AMERICAN INTERNATIONAL GROUP, INC. - Quarter Report: 2020 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020 |
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 | 13-2592361 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
|
|
175 Water Street, New York, New York | 10038 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (212) 770-7000
________________
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, Par Value $2.50 Per Share | AIG | New York Stock Exchange |
Warrants (expiring January 19, 2021) | AIG WS | New York Stock Exchange |
5.75% Series A-2 Junior Subordinated Debentures | AIG 67BP | New York Stock Exchange |
4.875% Series A-3 Junior Subordinated Debentures | AIG 67EU | New York Stock Exchange |
Stock Purchase Rights |
| New York Stock Exchange |
Depositary Shares Each Representing a 1/1,000th Interest in a Share of Series A 5.85% Non-Cumulative Perpetual Preferred Stock | AIG PRA | New York Stock Exchange |
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.
☑ |
|
|
| Accelerated filer ☐ |
Non-accelerated filer ☐ |
|
|
| Smaller reporting company ☐ |
|
|
|
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of April 30, 2020, there were 861,290,649 shares outstanding of the registrant’s common stock.
AMERICAN INTERNATIONAL GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
March 31, 2020
Table of Contents
FORM 10-Q |
| ||
Item Number | Description | Page | |
Part I — Financial Information |
| ||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
| |||
Part II — Other Information |
| ||
AIG | First Quarter 2020 Form 10-Q 1
Part I – Financial Information
Item 1. | Financial Statements
American International Group, Inc.
Condensed Consolidated Balance Sheets (unaudited)
| March 31, | December 31, | ||
(in millions, except for share data) |
| 2020 |
| 2019 |
Assets: |
|
|
|
|
Investments: |
|
|
|
|
Fixed maturity securities: |
|
|
|
|
Bonds available for sale, at fair value (net of allowance for credit losses of $211 in 2020) |
|
|
|
|
(amortized cost: 2020 - $234,586; 2019 - $233,230) | $ | 241,776 | $ | 251,086 |
Other bond securities, at fair value (See Note 6) |
| 5,353 |
| 6,682 |
Equity securities, at fair value (See Note 6) |
| 624 |
| 841 |
Mortgage and other loans receivable, net of allowance for credit losses of $787 in 2020 and $438 in 2019 |
| 46,844 |
| 46,984 |
Other invested assets (portion measured at fair value: 2020 - $6,576; 2019 - $6,827) |
| 17,966 |
| 18,792 |
Short-term investments, including restricted cash of $324 in 2020 and $188 in 2019 |
|
|
|
|
(portion measured at fair value: 2020 - $8,186; 2019 - $5,343) |
| 19,773 |
| 13,230 |
Total investments |
| 332,336 |
| 337,615 |
|
|
|
|
|
Cash |
| 2,738 |
| 2,856 |
Accrued investment income |
| 2,312 |
| 2,334 |
Premiums and other receivables, net of allowance for credit losses and disputes of $210 in 2020 and $178 in 2019 |
| 12,072 |
| 10,274 |
Reinsurance assets, net of allowance for credit losses and disputes of $310 in 2020 and $151 in 2019 |
| 39,927 |
| 37,977 |
Deferred income taxes |
| 13,975 |
| 13,146 |
Deferred policy acquisition costs |
| 11,889 |
| 11,207 |
Other assets, net of allowance for credit losses of $52 in 2020, including restricted cash of $257 in 2020 and $243 in 2019 |
|
|
|
|
(portion measured at fair value: 2020 - $3,311; 2019 - $3,151) |
| 16,392 |
| 16,383 |
Separate account assets, at fair value |
| 78,836 |
| 93,272 |
Total assets | $ | 510,477 | $ | 525,064 |
Liabilities: |
|
|
|
|
Liability for unpaid losses and loss adjustment expenses, net of allowance for credit losses of $14 in 2020 | $ | 77,747 | $ | 78,328 |
Unearned premiums |
| 20,128 |
| 18,269 |
Future policy benefits for life and accident and health insurance contracts |
| 49,803 |
| 50,512 |
Policyholder contract deposits (portion measured at fair value: 2020 - $8,153; 2019 - $6,910) |
| 154,067 |
| 151,869 |
Other policyholder funds |
| 3,460 |
| 3,428 |
Other liabilities (portion measured at fair value: 2020 - $637; 2019 - $1,100) |
| 29,183 |
| 26,609 |
Long-term debt (portion measured at fair value: 2020 - $2,276; 2019 - $2,062) |
| 25,268 |
| 25,479 |
Debt of consolidated investment entities |
| 10,142 |
| 9,871 |
Separate account liabilities |
| 78,836 |
| 93,272 |
Total liabilities |
| 448,634 |
| 457,637 |
Contingencies, commitments and guarantees (See Note 11) |
|
| ||
|
|
|
|
|
AIG shareholders’ equity: |
|
|
|
|
Series A Non-cumulative preferred stock and additional paid in capital, $5.00 par value; 100,000,000 shares |
|
|
|
|
authorized; shares issued: 2020 - 20,000 and 2019 - 20,000; liquidation preference $500 |
| 485 |
| 485 |
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2020 - 1,906,671,492 and |
|
|
|
|
2019 - 1,906,671,492 |
| 4,766 |
| 4,766 |
Treasury stock, at cost; 2020 - 1,045,380,884 shares; 2019 - 1,036,672,461 shares of common stock |
| (49,334) |
| (48,987) |
Additional paid-in capital |
| 81,188 |
| 81,345 |
Retained earnings |
| 24,062 |
| 23,084 |
Accumulated other comprehensive income (loss) |
| (994) |
| 4,982 |
Total AIG shareholders’ equity |
| 60,173 |
| 65,675 |
Non-redeemable noncontrolling interests |
| 1,670 |
| 1,752 |
Total equity |
| 61,843 |
| 67,427 |
Total liabilities and equity | $ | 510,477 | $ | 525,064 |
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements. |
2 AIG | First Quarter 2020 Form 10-Q
American International Group, Inc.
Condensed Consolidated Statements of Income (unaudited)
| Three Months Ended March 31, | ||||
(dollars in millions, except per common share data) |
| 2020 |
|
| 2019 |
Revenues: |
|
|
|
|
|
Premiums | $ | 7,443 |
| $ | 8,070 |
Policy fees |
| 755 |
|
| 735 |
Net investment income |
| 2,508 |
|
| 3,879 |
Net realized capital gains (losses) |
| 3,519 |
|
| (446) |
Other income |
| 218 |
|
| 218 |
Total revenues |
| 14,443 |
|
| 12,456 |
Benefits, losses and expenses: |
|
|
|
|
|
Policyholder benefits and losses incurred |
| 6,325 |
|
| 6,679 |
Interest credited to policyholder account balances |
| 957 |
|
| 940 |
Amortization of deferred policy acquisition costs |
| 1,862 |
|
| 1,289 |
General operating and other expenses |
| 2,153 |
|
| 2,053 |
Interest expense |
| 355 |
|
| 349 |
(Gain) loss on extinguishment of debt |
| 17 |
|
| (2) |
Net (gain) loss on sale or disposal of divested businesses |
| 216 |
|
| (6) |
Total benefits, losses and expenses |
| 11,885 |
|
| 11,302 |
Income from continuing operations before income tax expense |
| 2,558 |
|
| 1,154 |
Income tax expense |
| 904 |
|
| 217 |
Income from continuing operations |
| 1,654 |
|
| 937 |
Income (loss) from discontinued operations, net of income taxes |
| - |
|
| - |
Net income |
| 1,654 |
|
| 937 |
Less: |
|
|
|
|
|
Net income (loss) from continuing operations attributable to noncontrolling interests |
| (95) |
|
| 283 |
Net income attributable to AIG |
| 1,749 |
|
| 654 |
Less: Dividends on preferred stock |
| 7 |
|
| - |
Net income attributable to AIG common shareholders | $ | 1,742 |
| $ | 654 |
|
|
|
|
|
|
Income per common share attributable to AIG common shareholders: |
|
|
|
|
|
Basic: |
|
|
|
|
|
Income from continuing operations | $ | 1.99 |
| $ | 0.75 |
Income from discontinued operations | $ | - |
| $ | - |
Net income attributable to AIG common shareholders | $ | 1.99 |
| $ | 0.75 |
Diluted: |
|
|
|
|
|
Income from continuing operations | $ | 1.98 |
| $ | 0.75 |
Income from discontinued operations | $ | - |
| $ | - |
Net income attributable to AIG common shareholders | $ | 1.98 |
| $ | 0.75 |
Weighted average shares outstanding: |
|
|
|
|
|
Basic |
| 874,213,630 |
|
| 875,383,084 |
Diluted |
| 878,866,213 |
|
| 877,512,244 |
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements. |
|
|
|
|
|
AIG | First Quarter 2020 Form 10-Q 3
American International Group, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited)
| Three Months Ended March 31, | ||||
(in millions) |
| 2020 |
|
| 2019 |
Net income | $ | 1,654 |
| $ | 937 |
Other comprehensive income (loss), net of tax |
|
|
|
|
|
Change in unrealized appreciation (depreciation) of fixed maturity securities on which |
|
|
|
|
|
allowance for credit losses were taken |
| (359) |
|
| - |
Change in unrealized appreciation of fixed maturity securities on which |
|
|
|
|
|
other-than-temporary credit impairments were taken |
| - |
|
| 676 |
Change in unrealized appreciation (depreciation) of all other investments |
| (5,542) |
|
| 2,708 |
Change in foreign currency translation adjustments |
| (85) |
|
| 164 |
Change in retirement plan liabilities adjustment |
| (7) |
|
| (1) |
Change in fair value of liabilities under fair value option attributable to changes in own credit risk |
| 3 |
|
| - |
Other comprehensive income (loss) |
| (5,990) |
|
| 3,547 |
Comprehensive income (loss) |
| (4,336) |
|
| 4,484 |
Comprehensive income (loss) attributable to noncontrolling interests |
| (109) |
|
| 289 |
Comprehensive income (loss) attributable to AIG | $ | (4,227) |
| $ | 4,195 |
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements. |
|
|
|
|
|
4 AIG | First Quarter 2020 Form 10-Q
American International Group, Inc.
Condensed Consolidated Statements of Equity (unaudited)
|
| Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
| Non- |
|
|
| Stock and |
|
|
|
|
|
|
|
|
| Accumulated |
| Total AIG |
| redeemable |
|
| |
| Additional |
|
|
|
|
| Additional |
|
|
| Other |
| Share- |
| Non- |
|
| |
|
| Paid-in |
| Common |
| Treasury |
| Paid-in |
| Retained | Comprehensive |
| holders' |
| controlling |
| Total | |
(in millions) |
| Capital |
| Stock |
| Stock |
| Capital |
| Earnings | Income (Loss) |
| Equity |
| Interests |
| Equity | |
Three Months Ended March 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year | $ | 485 | $ | 4,766 | $ | (48,987) | $ | 81,345 | $ | 23,084 | $ | 4,982 | $ | 65,675 | $ | 1,752 | $ | 67,427 |
Cumulative effect of change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting principle, net of tax |
| - |
| - |
| - |
| - |
| (487) |
| - |
| (487) |
| - |
| (487) |
Preferred stock issued |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Common stock issued under stock plans |
| - |
| - |
| 160 |
| (255) |
| - |
| - |
| (95) |
| - |
| (95) |
Purchase of common stock |
| - |
| - |
| (500) |
| - |
| - |
| - |
| (500) |
| - |
| (500) |
Net income (loss) attributable to AIG or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
| - |
| - |
| - |
| - |
| 1,749 |
| - |
| 1,749 |
| (95) |
| 1,654 |
Dividends on preferred stock |
| - |
| - |
| - |
| - |
| (7) |
| - |
| (7) |
| - |
| (7) |
Dividends on common stock |
| - |
| - |
| - |
| - |
| (276) |
| - |
| (276) |
| - |
| (276) |
Other comprehensive loss |
| - |
| - |
| - |
| - |
| - |
| (5,976) |
| (5,976) |
| (14) |
| (5,990) |
Net increase due to acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and consolidations |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 48 |
| 48 |
Contributions from noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 1 |
| 1 |
Distributions to noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| (22) |
| (22) |
Other |
| - |
| - |
| (7) |
| 98 |
| (1) |
| - |
| 90 |
| - |
| 90 |
Balance, end of period | $ | 485 | $ | 4,766 | $ | (49,334) | $ | 81,188 | $ | 24,062 | $ | (994) | $ | 60,173 | $ | 1,670 | $ | 61,843 |
Three Months Ended March 31, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year | $ | - | $ | 4,766 | $ | (49,144) | $ | 81,268 | $ | 20,884 | $ | (1,413) | $ | 56,361 | $ | 948 | $ | 57,309 |
Preferred stock issued |
| 485 |
| - |
| - |
| - |
| - |
| - |
| 485 |
| - |
| 485 |
Common stock issued under stock plans |
| - |
| - |
| 145 |
| (222) |
| - |
| - |
| (77) |
| - |
| (77) |
Purchase of common stock |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Net income attributable to AIG or |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling interests |
| - |
| - |
| - |
| - |
| 654 |
| - |
| 654 |
| 283 |
| 937 |
Dividends on preferred stock |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
Dividends on common stock |
| - |
| - |
| - |
| - |
| (278) |
| - |
| (278) |
| - |
| (278) |
Other comprehensive income |
| - |
| - |
| - |
| - |
| - |
| 3,541 |
| 3,541 |
| 6 |
| 3,547 |
Current and deferred income taxes |
| - |
| - |
| - |
| (1) |
| - |
| - |
| (1) |
| - |
| (1) |
Net increase due to acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and consolidations |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 108 |
| 108 |
Contributions from noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 12 |
| 12 |
Distributions to noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| (59) |
| (59) |
Other |
| - |
| - |
| - |
| 103 |
| (1) |
| - |
| 102 |
| 8 |
| 110 |
Balance, end of period | $ | 485 | $ | 4,766 | $ | (48,999) | $ | 81,148 | $ | 21,259 | $ | 2,128 | $ | 60,787 | $ | 1,306 | $ | 62,093 |
See accompanying Notes to Condensed Consolidated Financial Statements.
AIG | First Quarter 2020 Form 10-Q 5
American International Group, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
| Three Months Ended March 31, | |||
(in millions) |
| 2020 |
| 2019 |
Cash flows from operating activities: |
|
|
|
|
Net income | $ | 1,654 | $ | 937 |
(Income) loss from discontinued operations |
| - |
| - |
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
Noncash revenues, expenses, gains and losses included in income: |
|
|
|
|
Net gains on sales of securities available for sale and other assets |
| (265) |
| (22) |
Net (gain) loss on sale or disposal of divested businesses |
| 216 |
| (6) |
(Gains) losses on extinguishment of debt |
| 17 |
| (2) |
Unrealized (gains) losses in earnings - net |
| (2,549) |
| 367 |
Equity in (income) loss from equity method investments, net of dividends or distributions |
| 167 |
| (83) |
Depreciation and other amortization |
| 1,878 |
| 1,299 |
Impairments of assets |
| 25 |
| 125 |
Changes in operating assets and liabilities: |
|
|
|
|
Insurance reserves |
| 1,651 |
| 596 |
Premiums and other receivables and payables - net |
| (62) |
| 315 |
Reinsurance assets and funds held under reinsurance treaties |
| (2,131) |
| (2,495) |
Capitalization of deferred policy acquisition costs |
| (1,379) |
| (1,420) |
Current and deferred income taxes - net |
| 842 |
| 167 |
Other, net |
| (78) |
| (754) |
Total adjustments |
| (1,668) |
| (1,913) |
Net cash used in operating activities |
| (14) |
| (976) |
Cash flows from investing activities: |
|
|
|
|
Proceeds from (payments for) |
|
|
|
|
Sales or distributions of: |
|
|
|
|
Available for sale securities |
| 7,040 |
| 6,370 |
Other securities |
| 1,577 |
| 1,034 |
Other invested assets |
| 1,447 |
| 1,118 |
Maturities of fixed maturity securities available for sale |
| 6,768 |
| 4,957 |
Principal payments received on and sales of mortgage and other loans receivable |
| 1,014 |
| 861 |
Purchases of: |
|
|
|
|
Available for sale securities |
| (15,121) |
| (12,757) |
Other securities |
| (317) |
| (287) |
Other invested assets |
| (717) |
| (567) |
Mortgage and other loans receivable |
| (1,733) |
| (1,504) |
Net change in short-term investments |
| (6,023) |
| (1,221) |
Other, net |
| 5,432 |
| 17 |
Net cash used in investing activities |
| (633) |
| (1,979) |
Cash flows from financing activities: |
|
|
|
|
Proceeds from (payments for) |
|
|
|
|
Policyholder contract deposits |
| 4,979 |
| 5,629 |
Policyholder contract withdrawals |
| (4,337) |
| (4,195) |
Issuance of long-term debt and debt of consolidated investment entities |
| 673 |
| 1,449 |
Repayments of long-term debt and debt of consolidated investment entities |
| (884) |
| (589) |
Borrowings under syndicated credit facility |
| 1,300 |
| - |
Issuance of preferred stock, net of issuance costs |
| - |
| 485 |
Purchase of common stock |
| (500) |
| - |
Dividends paid on preferred stock |
| (7) |
| - |
Dividends paid on common stock |
| (276) |
| (278) |
Other, net |
| (288) |
| 263 |
Net cash provided by financing activities |
| 660 |
| 2,764 |
Effect of exchange rate changes on cash and restricted cash |
| 10 |
| 12 |
Net increase (decrease) in cash and restricted cash |
| 23 |
| (179) |
Cash and restricted cash at beginning of year |
| 3,287 |
| 3,358 |
Change in cash of businesses held for sale |
| 9 |
| - |
Cash and restricted cash at end of period | $ | 3,319 | $ | 3,179 |
6 AIG | First Quarter 2020 Form 10-Q
American International Group, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)(continued)
Supplementary Disclosure of Condensed Consolidated Cash Flow Information
| Three Months Ended March 31, | |||
(in millions) |
| 2020 |
| 2019 |
Cash | $ | 2,738 | $ | 2,565 |
Restricted cash included in Short-term investments* |
| 324 |
| 251 |
Restricted cash included in Other assets* |
| 257 |
| 363 |
Total cash and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 3,319 | $ | 3,179 |
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
Interest | $ | 323 | $ | 315 |
Taxes | $ | 62 | $ | 50 |
Non-cash investing activities: |
|
|
|
|
Fixed maturity securities available for sale received in connection with pension risk transfer transactions | $ | 553 | $ | - |
Non-cash financing activities: |
|
|
|
|
Interest credited to policyholder contract deposits included in financing activities | $ | 869 | $ | 878 |
|
|
|
|
|
*Includes funds held for tax sharing payments to AIG Parent, security deposits, and replacement reserve deposits related to our affordable housing investments.
See accompanying Notes to Condensed Consolidated Financial Statements.
AIG | First Quarter 2020 Form 10-Q 7
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 1. Basis of Presentation
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.
These unaudited Condensed Consolidated Financial Statements do not include all disclosures that are normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) and should be read in conjunction with the audited Consolidated Financial Statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the 2019 Annual Report). The condensed consolidated financial information as of December 31, 2019 included herein has been derived from the audited Consolidated Financial Statements in the 2019 Annual Report.
Certain of our foreign subsidiaries included in the Condensed 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 Condensed Consolidated Financial Statements has been considered for adjustment and/or disclosure. In the opinion of management, these Condensed Consolidated Financial Statements contain normal recurring adjustments, including eliminations of material intercompany accounts and transactions, necessary for a fair statement of the results presented herein. Operating results for the three months ended March 31, 2020, are not necessarily indicative of the results that may be expected for the year ended December 31, 2020, especially when considering the risks and uncertainties associated COVID-19 and the impact it may have on our business, results of operations and financial condition.
We evaluated the need to recognize or disclose events that occurred subsequent to March 31, 2020 and prior to the issuance of these Condensed Consolidated Financial Statements.
Sales/disposals of Businesses
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 following December 31, 2023, which is subject to a purchase price adjustment wherein AIG will reimburse TCG for adverse development in property casualty related reserves, based on an agreed methodology, that occurs on or prior to December 31, 2023, up to the value of TCG’s investment in Fortitude. Any amount due to TCG in respect of this purchase price adjustment will be offset by the amount of the $95 million otherwise due from TCG to AIG. To the extent we do not receive all or a portion of the planned distributions by May 13, 2020, TCG will pay us up to an additional $100 million, which amount shall adjust in proportion with the amount of the dividend received by AIG. 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.
8 AIG | First Quarter 2020 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 1. Basis of Presentation
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 (Majority Interest Fortitude Sale). Upon closing of the Majority Interest Fortitude Sale, AIG will have a 3.5 percent ownership interest in Fortitude Holdings. The purchase price under the Majority Interest Fortitude Sale is subject to a post-closing purchase price adjustment pursuant to which AIG will pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur on or prior to December 31, 2023, up to a maximum payment of $500 million. In connection with the Majority Interest Fortitude Sale agreement, AIG, Fortitude Holdings and TCG have agreed that, effective as of the closing of the Majority Interest Fortitude Sale, (i) AIG’s aforementioned investment commitment targets will be assumed by Fortitude Holdings and AIG will be released therefrom, (ii) the purchase price adjustment that AIG had agreed to provide TCG in the 2018 Fortitude Sale will be terminated, and (iii) Carlyle will remain obligated to pay AIG $95 million of deferred compensation at December 31, 2023 and up to an additional $100 million to the extent AIG does not receive all or a portion of the planned distributions by May 13, 2020, which amount shall adjust in proportion with the amount of the dividend received by AIG. We expect to contribute approximately $1.45 billion of the proceeds of the Majority Interest 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 Majority Interest Fortitude Sale.
For further details on this transaction see Note 4 to the Condensed Consolidated Financial Statements.
Blackboard
At the end of March 2020, AIG decided to place Blackboard U.S. Holdings, Inc. (Blackboard), AIG’s technology-driven subsidiary, into run-off. As a result of this decision, AIG recognized a pre-tax loss of $210 million, primarily consisting of asset impairment charges.
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 impairments on other invested assets and goodwill impairment;
allowances for credit losses primarily on loans, available for sale fixed maturity securities, reinsurance assets and premiums and other receivables;
liability for legal contingencies;
fair value measurements of certain financial assets and liabilities; and
income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset and estimates associated with the Tax Cuts and Jobs Act (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.
AIG | First Quarter 2020 Form 10-Q 9
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 2. Summary of Significant Accounting Policies
2. Summary of Significant Accounting Policies
Accounting Standards Adopted During 2020
Financial Instruments - Credit Losses
In June 2016, the FASB issued an accounting standard that changed how entities account for current expected credit losses (CECL) for most financial assets, premiums receivable, trade receivables, off-balance sheet exposures and reinsurance receivables (the ). 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 is measured in a similar manner, except that losses are recognized as allowances rather than reductions in the amortized cost of the securities. The standard allows 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 January 1, 2020, the impact of the adoption of the standard was a reduction in opening retained earnings of $487 million (after-tax) primarily driven by commercial mortgage loans, and, to a lesser extent, reinsurance receivables and recoverables.
The following table provides a rollforward of our allowance, including credit losses, in connection with the adoption of the Financial Instruments Credit Losses Standard as well as cross references to the applicable notes herein for additional information:
Three Months Ended March 31, 2020 |
| Balance, |
| Cumulative Effect |
| Purchased Credit |
|
|
| Balance, |
|
| Beginning |
| Adjustment as of |
| Deteriorated Initial |
| Increase |
| End of |
(in millions) |
| of Year |
| January 1, 2020 |
| Allowance |
| (Decrease) |
| Period |
Securities available for sale(a) | $ | - | $ | - | $ | 13 | $ | 198 | $ | 211 |
Mortgage and other loan receivables(b) |
| 438 |
| 318 |
| - |
| 31 |
| 787 |
Reinsurance recoverables (inclusive of |
|
|
|
|
|
|
|
|
|
|
deposit accounted assets)(c) |
| 151 |
| 224 |
| - |
| (13) |
| 362 |
Premiums and other receivables(d) |
| 178 |
| 34 |
| - |
| (2) |
| 210 |
Contractual deductible recoverables(e) |
| - |
| 14 |
| - |
| - |
| 14 |
Commercial mortgage loan commitments(f) |
| - |
| 51 |
| - |
| 7 |
| 58 |
Total | $ | 767 | $ | 641 | $ | 13 | $ | 221 | $ | 1,642 |
Secondary impacts to certain long-duration |
|
|
|
|
|
|
|
|
|
|
insurance contracts(g) |
|
|
| (27) |
|
|
|
|
|
|
Tax impact |
|
|
| (127) |
|
|
|
|
|
|
Total cumulative effect adjustment |
|
| $ | 487 |
|
|
|
|
|
|
(a)The allowance for credit losses is reported in Bonds available for sale in the Condensed Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Net realized capital gains (losses) in the Condensed Consolidated Statements of Income. Refer to Note 6 for additional information.
(b)The allowance for credit losses is reported in Mortgage and other loans receivable in the Condensed Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Net realized capital gains (losses) in the Condensed Consolidated Statements of Income. Refer to Note 7 for additional information.
(c)The allowance for credit losses is reported for Reinsurance assets for reinsurance contracts that contain sufficient insurance risk, and reported in Other assets for insurance and reinsurance contracts that do not contain sufficient insurance risk in the Condensed Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Policyholder benefits and losses incurred for reinsurance contracts that do contain sufficient insurance risk and Premiums for contracts that do not contain sufficient insurance risk in the Condensed Consolidated Statements of Income. Refer to Note 2 for additional information.
(d)The allowance for credit losses is reported in Premiums and other receivables in the Condensed Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in General operating and other expenses in the Condensed Consolidated Statements of Income. Refer to Note 2 for additional information.
(e)The allowance for credit losses is reported in Liability for unpaid losses and loss adjustment expenses in the Condensed Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Policyholder benefits and losses incurred in the Condensed Consolidated Statements of Income. Refer to Note 10 for additional information.
(f)The allowance for credit losses is reported in Other liabilities in the Condensed Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Net realized capital gains (losses) in the Condensed Consolidated Statements of Income. Refer to Note 7 for additional information.
(g)This reflects adjustments to the amortization of DAC, unearned revenue reserve and sales inducement assets as well as impacts on the future policy benefits for certain universal life and variable annuity contracts.
10 AIG | First Quarter 2020 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 2. Summary of Significant Accounting Policies
The following presents the impact of the adoption of the standard on reinsurance recoverables and premiums and other receivables.
Reinsurance — Credit Losses
The estimation of reinsurance recoverable involves a significant amount of judgment, particularly for latent exposures, such as asbestos, due to their long-tail nature. Reinsurance assets include reinsurance recoverable on unpaid losses and loss adjustment expenses that are estimated as part of our loss reserving process and, consequently, are subject to similar judgments and uncertainties as the estimation of gross loss reserves. Similarly, Other assets include reinsurance recoverable for contracts which are accounted for as deposits.
We assess the collectability of reinsurance recoverable balances in each reporting period, through either historical trends of disputes and credit events or financial analysis of the credit quality of the reinsurer. We record adjustments to reflect the results of these assessments through an allowance for credit losses and disputes on uncollectable reinsurance that reduces the carrying amount of reinsurance and other assets on the consolidated balance sheets (collectively, the reinsurance recoverable balances). This estimate requires significant judgment for which key considerations include:
paid and unpaid amounts recoverable;
whether the balance is in dispute or subject to legal collection;
the relative financial health of the reinsurer as determined by the Obligor Risk Ratings (ORRs) we assign to each reinsurer based upon our financial reviews; insurers that are financially troubled (i.e., in run-off, have voluntarily or involuntarily been placed in receivership, are insolvent, are in the process of liquidation or otherwise subject to formal or informal regulatory restriction) are assigned ORRs that will generate significant allowance; and
whether collateral and collateral arrangements exist.
An estimate of the reinsurance recoverable’s lifetime expected credit losses is established utilizing a probability of default and loss given default method, which reflects the reinsurer’s ORR rating. The allowance for credit losses excludes disputed amounts. An allowance for disputes is established for a reinsurance recoverable using the losses incurred model for contingencies.
The total reinsurance recoverables as of March 31, 2020 were $42.2 billion. As of that date, utilizing AIG’s ORRs, (i) approximately 87 percent of the reinsurance recoverables are investment grade, of which 82 percent relate to General Insurance and 5 percent relate to Life and Retirement; (ii) approximately 12 percent of the reinsurance recoverables are non-investment grade, the majority of which relates to General Insurance; (iii) less than percent of the non-investment grade reinsurance recoverables related to Life and Retirement and (iv) approximately percent of the reinsurance recoverables relate to entities that are not rated by AIG.
As of March 31, 2020, approximately 76 percent of our non-investment grade reinsurance exposure relates to captive insurers. These arrangements are typically collateralized by letters of credit, funds held or trust agreements.
Reinsurance Recoverable Allowance
The following table presents a rollforward of the reinsurance recoverable allowance:
Three Months Ended March 31, 2020 |
| General |
| Life and |
|
|
(in millions) |
| Insurance |
| Retirement |
| Total |
Balance, beginning of year | $ | 111 | $ | 40 | $ | 151 |
Initial allowance upon CECL adoption |
| 202 |
| 22 |
| 224 |
Current period provision for expected credit losses and disputes |
| (4) |
| 2 |
| (2) |
Write-offs charged against the allowance for credit losses and disputes |
| (3) |
| (4) |
| (7) |
Other changes |
| (4) |
| - |
| (4) |
Balance, end of period | $ | 302 | $ | 60 | $ | 362 |
There were recoveries of credit losses previously written off for the three-month period ended March 31, 2020.
Past-Due Status
We consider a reinsurance asset to be past due when it is 90 days past due. Past due balances were not significant for any of the periods presented.
AIG | First Quarter 2020 Form 10-Q 11
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 2. Summary of Significant Accounting Policies
Premiums and other receivables — Credit Losses
Premiums and other receivables, net of allowance for credit losses include premium balances receivable, amounts due from agents and brokers and policyholders, trade receivables for the Direct Investment book 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 credit losses and disputes for premiums and other receivables was $210 million at March 31, 2020. Our allowance for credit losses for premium receivables considers a combination of internal and external information relating to past events, current conditions and reasonable and supportable forecasts. Our allowance contemplates our contractual provisions. Upon default or delinquency of the policyholder we may be able to cease coverage for the remaining period. In certain jurisdictions we are unable to cancel coverage even in the event of delinquency or default by the policyholder. We consider premium and other receivable balances to be past due if the payment is not received after 90 days from the contractual obligation due date and record an allowance for disputes when there is reasonable uncertainty of the collectability of a disputed amount during the reporting period.
For further information regarding the impacts of the adoption of this standard see Notes 5, 6, 7, 10 and 12 to the Condensed Consolidated Financial Statements.
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. The adoption of the standard did not have a material impact on our financial position, results of operations or cash flows.
Cloud Computing Arrangements
In August 2018, the FASB issued an accounting standard that aligns the requirements for capitalizing implementation costs incurred in a cloud computing (or hosting) arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Capitalized implementation costs must be amortized over the term of the hosting arrangement. The accounting for the service element is not affected by the amendments in this update.
We adopted the standard prospectively on its effective date of January 1, 2020. The adoption of the standard did not have a material impact on our consolidated financial position, results of operations or cash flows.
Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates
In March 2020, the Securities and Exchange Commission (SEC) adopted amendments to simplify and streamline the disclosure requirements for guarantors and issuers of guaranteed securities registered or being registered, and issuers’ affiliates whose securities collateralize securities registered or being registered. Currently, the SEC permits the omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met and the parent company provides summarized financial information of the subsidiary issuers and guarantors. The amendments, among other things, allow companies to cease providing summarized financial information if the subsidiary issuer’s or guarantor’s reporting obligation has been suspended.
The amendments are effective January 4, 2021, with early adoption permitted. Effective March 31, 2020, AIG early adopted the amendment and ceased providing the summarized information for the subsidiary issuers and guarantors because the subsidiaries issuer’s reporting obligations have been suspended.
Future Application of Accounting Standards
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:
12 AIG | First Quarter 2020 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 2. Summary of Significant Accounting Policies
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.
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 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 an accounting standard 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 of the standard on our consolidated financial condition, results of operations and cash flows.
Reference Rate Reform
On March 12, 2020, the FASB issued an accounting standard that provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The standard allows us to account for certain contract modifications that result from the discontinuation of the London Inter-Bank Offered Rate (LIBOR) or another reference rate as a continuation of the existing contract without additional analysis.
This standard may be elected and applied prospectively over time from March 12, 2020 through December 31, 2022 as reference rate reform activities occur. 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.
Clarification of Accounting for Certain Equity Method Investments
On January 16, 2020, the FASB issued an accounting standard to clarify how a previously issued standard regarding a company’s ability to measure the fair value of certain equity securities without a readily determinable fair value should interact with equity method investments standards. The previously issued standard provides that such equity securities could be measured at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs (measurement alternative). The new standard clarifies that a company should consider observable transactions that require the company to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with the equity method immediately before applying or upon discontinuing the equity method.
The standard further clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.
The standard is effective for interim and annual reporting periods beginning after December 15, 2020. We are evaluating the impact adoption of this standard will have on our consolidated financial condition, results of operations, cash flows and required disclosures.
AIG | First Quarter 2020 Form 10-Q 13
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 3. Segment Information
3. Segment Information
We report our results of operations consistent with the manner in which our chief operating decision makers review the business to assess performance and allocate resources, as follows:
General Insurance
General Insurance business is presented as two operating segments:
North America — consists of insurance businesses in the United States, Canada and Bermuda. This also includes the results of Validus Reinsurance, Ltd. (Validus), Western World Insurance Group, Inc. and Glatfelter Insurance Group (Glatfelter).
International — consists of regional insurance businesses in Japan, the UK, Europe, Asia Pacific, Latin America and Caribbean, Middle East and Africa, and China. This also includes the results of Talbot Holdings, Ltd.
Results are presented before internal reinsurance transactions. North America and International operating segments consist of the following products:
–Commercial Lines — consists of Liability, Financial Lines, Property and Special Risks.
–Personal Insurance — consists of Personal Lines and Accident and Health.
Life and Retirement
Life and Retirement business is presented as four operating segments:
Individual Retirement — consists of fixed annuities, fixed index annuities, variable annuities and retail mutual funds.
Group Retirement — consists of group mutual funds, group 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 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 U.S. Holdings, Inc. — and its subsidiaries which are focused on delivering commercial insurance solutions using digital technology, data analytics and automation. At the end of March 2020, AIG decided to place Blackboard into run-off.
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.
14 AIG | First Quarter 2020 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 3. Segment Information
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. For the items excluded from adjusted revenues and adjusted pre-tax income (loss) see the table below.
The following table presents AIG’s continuing operations by operating segment:
Three Months Ended March 31, | 2020 |
| 2019 | ||||||
|
|
|
| Adjusted |
|
|
|
| Adjusted |
|
| Total |
| Pre-tax |
|
| Total |
| Pre-tax |
(in millions) |
| Revenues |
| Income (Loss) |
|
| Revenues |
| Income (Loss) |
General Insurance |
|
|
|
|
|
|
|
|
|
North America | $ | 3,414 | $ | 409 |
| $ | 4,098 | $ | 934 |
International |
| 3,253 |
| 92 |
|
| 3,704 |
| 334 |
Total General Insurance |
| 6,667 |
| 501 |
|
| 7,802 |
| 1,268 |
Life and Retirement |
|
|
|
|
|
|
|
|
|
Individual Retirement |
| 1,370 |
| 306 |
|
| 1,351 |
| 508 |
Group Retirement |
| 694 |
| 143 |
|
| 709 |
| 232 |
Life Insurance |
| 1,091 |
| 55 |
|
| 1,073 |
| 116 |
Institutional Markets |
| 1,017 |
| 70 |
|
| 1,071 |
| 68 |
Total Life and Retirement |
| 4,172 |
| 574 |
|
| 4,204 |
| 924 |
Other Operations |
| 162 |
| (451) |
|
| 139 |
| (387) |
Legacy Portfolio |
| 264 |
| (368) |
|
| 706 |
| 112 |
AIG Consolidation and elimination |
| (145) |
| (84) |
|
| (97) |
| (70) |
Total AIG Consolidated adjusted revenues and adjusted pre-tax income |
| 11,120 |
| 172 |
|
| 12,754 |
| 1,847 |
Reconciling items from adjusted pre-tax income to pre-tax income: |
|
|
|
|
|
|
|
|
|
Changes in fair value of securities used to hedge guaranteed living benefits |
| 14 |
| (7) |
|
| 105 |
| 96 |
Changes in benefit reserves and DAC, VOBA and SIA related to net realized |
|
|
|
|
|
|
|
|
|
capital gains (losses) |
| - |
| (538) |
|
| - |
| 99 |
Changes in the fair value of equity securities |
| (191) |
| (191) |
|
| 79 |
| 79 |
Professional fees related to regulatory or accounting changes |
| - |
| (13) |
|
| - |
| - |
Other income (expense) - net |
| 9 |
| - |
|
| 7 |
| - |
Gain (loss) on extinguishment of debt |
| - |
| (17) |
|
| - |
| 2 |
Net realized capital gains (losses)* |
| 3,485 |
| 3,502 |
|
| (489) |
| (474) |
Income (loss) from divested businesses |
| - |
| (216) |
|
| - |
| 6 |
Non-operating litigation reserves and settlements |
| 6 |
| 6 |
|
| - |
| (1) |
Favorable prior year development and related amortization |
|
|
|
|
|
|
|
|
|
changes ceded under retroactive reinsurance agreements |
| - |
| 8 |
|
| - |
| 27 |
Net loss reserve discount charge |
| - |
| (56) |
|
| - |
| (473) |
Integration and transaction costs associated with acquired businesses |
| - |
| (2) |
|
| - |
| (7) |
Restructuring and other costs |
| - |
| (90) |
|
| - |
| (47) |
Revenues and Pre-tax income | $ | 14,443 | $ | 2,558 |
| $ | 12,456 | $ | 1,154 |
*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.
AIG | First Quarter 2020 Form 10-Q 15
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 4. Held-For-Sale Classification
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 March 31, 2020, 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 March 31, 2020, the affiliated transactions included the cession of approximately $30.1 billion of reserves from our Legacy Life and Retirement Run-Off Lines and approximately $3.8 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 $2.7 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 following December 31, 2023, which is subject to a purchase price adjustment wherein AIG will reimburse TCG for adverse development in property casualty related reserves, based on an agreed methodology, that occurs on or prior to December 31, 2023, up to the value of TCG’s investment in Fortitude. Any amount due to TCG in respect of this purchase price adjustment will be offset by the amount of the $95 million otherwise due from TCG to AIG. To the extent we do not receive all or a portion of the planned distributions by May 13, 2020, TCG will pay us up to an additional $100 million, which amount shall adjust in proportion with the amount of the dividend received by AIG. 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.
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 Majority Interest Fortitude Sale, AIG will have a 3.5 percent ownership interest in Fortitude Holdings. The purchase price under the Majority Interest Fortitude Sale is subject to a post-closing purchase price adjustment pursuant to which AIG will pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur on or prior to December 31, 2023, up to a maximum payment of $500 million. In connection with the Majority Interest Fortitude Sale agreement, AIG, Fortitude Holdings and TCG have agreed that, effective as of the closing of the Majority Interest Fortitude Sale, (i) AIG’s aforementioned investment commitment targets will be assumed by Fortitude Holdings and AIG will be released therefrom, (ii) the purchase price adjustment that AIG had agreed to provide TCG in the 2018 Fortitude Sale will be terminated, and (iii) Carlyle will remain obligated to pay AIG $95 million of deferred compensation at December 31, 2023 and up to an additional $100 million to the extent AIG does not receive all or a portion of the planned distributions by May 13, 2020, which amount shall adjust in proportion with the amount of the dividend received by AIG. We expect to contribute approximately $1.45 billion of the proceeds of the Majority Interest 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 Majority Interest Fortitude Sale.
16 AIG | First Quarter 2020 Form 10-Q
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 4. Held-For-Sale Classification
We recorded a loss of $98 million in 2019 in respect of our interest in Fortitude Holdings, which was 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 after elimination of intercompany balances:
|
| March 31, |
|
| December 31, |
(in millions) |
| 2020 |
|
| 2019 |
Assets: |
|
|
|
|
|
Bonds available for sale | $ | 2,308 |
| $ | 2,187 |
Other bond securities |
| 13 |
|
| 13 |
Other invested assets |
| 58 |
|
| 45 |
Short-term investments |
| 63 |
|
| 107 |
Cash |
| 54 |
|
| 63 |
Accrued investment income |
| 20 |
|
| 19 |
Deferred income taxes |
| (11) |
|
| (22) |
Other assets |
| 152 |
|
| 106 |
Assets of business held for sale |
| 2,657 |
|
| 2,518 |
Less: Loss accrual |
| (98) |
|
| (98) |
Total assets held for sale | $ | 2,559 |
| $ | 2,420 |
Liabilities: |
|
|
|
|
|
Other liabilities | $ | 14 |
| $ | 15 |
Total liabilities held for sale | $ | 14 |
| $ | 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 Majority Interest Fortitude Sale, AIG will recognize a loss for the portion of the unamortized balance of these assets that are not recoverable, if any, when AIG is no longer a controlling shareholder in Fortitude Holdings. As of March 31, 2020, the unamortized balances of the aforementioned prepaid insurance assets and related deferred acquisition costs were $2.2 billion (after-tax) and $0.4 billion (after-tax), respectively. 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. The combined loss of $2.6 billion for the three-month period ended March 31, 2020 would be incremental to any gain or loss recognized on the Majority Interest Fortitude Sale. The incremental gain or loss we will recognize on the Majority Interest Fortitude Sale would be impacted, perhaps significantly, by market conditions existing at the time the Majority Interest Fortitude Sale closes.
5. Fair Value Measurements
Fair Value Measurements on a Recurring Basis
Assets and liabilities recorded at fair value in the Condensed 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.
AIG | First Quarter 2020 Form 10-Q 17
ITEM 1 | Notes to Condensed Consolidated Financial Statements (unaudited) | 5. Fair Value Measurements
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.
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:
March 31, 2020 |
|
|
|
|
|
| Counterparty | Cash |
| |||
(in millions) |
| Level 1 |
| Level 2 |
| Level 3 |
| Netting(a) | Collateral |
| Total | |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Bonds available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities | $ | 239 | $ | 5,450 | $ | - | $ | - | $ | - | $ | 5,689 |
Obligations of states, municipalities and political subdivisions |
| - |
| 13,338 |
| 2,102 |
| - |
| - |
| 15,440 |
Non-U.S. governments |
| 48 |
| 14,119 |
| 6 |
| - |
| - |
| 14,173 |
Corporate debt |
| - |
| 143,107 |
| 1,215 |
| - |
| - |
| 144,322 |
RMBS |
| - |
| 19,170 |
| 11,687 |
| - |
| - |
| 30,857 |
CMBS |
| - |
| 13,080 |
| 1,146 |
| - |
| - |
| 14,226 |
CDO/ABS |
| - |
| 8,301 |
| 8,768 |
| - |
| - |
| 17,069 |
Total bonds available for sale |
| 287 |
| 216,565 |
| 24,924 |
| - |
| - |
| 241,776 |
Other bond securities: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government sponsored entities |
| 6 |
| 2,051 |
| - |
| - |
| - |
| 2,057 |
Non-U.S. governments |
| - |
| - |
| - |
| - |
| - |
| - |
Corporate debt |
| - |
| 16 |
| - |
| - |
| - |
| 16 |
RMBS |
| - |
| 318 |
| 149 |
| - |
| - |
| 467 |
CMBS |
| - |
| 229 |
| 42 |
| - |
| - |
| 271 |
CDO/ABS |
| - |
| 164 |
| 2,378 |
| - |
| - |
| 2,542 |
Total other bond securities |
| 6 |
| 2,778 |
| 2,569 |
| - |
| - |
| 5,353 |
Equity securities |
| 582 |
| 23 |
| 19 |
| - |
| - |
| 624 |
Other invested assets(b) |
| - |
| 80 |
| 1,467 |
| - |
| - |
| 1,547 |
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| 2 |
| 6,621 |
| - |
| - |
| - |
| 6,623 |
Foreign exchange contracts |
| - |
| 2,337 |
| 1 |
| - |
| - |
| 2,338 |
Equity contracts |
| 87 |
| 1,003 |
| 150 |
| - |
| - |
| 1,240 |
Credit contracts |
| - |
| - |
| 133 |
| - |
| - |
| 133 |
Other contracts |
| - |
| - |
| 15 |
| - |
| - |
| 15 |
Counterparty netting and cash collateral |
| - |
| - |
| - |
| (4,645) |
| (4,840) |
| (9,485) |
Total derivative assets |
| 89 |
| 9,961 |
| 299 |
| (4,645) |
| (4,840) |
| 864 |
Short-term investments |
| 1,732 |
| 6,454 |
| - |
| - |
| - |
| 8,186 |
Other assets |
| 176 |
| 2,180 |
| 91 |
| - |
| - |
| 2,447 |
Separate account assets |
| 74,591 |
| 4,245 |
| - |
| - |
| - |
| 78,836 |
Total | $ | 77,463 | $ | 242,286 | $ | 29,369 | $ | (4,645) | $ | (4,840) | $ | 339,633 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder contract deposits | $ | - | $ | - | $ | 8,153 | $ | - | $ | - | $ | 8,153 |
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| 2 |
| 4,224 |
| - |
| - |
| - |
| 4,226 |
Foreign exchange contracts |
| - |
| 1,028 |
| 4 |
| - |
| - |
| 1,032 |
Equity contracts |
| 8 |
| 62 |
| 7 |
| - |
| - |
| 77 |
Credit contracts |
| - |
| 24 |
| 57 |
| - |
| - |
| 81 |
Other contracts |
| - |
| - |
| 13 |
| - |
| - |
| 13 |
Counterparty netting and cash collateral |
| - |
| - |
| - |
| (4,645) |
| (147) |
| (4,792) |
Total derivative liabilities |
| 10 |
| 5,338 |
| 81 |
| (4,645) |
| (147) |
| 637 |
Other liabilities |
| - |
| - |
| - |
| - |
| - |
| - |
Long-term debt |
| - |
| 2,276 |
| - |
| - |
|