 10,948 $
(699)
$
(5,735) $
$
5,213
AIG | 2019 Form 10-K 251
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Change
in
Incurred
Loss and
ALAE
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
2019
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Unaudited
$
2,822 $
2,818 $
2,811 $
2,801 $
(10)
2,676
1,819
1,500
1,311
1,279
1,299
-
-
-
2,677
1,814
1,494
1,310
1,279
1,346
789
-
-
2,682
1,793
1,481
1,309
1,318
1,318
850
998
-
2,683
1,804
1,458
1,329
1,134
1,140
776
1,021
887
1
11
(23)
20
(184)
(178)
(74)
23
-
$ 12,706 $ 13,527 $ 14,560 $ 15,033 $
(414)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2010, net of reinsurance
Unallocated loss adjustment expense prior year development
-
-
-
-
(11,354)
1,588
1,534
-
-
-
(54)
276
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
$
5,213 $
(192)
The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
2019
Unaudited
Change
in
Incurred
Loss and
ALAE
$
(464) $
(449) $
(467) $
(437) $
(476)
(515)
(560)
(555)
(585)
-
-
-
-
(479)
(494)
(538)
(552)
(587)
-
-
-
-
(495)
(466)
(493)
(485)
(496)
-
-
-
-
(458)
(443)
(458)
(380)
(588)
-
-
-
-
30
37
23
35
105
(92)
-
-
-
-
$
(3,155) $
(3,099) $
(2,902) $
(2,764) $
138
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
-
-
Liabilities for losses and allocated loss adjustment expenses before 2010, net of reinsurance
-
(3,127)
(2,971)
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
(6,029) $
(5,735) $
-
156
213
507
252 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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, (in millions)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
$
550 $
1,093 $
1,537 $
1,855 $
2,126 $
2,288 $
2,426 $
2,532 $
2,597
$
2,647 $
Unaudited
519
1,129
415
1,561
804
282
1,884
1,089
619
231
2,129
1,272
879
558
234
2,285
1,440
1,067
786
524
147
2,388
1,563
1,214
930
725
378
93
2,451
1,632
1,287
1,030
854
521
224
85
2,496
1,669
1,335
1,096
925
584
294
215
93
$
11,354 $
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 | 2019 Form 10-K 253
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
Prior Year Development
During 2019, we recognized $699 million of favorable prior year development in U.S. Workers Compensation business due to
favorable frequency and severity trends seen across the diagonals across many subsets of U.S. Workers Compensation especially in
the recent accident years.
During 2018, we recognized $51 million of adverse prior year development in U.S. 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 U.S. 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 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).
U.S. Excess Casualty
During 2019, we recognized $76 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 wrap claims and
increasing loss severity in more recent accident years.
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.
254 AIG | 2019 Form 10-K
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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, (in millions)
December 31, 2019
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Unaudited
2019 Prior
Year
Development
Excluding the
Impact of
Adverse
Development
Reinsurance
Agreement
Total of IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Cumulative
Number of
Reported
Claims
Incurred
Impact of
Adverse
Development
Reinsurance
Agreement
IBNR Impact
of Adverse
Development
Reinsurance
Agreement
2019 (Net of
Impact of
Adverse
Development
Reinsurance
Agreement)
Total of IBNR
Liabilities Net
of Impact of
Adverse
Development
Reinsurance
Agreement
2010
$ 1,888 $ 2,097 $ 2,093 $ 1,784 $ 1,650 $ 1,739 $ 1,723 $ 1,708 $ 1,681
$ 1,638 $
(43) $
1,787
1,827
1,597
1,429
1,529
1,611
1,627
1,607
1,403
1,242
1,488
1,537
1,486
1,123
1,035
1,169
1,308
1,241
938
1,069
1,275
1,260
989
1,463
1,440
898
1,146
856
1,726
1,558
1,282
1,339
1,603
1,162
1,002
648
1,758
1,502
1,292
1,283
1,656
1,171
1,097
646
577
32
(56)
10
(56)
53
9
95
(2)
308
381
312
271
466
444
514
542
404
547
3,727 $
(252) $
(201) $
1,386 $
3,726
3,688
3,102
2,632
2,544
1,980
1,241
618
370
(342)
(288)
(260)
(439)
(493)
-
-
-
-
(272)
(229)
(197)
(360)
(392)
-
-
-
-
1,416
1,214
1,032
844
1,163
1,171
1,097
646
577
107
109
83
74
106
52
514
542
404
547
$ 12,620 $
42
$
(2,074) $
$
10,546
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
(6,799)
-
-
(6,799)
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2010, net of reinsurance
2,243
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
54
(20)
(1,705)
538
development, net of reinsurance
$ 8,064 $
76
$
(3,779) $
$
4,285
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Change
in
Incurred
Loss and
ALAE
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
2019
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Unaudited
$
1,452 $
1,448 $
1,426 $
1,386 $
1,369
1,175
935
902
1,027
898
-
-
-
1,371
1,163
932
905
1,015
1,146
856
-
-
1,436
1,254
981
915
1,139
1,162
1,002
648
-
1,416
1,214
1,032
844
1,163
1,171
1,097
646
577
$
7,758 $
8,836 $
9,963 $ 10,546 $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2010, net of reinsurance
Unallocated loss adjustment expense prior year development
612
(6,799)
538
-
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
4,285 $
(40)
(20)
(40)
51
(71)
24
9
95
(2)
-
6
-
(74)
94
26
AIG | 2019 Form 10-K 255
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
2019
Unaudited
Change
in
Incurred
Loss and
ALAE
$
(271) $
(260) $
(255) $
(252) $
(242)
(362)
(373)
(373)
(436)
-
-
-
-
(256)
(323)
(309)
(355)
(425)
-
-
-
-
(290)
(304)
(301)
(424)
(464)
-
-
-
-
(342)
(288)
(260)
(439)
(493)
-
-
-
-
3
(52)
16
41
(15)
(29)
-
-
-
-
$
(2,057) $
(1,928) $
(2,038) $
(2,074) $
(36)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
-
Liabilities for losses and allocated loss adjustment expenses before 2010, net of reinsurance
-
(1,577)
(1,705)
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
(3,615) $
(3,779) $
-
(128)
114
(50)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (in millions)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
$
10 $
197 $
475 $
654 $
795 $
946 $
1,052 $
1,217 $
1,265
$
1,288 $
Unaudited
5
63
3
225
106
15
387
288
105
3
716
495
207
77
9
921
649
387
240
210
28
1,069
887
578
444
391
80
1
1,214
1,022
705
590
718
204
45
1
1,257
1,121
819
703
935
388
156
125
7
$
6,799 $
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.
256 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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 2019, we recognized $76 million of unfavorable development driven by higher severity claim emergence in non-admitted
construction defect claims in older accident years and auto liability and general liability claims in recent accident years.
During 2018, we recognized $1.3 billion 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.
U.S. Other Casualty
U.S Other Casualty includes general liability, commercial auto, medical malpractice, and various other casualty lines of
business.
In 2019, we recognized $168 million of unfavorable prior year development in Other Casualty, net of external reinsurance but
before ADC cessions, primarily as a result of unfavorable loss emergence in recent accident years.
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.
AIG | 2019 Form 10-K 257
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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, (in millions)
December 31, 2019
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Unaudited
2019 Prior
Year
Development
Excluding the
Impact of
Adverse
Development
Reinsurance
Agreement
Total of IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Cumulative
Number of
Reported
Claims
Incurred
Impact of
Adverse
Development
Reinsurance
Agreement
IBNR Impact
of Adverse
Development
Reinsurance
Agreement
2019 (Net of
Impact of
Adverse
Development
Reinsurance
Agreement)
Total of IBNR
Liabilities Net
of Impact of
Adverse
Development
Reinsurance
Agreement
2010
$ 2,124 $ 2,102 $ 2,235 $ 2,185 $ 2,335 $ 2,381 $ 2,501 $ 2,492 $ 2,504
$ 2,505 $
1 $
2,033
2,202
2,302
2,439
2,585
2,620
2,582
1,986
2,139
2,193
2,203
2,352
2,407
1,653
1,729
1,912
2,148
2,185
1,751
1,721
1,963
2,009
1,329
1,762
1,829
1,339
1,343
602
2,517
2,343
2,164
1,910
1,736
1,321
629
802
2,515
2,328
2,211
1,916
1,794
1,391
738
845
1,059
(2)
(15)
47
6
58
70
109
43
225
126
190
286
230
259
513
411
621
935
96,534 $
(130) $
(103) $
2,375 $
122
75,391
42,048
37,117
35,730
33,313
26,834
20,255
15,010
15,546
(139)
(169)
(263)
(222)
(301)
-
-
-
-
(110)
(135)
(219)
(177)
(229)
-
-
-
-
2,376
2,159
1,948
1,694
1,493
1,391
738
845
1,059
16
55
67
53
30
513
411
621
935
$ 17,302 $
317
$
(1,224) $
$
16,078
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
(12,454)
-
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2010, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
1,392
(170)
21
-
(952)
(12,454)
440
development, net of reinsurance
$ 6,240 $
168
$
(2,176) $
$
4,064
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Change
in
Incurred
Loss and
ALAE
Calendar Years Ended
December 31,
(in millions)
2016
2018
2017
2019
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Unaudited
$
2,361 $
2,359 $
2,349 $
2,375 $
2,398
2,189
1,948
1,667
1,361
1,339
-
-
-
2,395
2,197
1,960
1,678
1,373
1,343
602
-
-
2,414
2,175
1,929
1,634
1,423
1,321
629
802
-
2,376
2,159
1,948
1,694
1,493
1,391
738
845
1,059
26
(38)
(16)
19
60
70
70
109
43
-
$ 13,263 $ 13,907 $ 14,676 $ 16,078 $
343
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
(12,454)
-
Liabilities for losses and allocated loss adjustment expenses before 2010, net of reinsurance
-
685
440
(245)
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
-
$
4,064 $
90
188
258 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
2019
Unaudited
Change
in
Incurred
Loss and
ALAE
$
(140) $
(133) $
(155) $
(130) $
(222)
(163)
(200)
(296)
(401)
-
-
-
-
(187)
(210)
(225)
(331)
(456)
-
-
-
-
(103)
(168)
(235)
(276)
(313)
-
-
-
-
(139)
(169)
(263)
(222)
(301)
-
-
-
-
$
(1,422) $
(1,542) $
(1,250) $
(1,224) $
25
(36)
(1)
(28)
54
12
-
-
-
-
26
-
(74)
69
21
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
-
Liabilities for losses and allocated loss adjustment expenses before 2010, net of reinsurance
-
(878)
(952)
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
(2,128) $
(2,176) $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (in millions)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
$
295 $
661 $
985 $
1,358 $
1,640 $
1,824 $
1,972 $
2,087 $
2,196
$
2,236 $
Unaudited
235
722
411
1,102
739
169
1,481
1,042
594
210
1,814
1,385
962
620
105
2,039
1,677
1,248
868
309
77
2,210
1,869
1,485
1,150
769
298
51
2,289
2,009
1,688
1,392
1,087
489
111
43
2,339
2,053
1,809
1,572
1,351
703
216
122
53
$
12,454 $
Paid Impact
of Adverse
Development
Reinsurance
Agreement
-
-
-
-
-
-
-
-
-
-
-
AIG | 2019 Form 10-K 259
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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.
260 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
Prior Year Development
Primary General Liability
In 2019, we recognized unfavorable development of $220 million largely driven by construction defect and construction wrap policies
where we observed significant increases in severity in recent accident years.
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.
Primary Commercial Auto Liability
In 2019, we experienced unfavorable development of approximately $23 million mainly due to deterioration in severity in the recent
accident years in the large deductible business.
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.
Medical Malpractice
During 2019, we recognized $30 million of unfavorable development largely driven by a few large cases.
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.
Other Lines
During 2019, we recognized favorable development of $105 million largely driven by extra contractual obligations, favorable
development on loss sensitive casualty business and business internally reinsured from other business units.
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 2019, we recognized $463 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 D&O subset of business.
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 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.
AIG | 2019 Form 10-K 261
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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, (in millions)
December 31, 2019
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Unaudited
2010
$ 1,584 $ 1,525 $ 1,423 $ 1,383 $ 1,374 $ 1,470 $ 1,509 $ 1,535 $ 1,542
$ 1,544 $
1,844
1,765
1,934
1,925
1,960
1,991
2,023
1,592
1,763
1,800
1,907
1,988
1,990
1,790
1,719
1,670
1,613
1,555
1,812
1,777
1,892
1,927
1,737
1,762
1,743
1,605
1,855
1,564
2,015
2,015
1,497
1,960
1,788
1,993
1,675
1,640
2,012
2,077
1,509
1,981
1,830
2,064
1,756
1,766
1,503
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
2019 Prior
Year
Development
Excluding the
Impact of
Adverse
Development
Reinsurance
Agreement
Total of IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Cumulative
Number of
Reported
Claims
Incurred
Impact of
Adverse
Development
Reinsurance
Agreement
IBNR Impact
of Adverse
Development
Reinsurance
Agreement
2019 (Net of
Impact of
Adverse
Development
Reinsurance
Agreement)
Total of IBNR
Liabilities Net
of Impact of
Adverse
Development
Reinsurance
Agreement
2 $
(3)
62
12
21
42
71
81
126
64
63
115
122
241
248
380
617
1,017
1,315
20,165 $
(55) $
(44) $
1,489 $
20,063
20,076
19,126
17,581
16,156
16,000
14,939
14,349
11,784
(54)
(115)
(100)
(240)
(278)
-
-
-
-
(43)
(92)
(80)
(199)
(213)
-
-
-
-
1,958
1,962
1,409
1,741
1,552
2,064
1,756
1,766
1,503
20
20
23
42
42
35
380
617
1,017
1,315
$ 18,042 $
414
$
(842) $
$
17,200
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 2010, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
(12,065)
154
-
11
38
-
(135)
(12,065)
19
development, net of reinsurance
$ 6,131 $
463
$
(977) $
$
5,154
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Change
in
Incurred
Loss and
ALAE
Calendar Years Ended
December 31,
(in millions)
2017
2018
2016
2019
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Unaudited
$
1,499 $
1,504 $
1,505 $
1,489 $
1,966
1,906
1,442
1,733
1,429
1,605
-
-
-
1,973
1,907
1,429
1,729
1,430
1,855
1,564
-
-
1,989
1,925
1,408
1,753
1,462
1,993
1,675
1,640
-
1,958
1,962
1,409
1,741
1,552
2,064
1,756
1,766
1,503
(16)
(31)
37
1
(12)
90
71
81
126
-
$ 11,580 $ 13,391 $ 15,350 $ 17,200 $
347
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2010, net of reinsurance
-
99
Unallocated loss adjustment expense prior year development
(12,065)
19
-
-
(80)
59
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
5,154 $
326
262 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
2019
Unaudited
Change
in
Incurred
Loss and
ALAE
$
(10) $
(31) $
(37) $
(55) $
(25)
(82)
(171)
(159)
(333)
-
-
-
-
(50)
(83)
(126)
(198)
(313)
-
-
-
-
(26)
(90)
(89)
(207)
(326)
-
-
-
-
(54)
(115)
(100)
(240)
(278)
-
-
-
-
(18)
(28)
(25)
(11)
(33)
48
-
-
-
-
$
(780) $
(801) $
(775) $
(842) $
(67)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
-
Liabilities for losses and allocated loss adjustment expenses before 2010, net of reinsurance
-
(45)
(135)
Unallocated loss adjustment expense prior year development
-
(90)
21
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
(820) $
(977) $
(136)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (in millions)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
$
31 $
278 $
558 $
793 $
1,009 $
1,172 $
1,273 $
1,354 $
1,394
$
1,420 $
Unaudited
165
494
73
886
403
41
1,210
812
327
66
1,529
1,250
682
366
63
1,752
1,494
945
849
390
73
1,885
1,622
1,139
1,158
791
499
64
1,912
1,687
1,235
1,387
1,055
1,002
391
86
1,918
1,859
1,314
1,573
1,282
1,358
761
486
94
$
12,065 $
Paid Impact
of Adverse
Development
Reinsurance
Agreement
-
-
-
-
-
-
-
-
-
-
-
Reserving Process and Methodology
U.S. Financial Lines business includes D&O, Errors and Omissions (E&O), EPLI policies 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 | 2019 Form 10-K 263
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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 certain claims from 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. In view of the changing severity profile of the book, we are using a capped and excess layer
approach on many segments to better reflect the potential impact of large claims on the results by accident 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. 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 2019, we recognized $463 million of unfavorable development particularly across accident years 2015-2018 driven by
increasing severity across most Directors and Officers (D&O) and Employment Practices Liability (EPLI) classes and Mergers and
Acquisitions (M&A) policies. We also experienced unfavorable development in Errors and Omissions (E&O) due to adverse frequency
and severity trends.
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.
U.S. Property and Special Risks
During 2019, we recognized $204 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 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.
264 AIG | 2019 Form 10-K
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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, (in millions)
December 31, 2019
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Unaudited
2019 Prior
Year
Development
Excluding the
Impact of
Adverse
Development
Reinsurance
Agreement
Total of IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Cumulative
Number of
Reported
Claims
Incurred
Impact of
Adverse
Development
Reinsurance
Agreement
IBNR Impact
of Adverse
Development
Reinsurance
Agreement
2019 (Net of
Impact of
Adverse
Development
Reinsurance
Agreement)
Total of IBNR
Liabilities Net
of Impact of
Adverse
Development
Reinsurance
Agreement
2010
$ 2,751 $ 2,504 $ 2,461 $ 2,535 $ 2,551 $ 2,531 $ 2,541 $ 2,552 $ 2,550
$ 2,556 $
6 $
3,833
3,700
3,630
3,622
3,607
3,646
3,653
4,166
4,284
4,256
4,215
4,327
4,318
2,528
2,530
2,387
2,432
2,445
2,943
2,710
2,784
2,770
3,102
2,978
2,911
3,147
3,184
5,370
3,646
4,300
2,447
2,789
2,900
3,099
4,903
3,715
3,644
4,282
2,439
2,769
2,864
3,086
4,744
3,776
2,824
(2)
(18)
(8)
(20)
(36)
(13)
(159)
61
42
39
56
49
101
122
197
398
506
785
47,225 $
(24) $
(19) $
2,532 $
49,133
48,391
49,722
60,126
58,524
53,525
77,455
65,375
69,105
(23)
(26)
(38)
(76)
(94)
-
-
-
-
(18)
(21)
(30)
(60)
(75)
-
-
-
-
3,621
4,256
2,401
2,693
2,770
3,086
4,744
3,776
2,824
23
21
35
19
41
47
197
398
506
785
$ 32,984 $
(189)
$
(281) $
32,703
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below
(27,948)
-
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2010, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
309
(3)
(12)
-
(114)
(27,948)
195
development, net of reinsurance
$ 5,345 $
(204)
$
(395) $
4,950
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Change
in
Incurred
Loss and
ALAE
Calendar Years Ended
December 31,
(in millions)
2018
2016
2017
2019
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Unaudited
$
2,532 $
2,534 $
2,532 $
2,532 $
3,626
4,300
2,405
2,717
2,837
3,147
-
-
-
3,634
4,293
2,407
2,709
2,813
3,184
5,370
-
-
3,631
4,281
2,420
2,725
2,813
3,099
4,903
3,715
-
3,621
4,256
2,401
2,693
2,770
3,086
4,744
3,776
2,824
-
(10)
(25)
(19)
(32)
(43)
(13)
(159)
61
-
$ 21,564 $ 26,944 $ 30,119 $ 32,703 $
(240)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2010, net of reinsurance
-
238
Unallocated loss adjustment expense prior year development
(27,948)
195
-
-
(43)
(5)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
4,950 $
(288)
AIG | 2019 Form 10-K 265
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
2019
Unaudited
Change
in
Incurred
Loss and
ALAE
$
(9) $
(18) $
(18) $
(24) $
(20)
(27)
(27)
(67)
(141)
-
-
-
-
(19)
(25)
(38)
(61)
(98)
-
-
-
-
(15)
(19)
(27)
(64)
(87)
-
-
-
-
(23)
(26)
(38)
(76)
(94)
-
-
-
-
(6)
(8)
(7)
(11)
(12)
(7)
-
-
-
-
$
(291) $
(259) $
(230) $
(281) $
(51)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
-
Liabilities for losses and allocated loss adjustment expenses before 2010, net of reinsurance
-
(84)
(114)
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
(314) $
(395) $
-
(30)
7
(74)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (in millions)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
$
750 $
1,558 $
1,890 $
2,090 $
2,219 $
2,344 $
2,414 $
2,450 $
2,475
$
2,488 $
Unaudited
1,018
2,331
840
2,915
2,709
734
3,177
3,404
1,570
913
3,378
3,768
1,847
1,761
1,037
3,476
3,985
2,040
2,113
1,871
1,000
3,532
4,113
2,188
2,326
2,237
2,027
1,360
3,562
4,145
2,300
2,466
2,491
2,361
3,070
1,060
3,577
4,178
2,325
2,558
2,617
2,612
3,792
2,663
1,138
$
27,948 $
Paid Impact
of Adverse
Development
Reinsurance
Agreement
-
-
-
-
-
-
-
-
-
-
-
266 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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 2019, we recognized $204 million of favorable prior year development in U.S. Property and Special Risks driven largely by
favorable development on the 2017 Hurricanes (Harvey, Irma, Maria) as well as subrogation recoverable on the 2017 California
Wildfires and by favorable emergence on non-Catastrophe Commercial Property, Program and Specialty classes.
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.
U.S. Personal Insurance
During 2019, we recognized $96 million of favorable prior year development in U.S. Personal Insurance, net of external
reinsurance but before ADC cessions, mainly due favorable development from the 2017 Catastrophes.
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.
AIG | 2019 Form 10-K 267
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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, (in millions)
December 31, 2019
Accident
Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Unaudited
2010
$ 1,843 $ 1,809 $ 1,819 $ 1,819 $ 1,820 $ 1,819 $ 1,817 $ 1,817 $ 1,815
$ 1,815 $
1,886
1,908
1,896
1,891
1,890
1,886
1,881
2,208
2,128
2,109
2,083
2,077
2,094
1,887
1,816
1,803
1,782
1,780
1,552
1,562
1,572
1,572
1,511
1,498
1,494
1,536
1,533
2,028
1,879
2,095
1,776
1,583
1,483
1,533
2,287
2,188
1,878
2,099
1,777
1,584
1,482
1,540
2,161
2,193
1,593
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
2019 Prior
Year
Development
Excluding the
Impact of
Adverse
Development
Reinsurance
Agreement
Total of IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Cumulative
Number of
Reported
Claims
Incurred
Impact of
Adverse
Development
Reinsurance
Agreement
IBNR Impact
of Adverse
Development
Reinsurance
Agreement
2019 (Net of
Impact of
Adverse
Development
Reinsurance
Agreement)
Total of IBNR
Liabilities Net
of Impact of
Adverse
Development
Reinsurance
Agreement
- $
(1)
4
1
1
(1)
7
(126)
5
1
1
1
1
4
9
23
114
229
470
422,774 $
(1) $
(1) $
1,814 $
413,127
403,920
335,158
274,703
260,468
246,354
217,752
97,349
68,057
(1)
(1)
(1)
(4)
(6)
-
-
-
-
(1)
(1)
(1)
(3)
(5)
-
-
-
-
1,877
2,098
1,776
1,580
1,476
1,540
2,161
2,193
1,593
-
-
-
-
1
4
23
114
229
470
$ 18,122 $
(110)
$
(14) $
18,108
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 2010, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
(16,744)
(71)
-
1
13
-
(6)
(16,744)
(77)
development, net of reinsurance
$ 1,307 $
(96)
$
(20) $
1,287
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Change
in
Incurred
Loss and
ALAE
Calendar Years Ended
December 31,
(in millions)
2017
2016
2018
2019
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Unaudited
$
1,816 $
1,816 $
1,814 $
1,814 $
1,881
2,088
1,774
1,564
1,476
1,536
-
-
-
1,880
2,091
1,774
1,564
1,475
1,533
2,028
-
-
1,878
2,093
1,774
1,571
1,472
1,533
2,287
2,188
-
1,877
2,098
1,776
1,580
1,476
1,540
2,161
2,193
1,593
-
(1)
5
2
9
4
7
(126)
5
-
$ 12,135 $ 14,161 $ 16,610 $ 18,108 $
(95)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2010, net of reinsurance
-
(72)
Unallocated loss adjustment expense prior year development
(16,744)
(77)
-
-
(5)
15
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
$
1,287 $
(85)
268 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Calendar Years Ended
December 31,
(in millions)
2016
2017
2018
2019
Unaudited
Change
in
Incurred
Loss and
ALAE
$
(1) $
(1) $
(1) $
(1) $
(5)
11
(8)
(8)
(1)
(3)
(6)
(8)
(22)
(19)
-
-
-
-
-
-
-
-
(1)
(2)
(2)
(12)
(11)
-
-
-
-
(1)
(1)
(1)
(4)
(6)
-
-
-
-
$
(33) $
(38) $
(29) $
(14) $
-
-
1
1
8
5
-
-
-
-
15
-
(3)
2
14
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below
Liabilities for losses and allocated loss adjustment expenses before 2010, net of reinsurance
-
(3)
-
(6)
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance
(32) $
(20) $
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (in millions)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
$
1,205 $
1,669 $
1,736 $
1,772 $
1,794 $
1,803 $
1,808 $
1,810 $
1,812
$
1,813 $
Unaudited
1,204
1,752
1,238
1,814
1,936
1,109
1,840
1,996
1,634
959
1,860
2,035
1,705
1,380
931
1,869
2,065
1,744
1,463
1,320
857
1,873
2,079
1,759
1,507
1,411
1,344
941
1,874
2,085
1,766
1,536
1,439
1,422
1,672
1,227
1,875
2,095
1,772
1,555
1,455
1,460
1,896
1,939
884
$
16,744 $
Paid Impact
of Adverse
Development
Reinsurance
Agreement
-
-
-
-
-
-
-
-
-
-
-
AIG | 2019 Form 10-K 269
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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 2019, we recognized $96 million of favorable prior year development in U.S. Personal Insurance driven largely by subrogation
recoverable on the 2017 California Wildfires and favorable development from Hurricanes Harvey, Irma and Maria.
During 2018, we recognized $255 million of adverse prior year development in U.S. 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.
UK/Europe Casualty and Financial Lines
During 2019, we recognized $161 million of unfavorable prior year development in Europe Casualty and Financial Lines
driven by greater frequency of large losses than expected.
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.
270 AIG | 2019 Form 10-K
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance*
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
Years Ended December 31, (in millions)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$ 1,303 $ 1,282 $ 1,303 $ 1,325 $ 1,273 $ 1,308 $ 1,288 $ 1,358 $ 1,339
$
1,336 $
Unaudited
1,257
1,212
1,288
1,336
1,424
1,432
1,479
1,088
1,065
1,029
1,111
1,171
1,148
1,041
1,082
1,063
1,044
1,079
1,040
1,011
1,035
1,042
1,097
1,236
1,279
1,317
1,458
1,349
1,456
1,205
1,114
1,037
1,176
1,498
1,326
1,376
1,453
1,199
1,171
1,062
1,237
1,505
1,286
1,423
1,301
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
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 2010, net of reinsurance
Unallocated loss adjustment expense prior year development
Liabilities for losses and loss adjustment expenses and prior year loss
December 31, 2019
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Cumulative
Number of
Reported
Claims
2019 Prior
Year
Development
(3) $
(3)
(6)
57
25
61
7
(40)
47
30
53
50
87
128
251
296
500
611
936
278,205
267,537
220,502
187,469
178,140
192,412
229,131
245,792
250,301
210,025
$ 12,973 $
145
(7,417)
678
-
9
7
development, net of reinsurance
$
6,234 $
161
* 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
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Years Ended December 31, (in millions)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
$
130 $
377 $
584 $
750 $
882 $
975 $
1,039 $
1,093 $
1,111
$
Unaudited
125
345
106
522
303
90
757
444
338
72
899
626
487
259
71
1,021
1,129
1,193
756
627
410
240
120
845
741
530
433
380
97
946
856
631
569
588
282
114
1,162
1,245
998
930
696
685
778
449
374
100
$
7,417
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
AIG | 2019 Form 10-K 271
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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 2019, we recognized $161 million of unfavorable prior year development in UK and Europe Casualty and Financial Lines
driven by increased large loss activity in recent accident years, particularly related to UK directors and officers class action suits
against insureds with global exposure, and increased frequency and severity in European casualty for auto liability and employers
liability. This was slightly offset by a benefit from an increase in the Ogden rates in the UK used to value long duration claims.
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.
UK/Europe Property and Special Risks
During 2019, we recognized $108 million of favorable prior year development in the UK/Europe Property and Special Risks
segment, net of external reinsurance.
During 2018, we recognized $22 million of favorable prior year development in the UK/Europe Property and Special Risks
segment, net of external reinsurance.
272 AIG | 2019 Form 10-K
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance*
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
Years Ended December 31, (in millions)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
December 31, 2019
Total of IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Cumulative
Number of
Reported
Claims
2019 Prior
Year
Development
$ 1,475
$ 1,471
$ 1,396
$ 1,336
$ 1,313
$ 1,291
$ 1,289
$ 1,286
$ 1,272
$ 1,278 $
6 $
Unaudited
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
1,383
1,336
1,320
1,222
1,219
1,421
1,188
1,148
1,415
1,474
1,158
1,132
1,306
1,499
1,601
1,146
1,114
1,286
1,479
1,538
1,558
1,143
1,119
1,271
1,469
1,518
1,704
1,678
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 2010, 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
9
10
(2)
3
16
23
31
76
148
462
47,625
48,985
44,096
43,932
52,060
57,667
59,637
55,694
45,564
25,179
1,134
1,102
1,260
1,478
1,476
1,697
1,642
1,650
1,131
1,096
1,240
1,452
1,451
1,702
1,634
1,654
1,248
(3)
(6)
(20)
(26)
(25)
5
(8)
4
$ 13,886 $
(73)
(11,335)
-
22
(28)
(7)
$ 2,573 $
(108)
* 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
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Years Ended December 31, (in millions)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
$
424 $
908 $
1,086 $
1,177 $
1,215 $
1,244 $
1,253 $
1,260 $
1,266
$
Unaudited
336
772
277
966
721
331
1,040
912
815
318
1,065
980
1,042
927
347
1,082
1,026
1,118
1,211
931
460
1,090
1,052
1,168
1,280
1,215
1,120
355
1,098
1,062
1,189
1,319
1,328
1,373
966
319
1,255
1,101
1,068
1,197
1,346
1,351
1,512
1,237
988
280
$
11,335
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
AIG | 2019 Form 10-K 273
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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 2019, we recognized $108 million of favorable prior year development in the Europe Property and Special Risks segment
driven by favorable development in Commercial Property and Specialty classes including aviation and marine.
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.
UK/Europe and Japan Personal Insurance
During 2019, we recognized $119 million of favorable prior year development in UK/Europe and Japan Personal Insurance,
net of external reinsurance.
During 2018, we recognized $116 million of favorable prior year development in UK/Europe and Japan Personal Insurance,
net of external reinsurance.
274 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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, (in millions)
December 31, 2019
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total of
IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
2019 Prior
Year
Development
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
$ 3,024
$ 3,072
$ 3,073
$ 3,061
$ 3,062
$ 3,057
$ 3,083
$ 3,063
$ 3,061
$
3,061 $
- $
Unaudited
3,332
3,394
2,933
3,360
2,916
2,780
3,361
2,897
2,779
2,738
3,350
2,882
2,745
2,748
2,806
3,353
2,891
2,745
2,730
2,780
2,755
3,345
2,881
2,740
2,727
2,783
2,748
2,693
3,344
2,877
2,736
2,718
2,772
2,734
2,609
3,396
3,343
2,876
2,733
2,718
2,769
2,726
2,590
3,312
2,466
(1)
(1)
(3)
-
(3)
(8)
(19)
(84)
3
4
5
7
10
17
31
64
196
404
Cumulative
Number of
Reported
Claims
1,820,113
1,778,510
1,730,216
1,735,489
1,793,862
1,773,628
1,798,299
1,715,573
1,848,711
1,708,106
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 2010, 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
$ 28,594 $
(119)
(26,676)
44
-
-
-
$
1,962 $
(119)
* 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
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Years Ended December 31, (in millions)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
$
1,737 $
2,547 $
2,796 $
2,908 $
2,967 $
3,001 $
3,021 $
3,032 $
3,040
$
Unaudited
2,031
2,846
1,642
3,085
2,402
1,527
3,200
2,634
2,279
1,498
3,264
2,743
2,500
2,253
1,516
3,293
2,800
2,608
2,478
2,291
1,517
3,310
2,830
2,665
2,590
2,516
2,254
1,482
3,320
2,848
2,695
2,648
2,637
2,475
2,208
1,895
3,047
3,325
2,856
2,709
2,672
2,681
2,582
2,401
2,920
1,483
$
26,676
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
AIG | 2019 Form 10-K 275
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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 2019, we recognized $119 million of favorable prior year development in UK/Europe and Japan Personal Insurance due to
favorable loss trends in personal auto and accident and health business.
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, we recognized $58 million of favorable development, mainly driven by the accident and health business.
U.S. Run-Off Long Tail Insurance Lines
During 2019, the U.S. Run-Off Long Tail Insurance Lines experienced favorable prior year development of $4 million, net of
external reinsurance.
During 2018, the U.S. Run-Off Long Tail Insurance Lines experienced favorable prior year development of $4 million, net of
external reinsurance.
276 AIG | 2019 Form 10-K
Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance*
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
Years Ended December 31, (in millions)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
December 31, 2019
Total of IBNR
Liabilities
Plus
Expected
Development
on Reported
Losses
Cumulative
Number of
Reported
Claims
2019 Prior
Year
Development
$
640
$
528
$
534
$
557
$
585
$
582
$
611
$
565
$
Unaudited
534
542
629
576
678
482
641
741
533
379
676
786
589
475
439
685
751
570
453
523
294
700
752
528
459
550
285
197
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
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 2010, 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
55
87
37
11
64
101
55
130
59
42
8,556
7,826
4,082
2,568
2,370
2,397
1,684
648
307
127
559
687
702
511
383
503
274
238
76
$
563 $
694
692
507
375
504
269
232
119
69
$ 4,024 $
(2,951)
3,362
4 $
7
(10)
(4)
(8)
1
(5)
(6)
43
22
-
(46)
20
$ 4,435 $
(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
2010
2011
2012
2013
2014
Unaudited
2015
2016
2017
2018
2019
Years Ended December 31, (in millions)
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
$
57 $
149 $
21
243 $
140
86
321 $
259
194
87
404 $
385
286
154
21
435 $
449
414
261
96
35
455 $
532
481
321
185
132
53
464 $
549
498
368
233
238
140
13
473 $
559
525
390
262
320
163
59
33
$
487
578
534
414
268
337
178
84
47
24
2,951
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
AIG | 2019 Form 10-K 277
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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
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.
278 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . 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 2019, the U.S. Run-Off Long Tail Insurance Lines recognized $4 million of favorable prior year development with unfavorable
development on pre-1986 pollution business offset by favorable development in Excess Workers Compensation.
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.
Asbestos and Environmental (1986 and prior)
In 2019, 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 $1 million on a gross basis, but had no net impact. For environmental, we recognized
approximately $95 million in unfavorable prior year development as a result of adverse claim emergence and top-down actuarial
analyses performed during the year.
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.
Excess Workers’ Compensation
During 2019, we recognized favorable development in this segment during 2019 of approximately $100 million in recognition of
favorable trends seen over the last three years. There were no changes during 2018 or 2017. The proactive management of
settlement negotiations and other claims mitigation strategies minimized the volatility observed during this period.
Other Casualty Run-Off
During 2019, prior year development was flat across these segments.
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.
AIG | 2019 Form 10-K 279
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
The table below presents the reconciliation of change in net ultimates from tables above to prior year development for the
year ended December 31, 2019:
(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)
(192)
$
Re-Attribution of
ADC Recovery(b)
(178)
$
Amortization of
Deferred Gain at
Inception
Prior Year
Development
26
188
326
(288)
(85)
161
(108)
(119)
(4)
33
$
$
(72)
(55)
(53)
(37)
(13)
(2)
-
-
-
-
-
$
(232)
$
55
25
1
114
(17)
-
-
-
-
-
-
(442)
26
160
290
(187)
(104)
161
(108)
(119)
(4)
33
(294)
232
(1)
(277)
(340)
Subtotal, adjusted pre-tax basis
$
(62)
$
Remove impact of Retroactive Reinsurance
Amortization of deferred gain at inception
Prior year development ceded under the Asbestos LPT
Prior year development ceded under the ADC
Total, prior years, excluding discount and amortization of deferred gain
$
(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
ADC, both of which are provided by NICO and are considered retroactive reinsurance under U.S. 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.
280 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
Development on earlier Accident Years
The following table summarizes (favorable) unfavorable development, of incurred losses and loss adjustment expenses on
accident years beyond the 10 years shown in the previous section’s development triangles by operating segment and major
class of business:
Years Ended December 31,
(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)
All Other including unallocated loss adjustment expenses
Total prior year (favorable) unfavorable development
Claims Payout Patterns
2019
(210) $
54
(170)
11
(3)
1
9
(28)
-
(46)
116
(266) $
2018
153 $
537
129
(1)
39
2
1
3
9
154
137
1,163 $
2017
(7)
164
(8)
(34)
11
9
169
(6)
3
(44)
178
435
$
$
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
13.8 % 17.4 % 12.5 %
8.5 %
6.9 %
4.6 %
3.3 %
2.3 %
1.7 %
1.5 %
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
0.7
8.6
4.2
30.6
58.6
7.9
25.1
57.1
14.2
8.2
14.8
18.0
35.2
29.8
16.9
39.4
27.4
18.4
11.3
15.5
21.6
13.5
5.1
13.6
17.2
7.9
16.6
14.2
15.1
16.7
8.0
2.1
13.0
6.7
3.9
13.8
12.8
12.5
13.1
5.2
1.2
9.9
2.9
1.9
9.0
11.1
8.6
8.7
3.7
0.6
7.7
1.9
1.0
5.1
8.2
6.1
5.4
1.5
0.3
6.7
0.7
0.6
3.7
8.3
3.2
5.0
1.0
0.2
4.3
0.6
0.3
1.5
2.7
3.2
1.4
0.7
0.1
2.5
0.4
0.2
2.2
1.4
1.6
1.7
0.5
0.1
3.8
(0.9)
0.2
2.5
DISCOUNTING OF LOSS RESERVES
At December 31, 2019, the loss reserves reflect a net loss reserve discount of $1.5 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.
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 our 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.
AIG | 2019 Form 10-K 281
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
In 2013 and in 2014, our Pennsylvania and Delaware regulators, respectively, 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 and Delaware-
domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers compensation
portfolios.
The discount consists of $582 million and $603 million of tabular discount, and $967 million and $1.4 billion of non-tabular discount for
workers’ compensation at December 31, 2019 and 2018, respectively. During the years ended December 31, 2019, 2018, and 2017
the benefit/(charge) from changes in discount of $(955) million, $371 million and ($187) million, respectively, were recorded as part of
the policyholder benefits and losses incurred in the Consolidated Statement of Income.
The following table presents the components of the loss reserve discount discussed above:
(in millions)
U.S. workers' compensation
Retroactive reinsurance
Total reserve discount*
$
$
December 31, 2019
December 31, 2018
North America
Commercial
Insurance
2,134 $
(1,251)
883 $
Legacy
Portfolio
666 $
-
666 $
Total
2,800
(1,251)
1,549
$
$
North America
Commercial
Insurance
2,782 $
(1,720)
1,062 $
Legacy
Portfolio
973 $
-
973 $
Total
3,755
(1,720)
2,035
* Excludes $172 million and $163 million of discount related to certain long tail liabilities in the United Kingdom at December 31, 2019 and 2018, respectively.
The following table presents the net loss reserve discount benefit (charge):
Years Ended December 31,
2019
2018
North
America
Commercial
Legacy
Insurance Portfolio
$
108 $
Total
- $ 108
North
America
Commercial
Legacy
Insurance Portfolio
$
119 $
Total
- $ 119
2017
North
America
Commercial
Legacy
Insurance Portfolio
$
114 $
- $
(229)
(527)
(87)
(220)
(316)
(747)
(108)
305
(58)
113
(166)
418
(186)
(46)
(44)
(25)
Total
114
(230)
(71)
(648)
(307)
(955)
316
55
371
(118)
(69)
(187)
469
-
469
(180)
-
(180)
(1,539)
-
(1,539)
$
(179) $
(307) $ (486) $
136 $
55 $ 191
$
(1,657) $
(69) $ (1,726)
(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*
* Excludes $9 million and $(9) million of discount related to certain long tail liabilities in the United Kingdom at December 31, 2019 and 2018, respectively.
During 2019, 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 changes in payout pattern assumptions. This resulted in a decrease in the loss reserve
discount by $747 million in 2019.
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, 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.
282 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
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 15 herein.
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 0.2 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, 2019, 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 15 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. The policyholder behavior assumptions for these liabilities include mortality, lapses and premium persistency.
The capital market assumptions used for the liability for universal life secondary guarantees include discount rates and net earned
rates.
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 | 2019 Form 10-K 283
The following table presents universal life policies with secondary guarantees and similar features (excluding base policy
liabilities and embedded derivatives):
ITEM 8 | Notes to Consolidated Financial Statements | 14 . In sur a nc e Li ab ili ti es
(in millions)
Balance, beginning of year
Incurred guaranteed benefits*
Paid guaranteed benefits
Balance, end of year
Years Ended December 31,
2019
2,640 $
514
(469)
2,685 $
2018
2,351 $
758
(469)
2,640 $
2017
2,095
705
(449)
2,351
$
$
*
Incurred guaranteed benefits include the portion of assessments established as additions to reserves as well as changes in estimates (assumption unlockings) affecting
these reserves.
The following table presents details concerning our Universal life policies with secondary guarantees and similar features,
by benefit type:
At December 31,
(dollars in millions)
Account value
Net amount at risk
Average attained age of contract holders
The following table presents Policyholder contract deposits by product line:
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
$
2019
2,850 $
59,924
54
2018
2,665
54,161
55
2019
2018
$
$
50,452 $
42,207
13,930
30,878
9,929
4,473
151,869 $
49,695
41,212
12,829
24,378
9,497
4,651
142,262
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 1.3 percent of gross insurance in
force at December 31, 2019 and 1.8 percent of gross domestic premiums and other considerations in 2019. 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.
284 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 15 . V a ria bl e Li fe a n d An n ui t y C o n tra ct s
15. 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
2019
$ 51,383
7,881
26,659
765
$ 86,688
2018
$ 43,059
7,231
24,100
787
$ 75,177
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 | 2019 Form 10-K 285
ITEM 8 | Notes to Consolidated Financial Statements | 15 . 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
$
2019
Net Deposits
Plus a Minimum
Return
98 $
1
65
0-4.5%
Highest Contract
Value Attained
16
-
71
$
2018
Net Deposits
Plus a Minimum
Return
89 $
1
63
0-4.5%
Highest Contract
Value Attained
15
1
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
2019
397
35
(40)
15
407
$
$
2018
352
93
(43)
(5)
397
$
$
2017
402
(14)
(42)
6
352
$
$
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, based on stochastically generated scenarios; 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 $2.5 billion and $1.9 billion at December 31, 2019 and 2018, respectively.
For a discussion of the fair value measurement of guaranteed benefits that are accounted for as embedded derivatives see Note 6
herein.
We had account values subject to GMWB that totaled $45 billion and $41 billion at December 31, 2019 and 2018, 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 $328 million and
$215 million at December 31, 2019 and 2018, respectively. We use derivative instruments and other financial instruments to mitigate
a portion of our exposure that arises from GMWB benefits.
286 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 16 . De b t
16. 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, 2019 and 2018. The interest rates presented in the
following table are the range of contractual rates in effect at December 31, 2019, including fixed and variable-rates:
At December 31, 2019
(in millions)
Debt issued or guaranteed by AIG:
AIG general borrowings:
Notes and bonds payable
Junior subordinated debt
AIG Japan Holdings Kabushiki Kaisha
AIGLH notes and bonds payable
AIGLH junior subordinated debt
Validus notes and bonds payable
Total AIG general borrowings
AIG borrowings supported by assets:(a)
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 and mortgages
payable - not guaranteed by AIG
Total long-term debt
Range of
Interest Rate(s)
Maturity
Date(s)
Balance at
Balance at
December 31,
December 31,
2019
2018
0% - 8.13%
4.88% - 8.63%
2020 - 2097 $
2037 - 2058
20,467
1,542
$
20,853
1,548
0.28% - 0.44%
2020 - 2021
6.63% - 7.50%
2025 - 2029
7.57% - 8.50%
2030 - 2046
8.88%
2040
1.89% - 1.92%
2046 - 2047
1.79% - 7.62%
2020 - 2047
0.50% - 10.37%
2030 - 2040
2.76% - 3.86%
2020 - 2028
344
282
361
353
23,349
21
2,003
59
2,083
25,432
47
25,479
9,871
35,350
$
331
282
361
359
23,734
21
2,164
49
2,234
25,968
168
26,136
8,404
34,540
Debt of consolidated investment entities - not guaranteed by AIG(b)
0% - 9.31%
2020 - 2062
Total debt
$
(a) AIG Parent guarantees all such debt, except for Series AIGFP matched notes and bonds payable, which are direct obligations of AIG Parent. Collateral posted to third
parties was $1.5 billion at both December 31, 2019 and December 31, 2018. This collateral primarily consists of securities of the U.S. government and government
sponsored entities and generally cannot be repledged or resold by the counterparties.
(b) At December 31, 2019, includes debt of consolidated investment entities related to real estate investments of $3.2 billion, affordable housing partnership investments of
$2.1 billion and other securitization vehicles of $4.6 billion. At December 31, 2018, includes debt of consolidated investment entities related to real estate investments of
$3.7 billion, affordable housing partnership investments of $1.8 billion and other securitization vehicles of $2.9 billion.
AIG | 2019 Form 10-K 287
13,504
1,542
-
282
361
353
16,042
21
1,508
59
1,588
17,630
5
5
17,635
The following table presents maturities of long-term debt (including unamortized original issue discount, hedge accounting
valuation adjustments and fair value adjustments, when applicable):
ITEM 8 | Notes to Consolidated Financial Statements | 16 . De b t
Total
2020
2021
2022
2023
2024
Thereafter
Year Ending
December 31, 2019
(in millions)
Debt issued or guaranteed by AIG:
AIG general borrowings:
Notes and bonds payable
Junior subordinated debt
AIG Japan Holdings Kabushiki Kaisha
AIGLH notes and bonds payable
AIGLH junior subordinated debt
Validus notes and bonds payable
Total AIG general borrowings
AIG borrowings supported by assets:
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
$
20,467 $ 1,346 $ 1,498 $ 1,511 $ 1,610 $
1,542
344
282
361
353
23,349
21
2,003
59
2,083
25,432
-
119
-
-
-
1,465
-
34
-
34
1,499
-
225
-
-
-
1,723
-
151
-
151
1,874
-
-
-
-
-
1,511
-
50
-
50
1,561
-
-
-
-
-
1,610
-
121
-
121
1,731
998 $
-
-
-
-
-
998
-
139
-
139
1,137
and mortgages payable
Total debt not guaranteed by AIG
Total
47
47
37
37
2
2
1
1
1
1
1
1
$
25,479 $ 1,536 $ 1,876 $ 1,562 $ 1,732 $ 1,138 $
Uncollateralized and collateralized notes, bonds, loans and mortgages payable consisted of the following:
At December 31, 2019
(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
344 $
1
345 $
- $
46
46 $
Total
344
47
391
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, 2019, 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, 2019
(in millions)
Syndicated Credit Facility
288 AIG | 2019 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 | 17 . 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
17. 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 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 may 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, indemnification 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 as 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. Such investigations, inquiries or examinations could develop into administrative, civil or
criminal proceedings or enforcement actions, in which remedies could include fines, penalties, restitution or alterations in our business
practices, and could result in additional expenses, limitations on certain business activities and reputational damage. For example,
among other matters, we are currently responding to governmental investigations and examinations pertaining to certain sales and
compensation practices and payments and related disclosures in connection with financial planning services and the sale and
distribution of related products, including 403(b) and similar retirement plans, by the Individual and Group Retirement business
segments. We have cooperated, and will continue to cooperate, in producing documents and other information with respect to these
matters.
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.
AIG | 2019 Form 10-K 289
ITEM 8 | Notes to Consolidated Financial Statements | 17 . 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
LEASE COMMITMENTS
We lease office space and equipment in various locations across jurisdictions in which the Company operates. The majority of the
resulting obligation arising from these contracts is generated by our real estate portfolio, which only includes contracts classified as
operating leases. As of December 31, 2019, the lease liability and corresponding right of use asset reflected in Other Liabilities and
Other Assets were $733 million and $648 million, respectively, and we made cash payments of $248 million in 2019 in connection with
these leases. The liability includes non-lease components, such as property taxes and insurance for our gross leases. Some of these
leases contain options to renew after a specified period of time at the prevailing market rate; however, renewal options that have not
been exercised as of December 31, 2019 are excluded until management attains a reasonable level of certainty. Some leases also
include termination options at specified times and term; however, termination options are not reflected in the lease asset and liability
balances until they have been exercised.
The weighted average discount rate and lease term assumptions used in determining the liability are 3.21 percent and 4.9 years,
respectively. The primary assumption used to determine the discount rate is the cost of funding for the Company, which is based on
the secured borrowing rate for terms similar to the lease term, and for the major financial markets in which AIG operates.
Rent expense was $232 million, $283 million and $269 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The following table presents the future undiscounted cash flows under operating leases at December 31, 2019; the primary
difference between our undiscounted cash flows and the recognized lease liability is interest expense:
(in millions)
2020
2021
2022
2023
2024
Remaining years after 2024
Total
$
$
250
186
108
84
64
165
857
During 2019, we recognized a pretax net gain of $200 million from the sale and concurrent leaseback of our corporate headquarters.
The company also procured additional office space via operating lease contracts for which lease commencement will occur in 2020.
Future undiscounted obligations stemming from those contracts total $507 million, which excludes the effect of renewal options.
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 $7.4 billion at December 31, 2019.
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, Inc. (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,
2019 was $81 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.
290 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 17 . 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
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 11 herein.
For additional disclosures about derivatives see Note 12 herein.
For additional disclosures about guarantees of outstanding debt of Validus and AIGLH see Note 25 herein.
18. Equity
SHARES OUTSTANDING
Preferred Stock
On March 14, 2019, we issued 20,000 shares of Series A 5.85% Non-Cumulative Perpetual Preferred Stock (Series A Preferred
Stock) (equivalent to 20,000,000 Depositary Shares, each representing a 1/1,000th interest in a share of Series A Preferred Stock),
$5.00 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). After underwriting discounts
and expenses, we received net proceeds of approximately $485 million.
We may redeem the Series A Preferred Stock at our option, (a) in whole, but not in part, at any time prior to March 15, 2024, within 90
days after the occurrence of a “Rating Agency Event,” at a redemption price equal to $25,500 per share of the Series A Preferred
Stock (equivalent to $25.50 per Depositary Share), plus an amount equal to any dividends per share that have been declared but not
paid prior to the redemption date (but no amount due in respect of any dividends that have not been declared prior to such date), or
(b) (i) in whole, but not in part, at any time prior to March 15, 2024, within 90 days after the occurrence of a “Regulatory Capital
Event,” or (ii) in whole or in part, from time to time, on or after March 15, 2024, in each case, at a redemption price equal to $25,000
per share of the Series A Preferred Stock (equivalent to $25.00 per Depositary Share), plus an amount equal to any dividends per
share that have been declared but not paid prior to the redemption date (but no amount due in respect of any dividends that have not
been declared prior to such date).
A “Rating Agency Event” is generally defined to mean that any nationally recognized statistical rating organization within the meaning
of Section 3(a)(62) of the Exchange Act that then publishes a rating for us amends, clarifies or changes the criteria it uses to assign
equity credit to securities such as the Series A Preferred Stock, which amendment, clarification or change results in the shortening of
the length of time the Series A Preferred Stock is assigned a particular level of equity credit by that rating agency as compared to the
length of time it would have been assigned that level of equity credit by that rating agency or its predecessor on the initial issuance of
the Series A Preferred Stock, or the lowering of the equity credit (including up to a lesser amount) assigned to the Series A Preferred
Stock by that rating agency as compared to the equity credit assigned by that rating agency or its predecessor on the initial issuance
of the Series A Preferred Stock. A “Regulatory Capital Event” is generally defined to mean our good faith determination that as a result
AIG | 2019 Form 10-K 291
ITEM 8 | Notes to Consolidated Financial Statements | 18 . E q ui t y
of a change in law, rule or regulation, or a proposed change or an official judicial or administrative pronouncement, there is more than
an insubstantial risk that the full liquidation preference of the Series A Preferred Stock would not qualify as capital (or a substantially
similar concept) for purposes of any group capital standard to which we are or will be subject.
Holders of the Series A Preferred Stock will be entitled to receive dividend payments only when, as and if declared by our board of
directors (or a duly authorized committee of the board). Dividends will be payable from the original date of issue at a rate of 5.85% per
annum, payable quarterly, in arrears, on the fifteenth day of March, June, September and December of each year, beginning on June
15, 2019. Dividends on the Series A Preferred Stock will be non-cumulative.
On May 21, 2019, our Board of Directors declared a cash dividend of $369.6875 per share on AIG’s Series A Preferred Stock. Holders
of Depositary Shares each representing a 1/1,000th interest in a share of Series A Preferred Stock received $0.3696875 per
Depositary Share. The dividend was paid on June 17, 2019 to holders of record at the close of business on May 31, 2019.
On August 7, 2019, our Board of Directors declared a cash dividend of $365.625 per share on AIG’s Series A Preferred Stock.
Holders of Depositary Shares each representing a 1/1,000th interest in a share of Series A Preferred Stock received $0.365625 per
Depositary Share. The dividend was paid on September 16, 2019 to holders of record at the close of business on August 30, 2019.
On October 31, 2019, our Board of Directors declared a cash dividend of $365.625 per share on AIG’s Series A Preferred Stock.
Holders of Depositary Shares each representing a 1/1,000th interest in a share of Series A Preferred Stock received $0.365625 per
Depositary Share. The dividend was paid on December 16, 2019 to holders of record at the close of business on November 29, 2019.
In the event of any liquidation, dissolution or winding-up of the affairs of AIG, whether voluntary or involuntary, before any distribution
or payment out of our assets may be made to or set aside for the holders of any junior stock, holders of the Series A Preferred Stock
will be entitled to receive out of our assets legally available for distribution to our stockholders, an amount equal to $25,000 per share
of Series A Preferred Stock (equivalent to $25.00 per Depositary Share), together with an amount equal to all declared and unpaid
dividends (if any), but no amount in respect of any undeclared dividends prior to such payment date. Distributions will be made only to
the extent of our assets that are available for distribution to stockholders (i.e., after satisfaction of all our liabilities to creditors, if any).
The Series A Preferred Stock does not have voting rights, except in limited circumstances, including in the case of certain dividend
non-payments.
Common Stock
The following table presents a rollforward of outstanding shares:
Common
Stock Issued
Treasury
Common Stock
Stock
Outstanding
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
1,906,671,492
(1,040,062,063)
866,609,429
-
-
3,389,602
3,389,602
-
-
1,906,671,492
(1,036,672,461)
869,999,031
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
Year Ended December 31, 2019
Shares, beginning of year
Shares issued
Shares repurchased
Shares, end of year
292 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 18 . 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 payment of dividends is also subject to the terms of AIG’s outstanding
Series A Preferred Stock, pursuant to which no dividends may be declared or paid on any AIG Common Stock unless the full
dividends for the latest completed dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid
or provided for.
The following table presents declaration date, record date, payment date and dividends paid per common share on AIG
Common Stock:
Declaration Date
October 31, 2019
August 7, 2019
May 6, 2019
February 13, 2019
October 31, 2018
August 2, 2018
May 2, 2018
February 8, 2018
November 2, 2017
August 2, 2017
May 3, 2017
February 14, 2017
Record Date
December 12, 2019
September 17, 2019
June 14, 2019
March 15, 2019
Payment Date
December 26, 2019
September 30, 2019
June 28, 2019
March 29, 2019
December 12, 2018
September 17, 2018
June 14, 2018
March 15, 2018
December 26, 2018
September 28, 2018
June 28, 2018
March 29, 2018
December 8, 2017
September 15, 2017
June 14, 2017
March 15, 2017
December 22, 2017
September 29, 2017
June 28, 2017
March 29, 2017
REPURCHASE OF AIG COMMON STOCK
$
Dividends Paid
Per Common 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*
$
$
2019
- $
-
- $
-
2018
1,739 $
37
11 $
1
2017
6,275
100
3
-
*
In 2019, we did not repurchase any warrants to purchase shares of AIG Common Stock. 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 February 13, 2019, our Board of Directors authorized an additional increase of
approximately $1.5 billion to its previous share repurchase authorization. As of December 31, 2019, approximately $2.0 billion
remained under our share repurchase authorization. Shares may be repurchased from time to time in the open market, private
purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise (including through
the purchase of warrants). Certain of our share repurchases have been and may from time to time be effected through Exchange Act
Rule 10b5-1 repurchase plans.
We did not repurchase any shares of AIG Common Stock during 2019. 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. The repurchase of
AIG Common Stock is also subject to the terms of AIG’s outstanding Series A Preferred Stock, pursuant to which AIG may not (other
than in limited circumstances) purchase, redeem or otherwise acquire AIG Common Stock unless the full dividends for the latest
completed dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid or provided for.
AIG | 2019 Form 10-K 293
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents a rollforward of Accumulated other comprehensive income (loss):
ITEM 8 | Notes to Consolidated Financial Statements | 18 . 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, 2017, net of tax
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 loss
Change in prior service cost
Change in deferred tax asset (liability)
Total other comprehensive income
Noncontrolling interests
$
426 $
6,405 $
(2,629) $
(972) $
- $
3,230
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) $
Cumulative effect of change in accounting principles
169
(285)
(284)
(183)
- $
5,465
7
(576)
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
(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)
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 loss
Change in prior service credit
842
13,333
15
-
-
-
-
(1,871)
(4,462)
-
-
-
Change in deferred tax asset (liability)
(196)
(1,311)
Change in fair value of liabilities under fair value
option attributable to changes in own credit risk
Total other comprehensive income (loss)
Noncontrolling interests
-
661
-
-
5,689
16
-
-
-
135
-
-
(31)
-
104
4
-
-
-
-
(58)
(2)
24
-
(36)
-
-
-
-
-
-
-
-
(3)
(3)
-
14,175
(1,856)
(4,462)
135
(58)
(2)
(1,514)
(3)
6,415
20
Balance, December 31, 2019, net of tax
$
623 $
8,099 $
(2,625) $
(1,122) $
7 $
4,982
*
Includes net unrealized gains and losses attributable to businesses held for sale at December 31, 2019 and December 31, 2017.
294 AIG | 2019 Form 10-K
The following table presents the other comprehensive income (loss) reclassification adjustments for the years ended
December 31, 2019, 2018 and 2017:
ITEM 8 | Notes to Consolidated Financial Statements | 18 . 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, 2017
Unrealized change arising during period
$
467 $
2,052 $
547 $
24 $
- $
3,090
Less: Reclassification adjustments
included in net income
Total other comprehensive income,
before income tax expense (benefit)
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 expense (benefit)
Less: Income tax expense (benefit)
Total other comprehensive income (loss),
net of income tax expense (benefit)
December 31, 2019
Unrealized change arising during period
Less: Reclassification adjustments
included in net income
Total other comprehensive income (loss),
before income tax expense (benefit)
Less: Income tax expense (benefit)
Total other comprehensive income (loss),
$
$
$
$
50
417
50
768
-
(95)
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)
-
(34)
(1,377)
(377)
(5,677)
(702)
(314)
35
(27)
(55)
-
3
-
(163)
(7,392)
(1,099)
(1,000) $
(4,975) $
(349) $
28 $
3 $
(6,293)
853 $
7,324 $
135 $
(97) $
(3) $
8,212
(4)
324
857
196
7,000
1,311
-
135
31
(37)
(60)
(24)
-
283
(3)
-
7,929
1,514
net of income tax expense (benefit)
$
661 $
5,689 $
104 $
(36) $
(3) $
6,415
AIG | 2019 Form 10-K 295
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:
ITEM 8 | Notes to Consolidated Financial Statements | 18 . E q ui t y
Years Ended December 31,
(in millions)
Unrealized appreciation (depreciation) of fixed
maturity securities on which other-than-temporary
credit impairments were taken
Amount Reclassified
from Accumulated Other
Comprehensive Income
2019
2018
2017
Affected Line Item in the
Consolidated Statements of Income
Investments
Total
$
(4) $
(4)
5 $
5
50 Other realized capital gains
50
Unrealized appreciation (depreciation) of all other
investments
Investments
Deferred acquisition costs adjustment
Future policy benefits
Total
Change in retirement plan liabilities adjustment
324
-
-
324
(134)
-
-
(134)
463 Other realized capital gains
305
-
768
Amortization of deferred policy acquisition costs
Policyholder benefits and losses incurred
Prior-service credit
Actuarial losses
Total
Total reclassifications for the year
-
(37)
(37)
283 $
1
(35)
(34)
(163) $
5
(100)
(95)
723
*
*
$
* These Accumulated other comprehensive income components are included in the computation of net periodic pension cost. For additional information see Note 22
herein.
296 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 19 . E a rni n gs P er C o m mo n S har e
19. Earnings Per Common 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 common share data)
Numerator for EPS:
Income (loss) from continuing operations
Less: Net income from continuing operations attributable to noncontrolling interests
Less: Preferred stock dividends
Income (loss) attributable to AIG common shareholders from continuing operations
Income (loss) from discontinued operations, net of income tax expense
Net income (loss) attributable to AIG common shareholders
Denominator for EPS:
Weighted average common shares outstanding — basic
Dilutive common shares
Weighted average common shares outstanding — diluted(a)(b)
Income (loss) per common share attributable to AIG common shareholders:
Basic:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Income (loss) attributable to AIG common shareholders
Diluted:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Income (loss) attributable to AIG common shareholders
2019
2018
2017
4,121 $
821
22
3,278
48
3,326 $
103 $
(6,060)
67
-
36
(42)
(6) $
28
-
(6,088)
4
(6,084)
876,750,264
12,761,682
889,511,946
898,405,537
930,561,286
11,735,705
-
910,141,242
930,561,286
3.74 $
0.05 $
3.79 $
3.69 $
0.05 $
3.74 $
0.04 $
(0.05) $
(0.01) $
0.04 $
(0.05) $
(0.01) $
(6.54)
-
(6.54)
(6.54)
-
(6.54)
$
$
$
$
$
$
$
$
(a) Shares in the diluted EPS calculation represent basic shares for 2017 due to the net loss in that period. The number of common shares excluded from the calculation
was 22,412,682 shares.
(b) Dilutive shares included our share-based employee compensation plans and a weighted average portion of the 10-year warrants issued to AIG shareholders as part of
AIG’s recapitalization in January 2011. The number of shares excluded from diluted shares outstanding were 20.0 million, 19.6 million and 1.7 million for the years
ended December 31, 2019, 2018 and 2017, respectively, because the effect of including those shares in the calculation would have been anti-dilutive.
AIG | 2019 Form 10-K 297
ITEM 8 | Notes to Consolidated Financial Statements | 20 . 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
20. 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
2019
2018
2017
$
$
$
$
$
$
$
$
$
$
$
$
1,482 $
1,382
2,864 $
310 $
3,356
3,666 $
17,433 $
16,230
33,663 $
9,227 $
5,264
14,491 $
4,178 $
8,645
12,823 $
3,383 $
1,229
4,612 $
(1,030) $
558
(472) $
671 $
(553)
118 $
(978)
(318)
(1,296)
1,066
21
1,087
17,435
15,709
33,144
9,454
1,809
11,263
4,393
8,456
12,849
3,301
1,159
4,460
(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) The 2019 amounts reflect our best estimate of the statutory net income, capital and surplus as of the date of AIG’s Form 10-K filing. In aggregate, the 2018 General
Insurance companies and Life and Retirement companies statutory net income increased by $1.1 billion and the 2018 General Insurance companies and Life and
Retirement companies statutory capital and surplus decreased by $1.4 billion, compared to the amounts previously reported in our Annual Report on Form 10-K for the
year ended December 31, 2018, due to finalization of statutory filings and revision of prior period number presented herein.
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, 2019
and 2018, 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.
298 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 20 . 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, 2019 and 2018, 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 at December 31, 2018. This permitted practice expired for periods after
September 30, 2019 and was not renewed.
Effective December 31, 2019 and subsequent reporting periods through September 30, 2020, a domestic life insurance subsidiary
domiciled in Texas adopted a permitted statutory accounting practice to recognize an admitted asset related to the notional value
of coverage defined in an excess of loss (XoL) reinsurance agreement, net of specified amounts. This reinsurance agreement has
a 20 year term and provides coverage to the subsidiary for aggregate claims incurred during the agreement term associated with
guaranteed minimum withdrawal benefits on certain fixed index annuities exceeding an attachment point defined in the treaty. The
permitted practice allows the subsidiary to manage its reserves in a manner more in line with anticipated principle-based reserving
requirements once they have been developed. This permitted practice resulted in an increase in the statutory surplus of this
subsidiary of approximately $285 million at December 31, 2019. The subsidiary may seek continuation of the permitted practice
beyond September 30, 2020, subject to the approval of its domiciliary regulator.
As described in Note 14, 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.
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, 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.
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.
This reinsurance arrangement does not meet the criteria for reinsurance accounting under U.S. GAAP; therefore, deposit accounting
is applied by the assuming off-shore life insurer. 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 9 herein.
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 $44.1 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, 2019.
To our knowledge, no AIG insurance company is currently on any regulatory or similar “watch list” with regard to solvency.
AIG | 2019 Form 10-K 299
ITEM 8 | Notes to Consolidated Financial Statements | 20 . 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, 2019, 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 18 herein.
21. 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)
$
2019
314 $
248
2018
337 $
266
2017
353
229
(a) As a result of accelerated vesting events, such as retirement eligibility in the year of grant and involuntary terminations, we recognized $82 million, $104 million and
$196 million in 2019, 2018 and 2017, respectively, prior to the end of the specified vesting periods. It is our policy to reverse compensation expense for forfeited awards
when they occur.
(b) We also recognized $27 million of additional tax expense due to share settlements occurring in 2019.
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 2019, performance share units (PSUs), restricted stock units (RSUs), stock options and deferred stock units (DSUs)
(collectively, units) were granted under the Omnibus Plan and 31,537,171 shares are available for future grants as of December 31,
2019. 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
Long-Term Incentive 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
2019, 2018 and 2017 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.
300 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 21 . 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 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 %
(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, $12 million in 2019 and the remainder will be recognized through December 2020.
During the third quarter of 2019, we added a modifier to the 2019 performance share units awarded to certain senior executives to
cap payout at 100 percent of target if our total shareholder return for the three-year performance period is below peer median. We did
not recognize any incremental compensation expense as a result of this modification.
The following table summarizes outstanding share-settled LTI awards(a):
As of or for the Year
Ended December 31, 2019(b)
Unvested, beginning of year
Granted
Vested(c)
Forfeited(d)
Unvested, end of year(e)
Number of Units
Weighted Average
Grant-Date Fair Value
2019 LTI
2018 LTI
2017 LTI
- 3,322,028 1,579,995
-
5,499
(529,576)
(540,580)
(140,957) (1,039,415)
2016 LTI
640,660
-
456,396
(873,692)
2015 LTI
272,332
-
(250,708)
(21,624)
2019 LTI 2018 LTI 2017 LTI 2016 LTI 2015 LTI
- $ 55.32 $ 62.32 $ 61.55 $ 60.51
$
-
-
60.51
64.22
60.40
64.97
-
53.85
50.88
47.57
55.72
55.47
44.81
44.39
44.28
6,185,729
(1,445,746)
(216,085)
4,523,898 2,656,994
-
223,364
-
$ 44.98 $ 55.21 $
- $ 62.14 $
-
(a) Excludes stock options, other RSUs and DSUs, which are discussed under Stock Options, Other RSU Grants and Non-Employee Plan, respectively.
(b) Except for the 2015 LTI, 2016 LTI and 2017 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 by the CMRC 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) Includes PSUs for which the performance metric was not met at the end of the performance period.
(e) At December 31, 2019, the total unrecognized compensation cost for outstanding RSUs and PSUs was $203 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.
AIG | 2019 Form 10-K 301
ITEM 8 | Notes to Consolidated Financial Statements | 21 . S h are - Ba se d C o m pe ns a ti o n Pla ns
Stock Options
Stock options were issued in 2019 and 2018 as part of the 2019 and 2018 LTI awards, and in 2017 and 2018 to certain newly hired
senior executives. Option awards are generally granted with an exercise price equal to the market price of the company’s stock on the
grant date. 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)
2019
2.86 %
23.17 %
2.47 %
6.38 years
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 from the date of grant.
The following table provides a rollforward of stock option activity:
As of or for the Year
Ended December 31, 2019
Weighted Average
Remaining
Intrinsic Values
Units
Exercise Price
Contractual Life
(in millions)
Weighted Average
Aggregate
Outstanding, beginning of year
5,205,799
$
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year
3,235,290
(36,194)
(39,004)
8,365,891
1,330,226
$
$
58.99
44.89
47.61
44.28
53.66
57.28
7.38
7.65
3.53
$
$
22
1
The weighted average grant-date fair value of stock options granted during 2019, 2018 and 2017 was $10.01, $11.08 and $10.54,
respectively. As of December 31, 2019, we recognized $28.1 million of expense, while $22 million was unrecognized and is expected
to be amortized up to 2.00 years.
Other RSU Grants
The Company may issue time-vesting RSUs for various reasons including, as a sign-on bonus, retention grant or replacement award
in an acquisition. Vesting for these awards generally ranges from 1 to 3 years and is contingent on continuous service.
The following table summarizes outstanding share-settled RSU grants.
As of or for the Year
Ended December 31,
Unvested, beginning of year
Granted
Vested
Forfeited
Unvested, end of year
Number of Units
2019
1,634,610
399,779
(774,350)
(28,854)
1,231,185
2018
595,250
1,385,929
(342,481)
(4,088)
1,634,610
2017
-
869,241
(273,991)
-
595,250
Weighted Average
Grant-Date Fair Value
2019
56.11 $
52.40
57.32
55.23
54.17 $
2018
62.93 $
54.07
59.68
60.31
56.11 $
2017
-
63.02
63.21
-
62.93
$
$
We recognized $41.6 million of expense related to these RSU grants in 2019. Total unrecognized compensation cost related to these
grants was $35 million and the weighted-average and expected period of years over which that cost is expected to be recognized are
0.88 years and 3.25 years at December 31, 2019.
302 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 21 . S h are - Ba se d C o m pe ns a ti o n Pla ns
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 2019, 2018 and 2017 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 2019, 2018 and 2017, we granted to non-employee directors 49,706, 39,092 and 32,067 DSUs, respectively,
under the 2013 Plan, and recognized expense of $2.6 million, $2.1 million and $2.0 million, respectively.
22. Employee Benefits
PENSION PLANS
We offer various defined benefit plans to eligible employees. 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.
The U.S. AIG Retirement Plan (the qualified plan) is a noncontributory defined benefit plan subject to the provisions of ERISA. In
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. Although benefits are frozen, these interest credits
continue to accrue on the cash balance accounts of active participants, who also accrue years of service for purposes of early
retirement eligibility and subsidies. Employees can take their vested benefits when they leave AIG as a lump sum or an annuity
option.
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. 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.
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.
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.
POSTRETIREMENT PLANS
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, which was reduced to 5 years in 2019 for medical coverage only. Eligible employees who have medical
coverage can enroll in retiree medical upon termination of employment. Medical benefits are contributory, while the life insurance
benefits, which are closed to new employees, are generally 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 retiree contributions are subject
to annual adjustments. Other cost sharing features of the medical plan include deductibles, coinsurance, Medicare coordination, and
an employer subsidy for grandfathered employees only.
Postretirement benefits are offered in certain non-U.S. countries and vary by geographic location.
AIG | 2019 Form 10-K 303
ITEM 8 | Notes to Consolidated Financial Statements | 22 . 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
Pension
Postretirement
U.S. Plans(a)(b)
2019
2018
Non-U.S. Plans(a)
2019
2018
U.S. Plans
2019
2018
Non-U.S. Plans
2018
2019
$ 4,553 $ 5,091 $
1,138 $ 1,202 $
5
176
536
(18)
(279)
-
-
-
-
(1)
5
162
(383)
(16)
(306)
-
-
-
-
-
21
15
91
(8)
(33)
-
(2)
(67)
18
1
22
16
(28)
(9)
(32)
3
-
(5)
(31)
-
$ 4,972 $ 4,553 $
1,174 $ 1,138 $
172 $
1
6
15
(13)
-
-
-
-
-
-
181 $
190 $
1
6
(10)
(15)
-
-
-
-
-
-
172 $
50 $
1
2
8
(1)
-
-
-
-
1
-
61 $
63
1
2
(14)
(1)
-
-
-
-
(1)
-
50
of year
$ 3,840 $ 4,350 $
Actual return on plan assets, net of expenses
AIG contributions
Benefits paid:
AIG assets
Plan assets
Settlements
Foreign exchange effect
Other
744
178
(18)
(279)
-
-
-
(204)
16
(16)
(306)
-
-
-
Fair value of plan assets, end of year
Funded status, end of year
Amounts recognized in the balance
$ 4,465 $ 3,840 $
(713) $
$
(507) $
861 $
64
63
875 $
6
51
- $
-
13
- $
-
15
- $
-
1
-
-
1
(8)
(33)
(67)
19
-
899 $
(275) $
(9)
(32)
(5)
(25)
-
861 $
(277) $
(13)
-
-
-
-
- $
(181) $
(15)
-
-
-
-
- $
(172) $
(1)
-
-
-
-
- $
(61) $
(1)
-
-
-
-
-
(50)
sheet:
Assets
Liabilities
Total amounts recognized
Pre-tax amounts recognized in Accumulated
other comprehensive income (loss):
Net gain (loss)
Prior service (cost) credit
Total amounts recognized
$
$
- $
(507)
(507) $
- $
(713)
(713) $
65 $
(340)
(275) $
72 $
(349)
(277) $
- $
- $
- $
(181)
(181) $
(172)
(172) $
(61)
(61) $
-
(50)
(50)
$ (1,436) $ (1,450) $
-
-
$ (1,436) $ (1,450) $
(195) $
(22)
(217) $
(149) $
(23)
(172) $
10 $
-
10 $
26 $
-
26 $
(6) $
1
(5) $
3
3
6
(a) Includes non-qualified unfunded plans of which the aggregate projected benefit obligation was $261 million and $250 million for the U.S. at December 31, 2019 and
2018, respectively, and $225 million and $201 million for the non-U.S. at December 31, 2019 and 2018, respectively.
(b) The significant decrease in actuarial gains and losses from the prior year is primarily due to a 106 bps decrease in the discount rate in 2019 for the qualified plan.
304 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 22 . E m pl o ye e B e n ef i t s
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
2019
4,972 $
1,159 $
2018
4,553
1,125
$
$
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:
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
2019
4,972 $
-
4,465
2018
4,553 $
-
3,840
2019
1,005 $
-
605
2018
994
- $
594
U.S. Plans
2019
-
4,972 $
4,465
2018
-
4,553 $
3,840
2019
-
931 $
605
2018
-
932
594
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)
2019
2018
2017
2019
2018
2017
2019
2018
2017
2019
2018
2017
$
5 $
5 $
11
$
21 $
22 $
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
176
162
166
(229)
(283)
(266)
-
35
-
28
-
26
Net periodic benefit cost (credit)
(13)
(88)
(63)
Curtailment gain
Settlement (credit) charges
-
-
-
-
-
60
15
(21)
2
5
22
-
(2)
16
(25)
2
7
22
-
-
29
16
(24)
-
12
33
(6)
1
$
1 $
1 $
6
-
-
(1)
6
-
-
6
-
(1)
-
6
-
-
2
6
-
(1)
(1)
6
-
-
6
$
1 $
1 $
2
-
(2)
-
1
-
-
2
-
(2)
1
2
-
-
$
1 $
2 $
3
3
-
(1)
1
6
(2)
-
4
9
Net benefit cost (credit)
$
(13) $
(88) $
(3) $
20 $
22 $
28
$
6 $
6 $
Total recognized in Accumulated other
comprehensive income (loss)
$
14 $
(77) $
32
$
(45) $
20 $
87
$
(17) $
9 $
(2) $
(10) $
12 $
Total recognized in net periodic benefit
cost and other comprehensive
income (loss)
$
27 $
11 $
35
$
(65) $
(2) $
59
$
(23) $
3 $
(8) $
(11) $
10 $
5
* Reflects administrative fees for the U.S. pension plans.
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. For certain non-U.S. plans, interest cost is 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 expected long-term rate of return would decrease the 2020 pension expense by approximately $51
million with all other items remaining the same. A 100 basis point increase in the discount rate would increase the 2020 pension
expense by approximately $8 million. This is because the increase in the interest cost due to the higher discount rate is larger than
the decrease in the amortization of the net loss. Conversely, a 100 basis point decrease in the discount rate or expected long-term
rate of return would increase the 2020 pension expense by approximately $19 million and $51 million, respectively, with all other items
remaining the same.
AIG | 2019 Form 10-K 305
ITEM 8 | Notes to Consolidated Financial Statements | 22 . 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, 2019
Discount rate
Interest crediting rate
Rate of compensation increase
December 31, 2018
Discount rate
Interest crediting rate
Rate of compensation increase
Pension
Postretirement
U.S. Plans
Non-U.S. Plans (a)
U.S. Plans
Non-U.S. Plans(a)
3.16 %
2.19 %
N/A (c)
4.22 %
3.34 %
N/A (c)
1.09 %
0.44 %(b)
2.22 %
1.71 %
0.74 %(b)
2.27 %
3.14 %
N/A
N/A
4.17 %
N/A
N/A
3.18 %
N/A
3.00 %
4.12 %
N/A
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) Represents the weighted average interest crediting rate of non-U.S. cash balance plans primarily in Japan and Switzerland.
(c) Compensation increases are no longer applicable as the plan is frozen 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)
2019
2018
5.74%
5.00%
4.50%
2038
2038
5.93%
5.00%
4.50%
2038
2038
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(a)
U.S. Plans
Non-U.S. Plans(a)
For the Year Ended December 31, 2019
Discount rate
Interest crediting rate
Rate of compensation increase
Expected return on assets
For the Year Ended December 31, 2018
Discount rate
Interest crediting rate
Rate of compensation increase
Expected return on assets
For the Year Ended December 31, 2017
Discount rate
Interest crediting rate
Rate of compensation increase
Expected return on assets
4.22 %
3.34 %
N/A
6.20 %
3.61 %
2.88 %
N/A
6.75 %
4.15 %
2.50 %
N/A
7.00 %
1.71 %
0.74 %(b)
2.27 %
2.51 %
1.60 %
0.70 %(b)
2.27 %
2.78 %
1.50 %
0.69 %(b)
2.50 %
2.92 %
4.17 %
N/A
N/A
N/A
3.53 %
N/A
N/A
N/A
4.01 %
N/A
N/A
N/A
4.12 %
N/A
3.00 %
N/A
3.59 %
N/A
3.00 %
N/A
3.95 %
N/A
3.38 %
N/A
(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) Represents the weighted average interest crediting rate of non-U.S. cash balance plans primarily in Japan and Switzerland.
306 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 22 . E m pl o ye e B e n ef i t s
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, 2019 and 2018, which resulted in a single discount rate that would produce the
same liability at the respective measurement dates. The discount rates were 3.16 percent at December 31, 2019 and 4.22 percent at
December 31, 2018. 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 53 percent and 52 percent of the total
projected benefit obligations for our non-U.S. pension plans at December 31, 2019 and 2018, respectively. The weighted average
discount rate of 0.42 percent and 0.72 percent at December 31, 2019 and 2018, 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, 2019 or 2018.
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 and level of interest rates. 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 2020 based on the plan’s funded status at December 31, 2019:
At December 31,
Asset class:
Equity securities
Fixed maturity securities
Other investments
Total
Target
2020
Actual
2019
Actual
2018
26 %
60 %
14 %
100 %
25 %
59 %
16 %
100 %
25 %
47 %
28 %
100 %
The expected weighted average long-term rate of return for the plan was 6.20 percent and 6.75 percent for 2019 and 2018,
respectively. The expected weighted average 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.
AIG | 2019 Form 10-K 307
The following table presents the asset allocation percentage by major asset class for non-U.S. pension plans and the target
allocation:
ITEM 8 | Notes to Consolidated Financial Statements | 22 . E m pl o ye e B e n ef i t s
At December 31,
Asset class:
Equity securities
Fixed maturity securities
Other investments
Cash and cash equivalents
Total
Target
2020
Actual
2019
Actual
2018
29 %
51 %
19 %
1 %
100 %
23 %
43 %
24 %
10 %
100 %
35 %
37 %
17 %
11 %
100 %
The assets of AIG’s Japan pension plans represent approximately 61 percent and 59 percent of total non-U.S. assets at December
31, 2019 and 2018, respectively. The expected long term rate of return was 1.82 percent and 2.22 percent, for 2019 and 2018,
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 2.51 percent and 2.78 percent for the
years ended December 31, 2019 and 2018, 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.
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 6 herein.
(in millions)
At December 31, 2019
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(f):
Futures
Direct private equity(g)
Insurance contracts
Mutual Funds(h)
Total
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)
308 AIG | 2019 Form 10-K
U.S. Plans
Non-U.S. Plans
Level 1
Level 2
Level 3
Total
Level 1 Level 2 Level 3
Total
$
133 $
- $
- $
133
$
90 $
- $
- $
90
278
161
-
25
-
-
-
-
-
(17)
-
-
-
2,200
203
106
48
-
-
-
14
-
$
555 $ 2,596 $
-
-
9
-
-
-
-
278
186
2,209
203
106
48
-
-
156
-
49
-
-
-
-
-
-
158
229
-
-
-
-
-
-
-
-
-
-
11
-
-
(17)
11
14
-
20 $ 3,171
-
-
-
-
246 $
-
-
-
57
493 $
-
-
160
-
160 $
$
-
205
-
158
229
-
-
-
-
160
57
899
$
501 $
- $
- $
501
$
97 $
- $
- $
97
240
137
-
-
-
-
240
137
-
218
-
84
-
-
1,463
157
13
-
1,476
157
-
-
-
130
-
-
-
-
-
302
-
130
ITEM 8 | Notes to Consolidated Financial Statements | 22 . E m pl o ye e B e n ef i t s
U.S. and international high yield(d)
Mortgage and other asset-backed
securities(e)
Other fixed maturity securities
Other investment types(f):
Futures
Direct private equity(g)
Insurance contracts
-
-
-
27
-
-
96
36
-
-
-
18
Total
$
905 $ 1,770 $
(a) Includes passive and active U.S. equity strategies.
(b) Includes passive and active international equity strategies.
-
-
-
96
36
-
-
-
-
185
-
2
-
-
-
185
-
2
-
14
-
27
14
18
27 $ 2,702
-
-
-
315 $
-
-
-
401 $
-
-
145
145 $
-
-
145
861
$
(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, 2019, the plan held additional asset-backed securities.
(f) Excludes investments that are measured at fair value using the NAV per share (or its equivalent), which totaled $1,294 million and $1,138 million at December 31, 2019
and 2018, respectively.
(g) Comprised of private capital financing including private debt and private equity securities.
(h) Comprised of mutual fund investing in variety of equity, derivatives, and bonds.
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, 2019.
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:
At December 31, 2019
(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
At December 31, 2018
(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
$
$
$
$
$
$
$
$
Net
Balance
Realized and
Beginning
Unrealized
Transfers
Transfers
of year
Gains (Losses)
Purchases
Sales
Issuances
Settlements
In
Out
Changes in
Unrealized Gains
Balance
(Losses) on
at End
of year
Instruments Held
at End of year
13 $
14
27 $
145 $
145 $
3 $
(3)
- $
16 $
16 $
Net
Balance
Realized and
Beginning
Unrealized
- $
2
2 $
(1) $
(1) $
(3) $
(2)
(5) $
- $
- $
- $
-
- $
- $
- $
- $
-
- $
- $
- $
- $
-
- $
- $
- $
(4) $
-
(4) $
9
11
20
- $
- $
160
160
$
$
$
$
3
2
5
-
-
of year
Gains (Losses)
Purchases
Sales
Issuances
Settlements
In
Out
Transfers
Transfers
Changes in
Unrealized Gains
Balance
(Losses) on
at End
of year
Instruments Held
at End of year
12 $
15
27 $
113 $
113 $
(2) $
(2)
(4) $
31 $
31 $
5 $
3
8 $
1 $
1 $
(3) $
(2)
(5) $
- $
- $
- $
-
- $
- $
- $
- $
-
- $
- $
- $
1 $
-
1 $
- $
- $
- $
-
- $
- $
- $
13
14
27
145
145
$
$
$
$
1
(1)
-
-
-
AIG | 2019 Form 10-K 309
ITEM 8 | Notes to Consolidated Financial Statements | 22 . E m pl o ye e B e n ef i t s
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 2019 for the U.S. AIG Retirement Plan. The non-qualified and postretirement plans’ benefit
payments are deductible when paid to participants.
Our annual pension contribution in 2020 is expected to be approximately $65 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.
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:
(in millions)
2020
2021
2022
2023
2024
2025-2029
$
Pension
Postretirement
$
U.S.
Plans
330 $
326
334
320
320
1,473
Non-U.S.
Plans
47
41
42
43
49
252
U.S.
Plans
13 $
13
13
13
12
50
Non-U.S.
Plans
1
1
2
2
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 $195
million, $210 million and $209 million in 2019, 2018 and 2017, respectively.
310 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
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.
The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes are imposed on the excess of a
deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes
are imposed on certain base eroding payments to affiliated foreign companies. While the U.S. tax authorities issued formal guidance,
including recently issued proposed and final regulations for BEAT and other provisions of the Tax Act, there are still certain aspects of
the Tax Act that remain unclear and subject to substantial uncertainties. Additional guidance is expected in future periods. Such
guidance may result in changes to the interpretations and assumptions we made and actions we may take, which may impact
amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we
treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in
a similar manner.
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.
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
2019
3,825
1,462
5,287
$
$
$
$
2018
(12)
269
257
2017
1,940
(474)
1,466
$
$
The following table presents the income tax expense (benefit) attributable to pre-tax income (loss) from continuing
operations:
Years Ended December 31,
(in millions)
Foreign and U.S. components of actual income tax expense:
U.S.:
Current
Deferred
Foreign:
Current
Deferred
Total
2019
2018
2017
$
$
278
633
267
(12)
1,166
$
$
134
(175)
202
(7)
154
$
$
427
6,865
209
25
7,526
AIG | 2019 Form 10-K 311
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:
Years Ended December 31,
2019
2018
2017
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
Pre-Tax
Income
(Loss)
Tax
Percent of
Expense/
Pre-Tax
(Benefit)
Income (Loss)
Pre-Tax
Income
(Loss)
Tax
Percent of
Tax
Percent of
Expense/
Pre-Tax
Pre-Tax
Expense/
Pre-Tax
(Benefit)
Income (Loss)
Income
(Benefit)
Income
$
5,336 $
1,120
21.0 % $
255 $
54
21.0 % $ 1,476 $
517
35.0 %
(dollars in millions)
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 effect
State income taxes
Impact of Tax Act
Global intangible low-taxed income
Other*
Effect of discontinued operations
Valuation allowance:
Continuing operations
(25)
258
(113)
21
-
(5)
15
(40)
69
27
13
-
13
(134)
(8)
(44)
1,167
(0.5)
4.8
(2.1)
0.4
-
(0.1)
0.3
(0.7)
1.3
0.5
0.2
-
0.2
(2.5)
(0.1)
(0.8)
21.9
2.0
(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
(184)
17
-
(7)
35
(90)
69
(40)
(9)
6,687
-
(58)
3
(7.5)
44.7
(12.5)
1.2
-
(0.5)
2.4
(6.1)
4.7
(2.7)
(0.6)
453.0
-
(3.9)
0.2
1,476
43
7,532
2.9
510.3
255
(2)
40
NM
10
6
60.0
Consolidated total amounts
5,336
Amounts attributable to discontinued
operations
49
1
Amounts attributable to continuing
operations
$
5,287 $
1,166
22.1 % $
257 $
154
59.9 % $ 1,466 $
7,526
513.4 %
* 2019 includes a net charge of $96 million related to the accrual of IRS interest, of which $207 million tax expense is reported in Uncertain Tax Positions and $(111) million
tax benefit is reported in Other. 2018 includes a net charge of $83 million related to the accrual of IRS interest, of which $189 million tax expense is reported in Uncertain
Tax Positions and $(106) million tax benefit is reported in Other. 2017 includes a net charge of $301 million related to the accrual of IRS interest, of which $245 million tax
expense is reported in Uncertain Tax Positions and $56 million tax expense is reported in Other.
For the year ended December 31, 2019, the effective tax rate on income from continuing operations was 22.1 percent. The effective
tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to a $96 million net charge
principally related to the accrual of IRS interest (including interest related to uncertain tax positions), $82 million associated with the
effect of foreign operations, $37 million of tax charges and related interest associated with increases in uncertain tax positions
primarily related to open tax issues and audits in state and local jurisdictions, $27 million of excess tax charges related to share-based
compensation payments recorded through the income statement, and $15 million of non-deductible transfer pricing charges, partially
offset by tax benefits of $113 million of reclassifications from accumulated other comprehensive income to income from continuing
operations related to the disposal of available for sale securities, $65 million associated with tax exempt income, and $44 million of
valuation allowance activity related to certain foreign subsidiaries and state jurisdictions. 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, 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 $83 million net charge
primarily related to the accrual of IRS interest (including interest related to uncertain tax positions), $62 million measurement period
adjustment related to the deemed repatriation tax, $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.
312 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
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.
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, 2019, 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 $110 million related to such withholding taxes has not been
recorded for those foreign subsidiaries whose earnings are considered to be indefinitely reinvested. Additionally, as of December 31,
2019, we do not project any significant potential U.S. tax with respect to foreign currency gains or losses accumulated on previously
taxed unremitted foreign earnings and therefore no deferred tax has been recorded. Deferred taxes, if necessary, have been provided
on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.
The following table presents the components of the net deferred tax assets (liabilities):
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)
2019
2018
$
$
10,541
2,673
1,766
743
148
471
58
382
963
319
617
18,681
(2,200)
(2,123)
-
(4,323)
14,358
(1,427)
12,931
$
$
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
AIG | 2019 Form 10-K 313
The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December
31, 2019.
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
December 31, 2019
(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 U.S. GAAP basis(a)
Tax
Gross Effected
Carryforward Period Ending Tax Year(b)
2020
2021
2022
2023
2024
$ 32,143 $ 6,750 $
$
-
-
2,249
-
- $
-
738
-
- $
-
116
-
- $
-
683
-
- $
-
711
-
- $
-
-
-
Unlimited
Carryforward
Period and
Carryforward
Periods(b)
2025 2026 - After
6,750
-
-
-
- $
-
-
-
$ 8,999 $
738 $
116 $
683 $
711 $
- $
- $
6,750
(a) Financial reporting basis is net of unrecognized tax benefits of $2.1 billion for those tax years in which tax attributes are available for use when settlement occurs.
(b) Carryforward periods are based on U.S. tax laws governing utilization of tax attributes. Expiration periods are based on the year the carryforward was generated.
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, including forecasts
of future income for each of our businesses and actual and planned business and operational changes;
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, 2019, 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.
314 AIG | 2019 Form 10-K
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
For the year ended December 31, 2019, 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
liability related to net unrealized tax capital gains. As of December 31, 2019, based on all available evidence, we concluded that no
valuation allowance is required. For the year ended December 31, 2019, we released $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. We released the full amount of valuation allowance previously recorded during the three-month period
ended March 31, 2019 and no additional activity was recorded for the remainder of 2019.
For the year ended December 31, 2019, recent changes in market conditions, including interest rate fluctuations, impacted the
unrealized tax gains and losses in the U.S. Non-Life Companies’ available for sale securities portfolio, resulting in an increase to the
deferred tax liability related to net unrealized tax capital gains. As of December 31, 2019, 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, 2019, we recognized a net decrease of $44 million in our deferred tax asset valuation allowance
associated with certain foreign subsidiaries and state jurisdictions, primarily attributable to current year activity.
The following table presents the net deferred tax assets (liabilities) at December 31, 2019 and 2018 on a U.S. GAAP basis:
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)
2019
2018
$ 14,622 $ 15,479
(510)
(405)
14,564
2,031
(1,374)
657
15,221
(169)
$ 12,931 $ 15,052
(2,055)
(90)
12,477
2,006
(1,337)
669
13,146
(215)
DEFERRED TAX ASSET VALUATION ALLOWANCE OF U.S. CONSOLIDATED FEDERAL INCOME TAX
GROUP
At December 31, 2019 and 2018, our U.S. consolidated income tax group had net deferred tax assets after valuation allowance of
$12.5 billion and $14.6 billion, respectively. At December 31, 2019 and 2018, our U.S. consolidated income tax group had valuation
allowances of $90 million and $405 million, respectively.
DEFERRED TAX ASSET — FOREIGN, STATE AND LOCAL
At December 31, 2019 and 2018, we had net deferred tax assets (liabilities) of $454 million and $488 million, respectively, related to
foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.
At December 31, 2019 and 2018, we had deferred tax asset valuation allowances of $1.3 billion and $1.4 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
AIG | 2019 Form 10-K 315
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
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.
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. In 2019, we
agreed with the IRS to execute an agreement for the tax years at issue in which AIG waives restrictions on the assessment of
additional tax related to the settlement of the underlying issues in those tax years. 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
Settlements
Gross unrecognized tax benefits, end of year
2019
4,709 $
51
(1)
4
(1)
4,762 $
2018
4,707 $
14
(6)
-
(6)
4,709 $
2017
4,530
210
(33)
-
-
4,707
$
$
At December 31, 2019, 2018 and 2017, our unrecognized tax benefits, excluding interest and penalties, were $4.8 billion, $4.7 billion
and $4.7 billion, respectively. The activity for the year ended December 31, 2019 includes increases primarily related to open tax
issues and audits in state and local jurisdictions. The activity for the year ended 2018 is not material. The activity for the year ended
December 31, 2017 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.
At December 31, 2019, 2018 and 2017, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the
effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $43 million,
$38 million and $28 million, respectively. Accordingly, at December 31, 2019, 2018 and 2017, the amounts of unrecognized tax
benefits that, if recognized, would favorably affect the effective tax rate were $4.7 billion, $4.7 billion and $4.7 billion, respectively.
Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2019, 2018, and
2017, we had accrued liabilities of $2.4 billion, $2.2 billion, and $2.0 billion, respectively, for the payment of interest (net of the federal
benefit) and penalties. For the years ended December 31, 2019, 2018, and 2017, we accrued expense of $236 million, $190 million
and $776 million, respectively, for the payment of interest and penalties. The activity for the period ended December 31, 2018, 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 $3.6
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.
316 AIG | 2019 Form 10-K
Listed below are the tax years that remain subject to examination by major tax jurisdictions:
ITEM 8 | Notes to Consolidated Financial Statements | 23 . In co m e Ta xe s
At December 31, 2019
Major Tax Jurisdiction
United States
Australia
France
Japan
Korea
Singapore
United Kingdom
24. Quarterly Financial Information (Unaudited)
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Open Tax Years
2000-2018
2015-2018
2017-2019
2013-2018
2014-2018
2015-2018
2018-2019
(dollars in millions, except per common share data)
Total revenues
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
Net income (loss) attributable to
*
AIG common shareholders
Income (loss) per common share
attributable to AIG common
shareholders:
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:
Prior year unfavorable (favorable)
development
Restructuring and other costs
March 31,
June 30,
September 30,
December 31,
2019
12,456 $
2018
11,712 $
2019
12,561 $
2018
11,631 $
2019
12,914 $
2018
11,486 $
2019
11,815 $
2018
12,560
Three Months Ended
1,154
1,227
1,837
1,252
1,260
(1,527)
1,036
-
937
283
654
(1)
949
11
938
(1)
1,390
281
1,109
-
931
(6)
937
-
973
317
656
(39)
(1,259)
-
(1,259)
49
869
(60)
929
(695)
(2)
(560)
62
(622)
$
654 $
938 $
1,102 $
937 $
648 $
(1,259) $
922 $
(622)
$
$
$
$
0.75 $
1.03 $
1.26 $
1.04 $
0.74 $
(1.37) $
0.99 $
(0.70)
- $
- $
- $
- $
- $
(0.04) $
0.06 $
-
0.75 $
1.01 $
1.24 $
1.02 $
0.72 $
(1.37) $
0.97 $
(0.70)
- $
- $
- $
- $
- $
(0.04) $
0.06 $
-
875,383,084
877,512,244
907,951,597
925,266,577
876,382,884
888,325,042
903,215,488
916,572,481
877,009,495
895,814,410
895,237,359
895,237,359
878,210,228
896,380,725
887,508,718
887,508,718
(15)
47
(40)
24
(132)
60
(26)
200
(74)
67
949
35
(119)
44
546
136
* 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 common shareholders 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 common shareholders 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 | 2019 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 Validus and AIGLH, each a holding
company and a 100 percent owned subsidiary of AIG. AIG provides a full and unconditional guarantee of the senior notes of
Validus and all outstanding debt of AIGLH.
CONDENSED CONSOLIDATING BALANCE SHEETS
(in millions)
December 31, 2019
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 and debt of consolidated investment entities
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, 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 and debt of consolidated investment entities
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
$
$
$
$
$
$
$
$
3,329 $
4,804
8,133
2
35,352
39,921
14,391
97,799 $
- $
22,030
9,379
715
32,124
65,675
-
65,675
97,799 $
1,141 $
3,377
4,518
2
34,963
33,300
15,389
88,172 $
- $
22,422
8,774
615
31,811
56,361
-
56,361
88,172 $
- $
-
-
8
-
3,646
1,793
5,447 $
- $
353
10
-
363
5,084
-
5,084
5,447 $
2 $
-
2
9
-
4,029
1,798
5,838 $
- $
359
228
-
587
5,251
-
5,251
5,838 $
-
-
-
9
-
30,216
17
30,242
-
643
42
-
685
29,557
-
29,557
30,242
-
-
-
9
-
25,058 (e)
124
25,191
-
643
144
-
787
24,404 (e)
-
24,404
25,191
$
12,496 $
$
$
319,622
332,118
2,837
715
-
170,642
506,312 $
302,406 $
12,324
115,313
35,353
465,396
39,164
1,752
40,916
$
506,312 $
$
10,329 $
$
$
301,158
311,487
2,853
615
-
159,430
474,385 $
293,652 $
11,116
100,974
34,963
440,705
32,732
948
33,680
$
474,385 $
$
$
$
$
$
$
$
(2,595)
(41)
(2,636)
-
(36,067)
(73,783)
(2,250)
(114,736)
-
-
(4,863)
(36,068)
(40,931)
(73,805)
-
(73,805)
(114,736)
(1,798)
-
(1,798)
-
(35,578)
(62,387) (e)
(1,839)
(101,602)
-
-
(3,637)
(35,578)
(39,215)
(62,387) (e)
-
(62,387)
(101,602)
$
13,230
324,385
337,615
2,856
-
-
184,593
525,064
302,406
35,350
119,881
-
457,637
65,675
1,752
67,427
525,064
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
(a) At December 31, 2019, includes restricted cash of $102 million and $86 million for American International Group, Inc. (as Guarantor) and Other Subsidiaries,
respectively. At December 31, 2018, includes restricted cash of $124 million and $18 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, 2019, includes restricted cash of $1 million and $242 million for American International Group, Inc. (as Guarantor) and Other Subsidiaries, respectively.
At December 31, 2018, includes restricted cash of $1 million and $342 million for American International Group, Inc. (as Guarantor) and Other Subsidiaries, respectively.
(e) The Investment in consolidated subsidiaries amounts for AIGLH and Reclassifications and Eliminations in 2018 have been revised from $26.3 billion to $25.1 billion and
from $(63.7) billion to $(62.4) billion, respectively, to correct Total assets in 2018. The AIG shareholders’ equity amounts for AIGLH and Reclassifications and
Eliminations in 2018 have been revised from $25.7 billion to $24.4 billion and from $(63.7) billion to $(62.4) billion, respectively, to correct Total equity in 2018. These
corrections in 2018 have no impact on AIG’s consolidated financial statements and are not considered material to previously issued financial statements.
318 AIG | 2019 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)
(in millions)
Year Ended December 31, 2019
Revenues:
American
International
Validus
Group, Inc.
Holdings,
Reclassifications
Other
and
Consolidated
(As Guarantor)
Ltd.
AIGLH
Subsidiaries
Eliminations
AIG
Equity in earnings of consolidated subsidiaries(a)
$
3,863 $
303 $
325
$
- $
(4,491)
$
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
Income (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, 2018
Revenues:
Equity in earnings of consolidated subsidiaries(a)
$
$
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
1,156
5,019
985
-
729
1,714
3,305
(45)
3,350
(2)
3,348
9
312
17
-
18
35
277
-
277
-
277
-
325
50
-
3
53
272
(6)
278
-
278
48,751
48,751
380
32
42,415
42,827
5,924
1,217
4,707
50
4,757
(170)
(4,661)
(15)
-
(155)
(170)
(4,491)
-
(4,491)
-
(4,491)
-
-
-
821
-
3,348 $
277 $
278
$
3,936 $
(4,491)
$
(580) $
(240) $
938
358
954
-
803
1,757
(1,399)
(1,433)
34
23
(217)
18
-
27
45
(262)
-
(262)
3,359 (b) $
1
3,360
50
-
3
53
3,307
39
3,268
(40)
(6)
-
-
(262)
3,268
- $
46,506
46,506
302
7
45,048
45,357
1,149
1,548
(399)
(2)
(401)
(2,539) (b) $
(79)
(2,618)
(15)
-
(65)
(80)
(2,538)
-
(2,538)
-
(2,538)
-
-
-
67
-
Net income (loss) attributable to AIG
$
(6) $
(262) $
3,268
$
(468) $
(2,538)
$
-
49,746
49,746
1,417
32
43,010
44,459
5,287
1,166
4,121
48
4,169
821
3,348
-
47,389
47,389
1,309
7
45,816
47,132
257
154
103
(42)
61
67
(6)
AIG | 2019 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, 2017
Revenues:
American
International
Validus
Group, Inc.
Holdings,
Reclassifications
Other
and
Consolidated
(As Guarantor)
Ltd.
AIGLH
Subsidiaries
Eliminations
AIG
Equity in earnings of consolidated subsidiaries(a)
$
(149) $
- $
1,328 (b) $
- $
(1,179) (b) $
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:
891
742
949
2
952
1,903
(1,161)
4,922
(6,083)
(1)
(6,084)
Net income from continuing operations
attributable to noncontrolling interests
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,328
50
-
2
52
1,276
(3)
1,279
-
1,279
48,802
48,802
176
(7)
46,116
46,285
2,517
2,607
(90)
5
(85)
(173)
(1,352)
(7)
-
(179)
(186)
(1,166)
-
(1,166)
-
(1,166)
-
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) $
- $
1,279
$
(113) $
(1,166)
$
(6,084)
(a) Eliminated in consolidation.
(b) Equity in earnings of consolidated subsidiaries amounts for AIGLH and Reclassifications and Eliminations in 2018 have been revised from $2.8 billion to $3.4 billion and
from $(2.0) billion to $(2.5) billion, respectively, to correct Total revenues in 2018. Equity in earnings of consolidated subsidiaries amounts for AIGLH and
Reclassifications and Eliminations in 2017 have been revised from $1.9 billion to $1.3 billion and from $(1.8) billion to $(1.2) billion, respectively, to correct Total
revenues in 2017. These corrections in 2018 and 2017 have no impact on AIG’s consolidated financial statements and are not considered material to previously issued
financial statements.
320 AIG | 2019 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, 2019
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, 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
$
$
$
$
American
International
Validus
Group, Inc. Holdings,
Reclassifications
Other
and
Consolidated
(As Guarantor)
Ltd.
AIGLH
Subsidiaries
Eliminations
AIG
$
3,348 $
277 $
278
$
4,757
$
(4,491)
$
6,395
9,743
1
278
6,209
6,487
6,370
11,127
(12,560)
(17,051)
-
-
-
841
-
9,743 $
278 $
6,487
$
10,286
$
(17,051)
$
(6) $
(262) $
(6,302)
(6,308)
-
(262)
3,268 (a) $
(4,555) (b)
(1,287)
$
(401)
(6,810) (b)
(7,211)
(2,538) (a) $
11,374 (b)
8,836
4,169
6,415
10,584
841
9,743
61
(6,293)
(6,232)
-
-
-
76
-
76
(6,308) $
(262) $
(1,287)
$
(7,287)
$
8,836
$
(6,308)
(6,084) $
- $
2,235
(3,849)
-
-
-
-
1,279 (a) $
1,844 (b)
3,123
$
(85)
2,021 (b)
1,936
(1,166) (a) $
(3,865) (b)
(5,031)
(6,056)
2,235
(3,821)
-
28
-
28
Comprehensive income (loss) attributable to AIG
$
(3,849) $
- $
3,123
$
1,908
$
(5,031)
$
(3,849)
(a) Net income (loss) amounts for AIGLH and Reclassifications and Eliminations in 2018 have been revised from $2.8 billion to $3.3 billion and from $(2.0) billion to $(2.5)
billion, respectively, to correct Comprehensive income (loss) in 2018. Net income (loss) amounts for AIGLH and Reclassifications and Eliminations in 2017 have been
revised from $1.9 billion to $1.3 billion and from $(1.8) billion to $(1.2) billion, respectively, to correct Comprehensive income (loss) in 2017. These corrections in 2018
and 2017 have no impact on AIG’s consolidated financial statements and are not considered material to previously issued financial statements.
(b) The Other comprehensive income (loss) amounts for AIGLH, Other Subsidiaries, and Reclassifications and Eliminations in 2018 have been revised from $2.5 billion to
$(4.6) billion, from $12.3 billion to $(6.8) billion, and from $(14.8) billion to $11.4 billion, respectively, to correct Comprehensive income (loss) in 2018. The Other
comprehensive income (loss) amounts for AIGLH, Other Subsidiaries, and Reclassifications and Eliminations in 2017 have been revised from $7.8 billion to $1.8 billion,
from $17.8 billion to $2.0 billion, and from $(25.7) billion to $(3.9) billion, respectively, to correct Comprehensive income (loss) in 2017. These corrections in 2018 and
2017 have no impact on AIG’s consolidated financial statements and are not considered material to previously issued financial statements.
AIG | 2019 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, 2019
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
$
3,484 $
187 $
1,470 $
(1,439) $
(4,630) $
(928)
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 and debt of
consolidated investment entities
Repayments of long-term debt and debt of
consolidated investment entities
Issuance of preferred stock
Purchase of common stock
Intercompany loans - net
Cash dividends paid on preferred stock
Cash dividends paid on common stock
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
Year Ended December 31, 2018
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
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 and debt of
consolidated investment entities
Repayments of long-term debt and debt of
consolidated investment entities
Purchase of common stock
Intercompany loans - net
Cash dividends paid on common stock
Other, net
322 AIG | 2019 Form 10-K
2,313
-
(2,957)
513
(237)
(2,170)
67
(2,471)
595
(1,006)
485
-
93
(22)
2
-
-
-
-
-
-
2
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,114)
(190)
(1,470)
(66)
-
-
(1,035)
(190)
(1,470)
-
(22)
127
-
-
(1)
9
-
-
-
9
-
63,830
2
(66,535)
(93)
-
(1,463)
1,436
(2,823)
3,286
(2,196)
-
-
(513)
-
(2,970)
6,654
4,261
16
15
3,213
(63)
(583)
-
583
(420)
237
-
-
(183)
-
-
-
-
420
-
4,630
(237)
4,813
-
-
-
-
105 $
8 $
9 $
3,165 $
- $
65,562
2
(68,909)
-
-
(3,633)
1,503
(5,475)
3,881
(3,202)
485
-
-
(22)
(1,114)
6,351
6,379
16
(8)
3,358
(63)
3,287
1,256 $
656 $
2,445 $
1,651 $
(5,947) $
61
5,587
-
(1,980)
868
1
(5,475)
1,533
(73)
461
13
-
-
-
-
112
-
-
125
2,470
-
(1,493)
(1,739)
90
(1,138)
212
(350)
-
-
(6)
(2,456)
(416)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
59,918
10
(59,778)
(90)
-
(354)
(9)
273
(30)
2,264
(1,829)
-
(868)
(3,485)
2,812
(3,206)
-
3,206
(778)
(1)
-
-
-
(779)
-
-
-
778
5,947
1
62,312
10
(58,552)
-
-
(5,717)
1,524
200
(223)
4,734
(3,672)
(1,739)
-
(1,138)
2,609
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
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
(1,598)
(772)
(2,456)
(1,106)
6,726
794
-
119
8
-
9
-
-
(11)
20
(11)
504
2,709
-
-
-
(11)
621
2,737
3,358
Cash and restricted cash at end of year
$
127 $
9 $
9 $
3,213 $
- $
(in millions)
Year Ended December 31, 2017
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
$
36 $
- $
1,413 $
(6,659) $
(2,608) $
(7,818)
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 and debt of
consolidated investment entities
Repayments of long-term debt and debt of
consolidated investment entities
Purchase of common stock
Intercompany loans - net
Cash dividends paid on common stock
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
5,821
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
-
-
-
-
Cash and restricted cash at end of year
$
8 $
- $
20 $
2,709 $
- $
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
AIG | 2019 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 $
8 $
9 $
2,837 $
- $
2,856
102
1
-
-
-
-
86
242
-
-
188
243
105 $
8 $
9 $
3,165 $
- $
3,287
(941) $
(22) $
(50) $
(313) $
- $
(1,326)
(3)
45
-
(42)
(11) $
1,179
- $
2
- $
-
(241) $
(1,181)
-
- $
-
-
(252)
-
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)
-
(in millions)
Year Ended December 31, 2019
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, 2019 for:
Interest:
Third party
Intercompany
Taxes:
Income tax authorities
Intercompany
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
$
$
$
$
$
$
$
$
$
$
$
$
324 AIG | 2019 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
26. Subsequent Events
DIVIDENDS DECLARED
2019
2018
2017
$
15 $
2,369 $
702
15
745
2,706
259
735
26
On February 12, 2020, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March
30, 2020 to shareholders of record on March 16, 2020. On February 12, 2020, our Board of Directors declared a cash dividend on
AIG’s Series A Preferred Stock of $365.625 per share, payable on March 16, 2020 to holders of record on February 28, 2020.
AIG | 2019 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 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, 2019. 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, 2019.
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,
2019 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, 2019, 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, 2019 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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting that have occurred during the quarter ended December
31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
326 AIG | 2019 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 | 2019 Form 10-K 327
Exhibit Index
Exhibit
Number
2
3
3(i)
3(ii)
Description
Location
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.
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).
(2) First Amendment to Stock Purchase Agreement, dated as of
December 29, 2016 between American International Group, Inc. and
Arch Capital Group Ltd.
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).
(3) Agreement and Plan of Merger, by and among AIG, Venus
Holdings Limited and Validus Holdings, Ltd., dated January 21, 2018
(4) Membership Interest Purchase Agreement, by and among AIG,
Fortitude Group Holdings, LLC, Carlyle FRL, L.P., The Carlyle Group
L.P., T&D United Capital Co., LTD. And T&D Holdings, Inc., dated as
of November 25, 2019
Articles of incorporation and by-laws
Amended and Restated Certificate of Incorporation of AIG
Certificate of Designations of AIG with respect to Series A Preferred
Stock, dated March 8, 2019
3(iii)
AIG By-laws, amended November 16, 2015
4
Instruments defining the rights of security holders, including
indentures
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 2.1 to AIG’s
Current Report on Form 8-K filed with the SEC on
November 25, 2019 (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 3.2 to AIG’s
Registration Statement on Form 8-A filed with the
SEC on March 13, 2019 (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.
(1) Warrant Agreement (including Form of Warrant), dated as of
January 6, 2011, between AIG and Wells Fargo Bank, N.A., as
Warrant Agent
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).
(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
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).
(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
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).
(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
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).
(5) Amendment No. 3, dated as of December 11, 2019, to Tax Asset
Protection Plan, between Equiniti Trust Company, as successor to
Wells Fargo Shareowner Services, a former division of Wells Fargo
Bank, as Rights Agent
Incorporated by reference to Exhibit 4.1 to AIG’s
Current Report on Form 8-K filed with the SEC on
December 11, 2019 (File No. 1-8787).
(6) Description of Registrant’s Securities
Filed herewith.
328 AIG | 2019 Form 10-K
(7) Deposit Agreement, dated March 14, 2019, among AIG, Equiniti
Trust Company, as depositary, and the holders from time to time of
the depositary receipts described therein
Incorporated by reference to Exhibit 4.2 to AIG’s
Current Report on Form 8-K filed with the SEC on
March 14, 2019 (File No. 1-8787).
(8) Form of depositary receipt representing the Depository Shares
(included in Exhibit A to Exhibit 4.7)
9
10
Voting Trust Agreement
Material contracts
None.
(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*
(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)*
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).
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).
AIG | 2019 Form 10-K 329
(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
(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).
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).
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).
330 AIG | 2019 Form 10-K
(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).
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).
(26) Parental Guarantee Agreement, dated January 20, 2017, by
Berkshire Hathaway Inc. in favor of National Union Fire Insurance
Company of Pittsburgh, Pa.
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).
(27) AIG Long Term Incentive Plan*
(28) Form of AIG Long Term Incentive Award Agreement*
(29) Letter Agreement between American International Group, Inc.
and Peter D. Hancock, dated March 17, 2017*
(30) Letter Agreement, dated November 3, 2010, between AIG and
Siddhartha Sankaran*
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).
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).
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).
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*
(33) Non-Solicitation and Non-Disclosure Agreement, dated July 22,
2015, between AIG and Douglas A. Dachille*
(34) Letter Agreement, dated May 14, 2017, between American
International Group, Inc. and Brian Duperreault*
(35) Form of Stock Option Award Agreement, between American
International Group, Inc. and Brian Duperreault*
(36) Letter Agreement, dated July 3, 2017, between American
International Group, Inc. and Peter Zaffino*
(37) Non-Solicitation and Non-Disclosure Agreement, dated July 5,
2017, between American International Group, Inc. and Peter Zaffino*
(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 March 2018)*
(41) Description of Non-Management Director Compensation*
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).
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).
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).
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).
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).
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).
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).
AIG | 2019 Form 10-K 331
(42) AIG Long Term Incentive Plan (as amended and restated
September 2018)*
(43) Release and Restrictive Covenant Agreement between AIG and
Siddhartha Sankaran, dated December 7, 2018*
(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*
(46) AIG Long Term Incentive Plan (as amended and restated April
2019)*
(47) Form of AIG Long Term Incentive Award Agreement*
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).
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).
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).
Incorporated by reference to Exhibit 10.2 to AIG’s
Quarterly Report on Form 10-Q, filed with the SEC on
May 7, 2019 (File No. 1-8787).
Incorporated by reference to Exhibit 10.1 to AIG’s
Quarterly Report on Form 10-Q, filed with the SEC on
May 7, 2019 (File No. 1-8787).
(48) AIG Long Term Incentive Plan (as amended and restated
January 2020)*
Filed herewith.
(49) Form of AIG Long Term Incentive Award Agreement*
Filed herewith.
Subsidiaries of Registrant
Filed herewith.
Consent of Independent Registered Public Accounting Firm
Filed herewith.
Powers of attorney
Included on signature page and filed herewith.
Rule 13a-14(a)/15d-14(a) Certifications
Section 1350 Certifications**
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the
Consolidated Balance Sheets as of December 31, 2019 and
December 31, 2018, (ii) the Consolidated Statements of Income for
the three years ended December 31, 2019, (iii) the Consolidated
Statements of Equity for the three years ended December 31, 2019,
(iv) the Consolidated Statements of Cash Flows for the three years
ended December 31, 2019, (v) the Consolidated Statements of
Comprehensive Income (Loss) for the three years ended
December 31, 2019 and (vi) the Notes to the Consolidated Financial
Statements.
Filed herewith.
Filed herewith.
Filed herewith.
21
23
24
31
32
101
* 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 | 2019 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 21st of
February, 2020.
AMERICAN INTERNATIONAL GROUP, INC.
By
/S/ BRIAN DUPERREAULT
(Brian Duperreault, 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 21st of February, 2020.
AIG | 2019 Form 10-K 333
SIGNATURE
TITLE
Chief Executive Officer and Director
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Senior Vice President – Deputy Chief Financial Officer and
Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
/S/ BRIAN DUPERREAULT
(Brian Duperreault)
/S/ MARK D. LYONS
(Mark D. Lyons)
/S/ JONATHAN WISMER
(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/ PETER R. PORRINO
(Peter R. Porrino)
/S/ AMY L. SCHIOLDAGER
(Amy L. Schioldager)
/S/ DOUGLAS M. STEENLAND
(Douglas M. Steenland)
/S/ THERESE M. VAUGHAN
(Therese M. Vaughan)
334 AIG | 2019 Form 10-K
Summary of Investments — Other than Investments in Related Parties
At December 31, 2019
(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
Mortgage and other loans receivable, net of allowance
Other invested assets
Short-term investments, at cost (approximates fair value)
Derivative assets(b)
Total investments
Cost(a)
Fair Value
$
7,229 $
7,501 $
13,960
14,042
17,861
120,203
66,617
239,912
15,318
14,869
19,378
130,276
70,426
257,768
1
151
380
532
13
296
841
46,984
19,495
13,230
793
321,255 $
1
151
380
532
13
296
841
49,005
18,792
13,230
793
340,429 $
$
Schedule I
Amount at
which shown in
the Balance Sheet
7,501
15,318
14,869
19,378
130,276
70,426
257,768
1
151
380
532
13
296
841
46,984
18,792
13,230
793
338,408
(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) The balance is reported in Other assets.
AIG | 2019 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
Investment in consolidated subsidiaries(b)
Other assets(c)
Total assets
Liabilities:
Due to affiliate(b)
Intercompany tax payable(b)
Notes and bonds payable
Junior subordinated debt
Series AIGFP matched notes and bonds payable
Loans from subsidiaries(b)
Other liabilities (includes intercompany derivative liabilities of $33 in 2019 and $105 in 2018)
Total liabilities
AIG Shareholders’ equity:
Preferred stock
Common stock
Treasury stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total AIG shareholders’ equity
Total liabilities and equity
(a) At December 31, 2019 and 2018, included restricted cash of $102 million and $124 million, respectively.
(b) Eliminated in consolidation.
(c) At December 31, 2019 and 2018, included restricted cash of $1 million and $1 million, respectively.
See accompanying Notes to Condensed Financial Information of Registrant.
Schedule II
2019
2018
3,329 $
4,804
8,133
2
35,352
1,504
3,121
9,426
39,921
340
97,799 $
3,231 $
2,700
20,467
1,542
21
715
3,448
32,124
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
485
4,766
(48,987)
81,345
23,084
4,982
65,675
97,799 $
-
4,766
(49,144)
81,268
20,884
(1,413)
56,361
88,172
$
$
$
$
336 AIG | 2019 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 loss on sale of divested businesses
Other expenses
Income (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.
$
44 $
Schedule II
2019
2018
2017
3,819
1,034
(3)
125
985
-
1
728
3,305
(45)
3,350
(2)
3,348 $
(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)
(b) Includes interest income on intercompany borrowings of $904 million, $840 million and $512 million on December 31, 2019, 2018 and 2017, respectively, eliminated in
consolidation.
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 (loss)
Other comprehensive income (loss)
Total comprehensive income (loss) attributable to AIG
See accompanying Notes to Condensed Financial Information of Registrant.
Schedule II
2019
3,348 $
6,395
9,743 $
2018
(6) $
(6,302)
(6,308) $
2017
(6,084)
2,235
(3,849)
$
$
AIG | 2019 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 from (to) subsidiaries - net
Acquisition of businesses
Payments received on mortgage and other loans receivable
Loans to subsidiaries - net
Other, net
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Issuance of long-term debt
Repayments of long-term debt
Issuance of preferred stock
Cash dividends paid on preferred stock
Cash dividends paid on common stock
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
See accompanying Notes to Condensed Financial Information of Registrant.
338 AIG | 2019 Form 10-K
Schedule II
2019
3,484 $
2018
1,256 $
$
2017
36
2,313
-
(2,957)
(2,170)
(237)
-
-
513
67
(2,471)
595
(1,006)
485
(22)
(1,114)
93
-
(66)
(1,035)
(22)
127
105 $
5,587
-
(1,980)
1,533
1
(5,475)
-
868
(73)
461
2,470
(1,493)
-
-
(1,138)
90
(1,739)
212
(1,598)
119
8
127 $
5,714
40
(2,465)
1,994
2,446
-
107
199
(183)
7,852
1,505
(1,724)
-
-
(1,172)
(63)
(6,275)
(154)
(7,883)
5
3
8
Years Ended December 31,
2019
2 $
102
1
2018
2 $
124
1
2017
3
4
1
$
$
$
105 $
127 $
8
$
(941) $
(3)
(11)
1,179
15
15
702
(914) $
1
(32)
895
2,369
2,706
745
(948)
-
(329)
614
259
26
735
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 2019 Annual Report on Form 10-K for the year ended December 31, 2019 (Annual Report on
Form 10-K) filed with the Securities and Exchange Commission on February 21, 2020.
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 16 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 | 2019 Form 10-K 339
Supplementary Insurance Information
At December 31, 2019 and 2018
Segment (in millions)
2019
General Insurance
Life and Retirement
Other Operations(a)
Legacy Operations
2018
General Insurance
Life and Retirement
Other Operations(a)
Legacy Operations
Schedule III
Liability
for Unpaid
Losses and
Loss
Adjustment
Expenses,
Deferred
Policy
Acquisition
Future Policy
Costs
Benefits
Unearned
Premiums
$
$
$
2,639
7,901
9
658
$
71,272
$
18,022
$
17,963
177
39,428
-
10
237
11,207
$
128,840
$
18,269
$
2,889
9,046
-
759
$
76,185
$
18,727
$
14,739
47
37,603
-
6
515
$
12,694
$
128,574
$
19,248
$
Policy
and
Contract
Claims
-
864
-
17
881
-
851
-
14
865
For the years ended December 31, 2019, 2018 and 2017
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)
$
26,438 $
6,493
42
603
3,444
8,461
234
2,480
$
17,246
$
4,482
$
9,127
739
2,122
650
(36)
68
4,621
2,472
1,138
306
$
25,092
-
420
(58)
$
$
$
$
33,576 $
14,619
$
29,234
$
5,164
$
8,537
$
25,454
27,505 $
2,668
$
20,824
$
4,596
$
5,261
39
600
7,922
(439)
2,325
7,692
357
2,293
680
5
105
5,222
2,412
1,270
398
$
26,407
-
387
3
33,405 $
12,476
$
31,166
$
5,386
$
9,302
$
26,797
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
1,227
484
$
25,438
-
317
4
Segment (in millions)
2019
General Insurance
Life and Retirement
Other Operations(a)
Legacy Operations
2018
General Insurance
Life and Retirement
Other Operations(a)
Legacy Operations
2017
General Insurance
Life and Retirement
Other Operations(a)
Legacy Operations
$
34,309 $
14,179
$
33,564
$
4,288
$
9,107
$
25,759
(a) Includes consolidation and elimination entries and reconciling items from adjusted pre-tax income to pre-tax income. See Note 3 to the Consolidated Financial
Statements.
(b) Balances reflect the segment changes discussed in Note 3 to the Consolidated Financial Statements.
340 AIG | 2019 Form 10-K
Reinsurance
At December 31, 2019, 2018 and 2017 and for the years then ended
Schedule IV
(in millions)
2019
Long-duration insurance in force
Premiums Earned:
General Insurance companies
Life and Retirement companies
Other
Total
2018
Long-duration insurance in force
Premiums Earned:
General Insurance companies
Life and Retirement companies
Other
Total
2017
Long-duration insurance in force
Premiums Earned:
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
$ 1,185,771 $
264,732 $
279 $
921,318
- %
$
$
30,017 $
4,363
-
34,380 $
9,526 $
916
-
10,442 $
6,395 $
228
-
6,623 $
26,886
3,675
-
30,561
23.8 %
6.2
-
21.7 %
$ 1,094,774 $
228,846 $
300 $
866,228
- %
$
$
31,450 $
3,489
-
34,939 $
8,164 $
855
-
9,019 $
4,638 $
56
-
4,694 $
27,924
2,690
-
30,614
16.6 %
2.1
-
15.3 %
$ 1,061,095 $
202,402 $
321 $
859,014
- %
$
$
30,928 $
5,771
-
36,699 $
7,904 $
810
-
8,714 $
3,374 $
15
-
3,389 $
26,398
4,976
-
31,374
12.8 %
0.3
-
10.8 %
AIG | 2019 Form 10-K 341
Valuation and Qualifying Accounts
For the years ended December 31, 2019, 2018 and 2017
Schedule V
(in millions)
2019
Allowance for mortgage and
Balance,
Charged to
Beginning
Costs and
Divested
of year
Expenses
Charge Offs
Acquisitions
Businesses
Other
Changes*
Balance,
End of year
other loans receivable
$
397 $
46 $
(5) $
- $
- $
- $
438
178
111
397
216
140
322
236
187
(310)
1,425
302
1,779
10
2
(2)
(2)
4
(3)
(1,500)
1,374
other loans receivable
$
322 $
93 $
(19) $
- $
- $
1 $
other loans receivable
$
297 $
49 $
(25) $
- $
- $
1 $
Allowance for premiums and
insurances balances receivable
Allowance for reinsurance assets
Federal and foreign valuation
216
140
allowance for deferred tax assets
1,779
2018
Allowance for mortgage and
(25)
(20)
(44)
(23)
(11)
-
-
-
-
-
-
-
Allowance for premiums and
insurances balances receivable
Allowance for reinsurance assets
Federal and foreign valuation
236
187
allowance for deferred tax assets
1,374
2017
Allowance for mortgage and
2
(8)
21
(20)
(45)
-
-
8
82
-
-
-
Allowance for premiums and
insurances balances receivable
Allowance for reinsurance assets
Federal and foreign valuation
262
207
allowance for deferred tax assets
2,831
36
33
43
(58)
(50)
-
-
-
-
(8)
-
-
*
Includes recoveries of amounts previously charged off and reclassifications to/from other accounts.
342 AIG | 2019 Form 10-K
American International Group, Inc., and Subsidiaries
Subsidiaries of Registrant
As of December 31, 2019
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
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 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.r.l
AIG Europe S.A.
AIG Global Reinsurance Operations
Avondhu Limited
AIG Holdings Europe Limited
AIG Israel Insurance Company Ltd
AIG Life Limited
American International Group UK Limited
Laya Healthcare Limited
AIG Investments UK Limited
Talbot Holdings Ltd.
Talbot Underwriting Holdings Ltd.
Talbot Underwriting Ltd.
AIG Japan Holdings Kabushiki Kaisha
AIG General Insurance Co., Ltd.
American Home Assurance Co., Ltd.
AIG Latin America Investments, S.L.
Inversiones Segucasai, C.A.
C.A. de Seguros American International
AIG Brazil Holding I, LLC
(1)
(2)
(3)
Exhibit 21
Percentage
of Voting
Securities
held by
Immediate
Parent
0
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
100
100
99.99
49
51
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
94
100
Jurisdiction of
Incorporation or
Organization
Delaware
Delaware
Delaware
England and Wales
Delaware
Delaware
Luxembourg
Delaware
Delaware
Delaware
Delaware
The United States
Delaware
Delaware
Delaware
Switzerland
Delaware
Delaware
Delaware
Delaware
Delaware
Vermont
Bermuda
Switzerland
Singapore
Singapore
Australia
Hong Kong
New Zealand
Korea, Republic of
Malaysia
Philippines
Malaysia
Vietnam
Indonesia
Thailand
Thailand
Canada
Canada
Luxembourg
Luxembourg
Belgium
Jersey
England and Wales
Israel
England
England
Ireland
England and Wales
Bermuda
England and Wales
England and Wales
Japan
Japan
Japan
Spain
Venezuela
Venezuela
Delaware
AIG | 2019 Form 10-K 343
As of December 31, 2019
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
American International Underwriters del Ecuador-Holding S.A.
AIG-Metropolitana Cia. de Seguros y Reaseguros S.A.
AIG MEA Holdings Limited
AIG Egypt Insurance Company S.A.E.
AIG CIS Investments, LLC
AIG Insurance Company, JSC
AIG Lebanon SAL
AIG MEA Limited
AIG Kenya Insurance Company Limited
AIG Uganda Limited
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.
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
AIG Insurance Company China Limited
Commerce and Industry Insurance Company
Eaglestone Reinsurance Company
Arthur J. Glatfelter Agency, Inc.
Glatfelter Underwriting Services, 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 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.
344 AIG | 2019 Form 10-K
Jurisdiction of
Incorporation or
Organization
Brazil
Brazil
Puerto Rico
Puerto Rico
Mexico
Bermuda
Ecuador
Ecuador
United Arab Emirates
Egypt
Russian Federation
Russian Federation
Lebanon
United Arab Emirates
Kenya
Uganda
South Africa
South Africa
South Africa
Delaware
Delaware
Singapore
Malaysia
England and Wales
Canada
Wisconsin
Bermuda
Bermuda
Bermuda
England and Wales
Switzerland
Bermuda
Bermuda
Delaware
Georgia
Illinois
Pennsylvania
Illinois
Delaware
New York
New York
Delaware
Delaware
China
New York
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Illinois
Illinois
Delaware
New Hampshire
Pennsylvania
Delaware
Vermont
Illinois
Massachusetts
Delaware
Illinois
Delaware
Illinois
(1)
(4)
(5)
Percentage
of Voting
Securities
held by
Immediate
Parent
90.56
100
100
100
100
100
100
32.06
100
95.02
99.99
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
50
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
As of December 31, 2019
Western World Insurance Company
Stratford Insurance Company
Tudor Insurance Company
AIG Technologies, Inc.
AIG Shared Services Corporation
AM Holdings LLC
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 Reinsurance Company Ltd.
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
New Hampshire
New Hampshire
New Hampshire
New Hampshire
New York
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Bermuda
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
80.10
100
100
100
100
100
100
100
100
100
100
100
100
100
100
(1)
(2)
(3)
(4)
(5)
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 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.
AIG | 2019 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.333-101640, No.333-148148, No.333-168679, No.333-188634 and No.333-219180) of American
International Group, Inc. of our report dated February 21, 2020 relating to the financial statements, financial statement
schedules and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
Exhibit 23
/s/ PricewaterhouseCoopers LLP
New York, New York
February 21, 2020
346 AIG | 2019 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 21, 2020
/S/ BRIAN DUPERREAULT
Brian Duperreault
Chief Executive Officer
AIG | 2019 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 21, 2020
/S/ MARK D. LYONS
Mark D. Lyons
Executive Vice President and
Chief Financial Officer
348 AIG | 2019 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, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian Duperreault,
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 21, 2020
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.
/S/ BRIAN DUPERREAULT
Brian Duperreault
Chief Executive Officer
AIG | 2019 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, 2019, 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 21, 2020
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.
/S/ MARK D. LYONS
Mark D. Lyons
Executive Vice President and
Chief Financial Officer
350 AIG | 2019 Form 10-K
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, 2019 or in the Fourth Quarter 2019 Financial Supplement available in the Investors section of AIG’s website, www.aig.com.
Life and Retirement Adjusted Attributed Common Equity is an attribution of total AIG Adjusted Common Shareholders’ Equity to this segment based
on our internal capital model, which incorporates the segment’s risk profile. Adjusted Attributed Common Equity represents our best estimates based on
current facts and circumstances and will change over time.
Life and Retirement Return on Common Equity – Adjusted After-tax Income (Adjusted Return on Attributed Common Equity) is used to show the
rate of return on Adjusted Attributed Common Equity. Adjusted Return on Attributed Common Equity is derived by dividing actual or annualized Adjusted
After-tax Income by Average Adjusted Attributed Common Equity.
Adjusted After-tax Income Attributable to Life and Retirement is derived by subtracting attributed interest expense, income tax expense and attributed
dividends on preferred stock from Adjusted Pre-tax Income. Attributed debt and the related interest expense and dividends on preferred stock are
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 segment conducts business, as well as the deductibility of expenses in those jurisdictions.
AIG | 2019 Annual Report
351
7
Non-GAAP Reconciliation
Reconciliations of Life and Retirement Adjusted Return on Attributed Common Equity
($ in millions)
Twelve Months Ended December 31, 2019
Adjusted pre-tax income
Interest expense on attributed financial debt
Adjusted pre-tax income including attributed interest expense
Income tax expense
Adjusted after-tax income
Dividends declared on preferred stock
Adjusted after-tax income attributable to common shareholders
Ending adjusted attributed common equity
$
$
$
$
$
$
$
$
3,458
173
3,285
652
2,633
9
2,624
19,513
Average adjusted attributed common equity
$ 19,109
Adjusted return on attributed common equity
13.7 %
352
8
AIG | 2019 Annual Report
Independent Chair of the Board
Letter to Shareholders
Dear AIG Shareholder,
2019 was a year of significant momentum as
Brian Duperreault and his leadership team
continued to execute against AIG’s strategy to
deliver long-term value for you, our shareholders.
Their many notable actions over the last two years
have begun to positively impact our financial
results, and they are taking decisive actions to
position the company for the future.
Your Board of Directors continues to provide
oversight of this journey, and you can find more
detail on specific actions over the past year and the
company’s progress in Brian’s letter. The Board also
remains focused on governance matters, and there
were several notable developments in this area.
In 2019, we welcomed four new independent
directors to the Board – Thomas Motamed, Peter
Porrino, Amy Schioldager and Therese Vaughan.
Also, Suzanne Nora Johnson has informed the
Board of her decision not to stand for re-election
this year. On behalf of the Board, I would like to
thank Suzanne for her outstanding service and
leadership over the last 12 years.
In December, the Board named Peter Zaffino
as President of AIG, in addition to his roles
as Global Chief Operating Officer and CEO of
General Insurance, effective January 1, 2020.
This appointment reflects the value Peter has
already delivered during his tenure by leading the
turnaround within General Insurance and overseeing
AIG 200, a global, multi-year effort designed to
position AIG as a top-performing company.
On behalf of the Board, I would like to thank
employees across AIG for their continued hard
work and dedication. Their many accomplishments
are reflected in AIG’s broad improvements in
financial performance in 2019.
Chief Executive Officer
Letter to Shareholders
Dear AIG Shareholder,
Our financial results for the full year 2019 reflect the significant progress we have
made to position AIG for long-term, sustainable and profitable growth.
The foundational work we have undertaken
at AIG since mid-2017 was evident in our 2019
financial performance, with broad-based
improvements in all business segments,
especially General Insurance.
Last year we also launched AIG 200, our global,
multi-year effort across the enterprise to position
AIG for the future. This work will improve how
we do business and strategically position AIG to
become a top-performing company as we create
value for all of our stakeholders.
I am proud of our many accomplishments in
2019. They are early proof points on AIG’s journey
to profitable growth as we instill a culture of
underwriting and operational excellence while
efficiently managing capital. There is still much
work to be done, but we have a clear path
toward becoming an industry leader and the top
performer we aim to be.
Overview of 2019 Performance
The improvements in 2019 financial results were
driven by contributions from across the company.
Several enterprise-level highlights include:
·
Net Income Attributable to AIG Common
Shareholders swung from a $6 million loss
in 2018 to a $3.3 billion profit in 2019 and
Adjusted After-tax Income Attributable to AIG
Looking ahead, the Board remains confident in
AIG’s future and is diligently focused on building
value for you over the long term.
Sincerely,
Douglas M. Steenland
Independent Chair of the Board
Common Shareholders* of $4.1 billion was
nearly four times what it was last year.
Return on Common Equity (ROCE) and
Adjusted ROCE* increased from 0.0%
and 2.1%, respectively, in 2018 to 5.3%
and 8.3%, respectively.
We returned capital in the form of
more than $1 billion in dividends to our
common shareholders.
Net Investment Income was $14.6 billion, an
increase of $2.1 billion over 2018.
·
·
·
*
These are non-GAAP financial measures. Reconciliations to the most comparable GAAP measures
are included within AIG’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019
(included herein) as follows. Adjusted After-tax Income Attributable to AIG Common Shareholders is
defined on page 43 of the Annual Report on Form 10-K and reconciled on page 69 of the Annual Report
on Form 10-K. Adjusted ROCE is defined on page 43 of the Annual Report on Form 10-K and reconciled
on page 40 of the Annual Report on Form 10-K. Accident Year Combined Ratio, as adjusted is defined
on page 44 of the Annual Report on Form 10-K and reconciled on page 76 of the Annual Report on
Form 10-K.
** This is a non-GAAP financial measure. The definition of such measure and reconciliation to the most
comparable GAAP measure are included on pages 351 and 352, respectively, of this Annual Report.
Shareholder Information
Requests for copies of the 2019 Annual Report should be directed to AIG Investor Relations. Shareholders may eliminate duplicate mailings
of AIG’s proxy materials by contacting AIG’s transfer agent. Contact details can be found at www.aig.com/investor-relations.
Cautionary Statement Regarding
Forward-Looking Information
This Annual Report and other publicly available documents may include, and officers and representatives of AIG may from time to time make and discuss,
projections, goals, assumptions and statements that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995. These projections, goals, assumptions and statements are not historical facts but instead represent only a belief regarding future events, many of
which, by their nature, are inherently uncertain and outside AIG’s control. These projections, goals, assumptions and statements include statements preceded
by, followed by or including words such as “will,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “focused on achieving,” “view,” “target,” “goal” or “estimate.”
These projections, goals, assumptions and statements may relate to future actions, prospective services or products, future performance or results of current
and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, anticipated organizational, business or
regulatory changes, anticipated sales, monetization and/or acquisitions of businesses or assets, or successful integration of acquired businesses, management
succession and retention plans, exposure to risk, trends in operations and financial results.
•
•
the effectiveness of our risk management
policies and procedures, including with
respect to our business continuity and disaster
recovery plans; 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, 2019.
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.
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,
including the significant global economic
slowdown, market volatility and business
interruption driven by responses to the
COVID-19 pandemic;
the occurrence of catastrophic events, both
natural and man-made, including pandemics
(such as COVID-19), and the effects of
climate change;
AIG’s ability to effectively execute on AIG 200
operational programs designed to achieve
underwriting excellence, modernization of
AIG’s operating infrastructure, enhanced user
and customer experiences and unification
of AIG;
AIG’s ability to consummate the sale of its
controlling interest in Fortitude Holdings
and AIG’s ability to successfully manage
Legacy Portfolios;
•
•
•
•
•
•
•
•
•
•
•
•
changes in judgments concerning potential
cost saving opportunities;
actions by credit rating agencies;
changes in judgments concerning insurance
underwriting and insurance liabilities;
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 strategies to recruit
and retain key personnel and to implement
effective succession plans;
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;
concentrations in AIG’s investment portfolios;
changes to the valuation of AIG’s investments;
AIG’s ability to successfully dispose of,
monetize and/or acquire businesses or assets
or successfully integrate
acquired businesses;
changes in judgments concerning the
recognition of deferred tax assets and
goodwill impairment;
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American International Group, Inc.
175 Water Street
New York, NY 10038
www.aig.com