AMERICAN INTERNATIONAL GROUP, INC. – 10-Q – | Management's Discussion and Analysis of Financial Condition and Results of Operations
Glossary and Acronyms of Selected Insurance Terms and References
Throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), we use certain terms and abbreviations, which are summarized in the Glossary and Acronyms.American International Group, Inc. (AIG) has incorporated into this discussion a number of cross-references to additional information included throughout this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the 2021 Annual Report) to assist readers seeking additional information related to a particular subject. In this Quarterly Report on Form 10-Q, unless otherwise mentioned or unless the context indicates otherwise, we use the terms "AIG," "we," "us" and "our" to refer toAmerican International Group, Inc. , aDelaware corporation, and its consolidated subsidiaries. We use the term "AIG Parent" to refer solely toAmerican International Group, Inc. , and not to any of its consolidated subsidiaries.
Cautionary Statement Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q and other publicly available documents may include, and members of AIG management may from time to time make and discuss, statements which, to the extent they are not statements of historical or present fact, may constitute "forward-looking statements" within the meaning of theU.S. Private Securities Litigation Reform Act of 1995. These forwardlooking statements are intended to provide management's current expectations or plans for AIG's future operating and financial performance, based on assumptions currently believed to be valid and accurate. Forward-looking statements are often preceded by, followed by or include words such as "will," "believe," "anticipate," "expect," "expectations," "intend," "plan," "strategy," "prospects," "project," "anticipate," "should," "guidance," "outlook," "confident," "focused on achieving," "view," "target," "goal," "estimate" and other words of similar meaning in connection with a discussion of future operating or financial performance. These statements may include, among other things, projections, goals and assumptions that relate to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expense reduction efforts, the outcome of contingencies such as legal proceedings, anticipated organizational, business or regulatory changes, such as the separation of the Life and Retirement business from AIG, the effect of catastrophes, and macroeconomic and/or geopolitical events, anticipated dispositions, monetization and/or acquisitions of businesses or assets, or successful integration of acquired businesses, management succession and retention plans, exposure to risk, trends in operations and financial results, and other statements that are not historical facts.
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All forward-looking statements involve risks, uncertainties and other factors that may cause AIG's actual results and financial condition to differ, possibly materially, from the results and financial condition expressed or implied in the forward-looking statements. Factors that could cause AIG's actual results to differ, possibly materially, from those in specific projections, goals, assumptions and statements include, without limitation: •the effects of economic conditions in the markets in which AIG and its businesses operate in theU.S. and globally and any changes therein, including financial market conditions, fluctuations in interest rates and foreign currency exchange rates and inflationary pressures, each of which may also be affected by geopolitical conflicts, including the conflict betweenRussia andUkraine ;
•the occurrence of catastrophic events, both natural and man-made, including
geopolitical conflicts, pandemics, civil unrest and the effects of climate
change;
•availability of reinsurance or access to reinsurance on acceptable terms;
•disruptions in the availability of AIG's electronic data systems or those of third parties, including as a result of information technology, cybersecurity or data security breaches due to supply chain disruptions, cyber-attacks or security vulnerabilities, the likelihood of which may increase as a result of continued remote business operations;
•AIG's ability to realize expected strategic, financial, operational or other
benefits from the separation of Corebridge Financial, Inc. (Corebridge);
•AIG's ability to effectively execute on and benefit from its ongoing
restructuring programs;
•changes in judgments concerning potential cost-saving opportunities;
•concentrations in AIG's investment portfolios, including as a result of our asset management relationships with Blackstone Inc. (Blackstone ) and BlackRock, Inc. (BlackRock);
•changes in the valuation of AIG's investments;
•the effectiveness of AIG's enterprise risk management policies and procedures,
including with respect to business continuity and disaster recovery plans;
•the effectiveness of strategies to recruit and retain key personnel and to
implement effective succession plans;
•actions by rating agencies with respect to AIG's credit and financial strength
ratings as well as those of its businesses and subsidiaries;
•changes to sources of or access to liquidity;
•changes in judgments concerning the recognition of deferred tax assets and the
impairment of goodwill;
•changes in judgments or assumptions concerning insurance underwriting and
insurance liabilities;
•AIG's ability to successfully dispose of, monetize and/or acquire businesses or
assets or successfully integrate acquired businesses;
•nonperformance or defaults by counterparties, including
Company Ltd.
•requirements, which may change from time to time, of the global regulatory
framework to which AIG is subject;
•significant legal, regulatory or governmental proceedings;
•the effects of sanctions, including those related to the conflict between
•the impact of COVID-19 and its variants and responses thereto;
•AIG's ability to effectively execute on environmental, social and governance
targets and standards; and
•such other factors discussed in:
-Part I, Item 2. MD&A of this Quarterly Report on Form 10Q; and
-Part I, Item 1A. Risk Factors and Part II, Item 7. MD&A of the 2021 Annual
Report.
Forward-looking statements speak only as of the date of this report, or in the case of any document incorporated by reference, the date of that document. We are not under any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Additional information as to factors that may cause actual results to differ materially from those expressed or implied in any forward-looking statements is disclosed from time to time in other filings with theSecurities and Exchange Commission (SEC). AIG | Third Quarter 2022 Form
10-Q 69
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TABLE OF CONTENTS
INDEX TO ITEM 2
Page
Use of Non-GAAP Measures 71
Critical Accounting Estimates 73
Executive Summary 74
Overview 74
Operating Structure 75
Financial Performance Summary 76
AIG 's Outlook - Industry and Economic Factors 78
Consolidated Results of Operations 82
Business Segment Operations 87
General Insurance 88
Life and Retirement 99
Other Operations 114
Investments 116
Overview 116
Investment Highlights in the Nine Months Ended
116 Investment Strategies 116 Credit Ratings 118 Insurance Reserves 126 Loss Reserves 126
Life and Annuity Future Policy Benefits, Policyholder Contract Deposits and DAC
131 Liquidity and Capital Resources 139 Overview 139 Liquidity and Capital Resources Highlights 140 Analysis of Sources and Uses of Cash 141 Liquidity and Capital Resources of AIG Parent and Subsidiaries 141 Credit Facilities 143 Contractual Obligations 144 Off-Balance Sheet Arrangements and Commercial Commitments 144 Debt 144 Credit Ratings 146 Financial Strength Ratings 147 Rating Agency Actions Related to Corebridge Offering s and Other Recent Actions 147 Regulation and Supervision 147 Dividends 148 Repurchases of AIG Common Stock 148 Dividend Restrictions 148 Enterprise Risk Management 149 Overview 149 Regulatory Environment 149 Overview 149 Glossary 150 Acronyms 153 70 AIG | Third Quarter 2022 Form 10-Q
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ITEM 2 | Use of Non-GAAP Measures
Use of Non-GAAP Measures
Throughout this MD&A, we present our financial condition and results of
operations in the way we believe will be most meaningful and representative of
our business results. Some of the measurements we use are "non-GAAP financial
measures" under SEC rules and regulations. GAAP is the acronym for "generally
accepted accounting principles" in the United States . The non-GAAP financial
measures we present may not be comparable to similarly-named measures reported
by other companies.
We use the following operating performance measures because we believe they
enhance the understanding of the underlying profitability of continuing
operations and trends of our business segments. We believe they also allow for
more meaningful comparisons with our insurance competitors. When we use these
measures, reconciliations to the most comparable GAAP measure are provided on a
consolidated basis in the Consolidated Results of Operations section of this
MD&A.
Book value per common share, excluding accumulated other comprehensive income
(loss) (AOCI) adjusted for the cumulative unrealized gains and losses related to
Fortitude Re funds withheld assets and deferred tax assets (DTA) (Adjusted book
value per common share) is used to show the amount of our net worth on a
per-common share basis after eliminating items that can fluctuate significantly
from period to period including changes in fair value of AIG's available for
sale securities portfolio, foreign currency translation adjustments and U.S. tax
attribute deferred tax assets. This measure also eliminates the asymmetrical
impact resulting from changes in fair value of our available for sale securities
portfolio wherein there is largely no offsetting impact for certain related
insurance liabilities. In addition, we adjust for the cumulative unrealized
gains and losses related to Fortitude Re funds withheld assets held by AIG in
support of Fortitude Re's reinsurance obligations to AIG post deconsolidation of
Fortitude Re (Fortitude Re funds withheld assets) since these fair value
movements are economically transferred to Fortitude Re. We exclude deferred tax
assets representing U.S. tax attributes related to net operating loss
carryforwards and foreign tax credits as they have not yet been utilized.
Amounts for interim periods are estimates based on projections of full-year
attribute utilization. As net operating loss carryforwards and foreign tax
credits are utilized, the portion of the DTA utilized is included in these book
value per common share metrics. Adjusted book value per common share is derived
by dividing total AIG common shareholders' equity, excluding AOCI adjusted for
the cumulative unrealized gains and losses related to Fortitude Re funds
withheld assets, and DTA (Adjusted common shareholders' equity), by total common
shares outstanding.
Return on common equity - Adjusted after-tax income excluding AOCI adjusted for
the cumulative unrealized gains and losses related to Fortitude Re funds
withheld assets and DTA (Adjusted return on common equity) is used to show the
rate of return on common shareholders' equity. We believe this measure is useful
to investors because it eliminates items that can fluctuate significantly from
period to period, including changes in fair value of our available for sale
securities portfolio, foreign currency translation adjustments and U.S. tax
attribute deferred tax assets. This measure also eliminates the asymmetrical
impact resulting from changes in fair value of our available for sale securities
portfolio wherein there is largely no offsetting impact for certain related
insurance liabilities. In addition, we adjust for the cumulative unrealized
gains and losses related to Fortitude Re funds withheld assets since these fair
value movements are economically transferred to Fortitude Re. We exclude
deferred tax assets representing U.S. tax attributes related to net operating
loss carryforwards and foreign tax credits as they have not yet been utilized.
Amounts for interim periods are estimates based on projections of full-year
attribute utilization. As net operating loss carryforwards and foreign tax
credits are utilized, the portion of the DTA utilized is included in Adjusted
return on common equity. Adjusted return on common equity is derived by dividing
actual or annualized adjusted after-tax income attributable to AIG common
shareholders by average Adjusted common shareholders' equity.
Adjusted after-tax income attributable to AIG common shareholders is derived by
excluding the tax effected adjusted pre-tax income (APTI) adjustments described
below, dividends on preferred stock, noncontrolling interest on net realized
gains (losses), other non-operating expenses and the following tax items from
net income attributable to AIG:
•deferred income tax valuation allowance releases and charges;
•changes in uncertain tax positions and other tax items related to legacy
matters having no relevance to our current businesses or operating performance;
and
•net tax charge related to the enactment of the Tax Cuts and Jobs Act (the Tax
Act).
Adjusted revenues exclude Net realized gains (losses), income from non-operating
litigation settlements (included in Other income for GAAP purposes) and changes
in fair value of securities used to hedge guaranteed living benefits (included
in Net investment income for GAAP purposes). Adjusted revenues is a GAAP measure
for our segments.
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ITEM 2 | Use of Non-GAAP Measures
Adjusted pre-tax income is derived by excluding the items set forth below from
income from continuing operations before income tax. This definition is
consistent across our segments. These items generally fall into one or more of
the following broad categories: legacy matters having no relevance to our
current businesses or operating performance; adjustments to enhance transparency
to the underlying economics of transactions; and measures that we believe to be
common to the industry. APTI is a GAAP measure for our segments. Excluded items
include the following:
•changes in fair value of securities used to hedge guaranteed living benefits;
•changes in benefit reserves and deferred policy acquisition costs (DAC), value of business acquired (VOBA), and deferred sales inducements (DSI) related to net realized gains and losses;
•changes in the fair value of equity securities;
•net investment income on Fortitude Re funds withheld assets;
•following deconsolidation of Fortitude Re, net realized gains and losses on
Fortitude Re funds withheld assets;
•loss (gain) on extinguishment of debt;
•all net realized 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 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);
•pension expense related to lump sum payments to former employees;
•net gain or loss on divestitures;
•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 acquiring or divesting
businesses;
•losses from the impairment of goodwill; and
•non-recurring 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 forGeneral Insurance excludes net loss reserve discount), and the amount of other underwriting expenses that would be incurred. A combined ratio of less than 100 indicates underwriting income and a combined ratio of over 100 indicates an underwriting loss. Our ratios are calculated using the relevant segment information calculated under GAAP, and thus may not be comparable to similar ratios calculated for regulatory reporting purposes. The underwriting environment varies across countries and products, as does the degree of litigation activity, all of which affect such ratios. In addition, investment returns, local taxes, cost of capital, regulation, product type and competition can have an effect on pricing and consequently on profitability as reflected in underwriting income and associated ratios. -Accident year loss and accident year combined ratios, as adjusted (Accident year loss ratio, ex-CAT and Accident year combined ratio, ex-CAT): both the accident year loss and accident year combined ratios, as adjusted, exclude catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting. Natural catastrophe losses are generally weather or seismic events, in each case, having a net impact on AIG in excess of$10 million and man-made catastrophe losses, such as terrorism and civil disorders that exceed the$10 million threshold. We believe that as adjusted ratios are meaningful measures of our underwriting results on an ongoing basis as they exclude catastrophes and the impact of reserve discounting which are outside of management's control. We also exclude prior year development to provide transparency related to current accident year results. •Life and Retirement -Premiums and deposits: includes direct and assumed amounts received and earned on traditional life insurance policies, group benefit policies and life-contingent payout annuities, as well as deposits received on universal life, investment-type annuity contracts,Federal Home Loan Bank (FHLB) funding agreements and mutual funds. We believe the measure of premiums and deposits is useful in understanding customer demand for our products, evolving product trends and our sales performance period over period.
Results from discontinued operations are excluded from all of these measures.
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ITEM 2 | Critical Accounting Estimates
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires the
application of accounting policies that often involve a significant degree of
judgment.
The accounting policies that we believe are most dependent on the application of estimates
and assumptions, which are critical accounting estimates, are related to the determination
of:
•loss reserves;
•future policy benefit reserves for life and accident and health insurance contracts;
•liabilities for guaranteed benefit features of variable annuity, fixed annuity and fixed
index annuity products;
•embedded derivative liabilities for fixed index annuity and life products;
•estimated gross profits to value deferred acquisition costs and unearned revenue for
investment-oriented products;
•reinsurance assets, including the allowance for credit losses and disputes;
•goodwill impairment;
•allowance for credit losses on certain investments, primarily on loans and available for
sale fixed maturity securities;
•legal contingencies;
•fair value measurements of certain financial assets and financial liabilities; and
•income taxes, in particular the recoverability of our deferred tax asset and establishment
of provisions for uncertain tax positions.
These accounting estimates require the use of assumptions about matters, some of
which are highly uncertain at the time of estimation. To the extent actual
experience differs from the assumptions used, our consolidated financial
condition, results of operations and cash flows could be materially affected.
For a complete discussion of our critical accounting estimates, see Part II,
Item 7. MD&A - Critical Accounting Estimates in the 2021 Annual Report.
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ITEM 2 | Executive Summary
Executive Summary
OVERVIEW
This overview of the MD&A highlights selected information and may not contain
all of the information that is important to current or potential investors in
our securities. You should read this Quarterly Report on Form 10-Q, together
with the 2021 Annual Report, in their entirety for a more detailed description
of events, trends, uncertainties, risks and critical accounting estimates
affecting us.
Separation of Life and Retirement Business and Relationship with
OnSeptember 19, 2022 , AIG closed on the initial public offering (IPO) of 80 million shares of Corebridge Financial, Inc. (Corebridge) common stock at a public offering price of$21.00 per share, representing 12.4 percent of Corebridge's common stock. Corebridge is the holding company for AIG's Life and Retirement business. The aggregate gross proceeds of the offering to AIG, before deducting underwriting discounts and commissions and other expenses payable by AIG, were approximately$1.7 billion . After consideration of underwriting discounts, commissions and other related expenses payable by AIG, AIG recorded$608 million as an increase in AIG's shareholder's equity. InNovember 2021 ,AIG and Blackstone Inc. (Blackstone ) completed the acquisition byBlackstone of a 9.9 percent equity stake in Corebridge.Blackstone is required to hold its ownership interest in Corebridge following the completion of the separation of the Life and Retirement business, subject to exceptions permittingBlackstone to sell 25 percent, 67 percent and 75 percent of its shares after the first, second and third anniversaries, respectively, of Corebridge IPO (which will beSeptember 19, 2023 , 2024 and 2025, respectively), with the transfer restrictions terminating in full on the fifth anniversary of the IPO (September 19, 2027 ). In the event that the IPO of Corebridge was not completed prior toNovember 2, 2023 ,Blackstone had the right to require AIG to undertake the IPO, and in the event that the IPO had not been completed prior toNovember 2, 2024 ,Blackstone had the right to exchange all or a portion of its ownership interest in Corebridge for shares of AIG's common stock. As a result of the consummation of the IPO onSeptember 19, 2022 , this exchange right ofBlackstone was terminated. Also inNovember 2021 , Corebridge declared a dividend payable to AIG Parent in the amount of$8.3 billion . In connection with such dividend, Corebridge issued a promissory note to AIG Parent in the amount of$8.3 billion (the Intercompany Note). The Intercompany Note was repaid to AIG Parent prior to the IPO of Corebridge with the proceeds of (i) the issuance by Corebridge, onApril 5, 2022 , of senior unsecured notes in the aggregate principal amount of$6.5 billion , (ii) the issuance by Corebridge, onAugust 23, 2022 , of$1.0 billion aggregate principal amount of 6.875% Fixed-to-Fixed Reset Rate Junior Subordinated Notes due 2052, and (iii) a portion of the$1.5 billion borrowing under Corebridge's$1.5 billion 3-Year Delayed Draw Term Loan Agreement. Following the IPO, AIG owns 77.7 percent of the outstanding common stock of Corebridge and continues to consolidate the assets, liabilities, and results of operations of Corebridge in AIG's Condensed Consolidated Financial Statements. The portion of equity interest of Corebridge that AIG does not own is reflected as noncontrolling interest in AIG's Condensed Consolidated Financial Statements. OnDecember 15, 2021 ,AIG and Blackstone Real Estate Income Trust (BREIT), a long-term, perpetual capital vehicle affiliated withBlackstone , completed the acquisition by BREIT of AIG's interests in aU.S. affordable housing portfolio. The historical results of theU.S. affordable housing portfolio were reported in our Life and Retirement operating segments.
Our Investment Management Agreements with BlackRock
OnMarch 28, 2022 , we announced entry into a binding letter of intent with BlackRock pursuant to which certain of our insurance company subsidiaries would enter into separate investment management agreements with BlackRock. Since that date, certain of our insurance company subsidiaries have entered into such investment management agreements, with the expectation that certain additional insurance company subsidiaries will enter into such investment management agreements over the coming months. We are in the process of transferring the management of up to$150 billion of our investments in liquid fixed income and certain private placement assets, including up to$90 billion of the Corebridge investment portfolio, to BlackRock under such investment management agreements, and anticipate completing the transfer of a majority of such assets by the end of 2022. The investment management agreements contain detailed investment guidelines and reporting requirements. These agreements also contain reasonable and customary representations and warranties, standard of care, expense reimbursement, liability, indemnity and other provisions. The investment management agreements continue unless terminated by either party on 45 days' notice or by us immediately for cause. We continue to be responsible for our overall investment portfolio, including decisions surrounding asset allocation, risk composition and investment strategy. There can be no assurance that all of such investment management agreements will be entered into as contemplated, or at all.
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ITEM 2 | Executive Summary
OPERATING STRUCTURE
AIG reports the results of its businesses through three segments - General
Insurance , Life and Retirement and Other Operations. General Insurance consists
of two operating segments - North America and International. Life and Retirement
consists of four operating segments - Individual Retirement, Group Retirement,
Life Insurance and Institutional Markets. Other Operations is primarily
comprised of corporate, our institutional asset management business and
consolidation and eliminations.
Consistent with how we manage our business, our General Insurance North America
operating segment primarily includes insurance businesses in the United States ,
Canada and Bermuda , and our global reinsurance business, AIG Re. Our General
Insurance International operating segment includes regional insurance businesses
in Japan , the United Kingdom , Europe , Middle East and Africa (EMEA region), Asia
Pacific , Latin America and Caribbean , and China . International also includes the
results of Talbot Holdings, Ltd. as well as AIG's Global Specialty business.
For additional information on our business segments, see Note 3 to the Condensed
Consolidated Financial Statements, and for information regarding the separation
of Life and Retirement, see Note 1 to the Condensed Consolidated Financial
Statements.
Business Segments
General Insurance Life and Retirement
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
world's most far-reaching property casualty networks.
long-standing, leading market positions in
many of the markets it serves in the
multichannel distribution network. Customers value
across multiple channels, Life and Retirement
is well positioned to serve growing market needs.
and its ability to be a market leader in critical lines of the insurance business.
[[Image Removed: aig-20220930_g2.gif]][[Image Removed: aig-20220930_g3.gif]] [[Image
Removed: aig-20220930_g4.gif]][[Image Removed: aig-20220930_g5.gif]][[Image Removed: aig-20220930_g6.gif]][[Image Removed: aig-20220930_g7.gif]]
Life and Retirement includes the following major operating
companies:
theCity of New York (U.S. Life);Laya Healthcare Limited
and
Ltd. (
Other Operations
Other Operations primarily consists of income from assets held by AIG Parent and other corporate subsidiaries, deferred tax assets related to tax attributes, corporate expenses and intercompany eliminations, our institutional asset management business and results of our consolidated investment entities,
results of our legacy insurance lines ceded to Fortitude Re.
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ITEM 2 | Executive Summary
FINANCIAL PERFORMANCE SUMMARY
Net Income (Loss) Attributable to AIG Common Shareholders
Three Months Ended
(in millions)
[[Image Removed: aig-20220930_g8.jpg]]
Quarterly 2022 and 2021 Comparison
Net income attributable to AIG common shareholders increased
following, on a pre-tax basis:
•an increase in Net realized gains on Fortitude Re funds withheld embedded derivative
of
Fortitude Re funds withheld assets of
million in 2021;
•an increase in Net realized gains excluding Fortitude Re funds withheld assets and
embedded derivative of
and hedge activity and gains on variable annuity embedded derivatives, net of hedging
partially offset by losses on sales of alternative investments and real estate of
exchange of
•higher underwriting income in
continued earn-in of positive rate change and strength of renewal retentions and new
business production, favorable business mix changes, as well as increased favorable
prior year development. Underwriting income was negatively impacted by unfavorable
movements in foreign exchange.
The increase in Net income attributable to AIG common shareholders was partially
offset by the following:
•lower net investment income of
alternative investments of
market performance.
•higher income attributable to noncontrolling interest of
sale of 9.9 percent interest of Corebridge to
million.
The
income from continuing operations.
For further discussion see Consolidated Results of Operations.
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ITEM 2 | Executive Summary
Net Income (Loss) Attributable to AIG Common Shareholders
Nine Months Ended September 30 ,
(in millions)
[[Image Removed: aig-20220930_g9.jpg]]
Year-to-Date 2022 and 2021 Comparison
Net income attributable to AIG common shareholders increased
following, on a pre-tax basis:
•an increase in Net realized gains on Fortitude Re funds withheld embedded derivative
of
Fortitude Re funds withheld assets of
million in 2021;
•an increase in Net realized gains excluding Fortitude Re funds withheld assets and
embedded derivative of
and hedge activity and gains on variable annuity embedded derivatives, net of hedging,
partially offset by losses on sales of securities of
alternative investments and real estate of
exchange
fixed maturity securities and loans of
•higher underwriting income in
continued earn-in of positive rate change and strength of renewal retentions and new
business production, favorable business mix changes, as well as increased favorable
prior year development and lower catastrophe losses. Underwriting income was negatively
impacted by unfavorable movements in foreign exchange.
•lower interest expense of
redemptions in the nine months ended
repurchases, through cash tender offers in the three months ended
interest savings of
the nine months ended
investment entities of
expense of
draw down on DDTL facility and
months ended
The increase in Net income attributable to AIG common shareholders was partially offset
by the following:
•lower net investment income of
alternative investments of
securities, where we elected the fair value option of
on available for sale fixed maturity securities of
higher rate environment and negative equity market performance.
•higher income attributable to noncontrolling interest of
sale of 9.9 percent interest of Corebridge to
million.
The
income from continuing operations.
For further discussion see Consolidated Results of Operations.
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ITEM 2 | Executive Summary
Adjusted Pre-Tax Income (Loss)*
Three Months Ended September 30 ,
(in millions)
[[Image Removed: aig-20220930_g10.jpg]]
Quarterly 2022 and 2021 Comparison
Adjusted pre-tax income decreased
at
as a result of lower yield enhancement income and alternative investment income. In
addition, Life and Retirement results were impacted by favorable impact from annual
assumptions update of
net of premiums, excluding the impact of assumptions updates, as a result of lower
mortality partially offset by lower variable annuity separate account returns of
market performance.
This decrease was partially offset by higher underwriting income in
of
the continued earn-in of positive rate change and strength of renewal retentions and
new business production, favorable business mix changes, as well as increased
favorable prior year development. Underwriting income was negatively impacted by
unfavorable movements in foreign exchange.
Adjusted Pre-Tax Income* Nine Months EndedSeptember 30 , (in millions)
[[Image Removed: aig-20220930_g11.jpg]]
Year-to-Date 2022 and 2021 Comparison
Adjusted pre-tax income decreased
at
as a result of lower yield enhancement income and alternative investment income. In
addition, Life and Retirement results were impacted by a favorable impact from annual
assumptions updates of
advisory fee expense of
to negative equity market performance.
This decrease was partially offset by higher underwriting income in
(
continued earn-in of positive rate change and strength of renewal retentions and new
business production, favorable business mix changes, as well as increased favorable
prior year development and lower catastrophe losses. Underwriting income was
negatively impacted by unfavorable movements in foreign exchange.
*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 challenging market conditions in the first nine months of 2022, characterized by factors such as the impact of COVID-19 and the related governmental and societal responses, rising interest rates, inflationary pressures, an uneven global economic recovery and global trade tensions. Responses by central banks and monetary authorities with respect to inflation, growth concerns and other macroeconomic factors have also affected global exchange rates and volatility.
The
continue to have a significant impact on the global macroeconomic and
geopolitical environments, including increased volatility in capital and
commodity markets, rapid changes to regulatory conditions around the globe
including the use of sanctions, operational challenges for multinational
corporations, inflationary pressures and an increased risk of cybersecurity
incidents.
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ITEM 2 | Executive Summary
The conflict is evolving and has the potential to adversely affect our business
and results of operations from an investment, underwriting and operational
perspective. While we believe we have taken appropriate actions to minimize
related risk, we continue to monitor potential exposure and operational impacts,
as well as any actual and potential claims activity. The ultimate impact will
depend on future developments that are uncertain and cannot be predicted,
including scope, severity and duration, the governmental, legislative and
regulatory actions taken (including the application of sanctions), and court
decisions, if any, rendered in response to those actions.
Impact of Changes in the Interest Rate Environment and Equity Markets
KeyU.S. benchmark rates have continued to rise during the first nine months of 2022 as markets react to heightened inflation measures, geopolitical risk, and theBoard of Governors of theFederal Reserve System raising short term interest rates for the first time since 2018. As ofSeptember 30, 2022 , due to increases in benchmark rates, combined with general widening of credit spreads, the yield on new investments has generally exceeded the yield on asset maturities and redemptions (runoff yield). The yield pick-up of new investments over the runoff assets has widened to more than 100 basis points during three months endedSeptember 30, 2022 . This combined with resetting of coupon rates on floating rate securities have steadily improved the overall portfolio yields. However, the key benchmark rates remain highly volatile. We actively manage our exposure to the interest rate environment through portfolio selection and asset-liability management, including spread management strategies for our investment-oriented products and economic hedging of interest rate risk from guarantee features in our variable and fixed index annuities, but we may not be able to fully mitigate our interest rate risk by matching exposure of our assets relative to our liabilities.
Equity Markets
Our financial results are impacted by the performance of equity markets which impacts the performance of our alternative investment portfolio, fee income, net amount at risk, policyholder benefits and DAC on our variable annuity portfolio. For instance, in our variable annuity separate accounts, mutual fund assets and brokerage and advisory assets, we generally earn fee income based on the account value, which fluctuates with the equity markets as a significant amount of these assets are invested in equity funds. The impact of equity market returns, both increases and decreases, is reflected in our results due to the impact on the account value and the fair values of equity-exposed securities in our Life and Retirement investment portfolio. In Life and Retirement, hedging costs could also be significantly impacted by changes in the level of equity markets as rebalancing and option costs are tied to the equity market volatility, and we may be required to post additional collateral when equity markets are higher. These hedging costs are mostly offset by our rider fees that are tied to the level of theChicago Board Options Exchange Volatility Index. As rebalancing and option costs increase or decrease, the rider fees will increase or decrease partially offsetting the hedging costs incurred. Annuity Sales and Surrenders The rising rate environment and our partnership withBlackstone have provided a strong tailwind for fixed annuity sales with sales in the three to fiveyear products significantly increasing. Continued rising interest rates could create the potential for increased sales, but may also drive higher surrenders. Fixed annuities have surrender charge periods, generally in the three-to-seven year range. Fixed index annuities have surrender charge periods, generally in the five-to-ten year range, and within our Group Retirement segment, certain of our fixed investment options are subject to other withdrawal restrictions, which may help mitigate increased early surrenders in a rising rate environment. In addition, older contracts that have higher minimum interest rates and continue to be attractive to contract holders have driven better than expected persistency in fixed annuities, although the reserves for such contracts have continued to decrease over time in amount and as a percentage of the total annuity portfolio. We closely monitor surrenders of fixed annuities as contracts with lower minimum interest rates come out of the surrender charge period. Changes in interest rates significantly impact the valuation of our liabilities for annuities with guaranteed living benefit features and the value of the related hedging portfolio.
Reinvestment and Spread Management
We actively monitor fixed income markets, including the level of interest rates,
credit spreads and the shape of the yield curve. We also frequently review our
interest rate assumptions and actively manage the crediting rates used for new
and in-force business. Business strategies continue to evolve and we attempt to
maintain profitability of the overall business in light of the interest rate
environment. A rising interest rate environment results in improved yields on
new investments and improves margins for our Life and Retirement business while
also making certain products, such as fixed annuities, more attractive to
potential customers. However, the rising rate environment has resulted in lower
values on general and separate accounts assets, mutual fund assets and brokerage
and advisory assets that hold investments in fixed income assets.
For additional information on our investment and asset-liability management
strategies see Investments.
AIG | Third Quarter 2022 Form 10-Q 79
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TABLE OF CONTENTS
ITEM 2 | Executive Summary
For investment-oriented products, including universal life insurance, and
variable, fixed and fixed index annuities, in our Individual Retirement, Group
Retirement, Life Insurance and Institutional Markets businesses, our spread
management strategies include disciplined pricing and product design for new
business, modifying or limiting the sale of products that do not achieve
targeted spreads, using asset-liability management to match assets to
liabilities to the extent practicable, and actively managing crediting rates to
help mitigate some of the pressure on investment spreads. Renewal crediting rate
management is done under contractual provisions that were designed to allow
crediting rates to be reset at pre-established intervals in accordance with
state and federal laws and subject to minimum crediting rate guarantees. We
expect to continue to adjust crediting rates on in-force business, as
appropriate, to be responsive to a rising rate environment. As interest rates
rise, we may need to raise crediting rates on in-force business for competitive
and other reasons, potentially offsetting a portion of the additional investment
income resulting from investing in a higher interest rate environment.
Of the aggregate fixed account values of our Individual Retirement and Group
Retirement annuity products, 67 percent were crediting at the contractual
minimum guaranteed interest rate as of September 30, 2022 . The percentage of
fixed account values of our annuity products that are currently crediting at
rates above one percent were 55 percent and 58 percent as of September 30, 2022
and December 31, 2021 , respectively. In the universal life products in our Life
Insurance business, 66 percent and 67 percent of the account values were
crediting at the contractual minimum guaranteed interest rate as of September
30, 2022 and December 31, 2021 , 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.
The following table presents fixed annuity and universal life account values of
our Individual Retirement, Group Retirement and Life Insurance operating
segments by contractual minimum guaranteed interest rate and current crediting
rates, excluding balances ceded to Fortitude Re:
Current Crediting Rates
September 30, 2022 1-50 Basis More than 50
Contractual Minimum Guaranteed At Contractual Points Above Basis Points
Interest Rate Minimum Minimum Above Minimum
(in millions) Guarantee Guarantee Guarantee Total
Individual Retirement*
<=1% $ 9,822 $ 1,656 $ 20,778 $ 32,256
> 1% - 2% 4,261 24 1,960 6,245
> 2% - 3% 9,790 - 17 9,807
> 3% - 4% 7,805 40 6 7,851
> 4% - 5% 464 - 5 469
> 5% - 5.5% 33 - 4 37
Total Individual Retirement $ 32,175 $ 1,720 $ 22,770 $ 56,665
Group Retirement*
<=1% $ 3,726 $ 1,614 $ 5,178 $ 10,518
> 1% - 2% 6,024 437 23 6,484
> 2% - 3% 14,449 - - 14,449
> 3% - 4% 690 - - 690
> 4% - 5% 6,943 - - 6,943
> 5% - 5.5% 159 - - 159
Total Group Retirement $ 31,991 $ 2,051 $ 5,201 $ 39,243
Universal life insurance
<=1% $ - $ - $ - $ -
> 1% - 2% 106 24 353 483
> 2% - 3% 235 635 1,112 1,982
> 3% - 4% 1,374 183 192 1,749
> 4% - 5% 2,999 - - 2,999
> 5% - 5.5% 224 - - 224
Total universal life insurance $ 4,938 $ 842 $ 1,657 $ 7,437
Total $ 69,104 $ 4,613 $ 29,628 $ 103,345
Percentage of total 67 % 4 % 29 % 100 %
*Individual Retirement and Group Retirement amounts shown include fixed options
within variable annuity products.
80 AIG | Third Quarter 2022 Form 10-Q
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TABLE OF CONTENTS
ITEM 2 | Executive Summary
General Insurance
Our net investment income is significantly impacted by market interest rates as
well as the deployment of asset allocation strategies to manage duration,
enhance yield and manage interest rate risk. As interest rates increase, so too
does our ability to reinvest future cash inflows from premiums, as well as sales
and maturities of existing investments, at more favorable rates. For additional
information on our investment and asset-liability management strategies see
Investments.
While the impact of rising interest rates on our General Insurance segment
increases the benefit of investment income, the current and medium-term
inflationary environment may also translate into higher loss cost trends. We
monitor these trends closely, particularly loss cost trend uncertainty, to
ensure that not only our pricing, but also our loss reserving assumptions are
proactive to, and considerate of, current and future economic conditions.
For our
favorably impact the statutory net loss reserve discount for workers'
compensation and its associated amortization.
Impact of Currency Volatility
Currency volatility remains acute. Strengthening of theU.S. dollar against the Euro, British pound and the Japanese yen (the Major Currencies) impacts income for our businesses with substantial international operations. In particular, growth trends in net premiums written reported inU.S. dollars can differ significantly from those measured in original currencies. The net effect on underwriting results, however, is significantly mitigated, as both revenues and expenses are similarly affected. These currencies may continue to fluctuate, especially as a result of central bank responses to inflation, concerns regarding future economic growth and other macroeconomic factors, and such fluctuations will affect net premiums written growth trends reported inU.S. dollars, as well as financial statement line item comparability.General Insurance businesses are transacted in most major foreign currencies. The following table presents the average of the quarterly weighted average exchange rates of the Major Currencies, which have the most significant impact on our businesses: Three Months Ended Nine Months Ended September 30, Percentage September 30, Percentage Rate for1 USD 2022 2021 Change 2022 2021 Change Currency: GBP 0.83 0.72 15 % 0.78 0.72 8 % EUR 0.97 0.84 15 % 0.93 0.83 12 % JPY 135.35 110.06 23 % 124.80 107.77 16 %
Unless otherwise noted, references to the effects of foreign exchange in the
movements in the Major Currencies included in the preceding table.
AIG | Third Quarter 2022 Form
10-Q 81
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TABLE OF CONTENTS
ITEM 2 | Consolidated Results of Operations
Consolidated Results of Operations
The following section provides a comparative discussion of our consolidated results of operations on a reported basis for the three- and nine-month periods endedSeptember 30, 2022 and 2021. Factors that relate primarily to a specific business are discussed in more detail within the business segment operations section.
For information regarding the Critical Accounting Estimates that affect our
results of operations see Critical Accounting Estimates in this MD&A and Part
II, Item 7. MD&A - Critical Accounting Estimates in the 2021 Annual Report.
The following table presents our consolidated results of operations and other
key financial metrics:
Three Months Ended Nine Months Ended
September 30, Percentage September 30, Percentage
(in millions) 2022 2021 Change 2022 2021 Change
Revenues:
Premiums $ 7,832 $ 7,504 4 % $ 22,458 $ 21,925 2 %
Policy fees 732 714 3 2,238 2,269 (1)
Net investment income:
Net investment income - excluding
Fortitude Re funds withheld assets 2,513 3,220 (22) 7,875 9,559
(18)
Net investment income - Fortitude Re funds withheld assets 155 495 (69) 634 1,488 (57) Total net investment income 2,668 3,715 (28) 8,509 11,047 (23) Net realized gains (losses): Net realized gains - excluding Fortitude Re funds withheld assets and embedded derivative 1,504 679 122 3,447 1,331
159
Net realized gains (losses) on Fortitude Re funds withheld assets (86) 190 NM (312) 536 NM Net realized gains (losses) on Fortitude Re funds withheld embedded derivative 1,757 (209) NM 7,851 117 NM Total net realized gains 3,175 660 381 10,986 1,984 454 Other income 195 242 (19) 660 745 (11) Total revenues 14,602 12,835 14 44,851 37,970 18 Benefits, losses and expenses: Policyholder benefits and losses incurred 6,187 5,959 4 16,565 17,182
(4)
Interest credited to policyholder account balances 951 923 3 2,738 2,663
3
Amortization of deferred policy acquisition costs 1,248 1,260 (1) 3,983 3,479
14
General operating and other expenses 2,093 2,240 (7) 6,497 6,546 (1) Interest expense 282 328 (14) 811 1,008 (20) Loss on extinguishment of debt - 51 NM 299 149 101 Net gain on divestitures (6) (102) 94 (45) (108) 58 Total benefits, losses and expenses 10,755 10,659 1 30,848 30,919
-
Income from continuing operations before income tax expense 3,847 2,176 77 14,003 7,051 99 Income tax expense 806 439 84 2,913 1,234 136 Income from continuing operations 3,041 1,737 75 11,090 5,817
91
Income (loss) from discontinued operations, net of income taxes - - NM (1) - NM Net income 3,041 1,737 75 11,089 5,817 91 Less: Net income attributable to noncontrolling interests 332 70 374 1,084 175 NM Net income attributable to AIG 2,709 1,667 63 10,005 5,642
77
Less: Dividends on preferred stock 7 7 - 22 22
-
Net income attributable to AIG common shareholders$ 2,702 $ 1,660 63 %$ 9,983 $ 5,620 78 % 82 AIG | Third Quarter 2022 Form 10-Q
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TABLE OF CONTENTS
ITEM 2 | Consolidated Results of Operations
(in millions, except per common share data) September 30, 2022 December 31, 2021
Balance sheet data:
Total assets $ 522,932 $ 596,112
Short-term and long-term debt 24,508 23,741
Debt of consolidated investment entities 5,924 6,422
Total AIG shareholders' equity 39,023 65,956
Book value per common share 51.58 79.97
Adjusted book value per common share 73.28 68.83
The following table presents a reconciliation of Book value per common share to
Adjusted book value per common share, which is a non-GAAP measure. For
additional information see Use of Non-GAAP Measures.
(in millions, except per common share data) September 30, 2022 December 31, 2021 Total AIG shareholders' equity $ 39,023 $ 65,956 Preferred equity 485 485 Total AIG common shareholders' equity 38,538 65,471 Less: Deferred tax assets 4,556 5,221 Less: Accumulated other comprehensive income (loss) (23,793) 6,687
Add: Cumulative unrealized gains and losses related to
Fortitude Re funds withheld assets
(3,021) 2,791
Subtotal: AOCI plus cumulative unrealized gains and losses
related to Fortitude Re funds withheld assets
(20,772) 3,896 Adjusted common shareholders' equity $ 54,754 $ 56,354 Total common shares outstanding 747.2 818.7 Book value per common share $ 51.58 $ 79.97 Adjusted book value per common share 73.28 68.83
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 Use of Non-GAAP Measures.
Three Months Ended Nine Months Ended Year Ended
September 30, September 30, December 31,
(dollars in millions) 2022 2021 2022 2021 2021
Actual or annualized net income (loss)
attributable to AIG common shareholders $ 10,808 $ 6,640 $ 13,311 $ 7,493 $
9,359
Actual or annualized adjusted after-tax income attributable to AIG common shareholders 2,036 3,348 3,416 4,121
4,430
Average AIG common shareholders' equity$ 41,699 $ 64,988 $ 51,082 $ 64,512 $ 64,704 Less: Average DTA 4,569 7,229 4,794 7,476 7,025 Less: Average AOCI (20,725) 9,408 (10,166) 9,698 9,096 Add: Average cumulative unrealized gains and losses related to Fortitude Re funds withheld assets (2,622) 3,154 (601) 3,303
3,200
Subtotal: AOCI plus cumulative unrealized gains and losses related to Fortitude Re funds withheld assets (18,103) 6,254 (9,565) 6,395
5,896
Average adjusted AIG common shareholders' equity$ 55,233 $ 51,505 $ 55,853 $ 50,641 $ 51,783 Return on common equity 25.9 % 10.2 % 26.1 % 11.6 % 14.5 % Adjusted return on common equity 3.7 % 6.5 % 6.1 % 8.1 % 8.6 % AIG | Third Quarter 2022 Form 10-Q 83
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TABLE OF
CONTENTS
Earnings Document
AMERICAN INTERNATIONAL GROUP, INC. – 10-Q – | Management's Discussion and Analysis of Financial Condition and Results of Operations
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