AMERICAN INTERNATIONAL GROUP, INC. Cautionary Statement Regarding Forward-Looking Information
This Annual Report on Form 10-K and other publicly available documents may include, and officers and representatives of AIG may from time to time make and discuss, 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 forward-looking statements are intended to provide management's current expectations or plans for AIG's future operating and financial performance, based on assumptions currently believed to be valid. 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," "see," "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, the effect of catastrophes, such as the COVID-19 pandemic, and macroeconomic 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. All forward-looking statements involve risks, uncertainties and other factors that may cause AIG's actual results and financial condition to differ, possibly materially, from the results and financial condition expressed or implied in the forward-looking statements. Factors that could cause AIG's actual results to differ, possibly materially, from those in the specific projections, goals, assumptions and statements include, without limitation: 54 AIG | 2021 Form 10-K -------------------------------------------------------------------------------- TABLE OF
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?AIG's ability to successfully separate ?concentrations in AIG's investment the Life and Retirement business and the portfolios, including as a result of our impact any separation may have on AIG, asset management relationship with its businesses, employees, contracts and Blackstone; customers; ?the effectiveness of strategies
to
?the occurrence of catastrophic events, recruit and retain key personnel and to both natural and man-made, including implement effective succession plans; COVID-19, other pandemics, civil unrest ?the effectiveness of AIG's enterprise and the effects of climate change; risk management policies and procedures, ?the effect of economic conditions in including with respect to business the markets in which AIG and its continuity and disaster recovery plans; businesses operate in theU.S. and ?changes in judgments concerning the globally and any changes therein, recognition of deferred tax assets and including financial market conditions, the impairment of goodwill; fluctuations in interest rates and ?AIG's ability to effectively execute on foreign currency exchange rates and ESG targets and standards; inflationary pressures; ?AIG's ability to successfully
dispose
?AIG's ability to effectively execute on of, monetize and/or acquire businesses the AIG 200 operational programs or assets or successfully integrate designed to modernize AIG's operating acquired businesses; infrastructure and enhance user and ?nonperformance or defaults by customer experiences, and AIG's ability counterparties, including Fortitude to achieve anticipated cost savings fromReinsurance Company Ltd. (Fortitude Re); AIG 200; ?changes in judgments concerning ?the impact of potential information potential cost-saving opportunities; technology, cybersecurity or data ?changes to our sources of or access to security breaches, including as a result liquidity; of supply chain disruptions, ?changes in judgments or
assumptions
cyber-attacks or security concerning insurance underwriting
and
vulnerabilities, the likelihood of which insurance liabilities; may increase due to extended remote ?the requirements, which may change from business operations as a result of time to time, of the global regulatory COVID-19; framework to which AIG is subject; ?the impact of COVID-19 and responses ?significant legal, regulatory or thereto, including new or changed governmental proceedings; and governmental policy and regulatory ?such other factors discussed in: actions, on AIG's business, financial -Part I, Item 1A. Risk Factors of this condition and results of operations; Annual Report; and ?availability of reinsurance or access -this Part II, Item 7. Management's to reinsurance on acceptable terms; Discussion and Analysis of Financial ?disruptions in the availability of Condition and Results of Operations AIG's electronic data systems or those (MD&A) of this Annual Report. of third parties; ?changes to the valuation of AIG's investments; ?actions by rating agencies with respect to AIG's credit and financial strength ratings as well as those of its businesses and subsidiaries; The forward-looking statements speak only as of the date of this report, or in the case of any document incorporated by reference, the date of that document. We are not under any obligation (and expressly disclaim any obligation) to update or alter any projections, goals, assumptions or other statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise. Additional information as to factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements is disclosed from time to time in our other filings with theSEC . AIG | 2021 Form 10-K 55
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ITEM 7 | Index to Item 7
INDEX TO ITEM 7
Page
Use of Non-GAAP Measures 57
Critical Accounting Estimates 59
Executive Summary 75
Overview 75
Financial Performance Summary 77
AIG's Outlook - Industry and Economic Factors
79
Consolidated Results of Operations 83 Business Segment Operations 88General Insurance 89 Life and Retirement 98 Other Operations 114 Investments 116 Overview 116 Investment Highlights in 2021 116 Investment Strategies 116 Credit Ratings 118 Insurance Reserves 126 Loss Reserves 126
Life and Annuity Future Policy Benefits, Policyholder Contract Deposits and DAC
130
Liquidity and Capital Resources
139
Overview
139
Analysis of Sources and Uses of Cash
141
Liquidity and Capital Resources of AIG Parent and Subsidiaries 142 Credit Facilities 144 Contractual Obligations 144 Off-Balance Sheet Arrangements and Commercial Commitments 145 Debt 146 Credit Ratings 148 Financial Strength Ratings 149 Rating Agency Actions Related to the Announced Separation of Life and Retirement 149 Regulation and Supervision 149 Dividends 150 Repurchases of AIG Common Stock 150 Dividend Restrictions 150 Enterprise Risk Management 151 Overview 151 Risk Governance Structure 151 Risk Appetite, Limits, Identification and Measurement 152 Credit Risk Management 154 Market Risk Management 155 Liquidity Risk Management 160 Operational Risk Management 161 Insurance Risks 163 Other Business Risks 171 Glossary 172 Acronyms 175
Throughout the MD&A, we use certain terms and abbreviations, which are summarized in the Glossary and Acronyms.
We have incorporated into this discussion a number of cross-references to additional information included throughout this Annual Report to assist readers seeking additional information related to a particular subject.
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ITEM 7 | 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) and 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 7 | Use of Non-GAAP Measures
Adjusted pre-tax income is derived by excluding the items set forth below from
income from continuing operations before income tax. This definition is
consistent across our segments. These items generally fall into one or more of
the following broad categories: legacy matters having no relevance to our
current businesses or operating performance; adjustments to enhance transparency
to the underlying economics of transactions; and measures that we believe to be
common to the industry. APTI is a GAAP measure for our segments. Excluded items
include the following:
?changes in fair value of securities ?income or loss from discontinued
used to hedge guaranteed living operations;
benefits; ?net loss reserve discount benefit
?changes in benefit reserves and (charge);
deferred policy acquisition costs (DAC), ?pension expense related to lump sum
value of business acquired (VOBA), and payments to former employees;
deferred sales inducements (DSI) related ?net gain or loss on divestitures;
to net realized gains and losses; ?non-operating litigation reserves and
?changes in the fair value of equity settlements;
securities; ?restructuring and other costs related
?net investment income on Fortitude Re to initiatives designed to reduce funds withheld assets;
operating expenses, improve efficiency
?following deconsolidation of Fortitude and simplify our organization; Re, net realized gains and losses on ?the portion of favorable or unfavorable Fortitude Re funds withheld assets; prior year reserve development for which ?loss (gain) on extinguishment of debt; we have ceded the risk under retroactive ?all net realized gains and losses reinsurance agreements and related except earned income (periodic changes in amortization of the
deferred
settlements and changes in settlement gain; accruals) on derivative instruments used ?integration and transaction costs for non-qualifying (economic) hedging or associated with acquiring or divesting for asset replication. Earned income on businesses; such economic hedges is reclassified ?losses from the impairment of goodwill; from net realized gains and losses to and specific APTI line items based on the ?non-recurring costs associated with the economic risk being hedged (e.g. net implementation of non-ordinary course investment income and interest credited legal or regulatory changes or changes to policyholder account balances); to accounting principles.
?
-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 7 | Critical Accounting Estimates
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires the
application of accounting policies that often involve a significant degree of
judgment.
The accounting policies that we believe are most dependent on the application of
estimates and assumptions, which are critical accounting estimates, are related
to the determination of:
?loss reserves;
?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.
Loss Reserves
Loss reserves represent the accumulation of estimates of unpaid claims, including estimates for claims incurred but not reported and loss adjustment expenses, less applicable discount. We regularly review and update the methods used to determine loss reserve estimates. Because these estimates are subject to the outcome of future events, changes in estimates are common given that loss trends vary and time is often required for changes in trends to be recognized and confirmed.
The estimate of loss reserves relies on several key judgments:
?the determination of the actuarial methods used as the basis for these estimates;
?the relative weights given to these models by product line;
?the underlying assumptions used in these models; and
?the determination of the appropriate groupings of similar product lines and, in some cases, the disaggregation of dissimilar losses within a product line.
Numerous assumptions are made in determining the best estimate of reserves for
each line of business, in consideration of expected ultimate losses, loss cost
trends and development factors, where appropriate. The importance of any one
assumption can vary by both line of business and accident year. Because such
assumptions may differ from actual experience, there is potential for
significant variation in the development of loss reserves. This estimation
uncertainty is particularly relevant for long-tail lines of business.
All of our methods to calculate net reserves include assumptions about estimated
reinsurance recoveries and their collectability. Reinsurance collectability is
evaluated independently of the reserving process and appropriate allowances for
uncollectible reinsurance are established.
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ITEM 7 | Critical Accounting Estimates
Overview of Loss Reserving Process and Methods
Our loss reserves can generally be categorized into two distinct groups: short-tail reserves and long-tail reserves. Short-tail reserves consist principally ofU.S. Property and Special Risks, Europe Property and Special Risks,U.S. Personal Insurance , andEurope andJapan Personal Insurance . Long-tail reserves includeU.S. Workers' Compensation,U.S. Excess Casualty,U.S. Other Casualty,U.S. Financial Lines, Europe Casualty and Financial Lines, andU.S. Run-Off Long Tail Insurance Lines.
Short-Tail Reserves
For our short-tail coverages, such as property, where the nature of claims is generally high frequency with short reporting periods, with volatility arising from occasional severe events, the process for recording non-catastrophe quarterly loss reserves is geared toward maintaining IBNR based on percentages of net earned premiums for that business, rather than projecting ultimate loss ratios based on reported losses. For example, the IBNR reserve required for the latest accident quarter for a product line such as homeowners might be approximately 20 percent of the quarter's earned premiums. This level of reserve would generally be recorded regardless of the actual losses reported in the current quarter, thus recognizing severe events as they occur. The percent of premium factor reflects both our expectation of the ultimate loss costs associated with the line of business and the expectation of the percentage of ultimate loss costs that have not yet been reported. The expected ultimate loss costs generally reflect the average loss costs from a period of preceding accident quarters that have been adjusted for changes in rate and loss cost levels, mix of business, known exposure to unreported losses, or other factors affecting the line of business. The expected percentage of ultimate loss costs that have not yet been reported would be derived from historical loss emergence patterns. For more mature quarters, specific loss development methods would be used to determine the IBNR. For other product lines where the nature of claims is high frequency but low severity, methods including loss development, frequency/severity or a multiple of average monthly losses may be used to determine IBNR reserves. IBNR for claims arising from catastrophic events or events of unusual severity would be determined in close collaboration with the claims department's evaluation of known information, using alternative techniques or expected percentages of ultimate loss cost emergence based on historical loss emergence of similar claim types.
Long-Tail Reserves
Estimation of loss reserves for our long-tail Casualty lines of business is a complex process and depends on a number of factors, including the product line and volume of business, as well as estimates of reinsurance recoveries. Experience in more recent accident years generally provides limited statistical credibility of reported net losses on long-tail Casualty lines of business. That is because in the more recent accident years, a relatively low proportion of estimated ultimate net incurred losses are reported or paid. Therefore, IBNR reserves constitute a relatively high proportion of loss reserves.
For our long-tail lines, we generally make actuarial and other assumptions with respect to the following:
?Loss cost trend factors, which are used to establish expected loss ratios for subsequent accident years based on the projected loss ratios for prior accident years. ?Expected loss ratios, which are used for the latest accident year and, in some cases, for accident years prior to the latest accident year. The expected loss ratio generally reflects the projected loss ratio from prior accident years, adjusted for the loss cost trend and the effect of rate changes and other quantifiable factors on the loss ratio. ?Loss development factors, which are used to project the reported losses for each accident year to an ultimate basis. Generally, the actual loss development factors observed from prior accident years would be used as a basis to determine the loss development factors for the subsequent accident years. ?Tail factors, which are development factors used for certain long-tail lines of business (for example, excess casualty, workers' compensation and general liability), to project future loss development for periods that extend beyond the available development data. The development of losses to the ultimate loss for a given accident year for these lines may take decades and the projection of ultimate losses for an accident year is very sensitive to the tail factors selected beyond a certain age. We record quarterly changes in loss reserves for each product line of business. The overall change in our loss reserves is based on the sum of the changes for all product lines of business. For most long-tail product lines of business, the quarterly loss reserve changes are based on the estimated current loss ratio for each subset of coverage less any amounts paid. Also, any change in estimated ultimate losses from prior accident years deemed to be necessary based on the results of our latest detailed valuation reviews, large loss analyses, or other analytical techniques, either positive or negative, is reflected in the loss reserve and incurred losses for the current quarter. Differences between actual loss emergence in a given period and our expectations based on prior loss reserve estimates are used to monitor reserve adequacy between detailed valuation reviews and may also influence our judgment with respect to adjusting reserve estimates. 60 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Critical Accounting Estimates
Details of the Loss Reserving Process
The process of determining the current loss ratio for each product line of business is based on a variety of factors. These include considerations such as: prior accident year and policy year loss ratios; rate changes; and changes in coverage, reinsurance, or mix of business. Other considerations include actual and anticipated changes in external factors such as trends in loss costs, inflation, employment rates or unemployment duration or in the legal and claims environment. The current loss ratio for each product line of business is intended to represent our best estimate after reflecting all relevant factors. At the close of each quarter, the assumptions and data underlying the loss ratios are reviewed to determine whether they remain appropriate. This process includes a review of the actual loss experience in the quarter, actual rate changes achieved, actual changes in reinsurance, quantifiable changes in coverage or mix of business, and changes in other factors that may affect the loss ratio. The loss ratio is changed to reflect the revised estimate if this review suggests that the previously determined loss ratio is no longer appropriate. We conduct a comprehensive loss reserve detailed valuation review at least annually for each product line of business in accordance with Actuarial Standards of Practice. These standards provide that the unpaid loss estimate may be presented in a variety of ways, such as a point estimate, a range of estimates, a point estimate based on the expected value of several reasonable estimates, or a probability distribution of the unpaid loss amount. Our actuarial best estimate for each product line of business represents an expected value generally considering a range of reasonably possible outcomes. The reserve analysis for each product line of business is performed by a credentialed actuarial team in collaboration with claims, underwriting, business unit management, risk management and senior management. Our actuaries consider the ongoing applicability of prior data groupings and update numerous assumptions, including the analysis and selection of loss development and loss trend factors. They also determine and select the appropriate actuarial or other methods used to develop our best estimate for each business product line, and may employ multiple methods and assumptions for each product line. These data groupings, accident year weights, method selections and assumptions necessarily change over time as business mix changes, development factors mature and become more credible and loss characteristics evolve. Through the execution of these detailed valuation reviews an actuarial best estimate of the loss reserve is determined. The sum of these estimates for each product line of business yields an overall actuarial best estimate for that line of business. For certain product lines, we measure sensitivities and determine explicit ranges around the actuarial best estimate using multiple methodologies and varying assumptions. Where we have ranges, we use them to inform our selection of best estimates of loss reserves by product line of business. Our range of reasonable estimates is not intended to cover all possibilities or extreme values and is based on known data and facts at the time of estimation. We consult with third-party environmental litigation and engineering specialists, third-party toxic tort claims professionals, third-party clinical and public health specialists, third-party workers' compensation claims adjusters and third-party actuarial advisors to help inform our judgments, as needed. A critical component of our detailed valuation reviews is an internal peer review of our reserving analyses and conclusions, where actuaries independent of the initial review evaluate the reasonableness of assumptions used, methods selected and weightings given to different methods. In addition, each detailed valuation review is subjected to a review and challenge process by specialists in our Enterprise Risk Management group.
Key factors considered in performing detailed actuarial reviews, include:
?an assessment of economic conditions including inflation, employment rates or unemployment duration;
?changes in the legal, regulatory, judicial and social environment including changes in road safety, public health and cleanup standards;
?changes in medical cost trends (inflation, intensity and utilization of medical services) and wage inflation trends;
?underlying policy pricing, terms and conditions including attachment points and policy limits;
?changes in claims handling philosophy, operating model, processes and related ongoing enhancements;
?third-party claims reviews that are periodically performed for key product lines of business such as toxic tort, environmental and other complex casualty;
?third-party actuarial reviews that are periodically performed for key product lines of business;
?input from underwriters on pricing, terms, and conditions and market trends; and
?changes in our reinsurance program, pricing and commutations.
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ITEM 7 | Critical Accounting Estimates
Actuarial and Other Methods for Our Lines of Business
Our actuaries determine the appropriate actuarial methods and segmentation. This determination is based on a variety of factors including the nature of the losses associated with the product line of business, such as the frequency or severity of the claims. In addition to determining the actuarial methods, the actuaries determine the appropriate loss reserve groupings of data. This determination is a judgmental, dynamic process and refinements to the groupings are made every year. The groupings may change to reflect observed or emerging patterns within and across product lines, or to differentiate risk characteristics (for example, size of deductibles and extent of third-party claims specialists used by our insureds). As an example of reserve segmentation, we write many unique subsets of professional liability insurance, which cover different products, industry segments, and coverage structures. While for pricing or other purposes, it may be appropriate to evaluate the profitability of each subset individually, we believe it is appropriate to combine the subsets into larger groups for reserving purposes to produce a greater degree of credibility in the loss experience. This determination of data segmentation and related actuarial methods is assessed, reviewed and updated at least annually. The actuarial methods we use most commonly include paid and incurred loss development methods, expected loss ratio methods, including "Bornhuetter Ferguson" and "Cape Cod ", and frequency/severity models. Loss development methods utilize the actual loss development patterns from prior accident years updated through the current year to project the reported losses to an ultimate basis for all accident years. We also use this information to update our current accident year loss selections. Loss development methods are generally most appropriate for lines of business that exhibit a stable pattern of loss development from one accident year to the next, and for which the components of the product line have similar development characteristics. For example, property exposures would generally not be combined into the same product line as casualty exposures, and primary casualty exposures would generally not be combined into the same product line as excess casualty exposures. We continually refine our loss reserving techniques and adopt further segmentations based on our analysis of differing emerging loss patterns for certain product lines. We generally use expected loss ratio methods in cases where the reported loss data lacked sufficient credibility to utilize loss development methods, such as for new product lines of business or for long-tail product lines at early stages of loss development. Frequency/severity models may be used where sufficient frequency counts are available to apply such approaches. Expected loss ratio methods rely on the application of an expected loss ratio to the earned premium for the product line of business to determine the liability for loss reserves and loss adjustment expenses. For example, an expected loss ratio of 70 percent applied to an earned premium base of$10 million for a product line of business would generate an ultimate loss estimate of$7 million . Subtracting any paid losses and loss adjustment expenses would result in the indicated loss reserve for this product line. Under the Bornhuetter Ferguson method, the expected loss ratio is applied only to the expected unreported portion of the losses. For example, for a long-tail product line of business for which only 10 percent of the losses are expected to be reported at the end of the accident year, the expected loss ratio would be used to represent the 90 percent of losses still unreported. The actual reported losses at the end of the accident year would be added to determine the total ultimate loss estimate for the accident year. Subtracting the reported paid losses and loss adjustment expenses would result in the indicated loss reserve. In the example above, the expected loss ratio of 70 percent would be multiplied by 90 percent. The result of 63 percent would be applied to the earned premium of$10 million resulting in an estimated unreported loss of$6.3 million . Actual reported losses would be added to arrive at the total ultimate losses. If the reported losses were$1 million , the ultimate loss estimate under the Bornhuetter Ferguson method would be$7.3 million versus the$7 million amount under the expected loss ratio method described above. Thus, the Bornhuetter Ferguson method gives partial credibility to the actual loss experience to date for the product line of business. Loss development methods generally give full credibility to the reported loss experience to date. In the example above, loss development methods would typically indicate an ultimate loss estimate of$10 million , as the reported losses of$1 million would be estimated to reflect only 10 percent of the ultimate losses. A key advantage of loss development methods is that they respond more quickly to any actual changes in loss costs for the product line of business. Therefore, if loss experience is unexpectedly deteriorating or improving, the loss development method gives full credibility to the changing experience. Expected loss ratio methods would be slower to respond to the change, as they would continue to give more weight to a prior expected loss ratio, until enough evidence emerged to modify the expected loss ratio to reflect the changing loss experience. On the other hand, loss development methods have the disadvantage of overreacting to changes in reported losses if the loss experience is anomalous due to the various key factors described above and the inherent volatility in some of the lines. For example, the presence or absence of large losses at the early stages of loss development could cause the loss development method to overreact to the favorable or unfavorable experience by assuming it is a fundamental shift in the development pattern. In these instances, expected loss ratio methods such as Bornhuetter Ferguson have the advantage of recognizing large losses without extrapolating unusual large loss activity onto the unreported portion of the losses for the accident year.
The
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ITEM 7 | Critical Accounting Estimates
Frequency/severity methods generally rely on the determination of an ultimate
number of claims and an average severity for each claim for each accident year.
Multiplying the estimated ultimate number of claims for each accident year by
the expected average severity of each claim produces the estimated ultimate loss
for the accident year. Frequency/severity methods generally require a sufficient
volume of claims in order for the average severity to be predictable. Average
severity for subsequent accident years is generally determined by applying an
estimated annual loss cost trend to the estimated average claim severity from
prior accident years. In certain cases, a structural approach may also be used
to predict the ultimate loss cost. Frequency/severity methods have the advantage
that ultimate claim counts can generally be estimated more quickly and
accurately than can ultimate losses. Thus, if the average claim severity can be
accurately estimated, these methods can more quickly respond to changes in loss
experience than other methods. However, for average severity to be predictable,
the product line of business must consist of homogenous types of claims for
which loss severity trends from one year to the next are reasonably consistent
and where there are limited changes to deductible levels or limits. Generally
these methods work best for high frequency, low severity product lines of
business such as personal auto. However, frequency and severity metrics are also
used to test the reasonability of results for other product lines of business
and provide indications of underlying trends in the data. In addition, ultimate
claim counts can be used as an alternative exposure measure to earned premiums
in the Cape Cod method.
Structural driver analytics seek to explain the underlying drivers of
frequency/severity. A structural driver analysis of frequency/severity is
particularly useful for understanding the key drivers of uncertainty in the
ultimate loss cost. For example, for the excess workers' compensation product
line of business, we have attempted to corroborate our judgment by considering
the impact on severity of the future potential for deterioration of an injured
worker's medical condition, the impact of price inflation on the various
categories of medical expense and cost of living adjustments on indemnity
benefits, the impact of injured worker mortality and claim specific settlement
and loss mitigation strategies, etc., using the following:
?Claim by claim reviews, often facilitated by third-party specialists, to determine the stability and likelihood of settling an injured worker's indemnity and medical benefits;
?Analysis of the potential for future deterioration in medical condition unlikely to be picked up by a claim file review and associated with potentially costly medical procedures (i.e., increases in both utilization and intensity of medical care) over the course of the injured worker's lifetime; ?Analysis of the cost of medical price inflation for each category of medical spend (services and devices) and for cost of living adjustments in line with statutory requirements; ?Portfolio specific mortality level and mortality improvement assumptions based on a mortality study conducted for our primary and excess workers' compensation portfolios and our opinion of future longevity trends for the open reported cases; ?Ground-up consideration of the reinsurance recoveries expected for the product line of business for reported claims with extrapolation for unreported claims; and
?The effects of various run-off loss management strategies that have been developed by our run-off unit.
In recent years, we have expanded our analysis of structural drivers to
additional product lines of business as a means of corroborating our judgments
using traditional actuarial techniques. For example, we have explicitly used
external estimates of future medical inflation and mortality in estimating the
loss development tail for excess of deductible primary workers' compensation
business. Using external forecasts for items such as these can improve the
accuracy and stability of our estimates.
The estimation of liability for loss reserves and loss adjustment expenses
relating to asbestos and environmental pollution losses on insurance policies
written many years ago is typically subject to greater uncertainty than other
types of losses. This is due to inconsistent court decisions, as well as
judicial interpretations and legislative actions that in some cases have tended
to broaden coverage beyond the original intent of such policies or have expanded
theories of liability. In addition, reinsurance recoverable balances relating to
asbestos and environmental loss reserves are subject to greater uncertainty due
to the underlying age of the claim, underlying legal issues surrounding the
nature of the coverage, and determination of proper policy period. For these
reasons, these balances tend to be subject to increased levels of disputes and
legal collection activity when actually billed. The insurance industry as a
whole is engaged in extensive litigation over these coverage and liability
issues and is thus confronted with a continuing uncertainty in its efforts to
quantify these exposures.
We continue to receive claims asserting injuries and damages from toxic waste,
hazardous substances, and other environmental pollutants and alleged claims to
cover the cleanup costs of hazardous waste dump sites, referred to collectively
as environmental claims, and indemnity claims asserting injuries from asbestos.
The vast majority of these asbestos and environmental losses emanate from
policies written in 1984 and prior years. Commencing in 1985, standard policies
contained absolute exclusions for pollution-related damage and asbestos. The
current environmental policies that we specifically price and underwrite for
environmental risks on a claims-made basis have been excluded from the analysis.
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The majority of our exposures for asbestos and environmental losses are related
to excess casualty coverages, not primary coverages. The litigation costs are
treated in the same manner as indemnity amounts, with litigation expenses
included within the limits of the liability we incur. Individual significant
loss reserves, where future litigation costs are reasonably determinable, are
established on a case-by-case basis.
Key Assumptions of our Actuarial Methods by Line of Business
Line of Key Assumptions Business or CategoryU.S. Workers' We generally use a combination of loss development and expected Compensation loss ratio methods forU.S. Workers' Compensation as this is a long-tail line of business. The loss cost trend assumption is not believed to be material with respect to our guaranteed cost loss reserves. This is primarily because our actuaries are generally able to use loss development projections for all but the most recent accident year's reserves, so there is limited need to rely on loss cost trend assumptions for primary workers' compensation business. The tail factor is typically the most critical assumption, and small changes in the selected tail factor can have a material effect on our carried reserves. For example, the tail factors beyond twenty years for guaranteed cost business could vary by one and one-half percent below to two percent above those indicated in the 2021 detailed valuation review. For excess of deductible business, in our judgment, it is reasonably likely that tail factors beyond twenty years could vary by four percent below to six percent above those indicated in the 2021 detailed valuation review.U.S. Excess Casualty We utilize various loss cost trend assumptions for different segments of the portfolio. In our judgment, after evaluating the historical loss cost trends from prior accident years since the early 1990s, it is reasonably likely that actual loss cost trends applicable to the year-end 2021 detailed valuation review forU.S. Excess Casualty may range five percent lower or higher than this estimated loss trend. The loss cost trend assumption is critical for theU.S. Excess Casualty line of business due to the long-tail nature of the losses, and it is applied across many accident years. Thus, there is the potential for the loss reserves with respect to a number of accident years (the expected loss ratio years) to be significantly affected by changes in loss cost trends that were initially relied upon in setting the loss reserves. These changes in loss trends could be attributable to changes in inflation or in the judicial environment, or in other social or economic conditions affecting losses.U.S. Excess Casualty is a long-tail line of business and any deviation in loss development factors might not be discernible for an extended period of time subsequent to the recording of the initial loss reserve estimates for any accident year. Mass tort claims in particular may develop over a very extended period and impact multiple accident years, so we usually select a separate pattern for them. Thus, there is the potential for the loss reserves with respect to a number of accident years to be significantly affected by changes in loss
development factors
that were initially relied upon in setting the reserves.
In our judgment, after evaluating the historical loss
development factors from prior accident years since the early
1990s, in our judgment, it is reasonably likely that the actual
loss development factors could vary by an amount equivalent to a
six month shift from those actually utilized in the year-end
2021 detailed valuation review. This would impact projections
both for accident years where the selections were directly based
on loss development methods as well as the a priori loss ratio
assumptions for accident years with selections based on
Bornhuetter Ferguson or Cape Cod methods. Similar to loss cost
trends, these changes in loss development factors could be
attributable to changes in inflation or in the judicial
environment, or in other social or economic conditions affecting
losses.
U.S. Other Casualty The key uncertainties for other casualty lines are similar to
U.S. Excess Casualty, as the underlying business is long-tailed
and can be subject to variability in loss cost trends and
changes in loss development factors. These may differ
significantly by line of business as coverages such as general
liability, medical malpractice and environmental may be subject
to different risk drivers.
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ITEM 7 | Critical Accounting Estimates
Line of Key Assumptions
Business or
Category
U.S. Financial The loss cost trends for U.S. Directors and Officers (D&O)
Lines liability business vary by year and subset. After evaluating the
historical loss cost levels from prior accident years since the
early 1990s, including the potential effect of losses relating
to the credit crisis, in our judgment, it is reasonably likely
that the actual variation in loss cost levels for these subsets
could vary by approximately 10 percent lower or higher on a
year-over-year basis than the assumptions actually utilized in
the year-end 2021 reserve review. Because the U.S. D&O business
has exhibited highly volatile loss trends from one accident year
to the next, there is the possibility of an exceptionally high
deviation. In our analysis, the effects of loss cost trend
assumptions affect the results through the a priori loss ratio
assumptions used for the Bornhuetter Ferguson and Cape Cod
methods, which impact the projections for the more recent
accident years.
The selected loss development factors are also an important
assumption, but are less critical than for U.S. Excess Casualty.
Because these lines are written on a claims made basis, the loss
reporting and development tail is much shorter than for U.S.
Excess Casualty. However, the high severity nature of the losses
does create the potential for significant deviations in loss
development patterns from one year to the next. Similar to U.S.
Excess Casualty, after evaluating the historical loss
development factors from prior accident years since the early
1990s, in our judgment, it is reasonably likely that actual loss
development factors could change by an amount equivalent to a
shift by six months from those actually utilized in the year-end
2021 reserve review.
UK /Europe Similar to U.S. business, European Casualty and Financial Lines
Casualty and can be significantly impacted by loss cost trends and changes in
Financial Lines loss development factors. The variation in such factors can
differ significantly by product and region.
U.S. and For short-tail lines such as Property and Special Risks,
UK /Europe variance in outcomes for individual large claims or events can
Property and have a significant impact on results. These outcomes generally
Special Risks relate to unique characteristics of events such as catastrophes
or losses with significant business interruption claims.
U.S. , UK /Europe Personal Insurance is short-tailed in nature similar to Property
and Japan and Special Risks but less volatile. Variance in estimates can
Personal result from unique events such as catastrophes. In addition,
Insurance some subsets of this business, such as auto liability, can be
impacted by changes in loss development factors and loss cost
trends.
U.S. Run-Off These are extremely long-tailed lines of business, and as such,
Long Tail carry a greater than normal degree of uncertainty when selecting
Insurance Lines loss development factors. Historically, we have used a
combination of loss development methods and expected loss ratio
methods for excess workers' compensation and other run-off
insurance lines. For environmental claims, we have utilized a
variety of methods including traditional loss development
approaches, claim department and other expert evaluations of the
ultimate costs for certain claims and survival ratio metrics.
Other Reserve Loss adjustment expenses (LAE) are separated into two broad
Items categories: allocated loss adjustment expenses, also referred to
as legal defense and cost containment or "legal" and unallocated
loss adjustment expenses, which includes certain claims adjuster
fees and other internal claim management costs.
We determine reserves for legal expenses for each line of
business by one or more actuarial or structural driver methods.
For most lines of business, legal costs are analyzed in
conjunction with losses. For lines of business where they are
separately analyzed the methods used generally include
development methods comparable to those described for loss
development methods. The development could be based on either
the paid loss adjustment expenses or the ratio of paid loss
adjustment expenses to paid losses, or both. Other methods
include the utilization of expected ultimate ratios of paid loss
expense to paid losses, based on actual experience from prior
accident years or from similar product lines of business.
The bulk of adjuster expenses are allocated and charged to
individual claim files. For these expenses, we generally
determine reserves based on calendar year ratios of adjuster
expenses paid to losses paid for the particular product line of
business. For other internal claim costs, which generally relate
to specific claim department expenses that are not allocated to
individual claim files such as technology costs and other broad
initiatives, we look at historic and expected expenditures for
these items and project these into the future.
The incidence of LAE is directly related to the frequency,
complexity and level of underlying claims. As a result, a key
driver of variability in LAE is the variability in the overall
claims, particularly for long tail lines.
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ITEM 7 | Critical Accounting Estimates
The following sensitivity analysis table summarizes the effect on the loss reserve position of using certain alternative loss cost trend (for accident years where we use expected loss ratio methods) or loss development factor assumptions rather than the assumptions actually used in determining our estimates in the year-end loss reserve analyses in 2021:
December 31, 2021 Increase (Decrease) Increase (Decrease)
(in millions) to Loss Reserves to Loss Reserves
Loss cost trends: Loss development factors:
U.S. Excess Casualty: U.S. Excess Casualty:
2.5 percent tail factor
4.5 percent increase $ 960 increase $ 1,030
2.0 percent tail factor
3.5 percent decrease (580) decrease (830)
U.S. Financial Lines (D&O) U.S. Financial Lines (D&O)
3.0 percent tail factor
5.5 percent increase 1,140 increase 680
2.25 percent tail factor
4.0 percent decrease (700) decrease (510)
U.S. Workers'
Compensation:
Tail factor increase(a) 790
Tail factor decrease(b) (540)
(a)Tail factor increase of 1.5 percent for guaranteed cost business and 2 percent for deductible business.
(b)Tail factor decrease of 1 percent for guaranteed cost business and 1.5 percent for deductible business.
For additional information on our reserving process and methodology see Note 12 to the Consolidated Financial Statements.
Future Policy Benefit RESERVEs for Life and Accident and Health Insurance Contracts
Long-duration traditional products primarily include whole life insurance, term life insurance, and certain payout annuities for which the payment period is life-contingent, which include certain of our single premium immediate annuities includingU.S. pension risk transfer (PRT) business and structured settlements. In addition, these products also include accident and health, and long-term care (LTC) insurance. The LTC block is in run-off and has been fully reinsured with Fortitude Re. For long-duration traditional business, a "lock-in" principle applies. Generally, future policy benefits are payable over an extended period of time and related liabilities are calculated as the present value of future benefits less the present value of future net premiums (portion of the gross premium required to provide for all benefits and expenses). The assumptions used to calculate the benefit liabilities and DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs. The assumptions include mortality, morbidity, persistency, maintenance expenses, and investment returns. These assumptions are typically consistent with pricing inputs. The assumptions also include margins for adverse deviation, principally for key assumptions such as mortality and interest rates used to discount cash flows, to reflect uncertainty given that actual experience might deviate from these assumptions. Establishing margins at contract inception requires management judgment. The extent of the margin for adverse deviation may vary depending on the uncertainty of the cash flows, which is affected by the volatility of the business and the extent of our experience with the product. 66 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Critical Accounting Estimates
Overview of Loss Recognition Process and Methods
Loss recognition occurs if observed changes in actual experience or estimates result in projected future losses under loss recognition testing. To determine whether loss recognition exists, we determine whether a future loss is expected based on updated current best estimate assumptions. If loss recognition exists, the assumptions as of the loss recognition test date are locked-in and used in subsequent valuations and the net reserves continue to be subject to loss recognition testing. Because of the long-term nature of many of our liabilities subject to the "lock-in" principle, small changes in certain assumptions may cause large changes in the degree of reserve balances. In particular, changes in estimates of future invested asset returns have a large effect on the degree of reserve balances. Groupings for loss recognition testing are consistent with our manner of acquiring, servicing, and measuring the profitability of the business and are applied by product groupings, that span across issuance years, including traditional life, payout annuities and LTC insurance. Once loss recognition has been recorded for a block of business, the old assumption set is replaced and the assumption set used for the loss recognition would then be subject to the lock-in principle. Our policy is to perform loss recognition testing net of reinsurance. The business ceded to Fortitude Re, is grouped separately. Since 100 percent of the risk has been ceded, no additional loss recognition events are expected to occur unless this business is recaptured.
Key judgments made in loss recognition testing include the following:
?To determine investment returns used in loss recognition tests, we project future cash flows on the assets supporting the liabilities. The duration of these assets is generally comparable to the duration of the liabilities and such, assets are primarily comprised of diversified portfolio of high to medium quality fixed maturity securities, and may also include, to a lesser extent, alternative investments. Our projections include a reasonable allowance for investment expenses and expected credit losses over the projection horizon. A critical assumption in the projection of expected investment income is the assumed net rate of investment return at which excess cash flows are to be reinvested. ?For mortality assumptions, base future assumptions take into account industry and our historical experience, as well as expected mortality changes in the future. The latter judgment is based on a combination of historical mortality trends and industry observations, public health and demography specialists that were consulted by AIG's actuaries and published industry information. ?For surrender rates, key judgments involve the correlation between expected increases/decreases in interest rates and increases/decreases in surrender rates. To support this judgment, we compare crediting rates on our products to expected rates on competing products under different interest rate scenarios. ?Significant unrealized appreciation on investments in a low interest rate environment may cause DAC to be adjusted and additional future policy benefit liabilities to be recorded through a charge directly to accumulated other comprehensive income (changes related to unrealized appreciation or depreciation of investments). These charges are included, net of tax, with the change in net unrealized appreciation of investments. In applying changes related to unrealized appreciation of investments, the Company overlays unrealized gains and other changes related to unrealized appreciation of investments onto loss recognition tests.
For additional information on impact of changes related to unrealized appreciation (depreciation) to investments, see Note 8 to the Consolidated Financial Statements.
For universal life policies with secondary guarantees, we recognize certain liabilities in addition to policyholder account balances. For universal life policies with secondary guarantees, as well as other universal life policies for which profits followed by losses are expected at contract inception, a liability is recognized based on a benefit ratio of (i) the present value of total expected payments, in excess of the account value, over the life of the contract, divided by (ii) the present value of total expected assessments over the life of the contract. Universal life account balances as well as these additional liabilities related to universal life products are reported within Future Policy Benefits in the Consolidated Balance Sheets. These additional liabilities are also adjusted to reflect the effect of unrealized gains or losses on fixed maturity securities available for sale on accumulated assessments, with related changes recognized through Other comprehensive income (loss). The primary policyholder behavior assumptions for these liabilities include mortality, lapses and premium persistency. The primary capital market assumptions used for the liability for universal life secondary guarantees include discount rates and net earned rates.
For additional information on actuarial assumption updates see Insurance Reserves - Life and Annuity Future Policy Benefits, Policyholder Contract Deposits and DAC - Update of Actuarial Assumptions and Models - Investment-Oriented Products.
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ITEM 7 | Critical Accounting Estimates
LIABILITIES FOR Guaranteed Benefit Features of Variable Annuity, FIXED ANNUITY AND FIXED INDEX ANNUITY Products
Variable annuity products offered by ourIndividual Retirement and Group Retirement segments offer guaranteed benefit features. These guaranteed features include guaranteed minimum death benefits (GMDB) that are payable in the event of death and living benefits that guarantee lifetime withdrawals regardless of fixed account and separate account value performance. Living benefit features primarily include guaranteed minimum withdrawal benefits (GMWB).
For additional information on these features, see Note 13 to the Consolidated Financial Statements.
The liability for GMDB, which is recorded in future policy benefits, represents the expected value of benefits in excess of the projected account value, with the excess recognized ratably through Policyholder benefits over the accumulation period based on total expected fee assessments. The liabilities for variable annuity GMWB, which are recorded in Policyholder contract deposits, are accounted for as embedded derivatives measured at fair value, with changes in the fair value of the liabilities recorded in net realized gains (losses). Certain of our fixed annuity and fixed index annuity contracts, which are not offered through separate accounts, contain optional GMWB benefits. Different versions of these GMWB riders contain different guarantee provisions. The liability for GMWB benefits in fixed annuity and fixed index annuity contracts for which the rider guarantee is considered to be clearly and closely related to the host contract are recorded in future policy benefits. This GMWB liability represents the expected value of benefits in excess of the projected account value, with the excess recognized ratably over the accumulation period based on total expected assessments, through Policyholder benefits. For rider guarantees that are linked to equity indices that are considered to be embedded derivatives that are not clearly and closely related to the host contract, the GMWB liability is recorded in Policyholder contract deposits and measured at fair value, with changes in the fair value of the liabilities recorded in net realized gains (losses). Our exposure to the guaranteed amounts is equal to the amount by which the contract holder's account balance is below the amount provided by the guaranteed feature. A deferred annuity contract may include more than one type of guaranteed benefit feature; for example, it may have both a GMDB and a GMWB. However, a policyholder can generally only receive payout from one guaranteed feature on a contract containing a death benefit and a living benefit, i.e., the features are generally mutually exclusive (except a surviving spouse who has a rider to potentially collect both a GMDB upon their spouse's death and a GMWB during his or her lifetime). A policyholder cannot purchase more than one living benefit on one contract. Declines in the equity markets, increased volatility and a low interest rate environment increase our exposure to potential benefits under the guaranteed features, leading to an increase in the liabilities for those benefits. For sensitivity analysis which includes the sensitivity of reserves for guaranteed benefit features to changes in the assumptions for interest rates, equity returns, volatility, and mortality see "Estimated Gross Profits to Value Deferred Acquisition Costs and Unearned Revenue for Investment-Oriented Products" below. For additional information on market risk management related to these product features, see "Enterprise Risk Management - Insurance Risks - Life and Retirement Companies' Key Risks - Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs." 68 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Critical Accounting Estimates
The reserving methodology and assumptions used to measure the liabilities of our two largest guaranteed benefit features are presented in the following table:
Guaranteed
Benefit Reserving Methodology &
Feature Assumptions and Accounting Judgments
GMDB and We determine the GMDB liability at each balance sheet date by
Fixed and estimating the expected value of death benefits in excess of the
certain projected account balance and recognizing the excess ratably over
Fixed Index the accumulation period based on total expected fee assessments. For
Annuity certain fixed and fixed index annuity products, we determine the
GMWB GMWB liability at each balance sheet date by estimating the expected
withdrawal benefits once the projected account balance has been
exhausted ratably over the accumulation period based on total
expected assessments. These GMWB features are deemed to not be
embedded derivatives as the GMWB feature is determined to be clearly
and closely related to the host contract. The present value of the
total expected excess payments (e.g., payments in excess of account
value) over the life of contract divided by the present value of
total expected assessments is referred to as the benefit ratio. The
magnitude and direction of the change in reserves may vary over time
based on the emergence of the benefit ratio and the level of
assessments.
For additional information on how we reserve for variable and fixed
index annuity products with guaranteed benefit features see Note 13
to the Consolidated Financial Statements.
Key assumptions and projections include:
•Interest credited that varies by year of issuance and products
•Actuarially determined assumptions for mortality rates that are
based upon industry and our historical experience modified to allow
for variations in policy features and experience anomalies
•Actuarially determined assumptions for lapse rates that are based
upon industry and our historical experience modified to allow for
variations in policy features and experience anomalies
•Investment returns, based on stochastically generated scenarios
•Asset returns that include a reversion to the meanmethodology,
similar to that applied for DAC
In applying separate account asset growth assumptions for the
variable annuity GMDB liability, we use a reversion to the mean
methodology, the same as that applied to DAC. For the fixed index
annuity GMWB liability, policyholder funds are projected assuming
growth equal to current option values for the current crediting
period followed by option budgets for all subsequent crediting
periods. For the fixed annuity liability, policyholder fund growth
projected assuming credited rates are expected to be maintained at a
target pricing spread, subject to guaranteed minimums.
Variable GMWB living benefits on variable annuities and GMWB living benefits
Annuity and linked to equity indices on fixed index annuities are embedded
certain derivatives that are required to be bifurcated from the host
Fixed Index contract and carried at fair value with changes in the fair value of
Annuity the liabilities recorded in realized gains (losses). The fair value
GMWB of these embedded derivatives is based on assumptions that a market
participant would use in valuing these embedded derivatives. For
additional information on how we reserve for variable and fixed
index annuity products with guaranteed benefit features see Note 13
to the Consolidated Financial Statements, and for information on
fair value measurement of these embedded derivatives, including how
we incorporate our own non-performance risk see Note 4 to the
Consolidated Financial Statements.
The fair value of the embedded derivatives, which are Level 3
liabilities, is based on a risk-neutral framework andincorporates
actuarial and capital market assumptions related to projected cash
flows over the expected lives of the contracts. Key assumptions
include:
•Interest rates
•Equity market returns
•Market volatility
•Credit spreads
•Equity / interest rate correlation
•Policyholder behavior, including mortality, lapses,withdrawals and
benefit utilization. Estimates of future policyholder behavior are
subjective and based primarily on our historical experience
•In applying asset growth assumptions for the valuation of GMWBs, we
use market-consistent assumptions calibrated to observable interest
rate and equity option prices
•Allocation of fees between the embedded derivative and host
contract
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ITEM 7 | Critical Accounting Estimates
embedded derivatives for fixed index annuity and Life Products
Fixed index annuity and life products provide growth potential based in part on the performance of a market index. Certain fixed index annuity products offer optional guaranteed benefit features similar to those offered on variable annuity products. Policyholders may elect to rebalance among the various accounts within the product at specified renewal dates. At the end of each index term, we generally have the opportunity to re-price the indexed component by establishing different participation rates or caps on equity indexed credited rates. The index crediting feature of these products results in the recognition of an embedded derivative that is required to be bifurcated from the host contract and carried at fair value with changes in the fair value of the liabilities recorded in Net realized gains (losses). Option pricing models are used to estimate fair value, taking into account assumptions for future equity index growth rates, volatility of the equity index, future interest rates, and our ability to adjust the participation rate and the cap on equity indexed credited rates in light of market conditions and policyholder behavior assumptions. For additional information on market risk management related to these product features see Enterprise Risk Management - Insurance Risks - Life and Retirement Companies' Key Risks - Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs.
ESTIMATED GROSS PROFITS TO VALUE DEFERRED ACQUISITION COSTS AND UNEARNED REVENUE for Investment-Oriented Products
Policy acquisition costs and policy issuance costs that are incremental and directly related to the successful acquisition of new or renewal of existing insurance contracts related to universal life insurance and investment-type products, for example, variable, fixed and fixed index annuities, (collectively, investment-oriented products) are generally deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over the expected lives of the contracts, except in instances where significant negative gross profits are expected in one or more periods. Investment oriented products have a long duration and a disclosed crediting interest rate. Total gross profits include both actual gross profits and estimates of gross profits for future periods. Estimated gross profits include current and projected interest rates, net investment income and spreads, net realized gains and losses, fees, surrender rates, mortality experience and equity market returns and volatility. In estimating future gross profits, lapse assumptions require judgment and can have a material impact on DAC amortization. For fixed index annuity contracts, the future spread between investment income and interest credited to policyholders is a significant judgment, particularly in a low interest rate environment. We regularly evaluate our assumptions used for estimated gross profits. If the assumptions used for estimated gross profits change, DAC and related reserves, including VOBA, DSI, guaranteed benefit reserves and unearned revenue reserve (URR), are recalculated using the new assumptions, and any resulting adjustment is included in income. Updating such assumptions may result in acceleration of amortization in some products and deceleration of amortization in other products. In estimating future gross profits for variable annuity products as ofDecember 31, 2021 , a long-term annual asset growth assumption of 7.0 percent (before expenses that reduce the asset base from which future fees are projected) was applied to estimate the future growth in assets and related asset-based fees. In determining the asset growth rate, the effect of short-term fluctuations in the equity markets is partially mitigated through the use of a reversion to the mean methodology, whereby short-term asset growth above or below the long-term annual rate assumption impacts the growth assumption applied to the five-year period subsequent to the current balance sheet date. The reversion to the mean methodology allows us to maintain our long-term growth assumptions, while also giving consideration to the effect of actual investment performance. When actual performance significantly deviates from the annual long-term growth assumption, as evidenced by growth assumptions for the five-year reversion to the mean period falling below a certain rate (floor) or above a certain rate (cap) for a sustained period, judgment may be applied to revise or "unlock" the growth rate assumptions to be used for both the five-year reversion to the mean period as well as the long-term annual growth assumption applied to subsequent periods. For additional information, see Insurance Reserves - Life and Annuity Future Policy Benefits, Policyholder Contract Deposits and DAC - DAC - Reversion to the Mean. 70 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Critical Accounting Estimates
The following table summarizes the sensitivity of changes in certain assumptions
for DAC and DSI, embedded derivatives and other reserves related to guaranteed
benefits and URR, measured as the related hypothetical impact on December 31,
2021 balances and the resulting hypothetical impact on pre-tax income, before
hedging.
Increase (decrease) in
Other Embedded
Reserves Derivatives
Related to Unearned Related to
December 31, 2021 DAC/DSI Guaranteed Revenue Guaranteed Pre-Tax
(in millions) Asset Benefits Reserve Benefits Income
Assumptions:
Net Investment Spread
Effect of an increase by 10
basis points $ 140 $ (49) $ (6) $ (154) $ 349
Effect of a decrease by 10
basis points (150) 49 1 158 (358)
Equity Return(a)
Effect of an increase by 1% 109 (29) - (60) 198
Effect of a decrease by 1% (105) 37 - 62 (204)
Volatility(b)
Effect of an increase by 1% (3) 25 - (32) 4
Effect of a decrease by 1% 3 (24) - 37 (10)
Interest Rate(c)
Effect of an increase by 1% - - - (2,550) 2,550
Effect of a decrease by 1% - - - 3,407 (3,407)
Mortality
Effect of an increase by 1% (10) 41 - (54) 3
Effect of a decrease by 1% 10 (41) (1) 54 (2)
Lapse
Effect of an increase by 10% (123) (105) (28) (94) 104
Effect of a decrease by 10% 126 109 24 97 (104)
(a)Represents the net impact of a one percent increase or decrease in long-term
equity returns for GMDB reserves and net impact of a one percent increase or
decrease in the S&P 500 index on the value of the GMWB embedded derivative.
(b)Represents the net impact of a one percentage point increase or decrease in equity volatility.
(c)Represents the net impact of one percent parallel shift in the yield curve on the value of the GMWB embedded derivative. Does not represent interest rate spread compression on investment-oriented products.
The sensitivity ranges of 10 basis points, one percent and 10 percent are included for illustrative purposes only and do not reflect the changes in net investment spreads, equity return, volatility, interest rate, mortality or lapse used by AIG in its fair value analyses or estimates of future gross profits to value DAC and related reserves. Changes different from those illustrated may occur in any period and may result from different products. The analysis of DAC, embedded derivatives and other reserves related to guaranteed benefits, and unearned revenue reserve is a dynamic process that considers all relevant factors and assumptions described above. We estimate each of the above factors individually, without the effect of any correlation among the key assumptions. An assessment of sensitivity associated with changes in any single assumption would not necessarily be an indicator of future results. The effects on pre-tax income in the sensitivity analysis table above do not reflect the related effects from our economic hedging program, which utilizes derivative and other financial instruments and is designed so that changes in value of those instruments move in the opposite direction of changes in the guaranteed benefit embedded derivative liabilities. For additional information on guaranteed benefit features of our variable annuities and the related hedging program see Enterprise Risk Management - Insurance Risks - Life and Retirement Companies' Key Risks - Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs, Insurance Reserves - Life and Annuity Future Policy Benefits, Policyholder Contract Deposits and DAC - Variable Annuity Guaranteed Benefits and Hedging Results, and Notes 4, 8 and 13 to the Consolidated Financial Statements.
For additional information on actuarial assumption updates see Insurance Reserves - Life and Annuity Future Policy Benefits, Policyholder Contract Deposits and DAC - Update of Actuarial Assumptions and Models - Investment-Oriented Products.
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ITEM 7 | Critical Accounting Estimates
Reinsurance ASSETS
In the ordinary course of business, our insurance companies may use both treaty
and facultative reinsurance to minimize their net loss exposure to any single
catastrophic loss event or to an accumulation of losses from a number of smaller
events or to provide greater diversification of our businesses. Reinsurance
assets include the balances due from reinsurance and insurance companies under
the terms of our reinsurance agreements for paid and unpaid losses and loss
adjustment expenses incurred, ceded unearned premiums and ceded future policy
benefits for life and accident and health insurance contracts and benefits paid
and unpaid.
The estimation of reinsurance recoverables involves a significant amount of
judgment, particularly for latent exposures, such as asbestos, due to their
long-tail nature. Reinsurance assets include reinsurance recoverables 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 recoverables 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 that reduces the carrying amount of reinsurance and
other assets on the consolidated balance sheets (collectively, reinsurance
recoverables). 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; reinsurers 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 a significant allowance; and
?whether collateral and collateral arrangements exist.
An estimate of the reinsurance recoverables 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.
For additional information on reinsurance see Note 7 to the Consolidated Financial Statements.
GOODWILL Impairment
Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized.Goodwill is tested for impairment annually, or more frequently if circumstances indicate an impairment may have occurred. A qualitative assessment may be performed, considering whether events or circumstances exist that lead to a determination that it is not more likely than not that the fair value of an operating segment is less than its carrying value. If management elects to perform a quantitative assessment to determine recoverability of carrying value or is compelled to do so based on the results of a qualitative assessment, the estimate of fair value involves applying one or a combination of common valuation approaches. These include discounted expected future cash flows, market-based earnings multiples and external appraisals, among other methods, all of which require management judgment and are subject to uncertainty, primarily as it relates to assumptions around business growth, earnings projections, and cost of capital.
For additional information on goodwill impairment see Part I, Item 1A. Risk Factors - Estimates and Assumptions and Note 11 to the Consolidated Financial Statements.
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ITEM 7 | Critical Accounting Estimates
allowance for credit losses ON CERTAIN INVESTMENTS
We maintain an allowance for the expected lifetime credit losses of commercial and residential mortgage loans and available for sale securities. The sufficiency of this allowance is reviewed quarterly using both quantitative and qualitative considerations, which are subject to risks and uncertainties.
Available for sale securities
If we intend to sell a fixed maturity security, or it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis and the fair value of the security is below amortized cost, an impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized losses. No allowance is established in these situations and any previously recorded allowance is reversed. When assessing our intent to sell a fixed maturity security, or whether it is more likely than not that we will be required to sell a fixed maturity security before recovery of its amortized cost basis, management evaluates relevant facts and circumstances including, but not limited to, decisions to reposition our investment portfolio, sales of securities to meet cash flow needs and sales of securities to take advantage of favorable pricing. For fixed maturity securities for which a decline in the fair value below the amortized cost is due to credit related factors, an allowance is established for the difference between the estimated recoverable value and amortized cost with a corresponding charge to realized losses. The allowance for credit losses is limited to the difference between amortized cost and fair value. The estimated recoverable value is the present value of cash flows expected to be collected, as determined by management. The difference between fair value and amortized cost that is not associated with credit related factors is presented in unrealized appreciation (depreciation) of fixed maturity securities on which an allowance for credit losses was previously recognized (a separate component of accumulated other comprehensive income).
Commercial and residential mortgage loans
At the time of origination or purchase, an allowance for credit losses is established for mortgage and other loan receivables and is updated each reporting period. Changes in the allowance for credit losses are recorded in realized losses. This allowance reflects the risk of loss, even when that risk is remote, that is expected over the remaining contractual life of the loan. The allowance for credit losses considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts of future economic conditions. We revert to historical information when we determine that we can no longer reliably forecast future economic assumptions. The allowances for the commercial mortgage loans and residential mortgage loans are estimated utilizing a probability of default and loss given default model. Loss rate factors are determined based on historical data and adjusted for current and forecasted information. The loss rates are applied based on individual loan attributes and considering such data points as loan-to-value ratios, Fair Isaac Corporation (FICO) scores, and debt service coverage. The estimate of credit losses also reflects management's assumptions on certain macroeconomic factors that include, but are not limited to, gross domestic product growth, employment, inflation, housing price index, interest rates and credit spreads.
For additional information on the methodology and significant inputs, by investment type, that we use to determine the amount of impairment and allowances for loan losses see the discussion in Notes 5 and 6 to the Consolidated Financial Statements.
Legal Contingencies
We estimate and record a liability for potential losses that may arise from regulatory and government investigations and actions, litigation and other forms of dispute resolution to the extent such losses are probable and can be estimated. Determining a reasonable estimate of the amount of such losses requires significant management judgment. In many cases, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the matter is close to resolution. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases that are in the early stages of litigation or in which claimants seek substantial or indeterminate damages, we often cannot predict the outcome or estimate the eventual loss or range of reasonably possible losses related to such matters. Given the inherent unpredictability of such matters, the outcome of certain matters could, from time to time, have a material adverse effect on the company's consolidated financial condition, results of operations or cash flows.
For additional information on legal, regulatory and litigation matters see Note 15 to the Consolidated Financial Statements.
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ITEM 7 | Critical Accounting Estimates
Fair Value Measurements of Certain Financial Assets and FINANCIAL Liabilities
Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are measured and classified in a hierarchy for disclosure purposes consisting of three levels based on the observability of inputs available in the marketplace used to measure the fair value. We classify fair value measurements for certain assets and liabilities as Level 3 when they require significant unobservable inputs in their valuation. We consider unobservable inputs to be those for which market data is not available. Our assessment of the significance of a particular input to the fair value measurement of an asset or liability requires judgment.
For additional information about the valuation methodologies of financial instruments measured at fair value see Note 4 to the Consolidated Financial Statements.
Income Taxes
Deferred income taxes represent the tax effect of the differences between the amounts recorded in our Consolidated Financial Statements and the tax basis of assets and liabilities. Our assessment of net deferred income taxes represents management's best estimate of the tax consequences of various events and transactions, which can themselves be based on other accounting estimates, resulting in incremental uncertainty in the estimation process.
Deferred Tax Asset Recoverability
The evaluation of the recoverability of our deferred tax asset and the need for a valuation allowance requires us to weigh all positive and negative evidence to reach a conclusion that it is more likely than not that all or some portion of the deferred tax asset will not be realized. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. As such, changes in tax laws in countries where we transact business can impact our deferred tax asset valuation allowance. We consider multiple factors to reliably estimate future taxable income so we can determine the extent of our ability to realize net operating losses, foreign tax credits, realized capital loss and other carryforwards. These factors include forecasts of future income for each of our businesses, which incorporate forecasts of future statutory income for our insurance companies, and actual and planned business and operational changes, both of which include assumptions about future macroeconomic and AIG-specific conditions and events. We subject the forecasts to stresses of key assumptions and evaluate the effect on tax attribute utilization. We also apply stresses to our assumptions about the effectiveness of relevant prudent and feasible tax planning strategies. In performing our assessment of recoverability, we consider tax laws governing the utilization of net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction. These tax laws are subject to change, resulting in incremental uncertainty in our assessment of recoverability.
Uncertain Tax Positions
Uncertain tax positions represent AIG's liability for income taxes on tax years subject to review by the Internal Revenue Service or other tax authorities. We determine whether it is more likely than not that a tax position will be sustained, based on technical merits, upon examination by the relevant taxing authorities before any part of the benefit can be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50 percent likely to be realized upon settlement. The completion of review, or the expiration of federal statute of limitations for a given audit period could result in an adjustment to the liability for income taxes.
For a discussion of our framework for assessing the recoverability of our deferred tax asset and other tax topics see Note 21 to the Consolidated Financial Statements.
OTHER UNCERTAINTIES
For a discussion of other risks and uncertainties that could impact the Company's results of operations or financial position, see Part I, Item 1A. Risk Factors and Note 15 to the Consolidated Financial Statements.
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ITEM 7 | 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 Annual Report in its entirety for a more
detailed description of events, trends, uncertainties, risks and critical
accounting estimates affecting us.
Separation of Life and Retirement Business and Relationship with Blackstone Inc.
OnOctober 26, 2020 , AIG announced its intention to separate its Life and Retirement business from AIG. OnNovember 2, 2021 ,AIG and Blackstone Inc. (Blackstone) completed the acquisition by Blackstone of a 9.9 percent equity stake inSAFG Retirement Services, Inc. (SAFG), which is the holding company for AIG's Life and Retirement business, for$2.2 billion in an all cash transaction, subject to adjustment if the final pro forma adjusted book value is greater or lesser than the target pro forma adjusted book value. This resulted in a$629 million decrease to AIG's shareholders' equity. As part of the separation, most of AIG's investment operations were transferred to SAFG or its subsidiaries as ofDecember 31, 2021 , and AIG entered into a long-term asset management relationship with Blackstone to manage an initial$50 billion of Life and Retirement's existing investment portfolio beginning in the fourth quarter of 2021, with that amount increasing by increments of$8.5 billion per year for five years beginning in the fourth quarter of 2022, for an aggregate of$92.5 billion . In addition, Blackstone designated one member of the Board of Directors of SAFG, which consists of 11 directors. Pursuant to the definitive agreement, Blackstone will be required to hold its ownership interest in SAFG following the completion of the separation of the Life and Retirement business, subject to exceptions permitting Blackstone to sell 25%, 67% and 75% of its shares after the first, second and third anniversaries, respectively, of the initial public offering of SAFG (the IPO), with the transfer restrictions terminating in full on the fifth anniversary of the IPO. In the event that the IPO of SAFG is not completed prior toNovember 2, 2023 , Blackstone will have the right to require AIG to undertake the IPO, and in the event that the IPO has not been completed prior toNovember 2, 2024 , Blackstone will have the right to exchange all or a portion of its ownership interest in SAFG for shares of AIG's common stock on the terms set forth in the definitive agreement. OnNovember 1, 2021 , SAFG declared a dividend payable to AIG Parent in the amount of$8.3 billion . In connection with such dividend, SAFG issued a promissory note to AIG Parent in the amount of$8.3 billion , which will be required to be paid to AIG Parent prior to the IPO of SAFG. As ofFebruary 16, 2022 , no amounts have been paid under the promissory note. While we currently believe the IPO is the next step in the separation of the Life and Retirement business from AIG, no assurance can be given regarding the form that future separation transactions may take or the specific terms or timing thereof, or that a separation will in fact occur. Any separation transaction will be subject to the satisfaction of various conditions and approvals, including approval by the AIG Board of Directors, receipt of insurance and other required regulatory approvals, and satisfaction of any applicable requirements of theSEC .
For additional information on the sale of SAFG to Blackstone see Note 16 to the Consolidated Financial Statements.
OnDecember 15, 2021 ,AIG and Blackstone Real Estate Income Trust (BREIT), a long-term, perpetual capital vehicle affiliated with Blackstone, completed the acquisition by BREIT of AIG's interests in aU.S. affordable housing portfolio for$4.9 billion , in an all cash transaction, resulting in a pre-tax gain of$3.0 billion . The historical results of theU.S. affordable housing portfolio were reported in our Life and Retirement operating segments.
Debt Cash Tender Offers and Redemptions
In 2021, we repurchased, through cash tender offers, and redeemed$4.0 billion aggregate principal amount of certain notes and debentures issued or guaranteed by AIG, for an aggregate purchase price of$4.4 billion , resulting in a total loss on extinguishment of debt of$408 million .
Sale of Certain AIG Life and Retirement Retail Mutual Funds Business
OnFebruary 8, 2021 , AIG announced the execution of a definitive agreement with Touchstone Investments (Touchstone), an indirect wholly-owned subsidiary ofWestern & Southern Financial Group , to sell certain assets of Life and Retirement's Retail Mutual Funds business. This sale consisted of the reorganization of twelve of the retail mutual funds managed bySunAmerica Asset Management, LLC (SAAMCo), a Life and Retirement entity, into certain Touchstone funds and was subject to certain conditions, including approval of the fund reorganizations by the retail mutual fund boards of directors/trustees and fund shareholders. The transaction closed onJuly 16, 2021 , at which time we received initial proceeds and the twelve retail mutual funds managed by SAAMCo, with$6.8 billion in assets, were reorganized into Touchstone funds. Additional consideration may be earned over a three-year period based on asset levels in certain reorganized funds. Six retail mutual funds managed by SAAMCo and not included in the transaction were liquidated. We will retain our fund management platform and capabilities dedicated to our variable annuity insurance products. AIG | 2021 Form 10-K 75
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ITEM 7 | Executive Summary
Sale of Fortitude Holdings
On June 2, 2020 , we completed the sale of a majority of the interests in
Fortitude Group Holdings, LLC (Fortitude Holdings ) to Carlyle FRL, L.P. (Carlyle
FRL), an investment fund advised by an affiliate of The Carlyle Group Inc.
(Carlyle), and T&D United Capital Co., Ltd. (T&D), a subsidiary of T&D Holdings,
Inc., under the terms of a membership interest purchase agreement entered into
on November 25, 2019 (the Purchase Agreement) by and among AIG, Fortitude
Holdings , Carlyle FRL, Carlyle, T&D and T&D Holdings, Inc. (the Majority
Interest Fortitude Sale). AIG established Fortitude Re, a wholly owned
subsidiary of Fortitude Holdings , in 2018 in a series of reinsurance
transactions related to AIG's Run-Off operations. As of December 31, 2021 ,
approximately $29.6 billion of reserves from AIG's Life and Retirement Run-Off
Lines and approximately $3.8 billion of reserves from AIG's General Insurance
Run-Off Lines, related to business written by multiple wholly-owned AIG
subsidiaries, had been ceded to Fortitude Re under these reinsurance
transactions. As of closing of the Majority Interest Fortitude Sale, these
reinsurance transactions are no longer considered affiliated transactions and
Fortitude Re is the reinsurer of the majority of AIG's Run-Off operations. As
these reinsurance transactions are structured as modified coinsurance and loss
portfolio transfers with funds withheld, following the closing of the Majority
Interest Fortitude Sale, AIG continues to reflect the invested assets, which
consist mostly of available for sale securities, supporting Fortitude Re's
obligations, in AIG's financial statements.
AIG sold a 19.9 percent ownership interest in Fortitude Holdings to TC Group
Cayman Investments Holdings, L.P. , an affiliate of Carlyle, in November 2018 . As
a result of completion of the Majority Interest Fortitude Sale, Carlyle FRL
purchased from AIG a 51.6 percent ownership interest in Fortitude Holdings and
T&D purchased from AIG a 25 percent ownership interest in Fortitude Holdings ;
AIG retained a 3.5 percent ownership interest in Fortitude Holdings and one seat
on its Board of Managers . The $2.2 billion of proceeds received by AIG at
closing included (i) the $1.8 billion under the Majority Interest Fortitude
Sale, subject to a post-closing purchase price adjustment pursuant to which AIG
would pay Fortitude Re for certain adverse development in property casualty
related reserves, based on an agreed methodology, that may occur through
December 31, 2023 , up to a maximum payment of $500 million ; and (ii) a $383
million purchase price adjustment from Carlyle FRL and T&D, corresponding to
their respective portions of a proposed $500 million non-pro rata distribution
from Fortitude Holdings that was not received by AIG prior to the closing.
Effective in the second quarter of 2021, AIG, Fortitude Holdings , Carlyle FRL,
T&D and Carlyle amended the Purchase Agreement to finalize the post-closing
purchase price adjustment for adverse reserve development. As a result of this
amendment, during 2021, AIG recorded a $21 million benefit through Policyholder
benefits and losses incurred and eliminated further net exposure to adverse
development on the reserves ceded to Fortitude Re.
For additional information on the sale of
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ITEM 7 | Executive Summary
Financial Performance Summary
For information regarding AIG's results of operations for the year ended
December 31, 2020 compared with the year ended December 31, 2019 see Part II,
Item 7. MD&A - Executive Summary - Financial Performance Summary of our Annual
Report on Form 10-K for the year ended December 31, 2020 (2020 Annual Report) .
Net Income (Loss) Attributable To AIG Common Shareholders
(in millions)
[[Image Removed: Chart 4]] 2021 and 2020 Comparison
Net income attributable to AIG common
shareholders increased $15.3 billion due to
the following, on a pre-tax basis:
?the recognition of a $3.0 billion gain on
the closing of the sale of the Affordable
Housing portfolio in 2021 and a $102
million gain from the sale of certain
assets of the Retail Mutual Funds business
to Touchstone in 2021, compared to an $8.3
billion loss on the closing of the Majority
Interest Fortitude Sale in 2020;
?net realized gain on Fortitude Re funds
withheld embedded derivative increased
($2.0 billion ) compared to a loss in 2020
and higher net realized gains on Fortitude
Re funds withheld assets ($540 million );
?higher net realized gains excluding
Fortitude Re funds withheld assets and
embedded derivatives of $1.8 billion ,
driven by a $1.1 billion increase in gains
on global real estate and other assets, a
$646 million increase on derivative and
hedge activity partially offset by losses
on variable annuity embedded derivatives,
net of hedging, as well as favorable
movement in the allowance for credit losses
on fixed maturity securities and loans
($557 million ), partially offset by losses
on foreign exchange ($349 million );
?higher underwriting income in General
Insurance ($2.1 billion ) from higher net
premium marked by strong rate improvement,
higher renewal retentions and strong new
business growth, with continued attritional
loss ratio improvement as well as lower
catastrophe losses, net of reinstatement
premiums ($1.1 billion ) and improved prior
year reserve development ($125 million );
?$981 million higher net investment income,
or $63 million excluding Fortitude Re funds
withheld assets, with higher returns in our
investment portfolio primarily due to
alternative investments, an increase which
was driven by positive returns achieved in
equity markets, partially offset by
declines in fair value of equity
securities; and
?prior period having included the results
of Fortitude Re, a loss of $233 million , up
through the Majority Interest Fortitude
Sale on June 2, 2020 .
The $3.6 billion increase in income tax
expense was primarily attributable to
higher income from continuing operations
and $1.7 billion attributable to the tax
benefit on the deconsolidation of Fortitude
Holdings in 2020.
For additional information see Consolidated
Results of Operations.
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ITEM 7 | Executive Summary
Adjusted Pre-Tax Income (Loss)*
(in millions)
[[Image Removed: Chart 4]] 2021 and 2020 Comparison
Adjusted pre-tax income increased $2.9
billion primarily due to:
?higher underwriting income in General
Insurance ($2.1 billion ) from higher net
premium marked by strong rate improvement,
higher renewal retentions and strong new
business growth, with continued attritional
loss ratio improvement as well as lower
catastrophe losses, net of reinstatement
premiums ($1.1 billion ) and improved prior
year development ($125 million ); and
?higher net investment income ($619
million), driven by returns in alternative
investments.
*Non-GAAP measure - for reconciliation of non-GAAP to GAAP measures see Consolidated Results of Operations.
General Operating and Other Expenses
(in millions)
[[Image Removed: Chart 1]] General operating and other expenses
increased $394 million in 2021 compared to
2020 primarily due to increases in
professional fees inclusive of transaction
costs, performance-based employee costs and
other acquisition expenses.
General operating and other expenses for
2021 and 2020 included approximately $433
million and $435 million , respectively, of
pre-tax restructuring and other costs which
were primarily comprised of employee
severance charges and other costs related
to organizational simplification,
operational efficiency, and business
rationalization.
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ITEM 7 | Executive Summary
AIG's Outlook - Industry and economic factors
Our business is affected by industry and economic factors such as interest rates, currency exchange rates, credit and equity market conditions, catastrophic claims events, regulation, tax policy, competition, and general economic, market and political conditions. We continued to operate under challenging market conditions in 2021, characterized by factors such as the impact of COVID-19 and the related governmental and societal responses, interest rate volatility, inflationary pressures, an uneven global economic recovery and global trade tensions. Responses by central banks and monetary authorities with respect to inflation, growth concerns and other macroeconomic factors have also affected global exchange rates and volatility.
Impact of COVID-19
We are continually assessing the impact on our business, operations and investments of COVID-19 and the resulting ongoing economic and societal disruption. These impacts initially included a global economic contraction, disruptions in financial markets, increased market volatility and declines in certain equity and other asset prices that had negative effects on our investments, our access to liquidity, our ability to generate new sales and the costs associated with claims. While global financial markets recovered in 2021, there remains a risk that the disruptions previously experienced could return and new ones emerge as COVID-19 persists or new variants continue to arise. In addition, in response to the pandemic, new governmental, legislative and regulatory actions have been taken and continue to be developed that have resulted and could continue to result in additional restrictions and requirements, or court decisions rendered, relating to or otherwise affecting our policies that may have a negative impact on our business, operations and capital.General Insurance offers numerous products for which we are monitoring claims activity and assessing adverse impact on future new and renewal business in relation to the COVID-19 pandemic. We are continually reassessing our exposures in light of unfolding developments in theU.S. and globally and evaluating coverage by our reinsurance arrangements. In our Life and Retirement business, the most significant impacts relating to COVID-19 have been the impact of interest rate and equity market levels on spread and fee income, deferred acquisition cost amortization and adverse mortality. We are actively monitoring the mortality rates and the potential direct and indirect impacts that COVID-19 may have across our portfolio of Life and Retirement businesses. We have a diverse investment portfolio with material exposures to various forms of credit risk. The far-reaching economic impacts of COVID-19 have been largely offset, to date, by intervention taken by governments and monetary authorities and equity market rebound resulting in a minimal impact on the value of the portfolio. At this point in time, uncertainty surrounding the duration and severity of the COVID-19 pandemic makes the long-term financial impact difficult to quantify. For additional information please see Part I, Item 1A. Risk Factors - Market Conditions - COVID-19 has adversely affected, and is expected to continue to adversely affect, our global business, results of operations, financial condition and liquidity and its ultimate impact will depend on future developments that are uncertain and cannot be predicted.
Impact of Changes in the Interest Rate Environment
KeyU.S. benchmark rates have been volatile in 2021 as investors form opinions over elevated inflation measures. While key rates have recently increased, they are still historically low. The low interest rate environment negatively affects sales of interest rate sensitive products in our industry and negatively impacts the profitability of our existing business as we reinvest cash flows from investments, including increased calls and prepayments of fixed maturity securities and mortgage loans, at rates below the average yield of our existing portfolios. 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. We may not be able to fully mitigate our interest rate risk by matching exposure of our assets relative to our liabilities. A low interest rate environment could also impair our ability to earn the returns assumed in the pricing and the reserving of our products at the time they were sold and issued.
Additionally, sustained low interest rates may result in higher pension expense due to the impact on discounting of projected benefit cash flows.
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ITEM 7 | Executive Summary
Annuity Sales and Surrenders
The sustained low interest rate environment has a significant impact on the
annuity industry. Low long-term interest rates put pressure on investment
returns, which may negatively affect sales of interest rate sensitive products
and reduce future profits on certain existing fixed rate products. However, our
disciplined pricing has helped to mitigate some of the pressure on investment
spreads. Rapidly rising interest rates could create the potential for increased
sales, but may also drive higher surrenders. Fixed annuities have surrender
charge periods, generally in the three-to-seven 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 to maintain profitability of the overall business in light of the interest rate environment. A low interest rate environment puts margin pressure on pricing of new business and on existing products, due to the challenge of investing new money or recurring premiums and deposits, and reinvesting investment portfolio cash flows, in the low interest rate environment. In addition, there is investment risk associated with future premium receipts from certain in-force business. Specifically, the investment of these future premium receipts may be at a yield below that required to meet future policy liabilities. The contractual provisions for renewal of crediting rates and guaranteed minimum crediting rates included in our products has reduced spreads in a sustained low interest rate environment and thus reduces future profitability.
For additional information on our investment and asset-liability management strategies see Investments.
For investment-oriented products, including universal life insurance, and variable, fixed and fixed index annuities, in ourIndividual 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 to mitigate the pressure on spreads from declining base yields, but our ability to lower crediting rates may be limited by the competitive environment, contractual minimum crediting rates, and provisions that allow rates to be reset only at pre-established intervals. If and as interest rates rise, we may need to raise crediting rates on in-force business for competitive and other reasons, potentially offsetting a portion of the additional investment income resulting from investing in a higher interest rate environment. Of the aggregate fixed account values of ourIndividual Retirement and Group Retirement annuity products, 68 percent were crediting at the contractual minimum guaranteed interest rate atDecember 31, 2021 . The percentage of fixed account values of our annuity products that are currently crediting at rates above one percent were 58 percent and 59 percent atDecember 31, 2021 andDecember 31, 2020 , respectively. These businesses continue to focus on pricing discipline and strategies to manage the minimum guaranteed interest crediting rates offered on new sales in the context of regulatory requirements and competitive positioning. In the universal life products in our Life Insurance business, 67 percent of the account values were crediting at the contractual minimum guaranteed interest rate atDecember 31, 2021 . 80 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Executive Summary
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
December 31, 2021 1-50 Basis More than 50
Contractual Minimum Guaranteed At Contractual Points Above Basis Points
Interest Rate Minimum Minimum Above Minimum
(in millions) Guarantee Guarantee Guarantee Total
Individual Retirement*
<=1% $ 10,212 $ 1,911 $ 17,936 $ 30,059
> 1% - 2% 4,540 28 1,681 6,249
> 2% - 3% 10,353 - 18 10,371
> 3% - 4% 8,151 41 6 8,198
> 4% - 5% 477 - 5 482
> 5% - 5.5% 34 - 4 38
Total Individual Retirement $ 33,767 $ 1,980 $ 19,650 $ 55,397
Group Retirement*
<=1% $ 2,134 $ 3,254 $ 4,682 $ 10,070
> 1% - 2% 6,027 644 99 6,770
> 2% - 3% 14,699 - - 14,699
> 3% - 4% 708 - - 708
> 4% - 5% 6,962 - - 6,962
> 5% - 5.5% 159 - - 159
Total Group Retirement $ 30,689 $ 3,898 $ 4,781 $ 39,368
Universal life insurance
<=1% $ - $ - $ - $ -
> 1% - 2% 103 25 359 487
> 2% - 3% 258 533 1,208 1,999
> 3% - 4% 1,417 178 213 1,808
> 4% - 5% 3,085 2 - 3,087
> 5% - 5.5% 236 - - 236
Total universal life insurance $ 5,099 $ 738 $ 1,780 $ 7,617
Total $ 69,555 $ 6,616 $ 26,211 $ 102,382
Percentage of total 68 % 6 % 26 % 100 %
*Individual Retirement and Group Retirement amounts shown include fixed options within variable annuity products.
AIG | 2021 Form 10-K 81
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ITEM 7 | Executive Summary
General Insurance
The impact of low interest rates on our General Insurance segment reduces the
benefit of investment income in our pricing. This leads to stronger requirements
for underwriting profitability in all of our portfolios, particularly those for
long-tail casualty business.
Although investing at lower interest rates puts pressure on our ability to
adjust pricing to achieve profitability objectives, market conditions have been
conducive to achieving our pricing targets. The pressure on pricing does not
necessarily ease as interest rates rise, as the changes in interest rates are a
lagging response to economic conditions of unemployment and inflation. We
monitor these trends closely, particularly loss cost trend uncertainty, to
ensure that not only our pricing, but also our loss reserving, assumptions are
proactive to, and considerate of, current and future economic conditions.
For our
Impact of Currency Volatility
Currency volatility remains acute. This volatility affected income for those businesses with substantial international operations. In particular, growth trends in net premiums written reported 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, in either direction, especially as a result of central bank responses to inflation, concerns regarding future economic growth and other macroeconomic factors, and such fluctuations will affect net premiums written growth trends reported 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: Years Ended December 31, Percentage Change Rate for1 USD 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Currency: GBP 0.73 0.78 0.79 (6) % (1) % EUR 0.84 0.88 0.90 (5) % (2) % JPY 108.92 107.23 109.31 2 % (2) %
Unless otherwise noted, references to the effects of foreign exchange in the
82 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Consolidated Results of Operations
Consolidated Results of Operations
The following section provides a comparative discussion of our consolidated
results of operations on a reported basis for the three-year period ended
For information regarding the Critical Accounting Estimates that affect our results of operations see Critical Accounting Estimates. For information regarding AIG's results of operations for the year endedDecember 31, 2019 and the year endedDecember 31, 2020 compared with the year endedDecember 31, 2019 see Part II, Item 7. MD&A - Consolidated Results of Operations of our 2020 Annual Report. The following table presents our consolidated results of operations and other key financial metrics: Years Ended December 31, Percentage Change (in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Revenues: Premiums$ 31,259 $ 28,523 $ 30,561 10 % (7) % Policy fees 3,051 2,917 3,015 5 (3) Net investment income: Net investment income - excluding Fortitude Re funds withheld assets 12,641 12,578 14,619 1 (14) Net investment income - Fortitude Re funds withheld assets 1,971 1,053 - 87 NM Total net investment income 14,612 13,631 14,619 7 (7) Net realized gains (losses): Net realized gains (losses) - excluding Fortitude Re funds withheld assets and embedded derivative 1,751 (56) 632 NM NM Net realized gains on Fortitude Re funds withheld assets 1,003 463 - 117 NM Net realized losses on Fortitude Re funds withheld embedded derivative (603) (2,645) - 77 NM
Total net realized gains (losses) 2,151 (2,238) 632
NM NM
Other income 984 903 919 9 (2)
Total revenues 52,057 43,736 49,746 19 (12)
Benefits, losses and expenses:
Policyholder benefits and losses
incurred 24,388 24,806 25,402 (2) (2)
Interest credited to policyholder
account balances 3,557 3,622 3,832 (2) (5)
Amortization of deferred policy
acquisition costs 4,573 4,211 5,164 9 (18)
General operating and other expenses 8,790 8,396 8,537
5 (2)
Interest expense 1,305 1,457 1,417 (10) 3
Loss on extinguishment of debt 389 12 32 NM (63)
Net (gain) loss on divestitures (3,044) 8,525 75
NM NM
Total benefits, losses and expenses 39,958 51,029 44,459
(22) 15 Income (loss) from continuing operations before income tax expense (benefit) 12,099 (7,293) 5,287 NM NM Current (45) 217 545 NM (60) Deferred 2,221 (1,677) 621 NM NM Income tax expense (benefit) 2,176 (1,460) 1,166 NM NM Income (loss) from continuing operations 9,923 (5,833) 4,121 NM NM Income from discontinued operations, net of income taxes - 4 48 NM (92) Net income (loss) 9,923 (5,829) 4,169 NM NM Less: Net income attributable to noncontrolling interests 535 115 821 365 (86)
Net income (loss) attributable to AIG 9,388 (5,944) 3,348
NM NM
Less: Dividends on preferred stock 29 29 22 - 32
Net income (loss) attributable to AIG
common
shareholders $ 9,359 $ (5,973) $ 3,326 NM % NM %
AIG | 2021 Form 10-K 83
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ITEM 7 | Consolidated Results of Operations
Years Ended December 31, 2021 2020 2019
Return on common equity 14.5 % (9.4) % 5.3 %
Adjusted return on common equity 8.6 % 4.4 % 8.3 %
December 31, December 31,
(in millions, except per common
share data) 2021 2020
Balance sheet data:
Total assets $ 596,112 $ 586,481
Long-term debt 23,741 28,103
Debt of consolidated investment entities 6,422 9,431
Total AIG shareholders' equity 65,956 66,362
Book value per common share 79.97 76.46
Adjusted book value per common
share 68.83 57.01
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.
At December 31,
(in millions, except per common share data) 2021 2020 2019
Total AIG shareholders' equity$ 65,956 $ 66,362 $
65,675
Preferred equity 485 485
485
Total AIG common shareholders' equity 65,471 65,877
65,190
Less: Accumulated other comprehensive income (loss) 6,687 13,511 4,982 Add: Cumulative unrealized gains and losses related to Fortitude Re funds withheld assets
2,791 4,657 -
Less: Deferred tax assets 5,221 7,907
8,977
Adjusted common shareholders' equity$ 56,354 $ 49,116 $
51,231
Total common shares outstanding 818.7 861.6
870.0
Book value per common share$ 79.97 $ 76.46 $
74.93
Adjusted book value per common share 68.83 57.01
58.89
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.
Years EndedDecember 31 , (dollars in millions) 2021 2020
2019
Actual or annualized net income (loss) attributable to AIG common shareholders
$ 9,359 $ (5,973) $ 3,326 Actual or annualized adjusted after-tax income attributable to AIG common shareholders 4,430 2,201
4,078
Average AIG common shareholders' equity$ 64,704 $ 63,225 $ 62,205 Less: Average AOCI 9,096 7,529
3,261
Add: Average cumulative unrealized gains and losses related to Fortitude Re funds withheld assets
3,200 2,653 -
Less: Average DTA 7,025 8,437
9,605
Average adjusted AIG common shareholders' equity
$ 49,339 Return on common equity 14.5 % (9.4) % 5.3 % Adjusted return on common equity 8.6 % 4.4
% 8.3 %
84 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Consolidated Results of Operations
The following table presents a reconciliation of revenues to adjusted revenues:
Years Ended December 31 ,
(in millions) 2021 2020 2019
Revenues $ 52,057 $ 43,736 $ 49,746
Changes in fair value of securities used to hedge
guaranteed living benefits (60) (56) (228)
Changes in the fair value of equity securities 237 (200) (158)
Other income (expense) - net 24 (49) (46) Net investment income on Fortitude Re funds withheld assets
(1,971) (1,053) -
Net realized gains on Fortitude Re funds withheld
assets (1,003) (463) - Net realized losses on Fortitude Re funds withheld embedded derivative
603 2,645 -
Net realized (gains) losses* (1,585) 148 (395)
Non-operating litigation reserves and settlements - (23) (9)
Adjusted Revenues $ 48,302 $ 44,685 $ 48,910
*Includes 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 and net realized
gains and losses on Fortitude Re funds withheld assets.
The following table presents a reconciliation of pre-tax income (loss)/net income (loss) attributable to AIG to adjusted pre-tax income (loss)/adjusted after-tax income (loss) attributable to AIG:
Years Ended December 31, 2021 2020 2019
Total Tax Non- Total Tax Non- Total Tax Non-
(Benefit) controlling After (Benefit) controlling After (Benefit) controlling After
(in millions, except per common share
data) Pre-tax Charge Interests(d) Tax Pre-tax Charge Interests(d) Tax Pre-tax Charge Interests(e) Tax
Pre-tax income (loss)/net income
(loss), including
noncontrolling interests $ 12,099 $ 2,176 $ -
(535) (535) (115) (115) (821) (821)
Pre-tax income (loss)/net income
(loss)
attributable to AIG $ 12,099 $ 2,176 $ (535)
29 29 22
Net income (loss) attributable to AIG
common
shareholders $ 9,359 $ (5,973) $ 3,326
Changes in uncertain tax positions and
other tax
adjustments(a) 998 - (998) 132 - (132) (30) - 30
Deferred income tax valuation
allowance
(releases) charges(b) (718) - 718 65 - (65) 43 - (43)
Changes in fair value of securities
used to hedge
guaranteed living benefits (61) (13) - (48) (41) (9) - (32) (194) (40) - (154)
Changes in benefit reserves and DAC,
VOBA and
DSI related to net realized gains
(losses) 52 11 - 41 (12) (3) - (9) (56) (12) - (44)
Changes in the fair value of equity
securities 237 49 - 188 (200) (42) - (158) (158) (33) - (125)
Loss on extinguishment of debt 389 82 - 307 12 2 - 10 32 7 - 25
Net investment income on Fortitude Re
funds withheld
assets (1,971) (414) - (1,557) (1,053) (221) - (832) - - - -
Net realized gains on Fortitude Re
funds
withheld assets (1,003) (211) - (792) (463) (98) - (365) - - - -
Net realized losses on Fortitude Re
funds withheld
embedded derivative 603 126 - 477 2,645 555 - 2,090 - - - -
Net realized (gains) losses(c) (1,623) (341) - (1,282) 97 22 - 75 (456) (99) - (357)
Income from discontinued operations - (4) (48)
Net (gain) loss on divestitures (3,044) (650) - (2,394) 8,525 1,610 - 6,915 75 9 - 66
Non-operating litigation reserves and
settlements 3 1 - 2 (21) (4) - (17) (2) - - (2)
Favorable prior year development and
related amortization changes ceded
under
retroactive reinsurance agreements (186) (39) - (147) (221) (46) - (175) (267) (56) - (211)
Net loss reserve discount (benefit)
charge (193) (40) - (153) 516 109 - 407 955 201 - 754
Pension expense related to lump sum
payments to former employees 34 7 - 27 - - - - - - - -
Integration and transaction costs
associated with
acquiring or divesting businesses 83 18 - 65 12 3 - 9 24 5 - 19
Restructuring and other costs 433 91 - 342 435 91 - 344 218 46 - 172
Non-recurring costs related to
regulatory or
accounting changes 68 15 - 53 65 14 - 51 12 2 - 10
Noncontrolling interests(d) 222 222 62 62 660 660
Adjusted pre-tax income/Adjusted
after-tax
income attributable to AIG common
shareholders $ 5,920 $ 1,148 $ (313) Weighted average diluted shares outstanding(e) 864.9 869.3 889.5 Income (loss) per common share attributable to AIG common shareholders (diluted)(e)$ 10.82 $ (6.88) $ 3.74 Adjusted after-tax income per common share attributable to AIG common shareholders (diluted)(e)$ 5.12 $ 2.52 $ 4.58
(a)The years ended
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ITEM 7 | Consolidated Results of Operations
(b)The years ended
(c)Includes 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 and net realized gains and losses on Fortitude Re funds withheld assets. (d)For the year endedDecember 31, 2021 , noncontrolling interests include realized non-operating gains on consolidated investment entities. Prior toJune 2, 2020 , noncontrolling interests was primarily due to the 19.9 percent investment inFortitude Holdings by an affiliate of Carlyle, which occurred in the fourth quarter of 2018. Carlyle was allocated 19.9 percent ofFortitude Holdings' standalone financial results through theJune 2, 2020 closing date of the Majority Interest Fortitude Sale.Fortitude Holdings' results were mostly eliminated in AIG's consolidated income from continuing operations given that its results arose from intercompany transactions. Noncontrolling interests was calculated based on the standalone financial results ofFortitude Holdings . The most significant component ofFortitude Holdings' standalone results was the change in fair value of the embedded derivatives which changes with movements in interest rates and credit spreads, and which was recorded in net realized gains and losses ofFortitude Holdings . In accordance with AIG's adjusted after-tax income definition, realized gains and losses are excluded from noncontrolling interests. Subsequent to the Majority Interest Fortitude Sale, AIG owns 3.5 percent ofFortitude Holdings and no longer consolidatesFortitude Holdings in its financial statements as of such date. The noncontrolling interest inFortitude Holdings is carried at cost within AIG's Other invested assets, which was$100 million as ofDecember 31, 2021 .Fortitude Holdings' summarized financial information (standalone results), prior to the Majority Interest Fortitude Sale onJune 2, 2020 is presented below: Years Ended December 31, 2020 2019 Fortitude AIG Noncontrolling Fortitude AIG Noncontrolling (in millions) Holdings Interest Holdings Interest Revenues$ 653 $ 130$ 2,359 $ 470 Expenses 702 140 1,890 376 Adjusted pre-tax income (loss) (49) (10) 469 94 Taxes (benefit) expense (10) (2) 98 20 Adjusted after-tax income (loss) (39) (8) 371 74 Net realized gains and other charges 383 77 4,216 839 Taxes on net realized gains and other charges 81 16 886 177 Net realized gains and other charges - after-tax 302 61 3,330 662 Net income$ 263 $ 53$ 3,701 $ 736 (e)For the year endedDecember 31, 2020 , because we reported a net loss attributable to AIG common shareholders, all common stock equivalents are anti-dilutive and are therefore excluded from the calculation of diluted shares and diluted per share amounts. However, because we reported adjusted after-tax income attributable to AIG common shareholders, the calculation of adjusted after-tax income per diluted share attributable to AIG common shareholders includes 5,401,597 dilutive shares for the year endedDecember 31, 2020 .
pre-tax income (LOSS) Comparison for 2021 and 2020
Pre-tax income of
For the main drivers impacting AIG's results of operations, see Executive Summary - Financial Performance Summary - Net Income (Loss) Attributable to AIG Common Shareholders.
U.S. Tax law changes TheIRS has continued to issue new guidance in relation to the Tax Act enacted in 2017. Guidance has been issued covering provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries, foreign tax credits by which theU.S. mitigates double taxation of foreign operations, and other elements of tax law. Changes to this guidance, and other provisions of tax law, are expected in future periods. Such guidance may result in changes to the interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we have made an accounting policy election to treat GILTI taxes as a period tax charge in the period the tax is incurred. OnMarch 27, 2020 , theU.S. enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act to mitigate the economic impacts of the COVID-19 pandemic. The tax provisions of the CARES Act have not had and are currently not expected to have a material impact on AIG'sU.S. federal tax liabilities.
On
Repatriation Assumptions
For 2021, we consider our foreign earnings with respect to certain operations inCanada ,South Africa ,Japan ,Latin America ,Bermuda as well as the European,Asia Pacific andMiddle East regions to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active business operations. Deferred taxes, if necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested. 86 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Consolidated Results of Operations
INCOME TAX EXPENSE ANALYSIS
For the year ended
?tax benefits of:
-$935 million associated with the release of reserves for uncertain tax positions, penalties and interest related to the recent completion of audit activity by theIRS , as well as release of reserves for uncertain tax positions and interest related to aNew York State tax settlement based on the completion of recent audit activity, -$109 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities,
-
-
?partially offset by tax charges of:
-
-
-
The effect of foreign operations is primarily related to income and losses in our foreign operations taxed at statutory tax rates different than 21 percent and foreign income subject toU.S. taxation.
For the year ended
?tax charges of:
-
-
-
-
-
?partially offset by tax benefits of:
-
-$101 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and
-
The effect of foreign operations is primarily related to income and losses in our foreign operations taxed at statutory tax rates different than 21 percent and foreign income subject toU.S. taxation. AIG | 2021 Form
10-K 87
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ITEM 7 | Business Segment Operations
Business Segment Operations
Our business operations consist of
On
For information regarding AIG's results of operations for the year ended
The following table summarizes Adjusted pre-tax income (loss) from our business segment operations. See also Note 3 to the Consolidated Financial Statements.
Years EndedDecember 31 , (in millions) 2021 2020 2019General Insurance North America - Underwriting loss$ (47) $ (1,301) $ (365) International - Underwriting income 1,102 277 454 Net investment income 3,304 2,925 3,444 General Insurance 4,359 1,901$ 3,533 Life and Retirement Individual Retirement 1,939 1,938 1,977 Group Retirement 1,284 1,013 937 Life Insurance 106 142 331 Institutional Markets 582 438 308 Life and Retirement 3,911 3,531 3,553 Other Operations Other Operations before consolidation and eliminations (1,418) (1,963) (1,312) Consolidation and eliminations (932) (466) (304) Other Operations (2,350) (2,429) (1,616) Adjusted pre-tax income$ 5,920 $ 3,003 $ 5,470 88 AIG | 2021 Form 10-K
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ITEM 7 | Business Segment Operations | General Insurance
General Insurance PRODUCTS AND DISTRIBUTION
[[Image Removed: Picture 143]] [[Image Removed: Picture 151]]
Liability: Products include general liability, environmental, commercial automobile liability, workers' compensation, excess casualty and crisis management insurance products. Casualty also includes risk-sharing and other customized structured programs for large corporate and multinational customers. Financial Lines: Products include professional liability insurance for a range of businesses and risks, including directors and officers, mergers and acquisitions, fidelity, employment practices, fiduciary liability, cyber risk, kidnap and ransom, and errors and omissions insurance. Property: Products include commercial and industrial property as well as package insurance products and services that cover exposures to man-made and natural disasters, including business interruption.Global Specialty: Products include Aero, political risk, trade credit, portfolio solutions, energy-related property insurance products and marine.Crop Risk Services : Products include hailstorm and multi-peril insurance. Personal Lines: Products include personal auto and property in selected markets and insurance for high net-worth individuals offered throughAIG's Private Client Group (PCG) in theU.S. that covers auto, homeowners, umbrella, yacht, fine art and collections. In addition, we offer extended warranty insurance and services covering electronics, appliances, and HVAC. Accident &Health: Products include voluntary and sponsor-paid personal accident and supplemental health products for individuals, employees, associations and other organizations, as well as a broad range of travel insurance products and services for leisure and business travelers.General Insurance products inNorth America and International markets are distributed through various channels, including captive and independent agents, brokers, affinity partners, airlines and travel agents, and retailers. Our global platform enables writing multi-national and cross-border risks in bothCommercial Lines and Personal Insurance .
BUSINESS STRATEGY
Profitable Growth: Deploy capital efficiently to act opportunistically and
optimize diversity within the portfolio to grow in profitable lines, geographies
and customer segments, while taking a disciplined approach in managing exposures
to those where terms and conditions meet our risk/return appetite. Look to
inorganic growth opportunities in profitable markets and segments to expand our
capabilities and footprint.
Reinsurance Optimization: Strategically partner with reinsurers to effectively
manage exposure to losses arising from frequency of large catastrophic events
and severity from individual risk losses. We strive to optimize our reinsurance
program to manage volatility and protect the balance sheet from tail events and
unpredictable net losses in support of our profitable growth objectives.
Underwriting Excellence: Empower and increase accountability of the underwriter
and continue to integrate underwriting, claims and actuarial to enable better
decision making. Focus on enhancing risk selection, driving consistent
underwriting best practices and building robust monitoring standards to improve
underwriting results.
AIG | 2021 Form 10-K 89
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ITEM 7 | Business Segment Operations | General Insurance
COMPETITION and challenges
Operating in a highly competitive industry, General Insurance competes against
several hundred companies, specialty insurance organizations and other
underwriting organizations in the U.S. In international markets, we compete
against foreign insurance operations of large global insurance groups and local
companies in specific market areas and product types. Insurance companies
compete through a combination of risk acceptance criteria, product pricing,
service and terms and conditions. General Insurance seeks to distinguish itself
in the insurance industry primarily based on its well-established brand, global
franchise, multinational capabilities, financial and capital strength,
innovative products, claims handling expertise, expertise in providing
specialized coverages and customer service.
We serve our business and individual customers on a global basis - from the largest multinational corporations to local businesses and individuals. Our clients benefit from our substantial underwriting expertise.
Our challenges include:
?long-tail Commercial Lines exposures that create added challenges to pricing and risk management;
?over-capacity in certain lines of business that creates downward market pressure on pricing;
?tort environment volatility in certain jurisdictions and lines of business; and
?volatility in claims arising from natural and man-made catastrophes, including public health events, such as the COVID-19 pandemic.
OUTLOOK - INDUSTRY AND ECONOMIC FACTORS
Below is a discussion of the industry and economic factors impacting our operating segments:
The worldwide health and economic impact of COVID-19 continues to evolve, influenced by the scope, severity and duration of the pandemic as well as the actions of governments, judiciaries, legislative bodies, regulators and other third parties in response, all of which are subject to continuing uncertainty. While production in certain lines of business continues to remain near or below pre-COVID-19 levels, the global economic recovery, although uneven, is having a positive impact on consumer and business demand across ourCommercial Lines and Personal Insurance businesses. The overall results ofGeneral Insurance for 2021 reflect continued strong performance from our Commercial Lines portfolio and positive momentum withinPersonal Insurance . Across ourNorth America and International Commercial Lines of business we have seen increased demand for our insurance products with improvement in rates as well as terms and conditions. We continue to monitor inflationary impacts resulting from government stimulus, sharp increases in demand, labor force and supply chain disruptions, among other factors, on rate adequacy and loss cost trends. The ultimate impact of COVID-19 on our business will likely be influenced by the evolution of the virus and its potential to further impact the global economy.
TheNorth America business remains in a firm market with common drivers being higher industry-wide claims severity trends driven by social and economic inflation, higher natural catastrophe losses over recent years driven by increasing loss frequency and severity (in part connected to climate change), the uncertain impact of COVID-19 and the low interest rate environment. While market discipline continues to support price increases across most lines (outside of Workers' Compensation), we are seeing capacity move back into the market in certain segments given the improved pricing levels. We have focused on retaining our best accounts which has led to improving retention across the portfolio. These retention rates are often coupled with an exposure limit management strategy to reduce volatility within the portfolio. We continue to proactively identify segment growth areas as market conditions warrant through effective portfolio management, while non-renewing unprofitable business.Personal Insurance growth prospects are supported by the need for full life cycle products and coverage, increases in personal wealth accumulation, and awareness of insurance protection and risk management. We compete in the high net worth market, accident and health insurance, travel insurance, and warranty services and will continue to expand our innovative products and services to distribution partners and clients. During the first quarter of 2021, AIG amended a distribution agreement with one of its largest travel insurance distributors. Following the effectiveness of the amendments, the revised agreement no longer represents a risk transfer transaction and as such is accounted for under deposit accounting. 90 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Business Segment Operations | General Insurance We believe our global presence providesCommercial Lines and Personal Insurance a competitive advantage, as the demand for multinational cross-border coverage and services increases due to the growing number of international customers, while giving us the ability to respond quickly to local market conditions and build client relationships. We are continuing to pursue growth in our most profitable lines of business and diversify our portfolio across all regions by expanding key business lines (i.e. Financial Lines and Accident & Health) while remaining a market leader in key developed and developing markets. Overall, Commercial Lines continue to show positive rate increases, particularly in our Global Specialty, Financial Lines and Property portfolio and across international markets where market events or withdrawal of capability and capacity have favorably impacted pricing. We are maintaining our underwriting discipline, reducing gross and net limits, increasing use of reinsurance to reduce volatility, as well as continuing our risk selection strategy to improve profitability.
General insurance RESULTS Years Ended December 31, Change (in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Underwriting results: Net premiums written$ 25,890 $ 22,959 $ 25,092 13 % (9) % (Increase) decrease in unearned premiums (833) 703 1,346 NM (48) Net premiums earned 25,057 23,662 26,438 6 (11) Losses and loss adjustment expenses incurred(a) 16,097 16,803 17,246 (4) (3) Acquisition expenses: Amortization of deferred policy acquisition costs 3,530 3,538 4,482 - (21) Other acquisition expenses 1,373 1,283 1,292 7 (1) Total acquisition expenses 4,903 4,821 5,774 2 (17) General operating expenses 3,002 3,062 3,329 (2) (8) Underwriting income (loss) 1,055 (1,024) 89 NM NM Net investment income 3,304 2,925 3,444 13 (15) Adjusted pre-tax income$ 4,359 $ 1,901 $ 3,533 129 % (46) % Loss ratio(a) 64.2 71.0 65.2 (6.8) 5.8 Acquisition ratio 19.6 20.4 21.8 (0.8) (1.4)
General operating expense ratio 12.0 12.9 12.6 (0.9)
0.3
Expense ratio 31.6 33.3 34.4 (1.7) (1.1)
Combined ratio(a) 95.8 104.3 99.6 (8.5) 4.7
Adjustments for accident year loss
ratio, as adjusted
and accident year combined ratio, as
adjusted:
Catastrophe losses and reinstatement
premiums (5.4) (10.3) (4.8) 4.9 (5.5)
Prior year development, net of reinsurance and prior year premiums 0.6 0.1 1.1 0.5
(1.0)
Adjustment for ceded premiums under reinsurance contracts and other - - 0.1 NM
NM
Accident year loss ratio, as adjusted 59.4 60.8 61.6 (1.4)
(0.8)
Accident year combined ratio, as adjusted 91.0 94.1 96.0 (3.1)
(1.9)
(a)Consistent with our definition of APTI, excludes net loss reserve discount
and the portion of favorable or unfavorable prior year reserve development for
which we have ceded the risk under retroactive reinsurance agreements and
related changes in amortization of the deferred gain.
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ITEM 7 | Business Segment Operations | General Insurance The following table presents
Years EndedDecember 31 , Percentage Change in
Percentage Change in
U.S. dollars Original Currency
(in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 2021 vs. 2020 2020 vs. 2019
North America $ 11,733 $ 9,784 $ 11,490 20 % (15) % 20 % (15) %
International 14,157 13,175 13,602 7 (3) 5 (3)
Total net
premiums written $ 25,890 $ 22,959 $ 25,092 13 % (9) % 11 % (9) %
The following tables present
# of North
(in millions) Events America International Total
Year EndedDecember 31, 2021 Flooding, rainstorms and other 7$ 136 $ 136$ 272 Windstorms and hailstorms 10 541 72 613 Winter storms 3 283 64 347 Wildfires 4 67 - 67 Earthquakes 1 - 19 19 Civil unrest 1 20 19 39 Reinstatement premiums 7 13 20 Total catastrophe-related charges 26$ 1,054 $ 323 $
1,377
Year EndedDecember 31, 2020 Flooding, rainstorms and other 4$ 27 $ 64$ 91 Windstorms and hailstorms 14 759 195 954 Wildfires 5 145 2 147 Earthquakes 2 35 12 47 COVID-19 N/A (c) 703 390 1,093 Civil unrest 1 68 28 96 Reinstatement premiums (11) 25 14 Total catastrophe-related charges 26$ 1,726 $ 716 $
2,442
Year EndedDecember 31, 2019 Flooding, rainstorms and other 3$ 20 $ 13$ 33 Windstorms and hailstorms 22 653 383 1,036 Winter storms 4 96 1 97 Wildfires 3 58 10 68 Civil unrest 2 - 23 23 Reinstatement premiums (14) 35 21 Total catastrophe-related charges 34$ 813 $ 465 $
1,278
(a)Natural catastrophe losses are generally weather or seismic events, in each
case, having a net impact on AIG in excess of
(b)Geography:North America primarily includes insurance businesses inthe United States ,Canada andBermuda , and our global reinsurance business, AIG Re. International includes regional insurance businesses inJapan , theUnited Kingdom ,Europe ,Middle East andAfrica (EMEA region),Asia Pacific ,Latin America andCaribbean , andChina . International also includes the results ofTalbot Holdings, Ltd. as well as AIG's global specialty business. (c)As COVID-19 continues to evolve, impacting many lines of business, the number of events is yet to be determined. 92 AIG | 2021 Form 10-K -------------------------------------------------------------------------------- TABLE OF CONTENTS ITEM 7 | Business Segment Operations | General Insurance North America Results Years Ended December 31, Change (in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Underwriting results: Net premiums written$ 11,733 $ 9,784 $ 11,490 20 % (15) % (Increase) decrease in unearned premiums (744) 518 646 NM (20) Net premiums earned 10,989 10,302 12,136 7 (15) Losses and loss adjustment expenses incurred(a) 8,134 8,720 8,867 (7) (2) Acquisition expenses: Amortization of deferred policy acquisition costs 1,333 1,365 1,923 (2) (29) Other acquisition expenses 440 359 478 23 (25) Total acquisition expenses 1,773 1,724 2,401 3 (28) General operating expenses 1,129 1,159 1,233 (3) (6) Underwriting loss$ (47) $ (1,301) $ (365) 96 % (256) % Loss ratio(a) 74.0 84.6 73.1 (10.6) 11.5 Acquisition ratio 16.1 16.7 19.8 (0.6) (3.1)
General operating expense ratio 10.3 11.3 10.2 (1.0)
1.1
Expense ratio 26.4 28.0 30.0 (1.6) (2.0)
Combined ratio(a) 100.4 112.6 103.1 (12.2) 9.5
Adjustments for accident year loss
ratio, as adjusted
and accident year combined ratio, as
adjusted:
Catastrophe losses and reinstatement
premiums (9.5) (16.7) (6.8) 7.2 (9.9)
Prior year development, net of reinsurance and prior year premiums 1.2 1.2 1.0 -
0.2
Adjustment for ceded premiums under reinsurance contracts and other - (0.1) 0.2 NM
(0.3)
Accident year loss ratio, as adjusted 65.7 69.0 67.5 (3.3)
1.5
Accident year combined ratio, as adjusted 92.1 97.0 97.5 (4.9)
(0.5)
(a)Consistent with our definition of APTI, excludes net loss reserve discount and the portion of favorable or unfavorable prior year reserve development for which we have ceded the risk under retroactive reinsurance agreements and related changes in amortization of the deferred gain.
Business and Financial Highlights
The North America General Insurance business continues to make progress in strengthening our underwriting, actively managing our portfolio to improve business mix and articulating our revised risk appetite to the marketplace. We are at the forefront of the industry across multiple lines in terms of driving rate momentum while simultaneously increasing the level of business retained in targeted lines. As we see disruption in the marketplace, we are well placed to capitalize on opportunities. During the second quarter of 2020, AIG entered into a series of quota share reinsurance agreements, including with Lloyd's Syndicate 2019, a Lloyd's syndicate managed byTalbot Underwriting Ltd. , and with PCG 2019Corporate Member Ltd. , both of which are wholly-owned subsidiaries of AIG, to cede PCG business written by ourGeneral Insurance operations to third parties. Overall, these ceded reinsurance transactions, accounted for under ASC 944 Financial Services - Insurance, further AIG's continued optimization of itsGeneral Insurance portfolio, create additional products for clients and diversify AIG's capital base. We consolidate our interest in Lloyd's Syndicate 2019 and account for the reinsurance transactions in a manner consistent with other third-party reinsurance arrangements. Underwriting losses decreased in 2021 compared to the prior year by$1.3 billion primarily due to significantly lower catastrophe losses, improvement in the accident year loss ratio, as adjusted, higher net favorable prior year reserve development and a lower expense ratio. Net premiums written increased in 2021 compared to the prior year by$1.9 billion primarily due to growth in Commercial Lines driven by strong rate improvement, higher renewal retentions, strong new business production and lower ceded premiums driven by 2020 quota share reinsurance agreements. While net premiums written increased across most Commercial Lines, the increase was particularly strong within our AIG Re, Casualty, Financial Lines and Property businesses. In Personal Lines, our Travel business benefitted from increased consumer spending, while our Warranty business saw growth in new and existing programs. AIG | 2021 Form 10-K 93
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ITEM 7 | Business Segment Operations | General Insurance For information regarding Reinsurance Activities see Enterprise Risk Management.
North America Net Premiums Written
(in millions)
[[Image Removed: Chart 6]] 2021 and 2020 Comparison
Net premiums written increased by $1.9 billion
primarily due to:
•growth in Commercial Lines ($1.6 billion ),
particularly within our AIG Re, Casualty,
Financial Lines, and Property businesses, driven
by strong rate improvement, higher renewal
retentions and strong new business production;
•increased PCG net premiums written resulting from
changes in our reinsurance program ($223 million );
and
•growth in Personal Lines in our Travel business
driven by increased consumer spending, as well as
growth in new and existing programs within our
Warranty business.
North America Underwriting Income (Loss)
(in millions)
[[Image Removed: Chart 3]] 2021 and 2020 Comparison
Underwriting loss decreased by $1.3 billion
primarily due to:
•significantly lower catastrophe losses ($672
million), notably due to the impact of COVID-19 in
2020;
•higher premium with improvement in the accident
year loss ratio, as adjusted (3.3 points) primarily
driven by changes in business mix along with strong
rate improvement, focused risk selection and
improved terms and conditions;
•lower expense ratio of 1.6 points reflecting a
lower acquisition ratio (0.6 points) primarily
driven by changes in business mix including the
impact of COVID-19 most notably in Travel, changes
in 2021 Commercial Lines reinsurance program and a
lower general operating expense ratio (1.0 points)
resulting from continued general expense discipline
as we grow the portfolio; and
•higher net favorable prior year reserve development
($37 million ), primarily driven by favorable
development in PCG, partially offset by unfavorable
development in Financial Lines and Property.
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ITEM 7 | Business Segment Operations | General Insurance
North America Combined Ratios
[[Image Removed: Chart 4]] 2021 and 2020 Comparison
The decrease in the calendar year combined ratio of
12.2 points reflected a decrease in both the loss
ratio (10.6 points) and the expense ratio (1.6
points).
The decrease in the loss ratio of 10.6 points
reflected:
•significantly lower catastrophe losses (7.2
points), notably due to the impact of COVID-19 in
2020; and
•higher premium with improvement in the accident
year loss ratio, as adjusted (3.3 points) primarily
driven by changes in business mix along with strong
rate improvement, focused risk selection and
improved terms and conditions.
The decrease in the expense ratio of 1.6 points
reflected a lower acquisition ratio (0.6 points)
primarily driven by changes in business mix
including the impact of COVID-19 most notably in
Travel, changes in 2021 Commercial Lines reinsurance
program and a lower general operating expense ratio
(1.0 points) resulting from continued general
expense discipline as we grow the portfolio.
International Results
Years Ended December 31, Change
(in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Underwriting results:
Net premiums written $ 14,157 $ 13,175 $ 13,602 7 % (3) %
(Increase) decrease in unearned
premiums (89) 185 700 NM (74)
Net premiums earned 14,068 13,360 14,302 5 (7)
Losses and loss adjustment expenses
incurred 7,963 8,083 8,379 (1) (4)
Acquisition expenses:
Amortization of deferred policy
acquisition costs 2,197 2,173 2,559 1 (15)
Other acquisition expenses 933 924 814 1 14
Total acquisition expenses 3,130 3,097 3,373 1 (8)
General operating expenses 1,873 1,903 2,096 (2) (9)
Underwriting income $ 1,102 $ 277 $ 454 298 % (39) %
Loss ratio 56.6 60.5 58.6 (3.9) 1.9
Acquisition ratio 22.2 23.2 23.6 (1.0) (0.4)General operating expense ratio 13.3 14.2 14.7 (0.9)
(0.5) Expense ratio 35.5 37.4 38.3 (1.9) (0.9) Combined ratio 92.1 97.9 96.9 (5.8) 1.0 Adjustments for accident year loss ratio, as adjusted and accident year combined ratio, as adjusted: Catastrophe losses and reinstatement premiums (2.3) (5.3) (3.2) 3.0
(2.1)
Prior year development, net of reinsurance and prior year premiums 0.1 (0.7) 1.1 0.8
(1.8)
Adjustment for ceded premiums under reinsurance contracts - - 0.1 NM
NM
Accident year loss ratio, as adjusted 54.4 54.5 56.6 (0.1)
(2.1)
Accident year combined ratio, as
adjusted 89.9 91.9 94.9 (2.0) (3.0)
AIG | 2021 Form 10-K 95
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ITEM 7 | Business Segment Operations | General Insurance Business and Financial Highlights
The
Underwriting income increased in 2021 compared to the prior year by$825 million primarily due to significantly lower catastrophe losses, net favorable prior year reserve development compared to net adverse prior year reserve development in 2020 and a lower expense ratio. Net premiums written, excluding the impact of foreign exchange, increased in 2021 compared to the prior year by$646 million primarily due to growth across most Commercial Lines, in particular Financial Lines, Global Specialty and Property driven by strong rate improvement, higher renewal retentions and strong new business production, partially offset by lower production across most lines withinPersonal Insurance due to the impact of COVID-19, as well as underwriting actions taken to strengthen our portfolio and maintain pricing discipline.
For a discussion of Reinsurance Activities see Enterprise Risk Management.
International Net Premiums Written
(in millions)
[[Image Removed: Chart 8]] 2021 and 2020 Comparison
Net premiums written, excluding the impact of
foreign exchange, increased by $646 million due
to:
?strong growth across Commercial Lines ($898
million), notably in Financial Lines, Global
Specialty and Property driven by strong rate
improvement, higher renewal retentions and strong
new business production.
These increases were partially offset by lower
production in Personal Insurance ($252 million )
due to the impact of COVID-19, as well as
underwriting actions taken to strengthen our
portfolio and maintain pricing discipline.
International Underwriting Income (Loss)
(in millions)
[[Image Removed: Chart 5]] 2021 and 2020 Comparison
Underwriting income increased by $825 million
primarily due to:
?significantly lower catastrophe losses ($393
million), notably due to the impact of COVID-19 in
2020;
?lower expense ratio 1.9 points reflected a lower
acquisition ratio (1.0 points) primarily driven by
lower acquisition expenses, changes in 2021
Commercial Lines reinsurance program and changes in
business mix, as well as a lower general operating
expense ratio (0.9 points), which reflects continued
general expense discipline as we grow the portfolio;
and
?net favorable prior year reserve development in 2021
as compared to adverse in 2020 (0.8 points or $88
million), primarily, due to favorable development
across Personal Lines partially offset by lower
favorable development in Property and Global
Specialty.
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ITEM 7 | Business Segment Operations | General Insurance
International Combined Ratios
[[Image Removed: Chart 4]] 2021 and 2020 Comparison
The decrease in the calendar year combined ratio of
5.8 points reflected a decrease in both the loss
ratio (3.9 points) and the expense ratio (1.9
points).
The decrease in the loss ratio by 3.9 points
reflected:
•significantly lower catastrophe losses (3.0
points), notably due to the impact of COVID-19 in
2020; and
•net favorable prior year reserve development in
2021 compared to net adverse prior year reserve
development in 2020 (0.8 points), primarily, due to
favorable development across Personal Lines
partially offset by lower favorable development in
Property and Global Specialty.
The decrease in the expense ratio by 1.9 points
reflected:
•lower acquisition ratio (1.0 points) primarily
driven by lower acquisition expenses, changes in
2021 Commercial Lines reinsurance program and
changes in business mix; and
•lower general operating expense ratio (0.9 points)
resulting from continued general expense discipline
as we grow the portfolio.
AIG | 2021 Form 10-K 97
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ITEM 7 | Business Segment Operations | Life and Retirement
Life and Retirement
Life and Retirement consists of four operating segments: Individual Retirement,
Group Retirement, Life Insurance and Institutional Markets. We offer a broad
portfolio of products in the U.S. through a multichannel distribution network
and life and health products in the UK and Ireland .
PRODUCTS AND DISTRIBUTION
Variable Annuities: Products include variable annuities that offer a
combination of growth potential, death benefit features and income
protection features. Variable annuities are distributed primarily
through banks, wirehouses, and regional and independent
broker-dealers.
Index Annuities: Products include fixed index annuities that provide
growth potential based in part on theperformance of a market index
as well as optional living guaranteed features that provide lifetime
income protection. Fixed index annuities are distributed primarily
through banks, broker-dealers, independent marketing organizations
and independent insurance agents.[[Image Removed: Picture 2]] Fixed Annuities: Products include single premium fixed annuities,
immediate annuities and deferred income annuities. Certain fixed
deferred annuity products offer optional income protection features.
The fixed annuities product line maintains an industry-leading
position in the U.S. bank distribution channel by designing products
collaboratively with banks and offering an efficient and flexible
administration platform.
Retail Mutual Funds: Includes our mutual fund offerings and related
administration and servicing operations. Retail Mutual Funds are
distributed primarily through broker-dealers. On July 16, 2021 , the
Company sold certain assets of the AIG Retail Mutual Funds business.
For further details on the Sale of Certain Assets of the Retail
Mutual Funds Business, see Executive Summary - Overview.
Group Retirement: Products and services consist of record-keeping,
plan administrative and compliance services, financial planning and
advisory solutions offered to employer defined contribution plans
and their participants, along withproprietary and non-proprietary
annuities and advisory and brokerage products offered outside of
[[Image Removed: Picture 3]] plans.
AIG Retirement Services offers its products and services through The
Variable Annuity Life Insurance Company and its subsidiaries, VALIC
Financial Advisors, Inc. and VALIC Retirement Services Company .
AIG Retirement Services career financial advisors serve individual
clients, including in-plan enrollment support and education, and
comprehensive financial planning services.
Life Insurance: In the U.S. , productsprimarily include term life
and universal life insurance distributed through independent
[[Image Removed: Picture 11]] marketing organizations, independent insurance agents, financial
advisors and direct marketing. International operations primarily
include the distribution of life and health products in the UK and
Ireland .
Institutional Markets: Products primarily include stable value wrap
products, structured settlement and pension risk transfer annuities
(direct and assumed reinsurance), corporate- and bank-owned life
[[Image Removed: Picture 12]] insurance, high net worth products and guaranteed investment
contracts (GICs). Institutional Markets products are primarily
distributed through specialized marketing and consulting firms and
structured settlement brokers.
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ITEM 7 | Business Segment Operations | Life and Retirement
FHLB Funding Agreements are issued through our Individual Retirement, Group
Retirement and Institutional Markets operating segments. Funding agreements are
issued by our U.S. Life and Retirement companies to FHLBs in their respective
districts at fixed or floating rates over specified periods, which can be
prepaid at our discretion. Proceeds are generally invested in fixed income
securities and other suitable investments to generate spread income. These
investment contracts do not have mortality or morbidity risk and are similar to
GICs.
BUSINESS STRATEGY
Deliver client-centric solutions through our unique franchise by bringing
together a broad portfolio of life insurance, retirement and institutional
products offered through an extensive, multichannel distribution network. Life
and Retirement focuses on ease of doing business, offering valuable solutions,
and expanding and deepening its distribution relationships across multiple
channels.
Position market leading businesses to serve growing needs by continually enhancing product solutions, service delivery and digital capabilities while using data and analytics in an innovative manner to improve customer experience.
Individual Retirement will continue Group Retirement continues to
to capitalize on the opportunity to enhance its technology platform to
meet consumer demand for guaranteed improve the customer experience for
income by maintaining innovative plan sponsors and individual
variable and index annuity products, participants. AIG Retirement
while also managing risk from Services' self-service tools
paired
guarantee features through with its career financial
advisors
risk-mitigating product design and provide a compelling service
well-developed economic hedging platform. Group Retirement's
capabilities. strategy also involves providing
Our fixed annuity products provide financial planning services for its
diversity in our annuity product clients and meeting their need for
suite by offering stable returns for income in retirement. In this
retirement savings. advisory role, Group Retirement's
clients may invest in assets in
which AIG or a third-party is
custodian.
Life Insurance in the
continue to position itself for grow its assets under management
growth and changing market dynamics across multiple product lines,
while continuing to execute including stable value wrap,
GICs
strategies to enhance returns. Our and pension risk transfer annuities.
focus is on materializing success Our growth strategy is opportunistic
from a multi-year effort of building and allows us to pursue select
state-of-the-art platforms and transactions that meet our
underwriting innovations, which are risk-adjusted return requirements.
expected to bring process improvements and cost efficiencies. In theUK ,AIG Life Insurance will continue to focus on growing the business organically and through potential acquisition opportunities. Enhance Operational Effectiveness by simplifying processes and operating environments to increase competitiveness, improve service and product capabilities and facilitate delivery of our target customer experience. We continue to invest in technology to improve operating efficiency and ease of doing business for our distribution partners and customers. We believe that simplifying our operating models will enhance productivity and support further profitable growth.
Manage our Balance Sheet through a rigorous approach to our products and portfolio. We match our product design and high-quality investments with our asset and liability exposures to support our cash and liquidity needs under various operating scenarios.
Deliver Value Creation and Manage Capital by striving to deliver solid earnings and returns on capital through disciplined pricing, sustainable underwriting improvements, expense efficiency, and diversification of risk, while optimizing capital allocation and efficiency within insurance entities to enhance return on common equity. AIG | 2021 Form 10-K 99
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ITEM 7 | Business Segment Operations | Life and Retirement
COMPETITION and challenges
Life and Retirement operates in the highly competitive insurance and financial services industry in theU.S. and select international markets, competing against various financial services companies, including banks and other life insurance and mutual fund companies. Competition is primarily based on product pricing and design, distribution, financial strength, customer service and ease of doing business.
Our business remains competitive due to its long-standing market leading positions, innovative products, distribution relationships across multiple channels, customer-focused service and strong financial ratings.
Our primary challenges include:
?a low interest rate environment and recent inflationary pressures, which makes it difficult to profitably price new products and puts margin pressure on existing business due to lower reinvestment yields;
?increased competition in our primary markets, including aggressive pricing of annuities by competitors, increased competition and consolidation of employer groups in the group retirement planning market, and competitors with different profitability targets in the pension risk transfer space as well as other product lines;
?increasingly complex new and proposed regulatory requirements, which have affected industry growth and costs; and
?upgrading our technology and underwriting processes while managing general operating expenses.
OUTLOOK - INDUSTRY AND ECONOMIC FACTORS
Below is a discussion of the industry and economic factors impacting our specific operating segments:
The worldwide health and economic impact of COVID-19 continues to evolve, influenced by the scope, severity and duration of the pandemic, including resurgences in the virus, as well as the actions of governments, judiciaries, legislative bodies, regulators and other third parties in response, as well as the distribution and effectiveness of vaccinations, all of which are subject to continuing uncertainty. COVID-19 impacted the results for 2021 primarily through increased mortality as compared to 2020. OnOctober 26, 2020 , AIG announced its intention to separate its Life and Retirement business from AIG. OnNovember 2, 2021 , AIG and Blackstone completed the acquisition by Blackstone of a 9.9 percent equity stake in SAFG, which is the holding company for AIG's Life and Retirement business, for$2.2 billion in an all cash transaction, subject to adjustment if the final pro forma adjusted book value is greater or lesser than the target pro forma adjusted book value. This resulted in a$629 million decrease to AIG's shareholders' equity. As part of the separation, most of AIG's investment operations were transferred to SAFG or its subsidiaries as ofDecember 31, 2021 , and AIG entered into a long-term asset management relationship with Blackstone to manage an initial$50 billion of Life and Retirement's existing investment portfolio beginning in the fourth quarter of 2021, with that amount increasing by increments of$8.5 billion per year for five years beginning in the fourth quarter of 2022, for an aggregate of$92.5 billion . OnNovember 1, 2021 , SAFG declared a dividend payable to AIG Parent in the amount of$8.3 billion . In connection with such dividend, SAFG issued a promissory note to AIG Parent in the amount of$8.3 billion , which will be required to be paid to AIG Parent prior to the IPO of SAFG. As ofFebruary 16, 2022 , no amounts have been paid under the promissory note. While we currently believe the IPO is the next step in the separation of the Life and Retirement business from AIG, no assurance can be given regarding the form that future separation transactions may take or the specific terms or timing thereof, or that a separation will in fact occur. Any separation transaction will be subject to the satisfaction of various conditions and approvals, including approval by the AIG Board of Directors, receipt of insurance and other required regulatory approvals, and satisfaction of any applicable requirements of theSEC .
For additional information on the sale of SAFG to Blackstone see Note 16 to the Consolidated Financial Statements.
OnDecember 15, 2021 , AIG and BREIT, a long-term, perpetual capital vehicle affiliated with Blackstone, completed the acquisition by BREIT of AIG's interests in aU.S. affordable housing portfolio for$4.9 billion , in an all cash transaction, resulting in a pre-tax gain of$3.0 billion . The historical results of theU.S. affordable housing portfolio were reported in our Life and Retirement operating segments. 100 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Business Segment Operations | Life and Retirement
On February 8, 2021 , AIG announced the execution of a definitive agreement with
Touchstone Investments (Touchstone), an indirect wholly-owned subsidiary of
Western & Southern Financial Group , to sell certain assets of Life and
Retirement's Retail Mutual Funds business. This sale consisted of the
reorganization of twelve of the retail mutual funds managed by SunAmerica Asset
Management, LLC (SAAMCo), a Life and Retirement entity, into certain Touchstone
funds and was subject to certain conditions, including approval of the fund
reorganizations by the retail mutual fund boards of directors/trustees and fund
shareholders. The transaction closed on July 16, 2021 , at which time we received
initial proceeds and the twelve retail mutual funds managed by SAAMCo, with $6.8
billion in assets, were reorganized into Touchstone funds. Additional
consideration may be earned over a three-year period based on asset levels in
certain reorganized funds. Six retail mutual funds managed by SAAMCo and not
included in the transaction were liquidated. We will retain our fund management
platform and capabilities dedicated to our variable annuity insurance products.
For additional information regarding the separation of Life and Retirement
please see Note 1 to the Consolidated Financial Statements and Part I, Item 1A.
Risk Factors - Business and Operations - "No assurances can be given that the
separation of our Life and Retirement business will occur or as to the specific
terms or timing thereof. In addition, the separation could cause the emergence
or exacerbate the effects of other risks to which AIG is exposed".
Individual Retirement
Increasing life expectancy and reduced expectations for traditional retirement income from defined benefit programs and fixed income securities are leading Americans to seek additional financial security as they approach retirement. The strong demand for individual index and fixed deferred annuities with guaranteed income features has attracted increased competition in this product space. In response to the low interest rate environment, which has added pressure to profit margins, we have developed guaranteed income benefits for variable, fixed index, and fixed deferred annuities with margins that are less sensitive to the level of interest rates. Changes in the capital markets (interest rate environment, equity markets, volatility) can have a significant impact on sales, surrender rates, investment returns, guaranteed income features, and net investment spreads in the annuity industry. Group Retirement Group Retirement competes in the defined contribution market under the AIG Retirement Services brand.AIG Retirement Services is a leading retirement plan provider in theU.S. for K-12 schools and school districts, higher education, healthcare, government and other not-for-profit institutions. The defined contribution market is a highly efficient and competitive market that requires support for both plan sponsors and individual participants. To meet this challenge,AIG Retirement Services is investing in a client-focused technology platform to support improved compliance and self-service functionality.AIG Retirement Services' model pairs self-service tools with its career financial advisors who provide individual plan participants with enrollment support and comprehensive financial planning services. Changes in the interest rate and equity market environment can have a significant impact on investment returns, fee income, advisory and other income, guaranteed income features, and net investment spreads, and a moderate impact on sales and surrender rates. Life Insurance Consumers have a significant need for life insurance, whether it is used for income replacement for their surviving family, estate planning or wealth transfer. Additionally, consumers use life insurance to provide living benefits in case of chronic, critical or terminal illnesses, and to supplement retirement income.
In response to consumer needs and a low interest rate environment, our Life Insurance product portfolio will continue to promote products with less long-duration interest rate risk and mitigate exposure to products that have long-duration interest rate risk through sales levels and hedging strategies.
As life insurance ownership remains at historical lows in theU.S. and theUK , efforts to expand the reach and increase the affordability of life insurance are critical. The industry is investing in consumer-centric efforts to reduce traditional barriers to securing life protection by simplifying the sales and service experience. Digitally enabled processes and tools provide a fast, friendly and simple path to life insurance protection. AIG | 2021 Form
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ITEM 7 | Business Segment Operations | Life and Retirement
Institutional Markets
Institutional Markets serves a variety of needs for corporate clients. Demand is
driven by a number of factors including the macroeconomic and regulatory
environment. We expect to see continued growth in the pension risk transfer
market (direct and assumed reinsurance) as corporate plan sponsors look to
transfer asset or liability, longevity, administrative and operational risks
associated with their defined benefit plans.
Changes in the interest rate environment can have a significant impact on
investment returns and net investment spreads, as well as the tax efficiency
associated with institutional life insurance products, impacting organic growth
opportunities.
For additional information on the impact of market interest rate movement on our
Life and Retirement business see Executive Summary - AIG's Outlook - Industry
and Economic Factors - Impact of Changes in the Interest Rate Environment.
life and retirement RESULTS
Years Ended December 31, Percentage Change
(in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Adjusted revenues:
Premiums $ 6,029 $ 4,624 $ 3,789 30 % 22 %
Policy fees 3,051 2,874 2,923 6 (2)
Net investment income 9,521 8,881 8,733 7 2
Advisory fee and other income 993 896 911 11 (2)
Total adjusted revenues 19,594 17,275 16,356 13 6
Benefits, losses and expenses:
Policyholder benefits and losses
incurred 8,379 6,884 5,824 22 18
Interest credited to policyholder
account balances 3,565 3,551 3,603 - (1)
Amortization of deferred policy
acquisition costs 973 632 672 54 (6)
Non deferrable insurance commissions 672 590 567 14 4
Advisory fee expenses 322 316 322 2 (2)
General operating expenses 1,642 1,616 1,653 2 (2)
Interest expense 130 155 162 (16) (4)
Total benefits, losses and expenses 15,683 13,744 12,803 14 7
Adjusted pre-tax income $ 3,911 $ 3,531 $ 3,553 11 % (1) %
For additional information including the impact of actuarial assumptions on our
Life and Retirement results, see Insurance Reserves - Life and Annuity Future
Policy Benefits, Policyholder Contract Deposits and DAC - Update of Actuarial
Assumptions by Business Segment.
Our insurance companies generate significant revenues from investment activities. As a result, the operating segments in Life and Retirement are significantly impacted by variances in net investment income on the asset portfolios that support insurance liabilities and surplus.
For additional information on our investment strategy, asset-liability management process and invested asset composition see Investments.
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ITEM 7 | Business Segment Operations | Life and Retirement
Individual Retirement Results
Years Ended December 31, Change (in millions) 2021 2020 2019 2021 vs 2020 2020 vs 2019 Adjusted revenues: Premiums$ 191 $ 151 $ 104 26 % 45 % Policy fees 962 861 811 12 6 Net investment income 4,338 4,131 4,122 5 - Advisory fee and other income 592 571 606 4 (6) Total adjusted revenues 6,083 5,714 5,643 6 1 Benefits and expenses: Policyholder benefits and losses incurred 536 397 409 35 (3) Interest credited to policyholder account balances 1,787 1,751 1,726 2 1 Amortization of deferred policy acquisition costs 736 590 449 25 31 Non deferrable insurance commissions 397 334 318 19 5 Advisory fee expenses 189 205 219 (8) (6) General operating expenses 438 427 468 3 (9) Interest expense 61 72 77 (15) (6) Total benefits, losses and expenses 4,144 3,776 3,666 10 3 Adjusted pre-tax income$ 1,939 $ 1,938 $ 1,977 - % (2) % Fixed annuities base net investment spread: Base yield* 3.94 % 4.16 % 4.54 % (22) bps (38) bps Cost of funds 2.58 2.63 2.68 (5) (5) Fixed annuities base net investment spread 1.36 % 1.53 % 1.86 % (17) bps (33) bps Variable and index annuities base net investment spread: Base yield* 3.83 % 3.94 % 4.41 % (11) bps (47) bps Cost of funds 1.32 1.31 1.36 1 (5) Variable and index annuities base net investment spread 2.51 % 2.63 % 3.05 % (12)
bps (42) bps
*Includes returns from base portfolio including accretion and income (loss) from certain other invested assets.
Business and Financial Highlights
In 2021, disruptions due to the COVID-19 pandemic were less impactful than in 2020. Premiums and deposits increased$3.5 billion in 2021 compared to the prior year. Net flows improved$4.1 billion in 2021 compared to the prior year. Adjusted pre-tax income increased$1 million in 2021 compared to the prior year primarily due to higher net investment income ($207 million ) and higher policy and advisory fee income, net of advisory fee expenses ($138 million ). Partially offsetting these increases was a net unfavorable impact from the review and update of actuarial assumptions ($195 million ), higher DAC amortization and policyholder benefits net of premiums excluding the actuarial assumptions update ($82 million ) compared to prior year and an increase in non-deferrable insurance commissions ($63 million ). AIG | 2021 Form 10-K 103
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ITEM 7 | Business Segment Operations | Life and Retirement
Individual Retirement Adjusted Pre-Tax Income (Loss)
(in millions)
[[Image Removed: Chart 3]] 2021 and 2020 Comparison
Adjusted pre-tax income increased $1 million
primarily due to:
?increase in net investment income ($207 million )
driven by higher private equity income ($256
million), higher commercial mortgage loan
prepayment income ($29 million ), and higher call
and tender income ($24 million ) partially offset
by lower base portfolio income ($92 million )
resulting from decreased reinvestment rates on the
base portfolio; and
?higher policy and advisory fee income, net of
advisory fee expenses ($138 million ), primarily
due to an increase in variable annuity separate
account assets driven by robust equity market
performance.
Partially offsetting these increases were:
?a net unfavorable impact from the review and
update of actuarial assumptions ($195 million );
?increase in DAC amortization and policyholder
benefits net of premiums, excluding the actuarial
assumption updates ($82 million ), primarily due to
higher growth in Index Annuities, coupled with the
impact of lower portfolio yields on policyholder
benefits; and
?higher non-deferrable insurance commissions ($63
million) primarily due to growth in variable
annuity separate account assets.
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ITEM 7 | Business Segment Operations | Life and Retirement
Individual Retirement GAAP Premiums, Premiums and Deposits, Surrenders and Net Flows
For Individual Retirement, premiums primarily represent amounts received on
life-contingent payout annuities. Premiums increased
Premiums and deposits are a non-GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts, FHLB funding agreements and mutual funds under administration.
Net flows for annuity products in Individual Retirement represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals.
The following table presents a reconciliation of Individual Retirement GAAP premiums to premiums and deposits:
Years EndedDecember 31 , (in millions) 2021 2020 2019 Premiums$ 191 $ 151 $ 104 Deposits 13,732 10,228 14,804 Other (7) (9) (9) Premiums and deposits$ 13,916 $ 10,370 $ 14,899
The following table presents surrenders as a percentage of average reserves:
Years Ended December 31, 2021 2020 2019 Surrenders as a percentage of average reserves Fixed annuities 7.2 % 5.9 % 7.2 % Variable and index annuities 6.5 5.6 6.4 Variable annuities 7.3 6.2 7.2 Index annuities 4.6 4.0 3.8
The following table presents reserves for fixed annuities and variable and index annuities by surrender charge category:
At December 31, 2021 2020*
Variable Variable
Fixed and Index Fixed and Index
(in millions) Annuities Annuities Annuities Annuities
No surrender charge $ 26,419 $ 36,039 $ 27,110 $ 30,954
Greater than 0% - 2% 2,091 12,607 2,298 11,647
Greater than 2% - 4% 2,424 14,079 2,758 15,361
Greater than 4% 16,443 35,708 16,163 32,261
Non-surrenderable 2,373 - 2,214 -
Total reserves $ 49,750 $ 98,433 $ 50,543 $ 90,223 *Certain reclassifications have been made to the prior year amounts for consistency with the current year presentation.
Individual Retirement annuities are typically subject to a four- to seven-year
surrender charge period, depending on the product. For fixed annuities, the
proportion of reserves subject to surrender charge at
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ITEM 7 | Business Segment Operations | Life and Retirement
A discussion of the significant variances in premiums and deposits and net flows for each product line follows:
Individual Retirement Premiums and Deposits (P&D) and Net Flows (in millions) [[Image Removed: Chart 5]]
2021 and 2020 Comparison
*Retail Mutual Fund net flows reflects ?Fixed Annuities Net flows remained
customer activity and in 2021, it negative but improved ($108 million )
excludes $7.0 billion of funds (i) over the prior year, primarily due to
transferred as part of the Touchstone higher premiums and deposits ($476
sale or (ii) liquidated. million) driven in part by the prior
year impact from distribution channel
disruptions related to COVID-19, and
lower death benefits ($222 million ),
partially offset by higher surrenders
and withdrawals ($590 million ) due to
higher interest rates.
?Variable Annuities Variable annuity
net flows improved ($690 million )
primarily due to higher premium and
deposits ($2.0 billion ) driven in part
due to prior year impact from
distribution channel disruptions
related to COVID-19, partially offset
by higher surrenders and withdrawals
($1.1 billion ) due to increase in
number of policies coming out of
surrender charge, and increase in
lapses of policies with guaranteed
minimum withdrawal benefits that are
out of the money, and higher death
benefits ($207 million ).
?Index Annuities Net flows increased
($1.1 billion ) primarily due to higher
premiums and deposits ($1.5 billion )
driven in part by fewer disruptions
related to COVID-19, partially offset
by higher surrenders and withdrawals
($366 million ) due to increased
competition and aging of the block, and
death benefits ($78 million ).
?Retail Mutual Funds Net flows remained
negative but improved ($2.3 billion )
due to lower surrenders and withdrawals
($2.7 billion ) due to the Touchstone
sale, partially offset by lower
premiums and deposits ($477 million )
due to investors' continued preference
for passive, low-fee investment
vehicles, and the distribution channel
disruptions related to COVID-19. Retail
Mutual Funds net flows reflects
customer activity and in 2021 exclude
$7.0 billion of funds (i) transferred
as part of the Touchstone sale or (ii)
liquidated. For additional information
regarding the sale of certain assets of
the AIG Life and Retirement Retail
Mutual Funds business, see Note 1 to
the Consolidated Financial Statements.
106 AIG | 2021 Form 10-K
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ITEM 7 | Business Segment Operations | Life and Retirement
Group Retirement Results
Years Ended December 31, Change
(in millions) 2021 2020 2019 2021 vs 2020 2020 vs 2019
Adjusted revenues:
Premiums $ 22 $ 19 $ 16 16 % 19 %
Policy fees 522 443 429 18 3
Net investment income 2,410 2,236 2,240 8 -
Advisory fee and other income 337 272 262 24 4
Total adjusted revenues 3,291 2,970 2,947 11 26
Benefits and expenses:
Policyholder benefits and losses
incurred 74 72 65 3 11
Interest credited to policyholder
account balances 1,150 1,123 1,147 2 (2)
Amortization of deferred policy
acquisition costs 61 7 81 NM (91)
Non deferrable insurance commissions 111 117 114 (5) 3
Advisory fee expenses 133 111 103 20 8
General operating expenses 443 485 456 (9) 6
Interest expense 35 42 44 (17) (5)
Total benefits, losses and expenses 2,007 1,957 2,010 3 (70)
Adjusted pre-tax income $ 1,284 $ 1,013 $ 937 27 % 8 %
Base net investment spread:
Base yield* 4.11 % 4.26 % 4.53 % (15) bps (27) bps
Cost of funds 2.61 2.65 2.72 (4) (7)
Base net investment spread 1.50 % 1.61 % 1.81 % (11) bps (20) bps
*Includes returns from base portfolio including accretion and income (loss) from certain other invested assets.
Business and Financial Highlights
Group Retirement is focused on implementing initiatives to grow its business.
However, external factors, including increased competition and the consolidation
of healthcare providers and other employers in target markets, continue to
impact Group Retirement's customer retention. Premiums and deposits increased
$270 million in 2021 compared to the prior year. Net flows remained negative and
deteriorated $1.3 billion in 2021 compared to the prior year.
Adjusted pre-tax income increased $271 million in 2021 compared to the prior
year primarily from higher net investment income ($174 million), higher policy
and advisory fee income, net of advisory fee expenses ($122 million) and lower
general operating expenses ($42 million). Partially offsetting these increases
was a net unfavorable impact from the review and update of actuarial assumptions
($70 million).
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ITEM 7 | Business Segment Operations | Life and Retirement
Group Retirement Adjusted Pre-Tax Income (Loss)
(in millions)
[[Image Removed: Chart 3]] 2021 and 2020 Comparison
Adjusted pre-tax income increased $271 million
primarily due to:
?higher net investment income ($174 million)
primarily driven by higher private equity returns
($158 million) and higher call and tender income
($32 million) partially offset by lower base
portfolio income net of interest credited ($31
million) primarily driven by decreased
reinvestment yields;
?higher policy and advisory fee income, net of
advisory fee expenses, ($122 million) due to an
increase in separate account, mutual fund, and
advisory average assets; and
?lower general operating expenses ($42 million)
primarily due to decreased regulatory expenses.
Partially offsetting these increases was:
?a net unfavorable impact from the review and
update of actuarial assumptions ($70 million).
Group Retirement GAAP Premiums, Premiums and Deposits, Surrenders and Net Flows
For Group Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums in 2021, which primarily represents immediate annuities, increased $3 million compared to 2020.
Premiums and deposits are a non-GAAP financial measure that includes, in addition to direct and assumed premiums, deposits received on investment-type annuity contracts, FHLB funding agreements and mutual funds under administration.
Net flows for annuity products included in Group Retirement represent premiums and deposits less death, surrender and other withdrawal benefits. Net flows for mutual funds represent deposits less withdrawals. Client deposits into advisory and brokerage accounts less total client withdrawals from advisory and brokerage accounts, are not included in net flows, but do contribute to growth in assets under administration and advisory fee income.
The following table presents a reconciliation of Group Retirement GAAP premiums to premiums and deposits:
Years Ended December 31, (in millions) 2021 2020 2019 Premiums $ 22 $ 19 $ 16 Deposits 7,744 7,477 8,330 Premiums and deposits $ 7,766 $ 7,496 $ 8,346
The following table presents Group Retirement surrenders as a percentage of average reserves and mutual funds under administration:
Years Ended December 31, 2021 2020
2019
Surrenders as a percentage of average reserves and mutual funds 8.8 % 8.6 % 10.7 %
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ITEM 7 | Business Segment Operations | Life and Retirement
The following table presents reserves for Group Retirement annuities by surrender charge category:
At December 31, (in millions) 2021 (a) 2020 (a) No surrender charge(b) $ 81,132 $ 77,507 Greater than 0% - 2% 716 565 Greater than 2% - 4% 857 829 Greater than 4% 6,197 6,119 Non-surrenderable 810 616 Total reserves $ 89,712 $ 85,636
(a)Excludes mutual fund assets under administration of $28.8 billion and $25.0 billion at December 31, 2021 and 2020, respectively.
(b)Group Retirement amounts in this category include general account reserves of approximately $4.7 billion at both December 31, 2021 and 2020, which are subject to 20 percent annual withdrawal limitations at the participant level and general account reserves of $5.7 billion and $5.2 billion at December 31, 2021 and 2020, respectively, which are subject to 20 percent annual withdrawal limitations at the plan level. Group Retirement annuity deposits are typically subject to a five- to seven-year surrender charge period, depending on the product. At December 31, 2021, Group Retirement annuity reserves with no surrender charge increased compared to December 31, 2020 primarily due to growth in assets under management.
A discussion of the significant variances in premiums and deposits and net flows follows:
Group Retirement Premiums and Deposits and Net Flows
(in millions)
[[Image Removed: Chart 5]] 2021 and 2020 Comparison
Net flows remained negative and
deteriorated ($1.3 billion) due to
higher surrenders, withdrawals and
death benefits ($1.6 billion) partially
offset by higher deposits ($0.3
billion). In general, net outflows are
concentrated in fixed annuity products
with higher contractual guaranteed
minimum crediting rates. Large plan
acquisitions and surrenders also
contributed to the period over period
volatility. In 2021, large plan
activity contributed net negative flows
of $0.1 billion compared to $0.4
billion of net negative flows in the
same period in the prior year.
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ITEM 7 | Business Segment Operations | Life and Retirement
Life Insurance Results
Years Ended December 31, Percentage Change
(in millions) 2021 2020 2019 2021 vs 2020 2020 vs 2019
Adjusted revenues:
Premiums $ 2,051 $ 1,915 $ 1,805 7 % 6 %
Policy fees 1,380 1,384 1,495 - (7)
Net investment income 1,619 1,526 1,483 6 3
Other income 62 52 42 19 24
Total adjusted revenues 5,112 4,877 4,825 5 1
Benefits and expenses:
Policyholder benefits and losses
incurred 3,636 3,569 3,189 2 12
Interest credited to policyholder
account balances 354 373 374 (5) -
Amortization of deferred policy
acquisition costs 170 30 137 467 (78)
Non deferrable insurance
commissions 137 108 104 27 4
General operating expenses 684 625 660 9 (5)
Interest expense 25 30 30 (17) -
Total benefits, losses and expenses 5,006 4,735 4,494 6 5
Adjusted pre-tax income $ 106 $ 142 $ 331 (25) % (57) %
Business and Financial Highlights
Life Insurance is focused on selling profitable new products through strategic
channels to enhance future returns. Adjusted pre-tax income decreased $36
million in 2021 compared to the prior year primarily due to a decrease in
premiums and policy fees, net of policyholder benefits, excluding actuarial
assumptions update ($301 million) primarily due to higher mortality, partially
offset by higher net favorable impact from the review and update of actuarial
assumptions ($207 million) and higher net investment income ($93 million).
Life Insurance Adjusted Pre-Tax Income (Loss)
(in millions)
[[Image Removed: Chart 3]] 2021 and 2020 Comparison
Adjusted pre-tax income decreased $36 million
primarily due to:
?unfavorable premiums and policy fees, net of
policyholder benefits, excluding actuarial
assumptions update ($301 million) due to higher
mortality.
Partially offsetting this decrease were:
?higher net favorable impact from the review and
update of actuarial assumptions ($207 million);
and
?higher net investment income ($93 million),
primarily driven by higher private equity returns
($104 million) due to stronger equity market
performance, higher gains on calls ($30 million)
partially offset by lower base portfolio income
($39 million) driven by reduced fixed asset
income.
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ITEM 7 | Business Segment Operations | Life and Retirement
Life Insurance GAAP Premiums and Premiums and Deposits
Premiums for Life Insurance represent amounts received on traditional life insurance policies, primarily term life and international life and health. Premiums, excluding the effect of foreign exchange, increased $96 million in 2021 compared to 2020. Premiums and deposits for Life Insurance is a non-GAAP financial measure that includes direct and assumed premiums as well as deposits received on universal life insurance.
The following table presents a reconciliation of Life Insurance GAAP premiums to premiums and deposits:
Years Ended December 31, (in millions) 2021 2020 2019 Premiums $ 2,051 $ 1,915 $ 1,805 Deposits 1,635 1,648 1,667 Other* 964 850 810 Premiums and deposits $ 4,650 $ 4,413 $ 4,282
*Other principally consists of adding back ceded premiums to reflect the gross premiums and deposits.
A discussion of the significant variances in premiums and deposits follows:
Life Insurance Premiums and Deposits
(in millions)
[[Image Removed: Chart 2]] Premiums and deposits, excluding the
effect of foreign exchange, increased
$178 million in 2021 compared to 2020
primarily due to growth in
international life premiums.
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ITEM 7 | Business Segment Operations | Life and Retirement
Institutional markets Results
Years Ended December 31, Percentage Change (in millions) 2021 2020 2019 2021 vs 2020 2020 vs 2019 Adjusted revenues: Premiums $ 3,765 $ 2,539 $ 1,864 48 % 36 % Policy fees 187 186 188 1 (1) Net investment income 1,154 988 888 17 11 Other income 2 1 1 100 - Total adjusted revenues 5,108 3,714 2,941 38 26 Benefits and expenses: Policyholder benefits and losses incurred 4,133 2,846 2,161 45 32 Interest credited to policyholder account balances 274 304 356 (10)
(15)
Amortization of deferred policy acquisition costs 6 5 5 20 - Non deferrable insurance commissions 27 31 31 (13) - General operating expenses 77 79 69 (3) 14 Interest expense 9 11 11 (18) - Total benefits, losses and expenses 4,526 3,276 2,633 38 24 Adjusted pre-tax income $ 582 $ 438 $ 308 33 % 42 %
Business and Financial Highlights
Institutional Markets is focused on opportunities to grow its portfolio while maintaining pricing discipline. Product distribution continues to be strong. Growth in assets under management in recent years has partially driven higher net investment income and adjusted pre-tax income. Adjusted pre-tax income increased $144 million in 2021 compared to the prior year.
Institutional Markets Adjusted Pre-Tax Income (Loss) (in millions) [[Image Removed: Chart 3]] 2021 and 2020 Comparison
Adjusted pre-tax income increased $144 million
primarily due to:
?Higher premiums on pension risk transfer business,
partially offset by lower premiums on structured
settlement business ($1.2 billion);
?higher net investment income ($166 million) primarily
due to private equity returns ($126 million) and
higher base portfolio income ($36 million) driven by
growth in average invested assets; and
?lower interest credited to policyholder account
balances ($30 million) due to interest rate impacts on
the GIC business and the fair value changes of certain
GICs and hedging instruments.
Partially offsetting these increases was:
?an increase in policyholder benefits and losses
incurred (including interest accretion) on pension
risk transfer and structured settlement products
driven by new business ($1.3 billion).
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ITEM 7 | Business Segment Operations | Life and Retirement
Institutional markets GAAP Premiums and Premiums and Deposits
Premiums for Institutional Markets primarily represent amounts received on pension risk transfer or structured settlement annuities with life contingencies. Premiums increased $1.2 billion in 2021 compared to the prior year primarily driven by the pension risk transfer business (direct and assumed reinsurance), partially offset by a decrease in structured settlement annuities with life contingencies. Premiums and deposits for Institutional Markets is a non-GAAP financial measure that includes direct and assumed premiums as well as deposits received on investment-type annuity contracts. Deposits primarily include GICs, FHLB funding agreements and structured settlement annuities with no life contingencies.
The following table presents a reconciliation of Institutional Markets GAAP premiums to premiums and deposits:
Years Ended December 31, (in millions) 2021 2020 2019 Premiums $ 3,765 $ 2,539 $ 1,864 Deposits 1,158 2,281 931 Other* 25 26 27 Premiums and deposits $ 4,948 $ 4,846 $ 2,822
*Other principally consists of adding back ceded premiums to reflect the gross premiums and deposits.
A discussion of the significant variances in premiums and deposits follows:
Institutional Markets Premiums and Deposits
(in millions)
[[Image Removed: Chart 2]] Premiums and deposits increased ($102
million) in 2021 primarily due to
higher premiums on pension risk
transfer ($1.3 billion), partially
offset by lower deposits on GICs ($1.1
billion) and structured settlement
annuities ($115 million).
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ITEM 7 | Business Segment Operations | Other Operations
Other Operations
Other Operations primarily consists of income from assets held by AIG Parent and
other corporate subsidiaries, deferred tax assets related to tax attributes,
corporate expenses and intercompany eliminations, our institutional asset
management business and results of our consolidated investment entities, General
Insurance portfolios in run-off as well as the historical results of our legacy
insurance lines ceded to Fortitude Re.
Other Operations Results
Years Ended December 31, Percentage Change
(in millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Adjusted revenues:
Premiums $ 186 $ 233 $ 334 (20) % (30) %
Policy fees - 43 92 NM (53)
Net investment income:
Interest and dividends 169 905 2,015 (81) (55)
Alternative investments 919 82 252 NM (67)
Other investment income 65 147 407 (56) (64)
Investment expenses (41) (47) (76) 13 38
Total net investment income 1,112 1,087 2,598 2 (58)
Other income 40 22 36 82 (39)
Total adjusted revenues 1,338 1,385 3,060 (3) (55)
Benefits, losses and expenses:
Policyholder benefits and losses
incurred 250 816 1,650 (69) (51)
Interest credited to policyholder
account balances 1 89 208 (99) (57)
Acquisition expenses:
Amortization of deferred policy
acquisition costs 37 50 64 (26) (22)
Other acquisition expenses (1) 1 9 NM (89)
Total acquisition expenses 36 51 73 (29) (30)
General operating expenses:
Corporate and Other 1,137 1,004 1,099 13 (9)
Asset Management 72 42 42 71 -
Amortization of intangible assets 40 40 40 - -
Total General operating expenses 1,249 1,086 1,181
15 (8)
Interest expense:
Corporate and Other 1,032 1,148 1,089 (10) 5
Asset Management* 188 158 171 19 (8)
Total interest expense 1,220 1,306 1,260 (7) 4Total benefits, losses and expenses 2,756 3,348 4,372
(18) (23) Adjusted pre-tax income (loss) before consolidation and eliminations (1,418) (1,963) (1,312) 28 (50) Consolidation and eliminations (932) (466) (304) (100) (53) Adjusted pre-tax loss $ (2,350) $ (2,429) $ (1,616)
3 % (50) %
Adjusted pre-tax income (loss) by activities: Corporate and Other $ (2,329) $ (2,041) $ (1,378) (14) % (48) % Asset Management 911 78 66 NM 18 Consolidation and eliminations (932) (466) (304) (100) (53) Adjusted pre-tax loss $ (2,350) $ (2,429) $ (1,616) 3 % (50) % *Interest - Asset Management primarily represents interest expense on consolidated investment entities of $182 million, $148 million and $158 million in 2021, 2020 and 2019, respectively. 114 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Business Segment Operations | Other Operations
2021 and 2020 Comparison
Adjusted pre-tax loss before consolidation and eliminations of $1.4 billion in
2021 compared to $2.0 billion in 2020, a decrease of $545 million, was primarily
due to the sale of a majority of the interest in Fortitude Holdings on June 2,
2020, as prior period results included adjusted pre-tax loss of $233 million.
Excluding the results of Fortitude Re, adjusted pre-tax loss decreased $312
million primarily due to:
?higher net investment income associated with consolidated investment entities
of $835 million, which was partially offset by a decline in net mark to market
gains on CDO securities of $280 million; and
?lower corporate interest expense primarily driven by interest savings resulting
from redemptions of $3.0 billion of debt in 2021 ($71 million) and expiration of
$1.3 billion of debt in 2020 ($58 million), partially offset by interest expense
resulting from $4.1 billion of new debt issuances in 2020 ($50 million).
The decrease in adjusted pre-tax loss was partially offset by:
?higher underwriting loss attributable to net prior year development in 2021 of $87 million and higher catastrophe activity of $44 million within Other Operations Run-off, primarily attributable to Blackboard; and
?higher corporate general operating expenses of $143 million, including increases in performance-based employee compensation.
Adjusted pre-tax loss on consolidation and eliminations of $932 million in 2021
compared to $466 million in 2020, an increase of $466 million, was primarily due
to the elimination of the insurance companies' net investment income from their
investment in the consolidated investment entities of $462 million.
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ITEM 7 | Investments
Investments
Overview
Our investment strategies are tailored to the specific business needs of each
operating unit by targeting an asset allocation mix that supports estimated cash
flows of our outstanding liabilities and provides diversification from an asset
class, sector, issuer, and geographic perspective. The primary objectives are
generation of investment income, preservation of capital, liquidity management
and growth of surplus. The majority of assets backing our insurance liabilities
consist of fixed maturity securities.
The worldwide health and economic impact of COVID-19 continues to evolve,
influenced by the scope, severity and duration of the pandemic as well as the
actions of governments, judiciaries, legislative bodies, regulators and other
third parties in response, including the distribution and effectiveness of
vaccinations, all of which are subject to continuing uncertainty. Weak initial
economic conditions resulting from COVID-19 led to price declines in our
investment portfolio from spread widening. Governments and monetary authorities
acted swiftly with intervention aimed at stimulating growth, which resulted in a
sharp increase in asset prices back to values that existed pre-COVID. Further
recognition of credit losses and increases in our allowances for credit losses
could result if new business closures are imposed or economic conditions worsen
in response to future resurgence of the virus.
INVESTMENT HIGHLIGHTS IN 2021
?A rise in interest rates resulted in a net unrealized loss movement in our
investment portfolio. Net unrealized gains in our available for sale portfolio
decreased to approximately $18.1 billion as of December 31, 2021 from
approximately $27.4 billion as of December 31, 2020.
?We continued to make investments in structured securities and other fixed
maturity securities with favorable risk compared to return characteristics to
improve yields and increase net investment income.
?We experienced an increase in net investment income in the year ended December
31, 2021 compared to the prior year due primarily to higher income on our
Private Equity alternative investments that directionally followed the positive
returns achieved in equity markets.
?Blended investment yields on new investments were lower than blended rates on
investments that were sold, matured or called.
Investment Strategies
Investment strategies are assessed at the segment level and involve considerations that include local and general market conditions, duration and cash flow management, risk appetite and volatility constraints, rating agency and regulatory capital considerations, and tax and legal investment limitations.
Some of our key investment strategies are as follows:
?Our fundamental strategy across the portfolios is to seek investments with similar characteristics to the associated insurance liabilities to the extent practicable.
?AIG embeds Environmental, Social and Governance (ESG) considerations in its fundamental investment analysis of the companies or projects we invest in to ensure that they have sustainable earnings over the full term of our investment, as material, relevant and available. AIG considers internal and external factors and evaluates changes in consumer behavior, industry trends related to ESG factors as well as the ability of the management of companies to respond appropriately to these changes in order to maintain their competitive advantage. ?We seek to originate investments that offer enhanced yield through illiquidity premiums, such as private placements and commercial mortgage loans, which also add portfolio diversification. These assets typically afford credit protections through covenants, ability to customize structures that meet our insurance liability needs, and deeper due diligence given information access. ?Given our global presence, we have access to assets that provide diversification from local markets. To the extent we purchase these investments, we generally hedge any currency risk using derivatives, which could provide opportunities to earn higher risk adjusted returns compared to assets in the functional currency. 116 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Investments
?AIG Parent, included in Other Operations, actively manages its assets and
liabilities, counterparties and duration. AIG Parent's liquidity sources are
held primarily in the form of cash, short-term investments and publicly traded,
investment grade rated fixed maturity securities that can be readily monetized
through sales or repurchase agreements. This strategy allows us to both
diversify our sources of liquidity and reduce the cost of maintaining sufficient
liquidity.
?Within the
-Insurance reserves are backed by mainly investment grade fixed maturity securities that meet our duration, risk-return, tax, liquidity, credit quality and diversification objectives. We assess asset classes based on their fundamental underlying risk factors, including credit (public and private), commercial real estate and residential real estate regardless of whether such investments are bonds, loans, or structured products. -Surplus investments seek to enhance portfolio returns and are generally comprised of a mix of fixed maturity investment grade and below investment grade securities and various alternative asset classes, including private equity, real estate equity, and hedge funds. Over the past few years, hedge fund investments have been reduced with more emphasis given to private equity, real estate and below investment grade credit.
?Outside of the
Asset Liability Management
The investment strategy within the General Insurance companies focuses on growth of surplus, maintenance of sufficient liquidity for unanticipated insurance claims, and preservation of capital. General Insurance invests primarily in fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans. Fixed maturity securities of the General Insurance companies'North America operations have an average duration of 3.9 years. Fixed maturity securities of the General Insurance companies' International operations have an average duration of 4.3 years. While invested assets backing reserves of the General Insurance companies are primarily invested in conventional liquid fixed maturity securities, we have continued to allocate to asset classes that offer higher yields through structural and illiquidity premiums, particularly in ourNorth America operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments to manage our exposure to potential changes in interest rates and inflation. We seek to diversify the portfolio across asset classes, sectors and issuers to mitigate idiosyncratic portfolio risks. In addition, a portion of the surplus of General Insurance is invested in a diversified portfolio of alternative investments that seek to balance liquidity, volatility and growth of surplus. There is a higher allocation to equity-oriented investments in General Insurance surplus relative to other AIG portfolios given the underlying inflation risks inherent in that business. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields and have provided added diversification to the broader portfolio. The investment strategy of the Life and Retirement companies is to provide net investment income to back liabilities that result in stable distributable earnings and enhance portfolio value, subject to asset liability management, capital, liquidity and regulatory constraints. The Life and Retirement companies use asset-liability management as a primary tool to monitor and manage risk in their businesses. The Life and Retirement companies maintain a diversified, high-to-medium quality portfolio of fixed maturity securities issued by corporations, municipalities and other governmental agencies; structured securities collateralized by, among other assets, residential and commercial real estate; and commercial mortgage loans that, to the extent practicable, match the duration characteristics of the liabilities. We seek to diversify the portfolio across asset classes, sectors, and issuers to mitigate idiosyncratic portfolio risks. The investment portfolio of each product line is tailored to the specific characteristics of its insurance liabilities, and as a result, duration varies between distinct portfolios. The interest rate environment has a direct impact on the asset-liability management profile of the businesses, and an extended low interest rate environment may result in a lengthening of liability durations from initial estimates, primarily due to lower lapses, which may require us to further extend the duration of the investment portfolio. A further lengthening of the portfolio will be assessed in the context of available market opportunities as longer duration markets may not provide similar diversification benefits as shorter duration markets.
Fixed maturity securities of the Life and Retirement companies' domestic operations have an average duration of 9.0 years.
In addition, the Life and Retirement companies seek to enhance surplus portfolio
returns through investments in a diversified portfolio of alternative
investments. Although these alternative investments are subject to periodic
earnings fluctuations, they have historically achieved returns in excess of the
fixed maturity portfolio returns.
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ITEM 7 | Investments
NAIC Designations of Fixed Maturity Securities
The Securities Valuation Office (SVO) of the NAIC evaluates the investments ofU.S. insurers for statutory reporting purposes and assigns fixed maturity securities to one of six categories called 'NAIC Designations.' In general, NAIC Designations of '1' highest quality, or '2' high quality, include fixed maturity securities considered investment grade, while NAIC Designations of '3' through '6' generally include fixed maturity securities referred to as below investment grade. NAIC Designations for non-agency residential mortgage backed securities (RMBS) and commercial mortgage backed securities (CMBS) are calculated using third party modeling results provided through the NAIC. These methodologies result in an improved NAIC Designation for such securities compared to the rating typically assigned by the three major rating agencies. The following tables summarize the ratings distribution of AIG subsidiaries' fixed maturity security portfolio by NAIC Designation, and the distribution by composite AIG credit rating, which is generally based on ratings of the three major rating agencies. For fixed maturity securities where no NAIC Designation is assigned or able to be calculated using third-party data, the NAIC Designation category used in the first table below reflects an internal rating. The NAIC Designations presented below do not reflect the added granularity to the designation categories adopted by the NAIC in 2020, which further subdivide each category of fixed maturity securities by appending letter modifiers to the numerical designations.
For a full description of the composite AIG credit ratings see - Credit Ratings below.
The following table presents the fixed maturity security portfolio categorized by NAIC Designation, at fair value:
December 31, 2021
(in millions)
Total
Total Below
Investment Investment
NAIC Designation 1 2 Grade 3 4 5 6 Grade Total
Other fixed maturity
securities $ 109,728 $ 88,546 $ 198,274 $ 8,936 $ 9,198 $ 1,152 $ 71 $ 19,357 $ 217,631
Mortgage-backed,
asset-backed and
collateralized 58,558 5,583 64,141 210 130 26 1,340 1,706 65,847
Total* $ 168,286 $ 94,129 $ 262,415 $ 9,146 $ 9,328 $ 1,178 $ 1,411 $ 21,063 $ 283,478
*Excludes an insignificant amount of fixed maturity securities for which no NAIC Designation is available.
The following table presents the fixed maturity security portfolio categorized by composite AIG credit rating, at fair value:
December 31, 2021
(in millions)
Total
Total Below
Investment CCC and Investment
Composite AIG Credit
Rating AAA/AA/A BBB Grade BB B Lower Grade Total
Other fixed maturity
securities $ 114,232 $ 83,652 $ 197,884 $ 9,077 $ 7,734 $ 2,936 $ 19,747 $ 217,631
Mortgage-backed,
asset-backed and
collateralized 50,430 6,217 56,647 495 478 8,227 9,200 65,847
Total* $ 164,662 $ 89,869 $ 254,531 $ 9,572 $ 8,212 $ 11,163 $ 28,947 $ 283,478
*Excludes an insignificant amount of fixed maturity securities for which no NAIC Designation is available.
Credit Ratings At December 31, 2021, approximately 89 percent of our fixed maturity securities were held by our domestic entities. Approximately 89 percent of these securities were rated investment grade by one or more of the principal rating agencies. Our investment decision process relies primarily on internally generated fundamental analysis and internal risk ratings. Third-party rating services' ratings and opinions provide one source of independent perspective for consideration in the internal analysis.Moody's Investors Service Inc. (Moody's),Standard & Poor's Financial Services LLC , a subsidiary of S&P Global Inc. (S&P), or similar foreign rating services rate a significant portion of our foreign entities' fixed maturity securities portfolio. Rating services are not available for some foreign-issued securities. Our Credit Risk Management department closely reviews the credit quality of the foreign portfolio's non-rated fixed maturity securities. At December 31, 2021, approximately 94 percent of such investments were either rated investment grade or, on the basis of our internal analysis, were equivalent from a credit standpoint to securities rated investment grade. Approximately 27 percent of the foreign entities' fixed maturity securities portfolio is comprised of sovereign fixed maturity securities supporting policy liabilities in the country of issuance. 118 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Investments
Composite AIG Credit Ratings
With respect to our fixed maturity securities, the credit ratings in the table
below and in subsequent tables reflect: (i) a composite of the ratings of the
three major rating agencies, or when agency ratings are not available, the NAIC
designation assigned by the NAIC SVO (98 percent of total fixed maturity
securities), or (ii) our internal ratings when these investments have not been
rated by any of the major rating agencies or the NAIC. The "Non-rated" category
in those tables consists of fixed maturity securities that have not been rated
by any of the major rating agencies, the NAIC or us.
For information regarding credit risks associated with Investments see Enterprise Risk Management.
The following table presents the composite AIG credit ratings of our fixed maturity securities calculated on the basis of their fair value:
Available for Sale Other Total
December 31, December 31, December 31, December 31, December 31, December 31,
(in millions) 2021 2020 2021 2020 2021 2020
Rating:
Other fixed
maturity
securities
AAA $ 15,578 $ 11,758 $ 1,756 $ 1,803 $ 17,334 $ 13,561
AA 39,110 36,146 282 42 39,392 36,188
A 57,346 57,255 160 12 57,506 57,267
BBB 83,192 80,878 461 - 83,653 80,878
Below investment
grade 17,795 18,087 314 - 18,109 18,087
Non-rated 1,638 769 - - 1,638 769
Total $ 214,659 $ 204,893 $ 2,973 $ 1,857 $ 217,632 $ 206,750
Mortgage-backed,
asset-
backed and
collateralized
AAA $ 27,144 $ 31,133 $ 232 $ 347 $ 27,376 $ 31,480
AA 15,688 15,287 485 195 16,173 15,482
A 6,685 6,711 197 145 6,882 6,856
BBB 5,492 4,137 725 343 6,217 4,480
Below investment
grade 7,508 9,281 1,462 2,165 8,970 11,446
Non-rated 26 54 204 239 230 293
Total $ 62,543 $ 66,603 $ 3,305 $ 3,434 $ 65,848 $ 70,037
Total
AAA $ 42,722 $ 42,891 $ 1,988 $ 2,150 $ 44,710 $ 45,041
AA 54,798 51,433 767 237 55,565 51,670
A 64,031 63,966 357 157 64,388 64,123
BBB 88,684 85,015 1,186 343 89,870 85,358
Below investment
grade 25,303 27,368 1,776 2,165 27,079 29,533
Non-rated 1,664 823 204 239 1,868 1,062
Total $ 277,202 $ 271,496 $ 6,278 $ 5,291 $ 283,480 $ 276,787
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ITEM 7 | Investments
Available-for-Sale Investments
The following table presents the fair value of our available-for-sale
securities:
Fair Value at Fair Value at
December 31, December 31,
(in millions) 2021 2020
Bonds available for sale:
U.S. government and government sponsored
entities $ 8,194 $ 4,126
Obligations of states, municipalities
and political subdivisions 14,527 16,124
Non-U.S. governments 16,330 15,345
Corporate debt 175,608 169,298
Mortgage-backed, asset-backed and
collateralized:
RMBS 27,287 31,465
CMBS 15,809 16,133
CDO/ABS 19,447 19,005
Total mortgage-backed, asset-backed and
collateralized 62,543 66,603
Total bonds available for sale* $ 277,202 $ 271,496
*At December 31, 2021 and 2020, the fair value of bonds available for sale held by us that were below investment grade or not rated totaled $27 billion and $28.2 billion, respectively.
The following table presents the fair value of our aggregate credit exposures to
non-
December 31, December 31,
(in millions) 2021 2020
Canada $ 1,233 $ 986
Japan 1,230 1,510
United Kingdom 1,031 820
France 731 790
Germany 702 642
Indonesia 634 554
Israel 515 535
Chile 511 398
United Arab Emirates 484 519
Mexico 481 358
Other 8,854 8,233
Total $ 16,406 $ 15,345
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ITEM 7 | Investments
The following table presents the fair value of our aggregate European credit exposures by major sector for our fixed maturity securities:
December 31, 2021
Non- December 31,
Financial Financial Structured 2020
(in millions) Sovereign Institution Corporates Products Total Total
Euro-Zone countries:
France $ 731 $ 1,745 $ 1,394 $ - $ 3,870 $ 4,206
Germany 702 268 2,640 - 3,610 3,691
Netherlands 249 1,070 1,286 47 2,652 2,804
Ireland 11 81 506 1,360 1,958 2,162
Belgium 119 299 1,162 40 1,620 1,538
Spain 24 365 499 - 888 989
Luxembourg 80 416 384 - 880 712
Italy 21 106 509 - 636 580
Denmark 236 95 187 - 518 539
Finland 71 36 43 - 150 123
Other Euro-Zone 347 2 30 - 379 482
Total Euro-Zone $ 2,591 $ 4,483 $ 8,640 $ 1,447 $ 17,161 $ 17,826
Remainder of Europe :
United Kingdom $ 1,031 $ 4,846 $ 9,419 $ 1,612 $ 16,908 $ 17,066
Switzerland 18 982 884 - 1,884 1,778
Norway 376 133 288 - 797 556
Sweden 188 221 128 - 537 646
Russian Federation 198 29 132 - 359 407
Other - Remainder of Europe 90 269 127 - 486 227
Total - Remainder of Europe $ 1,901 $ 6,480 $ 10,978 $ 1,612 $ 20,971 $ 20,680
Total $ 4,492 $ 10,963 $ 19,618 $ 3,059 $ 38,132 $ 38,506
Investments in Municipal Bonds
At December 31, 2021, theU.S. municipal bond portfolio was composed primarily of essential service revenue bonds and high-quality tax-exempt bonds with 95 percent of the portfolio rated A or higher.
The following table presents the fair values of our available for sale
December 31, 2021
State Local Total December 31,
General General Fair 2020
(in millions) Obligation Obligation Revenue Value Total Fair Value
California $ 720 $ 413 $ 1,975 $ 3,108 $ 3,301
New York 7 223 2,535 2,765 3,135
Texas 51 519 846 1,416 1,553
Illinois 88 69 852 1,009 1,106
Massachusetts 313 23 330 666 800
Ohio 9 - 479 488 542
Georgia 102 76 296 474 494
Florida 6 - 397 403 436
Pennsylvania 17 2 378 397 399
Virginia 10 - 370 380 456
Washington 142 7 210 359 413
Washington, D.C. 11 - 282 293 328
New Jersey 12 1 269 282 269
All other states(a) 315 175 1,997 2,487 2,892
Total(b)(c) $ 1,803 $ 1,508 $ 11,216 $ 14,527 $ 16,124
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ITEM 7 | Investments
(a)We did not have material credit exposure to the government of
(b)Excludes certain university and not-for-profit entities that issue their bonds in the corporate debt market. Includes industrial revenue bonds.
(c)Includes $532 million of pre-refunded municipal bonds.
Investments in Corporate Debt Securities
The following table presents the industry categories of our available for sale
corporate debt securities:
Fair Value at Fair Value at
Industry Category December 31, December 31,
(in millions) 2021 2020
Financial institutions:
Money center/Global bank groups $ 10,053 $ 10,512
Regional banks - other 434 627
Life insurance 3,094 3,175
Securities firms and other finance companies 350 312
Insurance non-life 6,795
5,805
Regional banks - North America 7,228 7,505 Other financial institutions 18,255 15,581 Utilities 24,180 23,470 Communications 11,510 11,137 Consumer noncyclical 24,411 24,826 Capital goods 8,668 8,773 Energy 13,506 13,293 Consumer cyclical 13,279 13,213 Basic 6,041 5,894 Other 27,804 25,175 Total* $ 175,608 $ 169,298
*At December 31, 2021 and December 31, 2020, respectively, approximately 90 percent and 90 percent of these investments were rated investment grade.
Our investments in the energy category, as a percentage of total investments in available-for-sale fixed maturities, was 4.9 percent and 4.9 percent at December 31, 2021 and December 31, 2020, respectively. While the energy investments are primarily investment grade and are actively managed, the category continues to experience volatility that could adversely affect credit quality and fair value.
Investments in RMBS
The following table presents AIG's RMBS available for sale securities:
Fair Value at Fair Value at
December 31, December 31,
(in millions) 2021 2020
Agency RMBS $ 13,778 $ 15,816
Alt-A RMBS 5,936 7,278
Subprime RMBS 2,329 2,575
Prime non-agency 3,058 3,847
Other housing related 2,186 1,949
Total RMBS(a)(b) $ 27,287 $ 31,465
(a)Includes approximately $6.1 billion and $7.6 billion at December 31, 2021 and December 31, 2020, respectively, of certain RMBS that had experienced deterioration in credit quality since their origination. For additional discussion on Purchased Credit Impaired Securities see Note 5 to the Consolidated Financial Statements.
(b)The weighted average expected life was five years at December 31, 2021 and five years at December 31, 2020.
Our underwriting practices for investing in RMBS, other asset-backed securities (ABS) and CDOs take into consideration the quality of the originator, the manager, the servicer, security credit ratings, underlying characteristics of the mortgages, borrower characteristics, and the level of credit enhancement in the transaction. 122 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Investments
Investments in CMBS
The following table presents our CMBS available for sale securities:
Fair Value at Fair Value at
December 31, December 31,
(in millions) 2021 2020
CMBS (traditional) $ 13,091 $ 12,917
Agency 1,627 2,078
Other 1,091 1,138
Total $ 15,809 $ 16,133
The fair value of CMBS holdings remained stable throughout 2021. The majority of
our investments in CMBS are in tranches that contain substantial protection
features through collateral subordination. The majority of CMBS holdings are
traditional conduit transactions, broadly diversified across property types and
geographical areas.
Investments in ABS/CDOs
The following table presents our ABS/CDO available for sale securities by
collateral type:
Fair value at Fair value at
December 31, December 31,
(in millions) 2021 2020
Collateral Type:
ABS $ 10,532 $ 9,178
Bank loans (collateralized loan obligation) 8,899 9,793
Other 16 34
Total $ 19,447 $ 19,005
Unrealized Losses of Fixed Maturity Securities
The following table shows the aging of the unrealized losses of fixed maturity
securities, the extent to which the fair value is less than amortized cost or
cost, and the number of respective items in each category:
December 31, 2021 Less Than or Equal Greater Than 20% Greater Than 50%
to 20% of Cost(b) to 50% of Cost(b) of Cost(b) Total
Aging(a) Unrealized Unrealized Unrealized Unrealized
(dollars in millions) Cost(c) Loss Items(e) Cost(c) Loss Items(e) Cost(c) Loss Items(e) Cost(c) Loss(d) Items(e)
Investment grade
bonds
0-6 months $ 46,908 $ 756 8,247 $ 24 $ 7 5 $ - $ - - $ 46,932 $ 763 8,252
7-11 months 5,670 190 1,339 4 1 2 - - - 5,674 191 1,341
12 months or more 10,547 526 1,693 18 6 5 - - - 10,565 532 1,698
Total $ 63,125 $ 1,472 11,279 $ 46 $ 14 12 $ - $ - - $ 63,171 $ 1,486 11,291
Below investment
grade bonds
0-6 months $ 5,906 $ 116 2,396 $ 19 $ 7 13 $ 18 $ 17 12 $ 5,943 $ 140 2,421
7-11 months 1,374 42 645 30 7 16 1 1 2 1,405 50 663
12 months or more 2,463 103 711 354 89 49 51 35 20 2,868 227 780
Total $ 9,743 $ 261 3,752 $ 403 $ 103 78 $ 70 $ 53 34 $ 10,216 $ 417 3,864
Total bonds
0-6 months $ 52,814 $ 872 10,643 $ 43 $ 14 18 $ 18 $ 17 12 $ 52,875 $ 903 10,673
7-11 months 7,044 232 1,984 34 8 18 1 1 2 7,079 241 2,004
12 months or more 13,010 629 2,404 372 95 54 51 35 20 13,433 759 2,478
Total(e) $ 72,868 $ 1,733 15,031 $ 449 $ 117 90 $ 70 $ 53 34 $ 73,387 $ 1,903 15,155
(a)Represents the number of consecutive months that fair value has been less than cost by any amount.
(b)Represents the percentage by which fair value is less than cost.
(c)For bonds, represents amortized cost net of allowance.
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ITEM 7 | Investments
(d)The effect on Net income of unrealized losses after taxes will be mitigated upon realization because certain realized losses will result in current decreases in the amortization of certain DAC.
(e)Item count is by CUSIP by subsidiary.
The allowance for credit losses was $6 million for investment grade bonds, and $93 million for below investment grade bonds as of December 31, 2021.
Commercial Mortgage Loans
At December 31, 2021, we had direct commercial mortgage loan exposure of $35.7 billion.
The following table presents the commercial mortgage loan exposure by location and class of loan based on amortized cost:
Number Percent
of Class of
(dollars in
millions) Loans Apartments Offices Retail Industrial Hotel Others Total Total
December 31,
2021
State:
New York 94 $ 2,217 $ 4,329 $ 450 $ 438 $ 103 $ - $ 7,537 21 %
California 62 817 1,293 239 553 761 13 3,676 10
New Jersey 48 2,092 30 462 225 11 33 2,853 8
Texas 49 630 1,133 167 187 144 - 2,261 6
Florida 60 469 152 368 214 281 - 1,484 4
Massachusetts 13 534 290 537 24 - - 1,385 4
Illinois 24 554 626 9 50 - 21 1,260 5
Pennsylvania 22 78 144 477 76 25 - 800 2
Washington
D.C. 11 455 184 - - 18 - 657 2
Ohio 25 167 10 175 289 - - 641 2
Other states 155 1,852 598 975 686 329 - 4,440 12
Foreign 86 4,402 1,341 998 1,116 449 365 8,671 24
Total* 649 $ 14,267 $ 10,130 $ 4,857 $ 3,858 $2,121 $ 432 $ 35,665 100 %
December 31, 2020 State: New York 107 $ 2,624 $ 5,237 $ 465 $ 393 $ 102 $ - $ 8,821 24 % California 66 842 1,343 247 532 775 32 3,771 10 New Jersey 47 1,756 31 420 92 12 33 2,344 6 Texas 51 605 1,165 170 100 144 - 2,184 6 Florida 69 421 153 497 216 217 - 1,504 4 Massachusetts 12 536 227 551 25 - - 1,339 4 Illinois 20 504 574 10 18 - 22 1,128 3 Washington, D.C. 13 465 213 - - 19 - 697 2 Pennsylvania 21 79 17 489 76 25 - 686 2 Ohio 23 170 10 183 261 - - 624 2 Other states 187 1,992 722 1,192 731 399 - 5,036 14 Foreign 84 3,975 1,020 1,025 1,322 575 373 8,290 23 Total* 700 $ 13,969 $ 10,712 $ 5,249 $ 3,766 $ 2,268 $ 460 $ 36,424 100 %
*Does not reflect allowance for credit losses.
For additional discussion on commercial mortgage loans see Note 6 to the Consolidated Financial Statements.
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ITEM 7 | Investments
Net Realized Gains and Losses
The following table presents the components of Net realized gains (losses):
Years Ended December 31, 2021 2020 2019
Excluding Fortitude Re Excluding Fortitude Re
Fortitude Re Funds Fortitude Re Funds
Funds Withheld Funds Withheld
(in millions) Withheld Assets Assets Total Withheld Assets Assets Total Total Sales of fixed maturity securities
$ 211 $ 717 $ 928 $ 307 $ 707 $ 1,014 $ 320
Other-than-temporary
impairments - - - - - - (174)
Intent to sell(a) - - - (3) - (3) -
Change in allowance for
credit losses on
fixed maturity
securities 19 7 26 (270) (10) (280) -
Change in allowance for
credit losses on
loans 163 9 172 (105) 2 (103) (46)
Foreign exchange
transactions 16 (5) 11 365 13 378 227
Variable annuity
embedded derivatives,
net of related hedges (39) - (39) 166 - 166 (294)
All other derivatives
and hedge accounting 179 28 207 (672) (249) (921) (22)
Other(b) 1,202 247 1,449 156 - 156 621
Net realized gains -
excluding
Fortitude Re funds
withheld
embedded derivative 1,751 1,003 2,754 (56) 463 407 632
Net realized gains
(losses) on Fortitude Re
funds withheld embedded
derivative - (603) (603) - (2,645) (2,645) -
Net realized gains
(losses) $ 1,751 $ 400 $ 2,151 $ (56) $ (2,182) $ (2,238) $ 632
(a)For 2019, Intent to sell was included in Other-than-temporary impairments.
(b)In 2021, primarily includes gains from sale of global real estate investments of $1.1 billion and gains from affordable housing partnerships of $208 million. In 2019, includes $200 million from the sale and concurrent leaseback of our corporate headquarters and $300 million as a result of sales in investment real estate properties. Net realized gains excluding Fortitude Re funds withheld assets in 2021 compared to net realized losses in the prior year were primarily due to gains on the sale of global real estate investments and derivatives gains compared to losses in the prior year, which more than offset lower foreign exchange gains compared to the prior year. Variable annuity embedded derivatives, net of related hedges, reflected losses in 2021 compared to gains in the prior year. Fair value gains or losses in the hedging portfolio are typically not fully offset by increases or decreases in liabilities due to the non-performance or "own credit" risk adjustment used in the valuation of the variable annuities with GMWB embedded derivative, which are not hedged as part of our economic hedging program, and other risk margins used for valuation that cause the embedded derivatives to be less sensitive to changes in market rates than the hedge portfolio. Net realized gains (losses) on Fortitude Re funds withheld assets primarily reflect changes in the valuation of the modified coinsurance and funds withheld assets. Increases in the valuation of these assets result in losses to AIG as the appreciation on the assets must under those reinsurance arrangements be transferred to Fortitude Re. Decreases in valuation of the assets result in gains to AIG as the depreciation on the assets under those reinsurance arrangements must be transferred to Fortitude Re. For further details on the impact of the funds withheld arrangements with Fortitude Re see Note 7 to the Consolidated Financial Statements. For additional discussion of market risk management related to these product features see Enterprise Risk Management - Insurance Risks - Life and Retirement Companies' Key Risks - Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs. For more information on the economic hedging target and the impact to pre-tax income of this program see Insurance Reserves - Life and Annuity Future Policy Benefits, Policyholder Contract Deposits and DAC - Variable Annuity Guaranteed Benefits and Hedging Results in this MD&A.
For further discussion of our investment portfolio see Note 5 to the Consolidated Financial Statements.
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ITEM 7 | Investments
Change in Unrealized Gains and Losses on Investments
The change in net unrealized gains and losses on investments in 2021 was primarily attributable to movements in interest rates and spreads. For 2021, net unrealized losses related to fixed maturity securities were $9.3 billion due primarily to an increase in interest rates. The change in net unrealized gains and losses on investments in 2020 was primarily attributable to increases in the fair value of fixed maturity securities. For 2020, net unrealized gains related to fixed maturity securities were $9.5 billion due primarily to lower rates partially offset by a widening of credit spreads.
For further discussion of our investment portfolio see Note 5 to the Consolidated Financial Statements.
Insurance Reserves
Liability for unpaid losses and loss adjustment expenses (Loss Reserves)
The following table presents the components of our gross and net loss reserves by segment and major lines of business(a):
At December 31, 2021 2020
Net Net
liability liability
for Reinsurance Gross liability for Reinsurance Gross liability
unpaid unpaid
losses recoverable on for unpaid losses recoverable on for unpaid
and loss unpaid losses and losses and and loss unpaid losses and losses and
adjustment loss adjustment loss adjustment adjustment loss adjustment loss adjustment
(in millions) expenses expenses expenses expenses expenses expenses
General Insurance:
U.S. Workers'
Compensation (net of
discount) $ 3,282 $ 5,216 $ 8,498 $ 3,905 $ 5,653 $ 9,558
U.S. Excess Casualty 3,850 4,195 8,045 3,746 4,584 8,330
U.S. Other Casualty 3,805 4,191 7,996 3,520 4,568 8,088
U.S. Financial Lines 5,356 1,893 7,249 4,838 2,193 7,031
U.S. Property and
Special Risks 6,615 3,587 10,202 6,181 2,571 8,752
U.S. Personal Insurance 1,001 2,198 3,199 1,116 1,626 2,742
UK /Europe Casualty and
Financial Lines 7,175 1,603 8,778 6,826 1,225 8,051
UK /Europe Property and
Special Risks 2,631 1,492 4,123 2,679 1,215 3,894
UK/Europe and Japan
Personal Insurance 1,962 608 2,570 2,219 505 2,724
Other product lines(b) 5,815 5,468 11,283 6,202 5,410 11,612
Unallocated loss
adjustment expenses(b) 1,654 1,015 2,669 1,526 1,106 2,632
Total General Insurance 43,146 31,466 74,612 42,758 30,656 73,414
Other Operations
Run-Off:
U.S. Run-Off Long Tail
Insurance Lines
(net of discount) 164 3,434 3,598 205 3,500 3,705
Other run-off product
lines 264 61 325 210 60 270
Blackboard 217 138 355 88 101 189
Unallocated loss
adjustment expenses 22 114 136 28 114 142
Total Other Operations
Run-Off 667 3,747 4,414 531 3,775 4,306
Total $ 43,813 $ 35,213 $ 79,026 $ 43,289 $ 34,431 $ 77,720
(a)Includes net loss reserve discount of $876 million and $725 million as of
December 31, 2021 and 2020, respectively. For information regarding loss reserve
discount see Note 12 to the Consolidated Financial Statements.
(b)Other product lines and Unallocated loss adjustment expenses includes Gross
liability for unpaid losses and loss adjustment expense and Reinsurance
recoverable on unpaid losses and loss adjustment expense for the Fortitude Re
reinsurance of $3.5 billion and $3.8 billion as of December 31, 2021 and 2020,
respectively.
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ITEM 7 | Insurance Reserves
Prior Year Development
The following table summarizes incurred (favorable) unfavorable prior year development net of reinsurance by segment:
(in millions) 2021 2020 2019 General Insurance: North America* $ (194) $ (157) $ (136) International (7) 81 (158) Total General Insurance $ (201) $ (76) $ (294) Other Operations Run-Off 86 2 -
Total prior year favorable development $ (115) $ (74) $ (294)
*Includes the amortization attributed to the deferred gain at inception from theNational Indemnity Company (NICO) adverse development reinsurance agreement of $193 million, $211 million and $232 million in the years ended December 31, 2021, 2020 and 2019, respectively. Consistent with our definition of APTI, the amount excludes the portion of (favorable)/unfavorable prior year reserve development for which we have ceded the risk under the NICO reinsurance agreements of $(249) million, $(228) million and $(278) million for the years ended December 31, 2021, 2020 and 2019, respectively. Also excludes the related changes in amortization of the deferred gain, which were $(3) million, $25 million and $(13) million over those same periods.
Net Loss Development - 2021
During 2021, we recognized favorable prior year loss reserve development of $115 million. The key components of this development were:
?Strong favorable development in Personal Insurance, primarily attributable to subrogation recovery related to the 2017 and 2018 California wildfires partially offset by the impact of dropping below the attachment point of our 2018 catastrophe aggregate treaty, which also adversely impacted ourU.S. Property and Special Risk Commercial Lines. ?Favorable development onU.S. Workers Compensation and short-tailed commercial lines within Other Product Lines, reflecting lower frequency and severity in recent calendar years.
?Amortization benefit of $193 million related to the deferred gain on the adverse development cover.
?Reserve strengthening within
International
?Favorable development on short-tailed International Commercial Lines and Personal Insurance, reflecting lower frequency and severity of claims.
?Reserve strengthening on International Financial Lines, reflecting higher severity of claims, the majority of which is from accident years 2018 and prior.
Other Operations
?Unfavorable development primarily attributed to the Blackboard insurance portfolio due to increased severity on reported claims.
Our analyses and conclusions about prior year reserves also help inform our judgments about the current accident year loss and loss adjustment expense ratios we selected.
For additional information on prior year development by line of business see Note 12 to the Consolidated Financial Statements. For information regarding actuarial methods employed for major classes of business, see Critical Accounting Estimates.
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ITEM 7 | Insurance Reserves
The following tables summarize incurred (favorable) unfavorable prior year development net of reinsurance, by segment and major lines of business, and by accident year groupings:
Years Ended December 31, 2021 (in millions) Total 2020 2019 & Prior General Insurance North America: U.S. Workers' Compensation $ (383) $ (25) $ (358) U.S. Excess Casualty (5) 6 (11) U.S. Other Casualty 7 56 (49) U.S. Financial Lines 521 49 472 U.S. Property and Special Risks 189 (28) 217 U.S. Personal Insurance (413) (48) (365) Other Product Lines (110) (35) (75) Total General Insurance North America $ (194) $ (25) $
(169)
General Insurance International: UK/Europe Casualty and Financial Lines $ 210 $ 50 $
160
UK/Europe Property and Special Risks (118) (51)
(67)
UK/Europe and Japan Personal Insurance (173) (148)
(25)
Other product lines 74 (11)
85
Total General Insurance International $ (7) $ (160) $
153
Other Operations Run-Off 86 42
44
Total Prior Year (Favorable) Unfavorable Development $ (115) $ (143) $
28
Net Loss Development - 2020
During 2020, we recognized favorable prior year loss reserve development of $74 million. The development was primarily driven by:
?Favorable development onU.S. Workers' Compensation business, both guaranteed cost business and large deductible, where we reacted to favorable loss trends in recent accident years;
?Favorable development from amortization of the deferred gain on the adverse development reinsurance agreement with NICO for accident years 2015 and prior;
?Favorable development across the combination of primary and excess casualty coverages;
?Favorable development in Property, Specialty and other miscellaneous coverages;
?Unfavorable development in
?Unfavorable development in Personal Lines where we reacted to adverse development in Homeowners and Umbrella.
International
?Unfavorable development on Financial Lines driven by low frequency and high
severity seen in D&O, especially in
?Favorable development on Property and Special Risks globally driven by
?Favorable development on
We note that for certain categories of claims (e.g., construction defect claims and environmental claims) and for reinsurance recoverable, losses may sometimes be reclassified to an earlier or later accident year as more information about the date of occurrence becomes available to us.
For information regarding the 2019 net loss development see Part II, Item 7. MD&A - Insurance Reserves - Loss Reserves of our 2020 Annual Report.
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ITEM 7 | Insurance Reserves
Significant Reinsurance Agreements
In the first quarter of 2017, we entered into an adverse development reinsurance agreement with NICO, under which we transferred to NICO 80 percent of the reserve risk on substantially all of ourU.S. Commercial long-tail exposures for accident years 2015 and prior. Under this agreement, we ceded to NICO 80 percent of the losses on subject business paid on or after January 1, 2016 in excess of $25 billion of net paid losses, up to an aggregate limit of $25 billion. We account for this transaction as retroactive reinsurance. This transaction resulted in a gain, which under GAAP retroactive reinsurance accounting is deferred and amortized into income over the settlement period. NICO created a collateral trust account as security for their claim payment obligations to us, into which they deposited the consideration paid under the agreement, and Berkshire Hathaway Inc. has provided a parental guarantee to secure NICO's obligations under the agreement.
For a description of AIG's catastrophe reinsurance protection for 2021, see Enterprise Risk Management - Insurance Risks - General Insurance Companies' Key Risks - Natural Catastrophe Risk.
The table below shows the calculation of the deferred gain on the adverse development reinsurance agreement as of December 31, 2021, 2020 and 2019, showing the effect of discounting of loss reserves and amortization of the deferred gain.
December 31, December 31, December 31,
(in millions) 2021 2020 2019
Gross Covered Losses
Covered reserves before discount $ 14,398 $ 16,534 $ 19,064
Inception to date losses paid 27,023 25,198 22,954
Attachment point (25,000) (25,000) (25,000)Covered losses above attachment point $ 16,421 $ 16,732 $ 17,018
Deferred Gain Development Covered losses above attachment ceded to NICO (80%) $ 13,137 $ 13,386 $ 13,614 Consideration paid including interest (10,188) (10,188)
(10,188)
Pre-tax deferred gain before discount and amortization 2,949 3,198
3,426
Discount on ceded losses(a) (953) (911)
(1,251)
Pre-tax deferred gain before amortization 1,996 2,287
2,175
Inception to date amortization of deferred gain at inception (1,097) (904)
(693)
Inception to date amortization attributed to changes in deferred gain(b) (30) (86)
(101)
Deferred gain liability reflected in AIG's balance sheet $ 869 $ 1,297
$ 1,381
(a)The accretion of discount and a reduction in effective interest rates is offset by changes in estimates of the amount and timing of future recoveries.
(b)Excluded from APTI.
The following table presents the rollforward of activity in the deferred gain from the adverse development reinsurance agreement:
Years Ended December 31, (in millions) 2021 2020
2019
Balance at beginning of year, net of discount $ 1,297 $ 1,381 $
1,382
(Favorable) unfavorable prior year reserve development ceded to NICO(a) (249) (228)
(277)
Amortization attributed to deferred gain at inception(b) (193) (211)
(232)
Amortization attributed to changes in deferred gain(c) 56 15
39
Changes in discount on ceded loss reserves (42) 340
469
Balance at end of year, net of discount $ 869 $ 1,297 $
1,381
(a)Prior year reserve development ceded to NICO under the retroactive reinsurance agreement is deferred under GAAP.
(b)Represents amortization of the deferred gain recognized in APTI.
(c)Excluded from APTI.
The lines of business subject to this agreement have been the source of the majority of the unfavorable prior year development over the past several years, though the overall prior year development has been favorable over the past three years. The agreement has resulted in lower capital charges for reserve risks at ourU.S. insurance subsidiaries. In addition, net investment income declined as a result of lower invested assets. AIG | 2021 Form
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ITEM 7 | Insurance Reserves
Fortitude Re was established during the first quarter of 2018 in a series of
reinsurance transactions related to our Run-Off operations. Those reinsurance
transactions were designed to consolidate most of our Insurance Run-Off Lines
into a single legal entity. As of December 31, 2021, approximately $29.6 billion
of reserves from our Life and Retirement Run-Off Lines and approximately $3.8
billion of reserves from our General Insurance Run-Off Lines related to business
written by multiple wholly-owned AIG subsidiaries, had been ceded to Fortitude
Re under these reinsurance transactions.
Of the Fortitude Re reinsurance agreements, the largest is the Amended and
Restated Combination Coinsurance and Modified Coinsurance Agreement by and
between our subsidiary American General Life Insurance Company (AGL) and
Fortitude Re. Under this treaty, approximately $22.6 billion of AGL reserves as
of December 31, 2021 were ceded to Fortitude Re representing a mix of life and
annuity risks. Fortitude Re provides 100 percent reinsurance of the ceded risks.
AGL retains the risk of collection of any third party reinsurance covering the
ceded business. At effectiveness of the treaty, an amount equal to the aggregate
ceded reserves was deposited by AGL into a modified coinsurance account of AGL
to secure the obligations of Fortitude Re. Fortitude Re receives or makes
quarterly payments that represent the net gain or loss under the treaty for the
relevant quarter, including any net investment gain or loss on the assets in the
modified coinsurance account. An AIG affiliate will serve as portfolio manager
of assets in the modified coinsurance account for a minimum of three years after
the June 2, 2020 closing of the Majority Interest Fortitude Sale.
Following receipt of all regulatory approvals and the satisfaction of other
conditions, effective as of January 1, 2022, AIG sold to an affiliate of
Fortitude Re all of the outstanding capital stock of two servicing companies
that administer the Life and Retirement and General Insurance ceded business,
and the ceding insurers entered into administrative services agreements pursuant
to which AIG transferred administration of certain Life and Retirement and
General Insurance ceded business to such companies.
For a summary of significant reinsurers see Enterprise Risk Management - Insurance Risks - Reinsurance Activities - Reinsurance Recoverable.
LIFE AND ANNUITY FUTURE POLICY BENEFITS, POLICYHOLDER CONTRACT DEPOSITS and dac
The following section provides discussion of life and annuity future policy benefits, policyholder contract deposits and deferred policy acquisition costs.
For information regarding 2019 life and annuity future policy benefits, policyholder contract deposits and deferred policy acquisition costs, see Part II, Item 7. MD&A - Insurance Reserves - Life and Annuity Future Policy Benefits, Policyholder Contract Deposits and DAC of our 2020 Annual Report.
Update of Actuarial Assumptions and Models
The life insurance companies review and update actuarial assumptions at least annually, generally in the third quarter. Assumption setting standards vary between investment-oriented products and traditional long-duration products.
Investment-Oriented Products
The life insurance companies review and update estimated gross profit assumptions used to amortize DAC and related items (which may include VOBA, DSI and unearned revenue reserves) and assessments used to accrue guaranteed benefit reserves for investment-oriented products at least annually. Estimated gross profit projections include assumptions for investment-related returns and spreads, product-related fees and expenses, mortality gains and losses, policyholder behavior and other factors. In estimating future gross profits, lapse assumptions require judgment and can have a material impact on DAC amortization. If the assumptions used for estimated gross profits change significantly, DAC and related reserves are recalculated using the new projections, and any resulting adjustment is included in income. Updating such projections may result in acceleration of amortization in some products and deceleration of amortization in other products. The life insurance companies also review assumptions related to their respective GMWB living benefits that are accounted for as embedded derivatives and measured at fair value. The fair value of these embedded derivatives is based on actuarial assumptions, including policyholder behavior, as well as capital market assumptions.
Various assumptions were updated, including the following effective September 30, 2021:
•The reversion to the mean rates of return (gross of fees) were decreased to 1.04 percent from 3.12 percent for the variable annuity product line in Individual Retirement and increased to 4.04 percent from 2.87 percent for the variable annuity product line in Group Retirement primarily due to recent equity market movements. The separate account long-term asset growth rate assumption related to equity market performance remained unchanged at 7.0 percent. The Group Retirement reversion to the mean rate of return had become and had remained less than zero percent, the rate was unlocked and reset to 3.59 percent, which increased the DAC and sales inducement balances by a total of $78 million and decreased reserve balances by $6 million, increasing pre-tax income by a total of $84 million. The long-term growth assumption remained unchanged at 7.0 percent; and 130 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Insurance Reserves
•Ultimate projected yields on most of our invested assets were lowered on life
and annuity deposits. Life deposit projected yields decreased up to 42 basis
points while annuity insurance deposits saw decreases of up to 52 basis points.
Projected yields are graded from a weighted average net GAAP book yield of
existing assets supporting the business based on the value of the assets to a
weighted average yield based on the duration of the assets excluding assets that
mature during the grading period. The grading period is three years for deferred
annuity products and five years for life insurance products due to deferred
annuities having a shorter duration than life products. Projected yields are
held constant after the grading period.
For information regarding actuarial methods see Critical Accounting Estimates -
Estimated Gross Profits to Value Deferred Acquisition Costs and Unearned Revenue
for Investment-Oriented Products.
Traditional long-duration products
For traditional long-duration products discussed below, which include whole life insurance, term life insurance, accident and health insurance, PRT group annuities, and life-contingent single premium immediate annuities and structured settlements, a "lock-in" principle applies. The assumptions used to calculate the benefit liabilities and DAC are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs. A loss recognition event occurs when current liabilities together with expected future premiums are not sufficient to provide for all future benefits, expenses, and DAC amortization, net of reinsurance. A loss recognition event is driven by observed changes in actual experience or estimates differing significantly from "locked-in" assumptions. Underlying assumptions, including interest rates, are reviewed periodically and updated as appropriate for loss recognition testing purposes. The net increases (decreases) to pre-tax income and adjusted pre-tax income as a result of the update of actuarial assumptions for 2021, 2020 and 2019 are shown in the following tables. The following table presents the decrease in pre-tax income resulting from the third quarter update of actuarial assumptions in the life insurance companies, by line item as reported in Results of Operations: Years Ended December 31, (in millions) 2021 2020 2019 Premiums $ (41) $ - $ Policy fees (74) (106) (32) Interest credited to policyholder account balances (50) (6) 19 Amortization of deferred policy acquisition costs (139) 225 203 Non deferrable insurance commissions - 15
-
Policyholder benefits and losses incurred 138 (235)
(363)
Decrease in adjusted pre-tax income (166) (107)
(173)
Change in DAC related to net realized gains and losses 57 (44) (17) Net realized gains (losses) (100) 142 180 Decrease in pre-tax income $ (209) $ (9) $ (10)
Update of Actuarial Assumptions by Business Segment
The following table presents the increase (decrease) in adjusted pre-tax income
resulting from the third quarter update of actuarial assumptions for the life
insurance companies, by segment and product line:
Years Ended December 31,
(in millions) 2021 2020 2019
Life and Retirement:
Individual Retirement
Fixed annuities $ (274) $ (77) $ 82
Variable and indexed annuities 4 2 (145)
Total Individual Retirement (270) (75) (63)
Group Retirement (2) 68 (17)
Life Insurance 106 (101) (64)
Institutional Markets - 1 -
Total Life and Retirement (166) (107) (144)
Other Operations Run-Off - - (29)
Total decrease in adjusted pre-tax income from update
of assumptions $ (166) $ (107) $ (173)
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ITEM 7 | Insurance Reserves
In 2021, adjusted pre-tax income included a net unfavorable update of $166
million, primarily in fixed annuities driven by changes to earned rates causing
spread compression partially offset by favorable updates to full surrender
assumptions, and updates to the Life Insurance reserves for universal life with
secondary guarantees and similar features (excluding base policy liabilities and
embedded derivatives) model.
In 2020, adjusted pre-tax income included a net unfavorable adjustment of $107
million, primarily in fixed annuities driven by changes to earned rates causing
spread compression partially offset by favorable updates to full surrender
assumptions, and in Life Insurance primarily due to mortality modeling
enhancements.
The impacts related to the update of actuarial assumptions in each period are discussed by business segment below.
Individual Retirement
The annual update of actuarial assumptions resulted in net unfavorable impact to adjusted pre-tax income of Individual Retirement of $270 million and $75 million in 2021 and 2020, respectively. In 2021, in fixed annuities, the update of estimated gross profit assumptions resulted in a net unfavorable impact of $274 million which reflected lower projected investment earnings. In 2020, the update of estimated gross profit assumptions resulted in a net unfavorable impact of $77 million which reflected lower projected investment earnings, partially offset by lower assumed lapses. In 2021, in variable and index annuities, the update of estimated gross profit assumptions resulted in a net favorable impact of $4 million, driven by lower assumed lapses. These updates were largely offset by lower projected investment earnings. In 2020, the update of estimated gross profit assumptions resulted in a net favorable adjustment of $2 million driven by guarantee withdrawal benefit utilization assumptions. These updates were partially offset by lower projected investment earnings. Group Retirement In 2021, in Group Retirement, the update of estimated gross profit assumptions resulted in a net unfavorable impact of $2 million, driven primarily in the variable annuities line by lower projected investment earnings, largely offset by resetting the reversion to the mean rates. In 2020, the update of estimated gross profit assumptions resulted in a favorable impact of $68 million, primarily in the variable annuities line from extending the DAC amortization projection period, partially offset by updates to expense and lapse assumptions. The DAC amortization projection period was extended to reflect business still in-force at the end of the previous projection period, resulting in an increase in modeled future profits and an increase in the current DAC balance.
Life Insurance
In 2021, in Life Insurance, the update of actuarial assumptions resulted in a net favorable impact of $106 million, primarily driven by updates to the modeling of certain policy fees for universal life with secondary guarantees and similar features (excluding base policy liabilities and embedded derivatives), which was partially offset by lower projected investment earnings and model updates involving reinsurance. In 2020, the annual update of actuarial assumptions resulted in a net unfavorable impact of $101 million, primarily driven by updates to universal life mortality assumptions. The mortality updates better align the assumptions with experience and reduce future profits which increases the reserves for affected products. The unfavorable updates were partially offset by refinements to reserve modeling. 132 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Insurance Reserves
Variable Annuity Guaranteed Benefits and Hedging Results
Our Individual Retirement and Group Retirement businesses offer variable annuity products with GMWB riders that provide guaranteed living benefit features. The liabilities for GMWB are accounted for as embedded derivatives measured at fair value. The fair value of the embedded derivatives may fluctuate significantly based on market interest rates, equity prices, credit spreads, market volatility, policyholder behavior and other factors. In addition to risk-mitigating features in our variable annuity product design, we have an economic hedging program designed to manage market risk from GMWB, including exposures to changes in interest rates, equity prices, credit spreads and volatility. The hedging program utilizes derivative instruments, including but not limited to equity options, futures contracts and interest rate swap and swaption contracts, as well as fixed maturity securities with a fair value election. For additional information on market risk management related to these product features see Enterprise Risk Management - Insurance Risks - Life and Retirement Companies' Key Risks - Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs.
Differences in Valuation of Embedded Derivatives and Economic Hedge Target
The variable annuity hedging program utilizes an economic hedge target, which represents an estimate of the underlying economic risks in our GMWB riders. The economic hedge target differs from the GAAP valuation of the GMWB embedded derivatives, creating volatility in our net income (loss) primarily due to the following:
?The economic hedge target includes 100 percent of rider fees in present value calculations; the GAAP valuation reflects only those fees attributed to the embedded derivative such that the initial value at contract issue equals zero;
?The economic hedge target uses best estimate actuarial assumptions and excludes explicit risk margins used for GAAP valuation, such as margins for policyholder behavior, mortality, and volatility; and ?The economic hedge target excludes the non-performance or "own credit" risk adjustment used in the GAAP valuation, which reflects a market participant's view of our claims-paying ability by incorporating a different spread (the NPA spread) to the curve used to discount projected benefit cash flows. Because the discount rate includes the NPA spread and other explicit risk margins, the GAAP valuation has different sensitivities to movements in interest rates and other market factors, and to changes from actuarial assumption updates, than the economic hedge target. For more information on our valuation methodology for embedded derivatives within policyholder contract deposits see Note 4 to the Consolidated Financial Statements. The market value of the hedge portfolio compared to the economic hedge target at any point in time may be different and is not expected to be fully offsetting. In addition to the derivatives held in conjunction with the variable annuity hedging program, the Life and Retirement companies have cash and invested assets available to cover future claims payable under these guarantees. The primary sources of difference between the change in the fair value of the hedging portfolio and the economic hedge target include:
?Basis risk due to the variance between expected and actual fund returns, which may be either positive or negative;
?Realized volatility versus implied volatility;
?Actual versus expected changes in the hedge target driven by assumptions not subject to hedging, particularly policyholder behavior; and
?Risk exposures that we have elected not to explicitly or fully hedge.
The following table presents a reconciliation between the fair value of the GAAP embedded derivatives and the value of our economic hedge target:
December 31, December 31,
(in millions) 2021 2020
Reconciliation of embedded derivatives and economic hedge target: Embedded derivative liability $ 2,472 $ 3,572 Exclude non-performance risk adjustment (2,508)
(2,958)
Embedded derivative liability, excluding NPA 4,980
6,530
Adjustments for risk margins and differences in valuation (2,172)
(2,502)
Economic hedge target liability $ 2,808 $ 4,028
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ITEM 7 | Insurance Reserves
Impact on Pre-tax Income (Loss)
The impact on our pre-tax income (loss) of variable annuity guaranteed living benefits and related hedging results includes changes in the fair value of the GMWB embedded derivatives, and changes in the fair value of related derivative hedging instruments, both of which are recorded in Net realized gains (losses). Realized gains (losses), as well as net investment income from changes in the fair value of fixed maturity securities used in the hedging program, are excluded from adjusted pre-tax income of Individual Retirement and Group Retirement. The change in the fair value of the embedded derivatives and the change in the value of the hedging portfolio are not expected to be fully offsetting, primarily due to the differences in valuation between the economic hedge target, the GAAP embedded derivatives and the fair value of the hedging portfolio, as discussed above. When corporate credit spreads widen, the change in the NPA spread generally reduces the fair value of the embedded derivative liabilities, resulting in a gain, and when corporate credit spreads narrow or tighten, the change in the NPA spread generally increases the fair value of the embedded derivative liabilities, resulting in a loss. In addition to changes driven by credit market-related movements in the NPA spread, the NPA balance also reflects changes in business activity and in the net amount at risk from the underlying guaranteed living benefits. The following table presents the net increase (decrease) to consolidated pre-tax income (loss) from changes in the fair value of the GMWB embedded derivatives and related hedges, excluding related DAC amortization: Years Ended December 31, (in millions) 2021 2020
2019
Change in fair value of embedded derivatives, excluding update of actuarial assumptions and NPA $ 2,289 $ (1,145) $
(156)
Change in fair value of variable annuity hedging portfolio: Fixed maturity securities* 57 44
194
Interest rate derivative contracts (600) 1,342
1,029
Equity derivative contracts (1,217) (679)
(1,274)
Change in fair value of variable annuity hedging portfolio (1,760) 707
(51)
Change in fair value of embedded derivatives excluding update of actuarial assumptions and NPA, net of hedging portfolio 529 (438)
(207)
Change in fair value of embedded derivatives due to NPA spread
(68) 50 (314)
Change in fair value of embedded derivatives due to change in NPA volume
(383) 404 202
Change in fair value of embedded derivatives due to update of actuarial assumptions
(60) 194 219
Total change due to updated of actuarial assumptions and NPA
(511) 648 107
Net impact on pre-tax income (loss) $ 18 $ 210 $
(100)
Impact to Consolidated Income Statement Net investment income, net of related interest credited to policyholder account balances $ 57 $ 44 $
194
Net realized gains (losses) (39) 166
(294)
Net impact on pre-tax income (loss) $ 18 $ 210 $
(100)
Net change in value of economic hedge target and related hedges Net impact on economic gains (losses) $ 109 $ 295 $
261
*Beginning in July 2019, the fixed maturity securities portfolio used in the hedging program was rebalanced to reposition the portfolio from a duration, sector, and issuer perspective. As part of this rebalancing, fixed maturity securities where we elected the fair value option were sold. Later in the quarter, as new fixed maturity securities were purchased, they were classified as available for sale. The change in fair value of available-for-sale fixed maturity securities recognized as a component of other comprehensive income (loss) was a loss of $122 million in 2021 due to higher interest rates. The change in fair value of available-for-sale fixed maturity securities recognized as a component of other comprehensive income (loss) were gains of $217 million and $57 million for 2020 and 2019, respectively, due to lower interest rates and tightening credit spreads. 134 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Insurance Reserves
The net impact on pre-tax income of $18 million from the GMWB embedded
derivatives and related hedges in 2021 was driven by gains from higher equity
markets, impact of higher interest rates on the change in the fair value of
embedded derivatives excluding NPA, net of the hedging portfolio, offset by the
tightening of NPA credit spreads, impact of higher interest rates that resulted
in NPA volume losses from lower expected GMWB payments, and losses from the
review and update of actuarial assumptions. In 2020, the net impact on pre-tax
income of $210 million was driven by the widening of NPA credit spreads, impact
of lower interest rates that resulted in NPA volume gains from higher expected
GMWB payments, gains from higher equity markets, and gains from the review and
update of actuarial assumptions, partially offset by the impact of lower
interest rates on the change in the fair value of embedded derivatives excluding
NPA, net of the hedging portfolio.
The change in the fair value of the GMWB embedded derivatives, excluding NPA and
update of actuarial assumptions in 2021 reflected gains from increases in
interest rates and equity markets. In 2020, the change in the fair value of the
GMWB embedded derivatives, excluding NPA and update of actuarial assumptions,
reflected losses from decreases in interest rates, partially offset by gains
from higher equity markets.
Fair value gains or losses in the hedging portfolio are typically not fully
offset by increases or decreases in liabilities on a GAAP basis, due to the NPA
and other risk margins used for GAAP valuation that cause the embedded
derivatives to be less sensitive to changes in market rates than the hedge
portfolio. On an economic basis, the changes in the fair value of the hedge
portfolio were partially offset by the changes in the economic hedge target, as
discussed below. In 2021, we had a net mark to market gain of approximately $109
million from our hedging activities related to our economic hedge target
primarily driven by higher equity markets, partially offset by losses from the
review and update of actuarial assumptions. In 2020, we estimated a net mark to
market gain of approximately $295 million from our hedging activities related to
our economic hedge target primarily driven by gains from higher equity markets
and gains from the review and update of actuarial assumptions offset by
tightening credit spreads.
Change in Economic Hedge Target
The decrease in the economic hedge target liability in 2021 was primarily driven by higher interest rates and higher equity markets, partially offset by losses from the review and update of actuarial assumptions. The increase in the economic hedge target liability in 2020 was primarily due to lower interest rates and tighter credit spreads, offset by benefits from the review and update of assumptions and higher equity markets.
Change in Fair Value of the Hedging Portfolio
The changes in the fair value of the economic hedge target and, to a lesser extent, the embedded derivative valuation under GAAP, were offset in part by the following changes in the fair value of the variable annuity hedging portfolio:
?Changes in the fair value of interest rate derivative contracts, which included swaps, swaptions and futures, resulted in losses driven by higher interest rates in 2021 compared to gains driven by lower interest rates in 2020.
?Changes in the fair value of equity derivative contracts, which included futures and options, resulted in losses in 2021 and 2020, and varied based on the relative change in equity market returns in the respective periods.
?Changes in the fair value of fixed maturity securities, primarily corporate
bonds, are used as a capital-efficient way to economically hedge interest rate
and credit spread-related risk. The change in the fair value of the corporate
bond hedging program in 2021 reflected losses due to higher interest rates. The
gains in 2020 reflected the impact of decreases in interest rates and tightening
credit spreads.
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ITEM 7 | Insurance Reserves
DAC
The following table summarizes the major components of the changes in DAC, including VOBA, within the Life and Retirement companies:
Years Ended December 31, (in millions) 2021 2020 2019 Balance, beginning of year $ 7,316 $ 8,119
$ 9,286 Initial allowance upon the adoption of the current expected credit loss accounting standard
- 15 -
Acquisition costs deferred 1,010 910
1,180
Amortization expense: Update of assumptions included in adjusted pre-tax income
(139) 225 203
Related to realized gains and losses (33) 8
51
All other operating amortization (834) (856)
(875)
Increase (decrease) in DAC due to foreign exchange (10) 18
18
Change related to unrealized depreciation (appreciation) of investments 776 (1,123)
(1,744)
Balance, end of year, excluding Fortitude Re DAC(a) 8,086 7,316
8,119
DAC on business ceded to Fortitude Re(b) - - 456 Balance, end of year $ 8,086 $ 7,316 $ 8,575
(a)DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments was $10.5 billion, $10.5 billion and $10.1 billion at December 31, 2021, 2020 and 2019, respectively.
(b)As of closing of the Majority Interest Fortitude Sale on June 2, 2020, these DAC balances were deemed to be not recoverable and were written off.
The net impact to DAC amortization from the update of actuarial assumptions for estimated gross profits, including those reported within change in DAC related to net realized gains (losses), represented one percent and two percent of the DAC balance excluding the amount related to unrealized depreciation (appreciation) of investments as of December 31, 2021 and 2020, respectively.
Reversion to the Mean
The projected separate account returns on variable annuities use a reversion-to-the-mean (RTM) approach, under which lower historical returns lead to higher current returns and vice versa. The RTM rate is updated quarterly based on market returns and can change dramatically in periods where market returns move significantly. An anchor date is set in the past, such that the historical returns since the anchor date, combined with the updated RTM rate applied for over the first five years of the projection brings the average growth over the combined period to the long-term rate 7.00 percent assumption. The criterion to review the five-year RTM anchor date is for the current RTM rate to be less than zero or more than double the long-term growth rate assumption for three consecutive months. When the anchor date is reset, the RTM rate is determined to be approximately one-half of the long-term rate. Should market returns be significantly out of line with our expectations there are caps and floors that if breached would trigger a reassessment of the long-term rate and the RTM rate. For additional information on assumptions related to our reversion to the mean methodology see Critical Accounting Estimates - Estimated Gross Profits to Value Deferred Acquisition Costs and Unearned Revenue for Investment-Oriented Products.
DAC and Reserves Related to Unrealized Appreciation of Investments
DAC and Reserves for universal life insurance and investment-oriented products are adjusted at each balance sheet date to reflect the change in DAC, unearned revenue, and benefit reserves with an offset to Other comprehensive income (loss) (OCI) as if securities available for sale had been sold at their stated aggregate fair value and the proceeds reinvested at current yields (changes related to unrealized appreciation (depreciation) of investments). Similarly, for long-duration traditional products, significant unrealized appreciation of investments in a sustained low interest rate environment may cause additional future policy benefit liabilities with an offset to OCI to be recorded. Changes related to unrealized appreciation (depreciation) of investments related to DAC and unearned revenue generally move in the opposite direction of the change in unrealized appreciation of the available for sale securities portfolio, reducing the reported DAC and unearned revenue balance when market interest rates decline. Conversely, changes related to unrealized appreciation (depreciation) of investments related to benefit reserves generally move in the same direction as the change in unrealized appreciation of the available for sale securities portfolio, increasing reported future policy benefit liabilities balance when market interest rates decline. 136 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Insurance Reserves
Market conditions in 2021 drove a $7.4 billion decrease in the unrealized
appreciation of the available for sale fixed maturity securities portfolio held
to support the Life and Retirement businesses at December 31, 2021 compared to
December 31, 2020. At December 31, 2021, the changes related to unrealized
appreciation (depreciation) of investments reflected increases in amortized
balances including DAC and unearned revenue reserves, while accrued liabilities
such as policyholder benefit liabilities decreased $941 million from December
31, 2020.
Reserves
The following table presents a rollforward of insurance reserves by operating
segments for Life and Retirement, including future policy benefits, policyholder
contract deposits, other policyholder funds, and separate account liabilities,
as well as Retail Mutual Funds and Group Retirement mutual fund assets under
administration:
Years Ended December 31,
(in millions) 2021 2020 2019
Individual Retirement
Balance at beginning of year, gross $ 148,837 $ 144,753 $ 132,529
Premiums and deposits 13,916 10,370 14,899
Surrenders and withdrawals (11,368) (12,023) (13,135)
Death and other contract benefits (3,138) (3,075) (3,204)
Subtotal 148,247 140,025
131,089
Change in fair value of underlying assets and reserve accretion, net of policy fees
5,457 7,285 11,492
Cost of funds(a) 1,683 1,675 1,666
Other reserve changes 114 (148) 506
Less the sale of retail mutual fund assets (7,009) - -
Balance at end of year 148,492 148,837 144,753
Reinsurance ceded (308) (313) (308)Total Individual Retirement insurance reserves and mutual fund assets
$ 148,184 $ 148,524 $ 144,445
Group Retirement
Balance at beginning of year, gross $ 110,651 $ 102,049 $ 91,685
Premiums and deposits 7,766 7,496 8,346
Surrenders and withdrawals (10,097) (8,696) (10,317)
Death and other contract benefits (877) (740) (675)
Subtotal 107,443 100,109
89,039
Change in fair value of underlying assets and reserve accretion, net of policy fees 10,240 9,644 11,939 Cost of funds(a) 1,138 1,125 1,128 Other reserve changes (329) (227) (57) Balance at end of year 118,492 110,651 102,049
Total Group Retirement insurance reserves and mutual fund assets
$ 118,492 $ 110,651 $ 102,049
Life Insurance
Balance at beginning of year, gross $ 27,998 $ 27,397 $ 24,844
Premiums and deposits 4,229 4,046 3,931
Surrenders and withdrawals (487) (484) (663)
Death and other contract benefits (592) (557) (663)
Subtotal 31,148 30,402
27,449
Change in fair value of underlying assets and reserve
accretion, net of policy fees (808) (1,133) (1,138)
Cost of funds(a) 353 373 374
Other reserve changes (2,278) (1,644) 712
Balance at end of year 28,415 27,998 27,397
Reinsurance ceded (1,554) (1,437) (1,358)
Total Life Insurance reserves $ 26,861 $ 26,561 $ 26,039
AIG | 2021 Form 10-K 137
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ITEM 7 | Insurance Reserves
Institutional Markets
Balance at beginning of year, gross $ 27,342 $ 23,673 $ 21,762
Premiums and deposits 4,948 4,846 2,822
Surrenders and withdrawals (1,821) (1,788) (984)
Death and other contract benefits (887) (886) (1,102)
Subtotal 29,582 25,845
22,498
Change in fair value of underlying assets and reserve accretion, net of policy fees 741 823 788 Cost of funds(a) 274 304 356 Other reserve changes (333) 370 31 Balance at end of year 30,264 27,342 23,673 Reinsurance ceded (45) (45) (44) Total Institutional Markets reserves $ 30,219 $ 27,297 $ 23,629 Total insurance reserves and mutual fund assets Balance at beginning of year, gross $ 314,828 $ 297,872 $ 270,820 Premiums and deposits 30,859 26,758 29,998 Surrenders and withdrawals (23,773) (22,991) (25,099) Death and other contract benefits (5,494) (5,258)
(5,644)
Subtotal 316,420 296,381
270,075
Change in fair value of underlying assets and reserve accretion, net of policy fees
15,630 16,619 23,081
Cost of funds(a) 3,448 3,477 3,524
Other reserve changes (2,826) (1,649) 1,192
Less the sale of retail mutual fund assets (7,009) - -
Balance at end of year, excluding Fortitude Re reserves 325,663 314,828
297,872
Fortitude Re reserves(b) 27,654 28,505
30,441
Balance at end of year, including Fortitude Re reserves 353,317 343,333
328,313
Fortitude Re reinsurance ceded(b) (27,654) (28,505)
-
Reinsurance ceded (1,907) (1,795)
(1,710)
Total insurance reserves and mutual fund assets $ 323,756 $ 313,033 $ 326,603
(a)Excludes amortization of deferred sales inducements.
(b)Includes amounts related to policies where AIG has partially ceded to other reinsurers and Fortitude Re.
Insurance reserves, as well as Retail Mutual Funds and Group Retirement mutual fund assets under administration, were comprised of the following balances:
December 31, December 31,
(in millions) 2021 2020(b)
Future policy benefits $ 57,749 $ 54,645
Policyholder contract deposits 156,844 154,669
Other policyholder funds(a) 833
957
Separate account liabilities 109,111 100,290 Total insurance reserves 324,537 310,561 Mutual fund assets 28,780 32,772
Total insurance reserves and mutual fund assets $ 353,317 $ 343,333
(a)Excludes unearned revenue liability.
(b)Liabilities for certain universal life products were reclassified from Policyholder contract deposits to Future policy benefits for life and accident and health insurance contracts. For additional information, see Note 1 to the Consolidated Financial Statements. 138 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Liquidity and Capital Resources
Liquidity and Capital Resources
Overview
Liquidity refers to the ability to generate sufficient cash resources to meet our payment obligations. It is defined as cash and unencumbered assets that can be monetized in a short period of time at a reasonable cost. We endeavor to manage our liquidity prudently through various risk committees, policies and procedures, and a stress testing and liquidity risk framework established by ourTreasury group with oversight by Enterprise Risk Management (ERM). Our liquidity risk framework is designed to manage liquidity at both AIG Parent and its subsidiaries to meet our financial obligations for a minimum of six months under a liquidity stress scenario.
For additional information see Enterprise Risk Management - Risk Appetite, Limits, Identification and Measurement and Enterprise Risk Management - Liquidity Risk Management below.
Capital refers to the long-term financial resources available to support the operation of our businesses, fund business growth, and cover financial and operational needs that arise from adverse circumstances. Our primary source of ongoing capital generation is derived from the profitability of our insurance subsidiaries. We must comply with numerous constraints on our minimum capital positions. These constraints drive the requirements for capital adequacy at AIG and the individual businesses and are based on internally-defined risk tolerances, regulatory requirements, rating agency and creditor expectations and business needs. Actual capital levels are monitored on a regular basis, and using ERM's stress testing methodology, we evaluate the capital impact of potential macroeconomic, financial and insurance stresses in relation to the relevant capital constraints of both AIG and our insurance subsidiaries. We believe that we have sufficient liquidity and capital resources to satisfy future requirements and meet our obligations to policyholders, customers, creditors and debt-holders, including those arising from reasonably foreseeable contingencies or events. Nevertheless, some circumstances may cause our cash or capital needs to exceed projected liquidity or readily deployable capital resources. Additional collateral calls, deterioration in investment portfolios or reserve strengthening affecting statutory surplus, higher surrenders of annuities and other policies, downgrades in credit ratings, catastrophic losses or fluctuations in the capital markets generally may result in significant additional cash or capital needs and loss of sources of liquidity and capital. Other potential events that could cause a liquidity strain include an economic collapse of a nation or region significant to our operations, nationalization, catastrophic terrorist acts, pandemics or other events causing economic or political upheaval. In addition, regulatory and other legal restrictions could limit our ability to transfer funds freely, either to or from our subsidiaries.
For information regarding risks associated with COVID-19, see Part I, Item 1A. - Risk Factors - Market Conditions - "COVID-19 has adversely affected, and is expected to continue to adversely affect, our global business, results of operations, financial condition and liquidity, and its ultimate impact will depend on future developments that are uncertain and cannot be predicted".
Depending on market conditions, regulatory and rating agency considerations and
other factors, we may take various liability and capital management actions.
Liability management actions may include, but are not limited to, repurchasing
or redeeming outstanding debt, issuing new debt or engaging in debt exchange
offers. Capital management actions may include, but are not limited to, issuing
preferred stock, paying dividends to our shareholders on the AIG Common Stock,
par value $2.50 per share (AIG Common Stock), paying dividends to the holders of
our Series A 5.85% Non-Cumulative Perpetual Preferred Stock (Series A Preferred
Stock), and repurchases of AIG Common Stock.
AIG | 2021 Form 10-K 139
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ITEM 7 | Liquidity and Capital Resources
LIQUIDITY AND CAPITAL RESOURCES HIGHLIGHTS
Sources
Liquidity to AIG Parent from Subsidiaries
During 2021, our General Insurance companies distributed cash and fixed maturity
securities of $2.3 billion, and our Life and Retirement companies distributed
$2.8 billion of cash and $38 million of AIG Common Stock held by certain Life
and Retirement companies to AIG Parent or applicable intermediate holding
companies.
Warrant Exercises
In January 2021, we received aggregate proceeds of approximately $92 million in
connection with warrant exercises to purchase approximately 2 million shares of
AIG Common Stock that occurred prior to the January 19, 2021 expiration of
warrants to purchase shares of AIG Common Stock.
Tax Sharing Payment from Fortitude Re
In January 2021, we received $109 million in tax sharing payments in the form of
cash from Fortitude Re related to periods prior to the Majority Interest
Fortitude Sale. The tax sharing payments from Fortitude Re may be subject to
further adjustment in future periods.
Blackstone Transactions
In November 2021, AIG completed the sale of a 9.9 percent equity interest in
SAFG to an affiliate of Blackstone for $2.2 billion.
In December 2021, AIG Parent and AGL received net proceeds of $3.9 billion and
$0.5 billion, respectively, from the sale of AIG's interests in a U.S.
affordable housing portfolio to Blackstone Real Estate Income Trust.
Uses
General Borrowings During 2021, $4.0 billion of debt categorized as general borrowings matured, was repaid or redeemed, including the following: ?Redeemed $1.5 billion aggregate principal amount of our 3.300% Notes Due 2021 for a redemption price of 100 percent of the principal amount, plus accrued and unpaid interest. ?Repurchased, through cash tender offers, $945 million aggregate principal amount of certain notes and debentures issued or guaranteed by AIG for an aggregate purchase price of approximately $1.3 billion. ?Redeemed $1.5 billion aggregate principal amount of our 4.875% Notes Due 2022 for a redemption price of 103.156 percent of the principal amount, plus accrued and unpaid interest. We made interest payments on our general borrowings totaling $1.0 billion during 2021. Of this amount, AIG Parent made interest payments on AIG Parent-issued debt instruments totaling $941 million during 2021. Dividends During 2021, we made: ?Four quarterly cash dividend payments of $365.625 per share on AIG's Series A Preferred Stock totaling $29 million. ?Four quarterly cash dividend payments of $0.32 per share on AIG Common Stock totaling $1.1 billion. Repurchases of Common Stock* During 2021, AIG Parent repurchased approximately 50 million shares of AIG Common Stock, for an aggregate purchase price of approximately $2.6 billion. Approximately $92 million of these share repurchases were funded with proceeds received from warrant exercises that occurred prior to the expiration of warrants to purchase shares of AIG Common Stock on January 19, 2021. IRS Tax Prepayment During 2021, AIG Parent made aggregate prepayments of approximately $364 million to theU.S. Treasury in connection with certain settlement agreements described in Tax Matters below. *Pursuant to an Exchange Act Rule 10b5-1 repurchase plan, from January 1, 2022 to February 15, 2022, we repurchased approximately $522 million of additional shares of AIG Common Stock. As of February 15, 2022, approximately $3.4 billion remained under our share repurchase authorization. 140 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Liquidity and Capital Resources
Analysis of Sources and Uses of Cash
Operating Cash Flow Activities
Insurance companies generally receive most premiums in advance of the payment of claims or policy benefits. The ability of insurance companies to generate positive cash flow is affected by the frequency and severity of losses under their insurance policies, policy retention rates, effective management of our investment portfolio and operating expense discipline.
Interest payments totaled $1.3 billion and $1.1 billion in 2021 and 2020, respectively. Excluding interest payments, AIG had operating cash inflows of $7.6 billion in 2021 compared to operating cash inflows of $2.1 billion in 2020.
Investing Cash Flow Activities
Net cash used in investing activities in 2021 included approximately $4.7 billion of proceeds from divestitures. Net cash used in investing activities in 2020 included $2.2 billion of net cash proceeds from the sale of Fortitude Holdings.
Financing Cash Flow Activities
Net cash used in financing activities in 2021 reflected:
•approximately $1.1 billion in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each quarter of 2021;
•approximately $29 million in the aggregate to pay a dividend of $365.625 per share on AIG's Series A Preferred Stock in each quarter of 2021;
•approximately $2.6 billion to repurchase approximately 50 million shares of AIG Common Stock;
•approximately $4.0 billion in net outflows from the issuance, repayment and cash tender of long-term debt;
•approximately $156 million in net outflows from the issuance and repayment of debt of consolidated investment entities; and
•approximately $2.2 billion in net inflows from the sale of a 9.9 percent equity interest in SAFG to an affiliate of Blackstone.
Net cash provided by financing activities in 2020 reflected:
•approximately $1.1 billion in the aggregate to pay a dividend of $0.32 per share on AIG Common Stock in each quarter of 2020;
•approximately $29 million in the aggregate to pay a dividend of $365.625 per share on AIG's Series A Preferred Stock in each quarter of 2020;
•$500 million to repurchase approximately 12 million shares of AIG Common Stock;
•approximately $2.3 billion in net inflows from the issuance and repayment of long-term debt; and
•approximately $655 million in net outflows from the issuance and repayment of debt of consolidated investment entities.
For information regarding cash flow activities for the year ended December 31,
2019, see Part II, Item 7. MD&A - Liquidity and Capital Resources - Analysis of
Sources and Uses of Cash of our 2020 Annual Report.
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ITEM 7 | Liquidity and Capital Resources
Liquidity and Capital Resources of AIG Parent and Subsidiaries
AIG Parent
As of December 31, 2021, AIG Parent and applicable intermediate holding companies had approximately $15.2 billion in liquidity sources. AIG Parent's liquidity sources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities and also include a committed, revolving syndicated credit facility. Fixed maturity securities primarily includeU.S. government and government sponsored entity securities,U.S. agency mortgage-backed securities, corporate and municipal bonds and certain other highly rated securities. AIG Parent actively manages its assets and liabilities in terms of products, counterparties and duration. Based upon an assessment of funding needs, the liquidity sources can be readily monetized through sales or repurchase agreements or contributed as admitted assets to regulated insurance companies. AIG Parent liquidity is monitored through the use of various internal liquidity risk measures. AIG Parent's primary sources of liquidity are dividends, distributions, loans and other payments from subsidiaries and credit facilities. AIG Parent's primary uses of liquidity are for debt service, capital and liability management, and operating expenses. We believe that we have sufficient liquidity and capital resources to satisfy our reasonably foreseeable future requirements and meet our obligations to our creditors, debt-holders and insurance company subsidiaries. We expect to access the debt and preferred equity markets from time to time to meet funding requirements as needed. We utilize our capital resources to support our businesses, with the majority of capital allocated to our insurance operations. Should we have or generate more capital than is needed to support our business strategies (including organic growth or acquisition opportunities) or mitigate risks inherent to our business, we may develop plans to distribute such capital to shareholders via dividends or AIG Common Stock repurchase authorizations or deploy such capital towards liability management. In the normal course, it is expected that a portion of the capital released by our insurance companies, by our other operations or through the utilization of AIG's deferred tax assets may be available to support our business strategies, for distribution to shareholders or for liability management. In developing plans to distribute capital, AIG considers a number of factors, including, but not limited to: AIG's business and strategic plans, expectations for capital generation and utilization, AIG's funding capacity and capital resources in comparison to internal benchmarks, as well as rating agency expectations, regulatory requirements, bank creditor covenants and internal stress tests for capital. The following table presents AIG Parent and applicable intermediate holding companies liquidity sources: As of As of December 31, December 31, (in millions) 2021 2020 Cash and short-term investments(a) $ 4,334 $
6,762
Unencumbered fixed maturity securities(b) 6,357
3,711
Total AIG Parent liquidity 10,691
10,473
Available capacity under committed, syndicated credit facility(c) 4,500
4,500
Total AIG Parent liquidity sources $ 15,191 $
14,973
(a)Cash and short-term investments include agreements in which securities are purchased by us under agreements to resell totaling $1.9 billion and $5.4 billion as of December 31, 2021 and 2020, respectively.
(b)Unencumbered securities consist of publicly traded, investment grade rated
fixed maturity securities. Fixed maturity securities primarily include
(c)For additional information relating to this committed, syndicated credit facility see - Credit Facilities below.
Insurance Companies
We expect that our insurance companies will be able to continue to satisfy reasonably foreseeable future liquidity requirements and meet their obligations, including those arising from reasonably foreseeable contingencies or events, through cash from operations and, to the extent necessary, monetization of invested assets. Our insurance companies' liquidity resources are primarily held in the form of cash, short-term investments and publicly traded, investment grade rated fixed maturity securities. Each of our material insurance companies' liquidity is monitored through various internal liquidity risk measures. The primary sources of liquidity are premiums, fees, reinsurance recoverables and investment income and maturities. The primary uses of liquidity are paid losses, reinsurance payments, benefit claims, surrenders, withdrawals, interest payments, dividends, expenses, investment purchases and collateral requirements. 142 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Liquidity and Capital Resources
Our insurance companies may require additional funding to meet capital or
liquidity needs under certain circumstances. For example, large catastrophes may
require us to provide additional support to the affected operations of our
General Insurance companies, and a shift in interest rates may require us to
provide support to the affected operations of our Life and Retirement companies.
Downgrades in our credit ratings could put pressure on the insurer financial
strength ratings of our subsidiaries, which could result in non-renewals or
cancellations by policyholders and adversely affect a subsidiary's ability to
meet its own obligations. Increases in market interest rates may adversely
affect the financial strength ratings of our subsidiaries, as rating agency
capital models may reduce the amount of available capital relative to required
capital.
Management believes that because of the size and liquidity of our Life and
Retirement companies' investment portfolios, normal deviations from projected
claim or surrender experience would not create significant liquidity risk.
Furthermore, our Life and Retirement companies' products contain certain
features that mitigate surrender risk, including surrender charges. However, in
times of extreme capital markets disruption or as a result of fluctuations in
the capital markets generally, liquidity needs could outpace resources.
As part of their risk management framework, our insurance companies continue to
evaluate and, where appropriate, pursue strategies and programs to improve their
liquidity position and facilitate their ability to maintain a fully invested
asset portfolio.
Certain of our U.S. insurance companies are members of the FHLBs in their
respective districts. Borrowings from FHLBs are used to supplement liquidity or
for other uses deemed appropriate by management. Our U.S. General Insurance
companies had no outstanding borrowings from FHLBs at both December 31, 2021 and
2020. Our U.S. Life and Retirement companies had $3.6 billion which were due to
FHLBs in their respective districts at both December 31, 2021 and 2020, under
funding agreements issued through our Individual Retirement, Group Retirement
and Institutional Markets operating segments, which were reported in
Policyholder contract deposits. Proceeds from funding agreements are generally
invested in fixed income securities and other investments intended to generate
spread income. These investment contracts do not have mortality or morbidity
risk and are similar to GICs. In addition, our U.S. Life and Retirement
companies had no outstanding borrowings in the form of cash advances from FHLBs
at both December 31, 2021 and 2020.
Certain of our U.S. Life and Retirement companies have programs, which began in
2012, that lend securities from their investment portfolio to supplement
liquidity or for other uses as deemed appropriate by management. Under these
programs, these U.S. Life and Retirement companies lend securities to financial
institutions and receive cash as collateral equal to 102 percent of the fair
value of the loaned securities. Cash collateral received is invested in
short-term investments or partially used for short-term liquidity purposes.
Additionally, the aggregate amount of securities that a Life and Retirement
company is able to lend under its program at any time is limited to five percent
of its general account statutory-basis admitted assets. Our U.S. Life and
Retirement companies had $3.3 billion and $3.4 billion of securities subject to
these agreements at December 31, 2021 and 2020, respectively, and $3.4 billion
and $3.5 billion of liabilities to borrowers for collateral received at December
31, 2021 and 2020, respectively.
AIG generally manages capital between AIG Parent and our insurance companies
through internal, Board-approved policies and limits, as well as management
standards. In addition, AIG Parent has unconditional capital maintenance
agreements in place with certain subsidiaries. Nevertheless, regulatory and
other legal restrictions could limit our ability to transfer capital freely,
either to or from our subsidiaries.
AIG Parent and/or certain subsidiaries are parties to several letter of credit
agreements with various financial institutions, which issue letters of credit
from time to time in support of our insurance companies. These letters of credit
are subject to reimbursement by AIG Parent and/or certain subsidiaries in the
event of a drawdown of these letters of credit. Letters of credit issued in
support of the General Insurance companies totaled approximately $4.8 billion at
December 31, 2021. Letters of credit issued in support of the Life and
Retirement companies totaled approximately $361 million at December 31, 2021.
In 2021, our General Insurance companies collectively paid to AIG Parent or
applicable intermediate holding companies a total of approximately $2.3 billion
in dividends in the form of cash and fixed maturity securities and received $2
million in tax sharing payments in the form of cash. The fixed maturity
securities primarily included U.S. treasuries and securities issued by U.S.
agencies.
In 2021, our Life and Retirement companies collectively paid to AIG Parent or
applicable intermediate holding companies a total of approximately $1.3 billion
in dividends in the form of cash and AIG Common Stock and $1.5 billion in tax
sharing payments in the form of cash. On November 1, 2021, SAFG declared a
dividend payable to AIG Parent in the amount of $8.3 billion. In connection with
such dividend, SAFG issued a promissory note to AIG Parent in the amount of $8.3
billion, which will be required to be paid to AIG Parent prior to the initial
public offering of SAFG. As of February 16, 2022, no amounts have been paid
under the promissory note.
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ITEM 7 | Liquidity and Capital Resources
Tax Matters
In October 2020, the Southern District of New York dismissed the case for the
1997 tax year related to the disallowance of foreign tax credits associated with
cross border financing transactions based upon the settlement reached between
AIG and the government. The settlement concluded our ongoing dispute related to
the disallowance of foreign tax credits associated with cross border financing
transactions for all years and as a result of the settlement, we will be
required to make a payment to the U.S. Treasury . The amount we currently expect
to pay based on settlement terms is approximately $0.2 billion, including
obligations of AIG Parent and subsidiaries. This amount is net of payments
previously made with respect to cross border financing transactions from tax
years 1997 through 2006 and other matters related to 2006 and prior, including
prepayments of approximately $548 million, $354 million and $10 million that AIG
made to the U.S. Treasury in June 2020, June 2021 and October 2021,
respectively. The amount also includes interest that will become due after
review of the interest calculations and will reflect benefits from the
application of interest netting which AIG has requested. While we continue to
finalize the interest calculations with the IRS , the remaining amounts may not
be determined until 2023.
For additional information regarding this matter see Note 21 to the Consolidated Financial Statements.
Credit Facilities On November 19, 2021, we entered into a new committed, revolving syndicated credit facility (the Facility) as a potential source of liquidity for general corporate purposes. The Facility provides for aggregate commitments by the bank syndicate to provide unsecured revolving loans and/or standby letters of credit of up to $4.5 billion without any limits on the type of borrowings and is scheduled to expire in November 2026. As of December 31, 2021, a total of $4.5 billion remains available under the Facility. Our ability to utilize the Facility is not contingent on our credit ratings. However, our ability to utilize the Facility is conditioned on the satisfaction of certain legal, operating, administrative and financial covenants and other requirements contained in the Facility. These include covenants relating to our maintenance of a specified total consolidated net worth and total consolidated debt to total consolidated capitalization. Failure to satisfy these and other requirements contained in the Facility would restrict our access to the Facility and could have a material adverse effect on our financial condition, results of operations and liquidity. We expect to utilize the Facility from time to time, and may use the proceeds for general corporate purposes.
In connection with our entry into the Facility, we terminated our prior $4.5 billion credit facility, and no amounts were outstanding under the prior facility at the time of termination.
Contractual Obligations
The following table summarizes material contractual obligations in total, and by
remaining maturity:
December 31, 2021 Payments due by Period
Total 2023 -
(in millions) Payments 2022 2024 Thereafter
Loss reserves(a) $ 80,855 $ 22,309 $ 23,036 $ 35,510
Insurance and investment contract liabilities 293,624 16,435 36,536 240,653
Long-term debt(b) 23,741 68 3,103
20,570
Interest payments on long-term debt 13,683 1,002 1,874 10,807 Total $ 411,903 $ 39,814 $ 64,549 $ 307,540
(a)Represents loss reserves, undiscounted and gross of reinsurance.
(b)Does not reflect $6.4 billion of debt of consolidated investment entities, for which recourse is limited to the assets of the respective investment entities and for which there is no recourse to the general credit of AIG.
Loss Reserves
Loss reserves relate to our General Insurance companies and represent estimates of future loss and loss adjustment expense payments based on historical loss development payment patterns. The amounts presented in the above table are undiscounted and therefore exceed the liability for unpaid losses and loss adjustment expenses, including allowance for credit losses, as presented on the Consolidated Balance Sheets. Due to the significance of the assumptions used, the payments by period presented above could be materially different from actual required payments. We believe that our General Insurance companies maintain adequate financial resources to meet the actual required payments under these obligations. 144 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Liquidity and Capital Resources
For additional information on loss reserves see Critical Accounting Estimates - Loss Reserves and Note 12 to the Consolidated Financial Statements.
Insurance and Investment Contract Liabilities
Insurance and investment contract liabilities, including GIC liabilities, relate to our Life and Retirement companies. These liabilities include various investment-type products with contractually scheduled maturities, including periodic payments. These liabilities also include benefit and claim liabilities, of which a significant portion represents policies and contracts that do not have stated contractual maturity dates and may not result in any future payment obligations. For these policies and contracts (i) we are not currently making payments until the occurrence of an insurable event, such as death or disability, (ii) payments are conditional on survivorship or (iii) payment may occur due to a surrender or other non-scheduled event beyond our control. We have made significant assumptions to determine the estimated undiscounted cash flows of these contractual policy benefits. These assumptions include mortality, morbidity, future lapse rates, expenses, investment returns and interest crediting rates, offset by expected future deposits and premiums on in-force policies. Due to the significance of the assumptions, the periodic amounts presented could be materially different from actual required payments. The amounts presented in the above table are undiscounted and therefore exceed the liabilities for future policy benefits for life and accident and health insurance contracts, and policyholder contract deposits included in the Consolidated Balance Sheets. We believe that our Life and Retirement companies have adequate financial resources to meet the payments actually required under these obligations. These subsidiaries have substantial liquidity in the form of cash and short-term investments. In addition, our Life and Retirement companies maintain significant levels of investment grade rated fixed maturity securities, including substantial holdings in government and corporate bonds, and could seek to monetize those holdings in the event operating cash flows are insufficient. We expect liquidity needs related to GIC liabilities to be funded through cash flows generated from maturities and sales of invested assets.
For additional information on loss reserves see Critical Accounting Estimates - Loss Reserves and Notes 12 and 13 to the Consolidated Financial Statements.
Long-Term Debt and Interest Payments on Long-Term Debt
The amounts presented in this table represent AIG's total long-term debt outstanding and associated future interest payments due on such debt.
For additional information on outstanding debt, see "Debt" below.
Other Contractual Obligations
We have no other significant contractual obligations not reflected in the table above that in aggregate would have a material effect on AIG's financial position, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.
Off-Balance Sheet Arrangements and Commercial Commitments
In the normal course of business, AIG and our subsidiaries enter into commitments under which we may be required to make payments in the future on a contingent basis.
The following table summarizes Off-Balance Sheet Arrangements and Commercial Commitments in total, and by remaining maturity:
December 31, 2021 Amount of Commitment Expiring
Total Amounts 2023 -
(in millions) Committed 2022 2024 Thereafter
Commitments:
Investment commitments $ 7,254 $ 4,132 $ 2,379 $ 743
Commitments to extend credit 5,780 1,774 2,769 1,237
Letters of credit 986 752 201 33
Total(a)(b) $ 14,020 $ 6,658 $ 5,349 $ 2,013
(a)Excludes guarantees, CMAs or other support arrangements between AIG consolidated entities.
(b)Excludes commitments with respect to pension plans. The annual pension contribution for 2022 is expected to be approximately $65 million.
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ITEM 7 | Liquidity and Capital Resources
Investment commitments
We enter into investment commitments in the normal course of business that are
aligned with and support our investment strategies. These represent commitments
to investment in private equity funds, hedge funds and other funds, as well as
commitments to purchase and develop real estate in the United States and abroad.
The commitments to invest in private equity funds, hedge funds and other funds
are called at the discretion of each fund, as needed for funding new investments
or expenses of the fund. The expiration of these commitments is estimated based
on the expected life cycle of the related funds, consistent with past trends of
requirements for funding. These commitments are primarily made by insurance and
real estate subsidiaries of the Company.
We also enter into arrangements with variable interest entities (VIEs) and consolidate a VIE when we are the primary beneficiary of the entity.
For additional information on investment commitments and VIEs see Note 9 to the Consolidated Financial Statements.
Commitments to extend credit
As part of our normal course of business lending operations, we enter into commitments to fund mortgage loans at certain interest rates and various other terms, within a stated period of time. Such commitments are legally binding and generally made by insurance subsidiaries of the Company.
Letters of credit
AIG is party to several letter of credit agreements with various financial institutions, which issue letters of credit from time to time for the benefit of third parties in support of our businesses. These letters of credit are subject to reimbursement by AIG in the event of a drawdown.
Other commitments and guarantees
We have no other significant guarantees or commitments not reflected in the table above that in aggregate would have a material effect on AIG's financial position, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.
Indemnification Agreements
We are subject to financial guarantees and indemnity arrangements in connection with our sales of businesses. These arrangements may be triggered by declines in asset values, specified business contingencies, the realization of contingent liabilities, litigation developments, or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to time limitations, defined by contract or by operation of law, such as by prevailing statutes of limitation. Depending on the specific terms of the arrangements, the maximum potential obligation may or may not be subject to contractual limitations. We have recorded liabilities for certain of these arrangements where it is possible to estimate them. These liabilities are not material in the aggregate. We are unable to develop a reasonable estimate of the maximum potential payout under some of these arrangements. Overall, we believe the likelihood that we will have to make any material payments under these arrangements is remote.
For additional information regarding our indemnification agreements see Note 15 to the Consolidated Financial Statements.
Debt
AIG expects to service and repay general borrowings through maturing investments and dispositions of invested assets, future cash flows from operations, cash flows generated from invested assets, future debt or preferred stock issuances and other financing arrangements. AIG borrowings supported by assets of AIG include GIAs that are supported by cash and investments held by AIG Parent, certain non-insurance subsidiaries and amounts posted to third parties as collateral for the repayment of those obligations. Total debt includes debt of consolidated investments not guaranteed by AIG.
For additional information on GIAs and associated collateral posted see Note 5 to the Consolidated Financial Statements.
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ITEM 7 | Liquidity and Capital Resources
The following table provides the rollforward of AIG's total debt outstanding:
Balance at Maturities Effect of Balance at
Year Ended December 31, 2021 December 31, and Foreign Other December 31,
(in millions) 2020 Issuances Repayments Exchange Changes 2021
Debt issued or guaranteed by
AIG:
AIG general borrowings:
Notes and bonds payable $ 23,068 $ - $ (3,315) $ (157) $ 37 $ 19,633
Junior subordinated debt 1,561 - (385) (15) 3 1,164
AIG Japan Holdings Kabushiki
Kaisha 361 - - (28) - 333
AIGLH notes and bonds
payable 282 - (83) - - 199
AIGLH junior subordinated
debt 361 - (134) - - 227
Validus notes and bonds
payable 348 - (36) - (19) 293
Total AIG general borrowings 25,981 - (3,953) (200) 21 21,849
AIG borrowings supported by
assets:(a)
Series AIGFP matched notes
and bonds payable 21 - (3) - - 18
GIAs, at fair value 2,033 107 (264) - (73) (b) 1,803
Notes and bonds payable, at
fair value 64 - (6) - 10 (b) 68
Total AIG borrowings
supported by assets 2,118 107 (273) - (63) 1,889
Total debt issued or
guaranteed by AIG 28,099 107 (4,226) (200) (42) 23,738
Other subsidiaries' notes,
bonds, loans and
mortgages payable - not
guaranteed by AIG 4 - (1) - - 3
Total long-term debt 28,103 107 (4,227) (200) (42) 23,741
Debt of consolidated
investment entities - not
guaranteed by AIG(c) 9,431 4,338 (4,495) (21) (2,831) (d) 6,422
Total debt $ 37,534 $ 4,445 $ (8,722) $ (221) $ (2,873) $ 30,163
(a)AIG Parent guarantees all such debt, except for Series AIGFP matched notes
and bonds payable, which are direct obligations of AIG Parent. Collateral posted
to third parties was $1.4 billion at both December 31, 2021 and December 31,
2020, respectively. This collateral primarily consists of securities of the U.S.
government and government sponsored entities and generally cannot be repledged
or resold by the counterparties.
(b)Primarily represents adjustments to the fair value of debt.
(c)At December 31, 2021, includes debt of consolidated investment entities primarily related to real estate investments of $1.9 billion and other securitization vehicles of $4.5 billion. At December 31, 2020, includes debt of consolidated investment entities related to real estate investments of $3.1 billion, affordable housing partnership investments of $2.3 billion and other securitization vehicles of $4.0 billion.
(d)Includes the effect of consolidating previously unconsolidated partnerships.
Debt Maturities
The following table summarizes maturing long-term debt at December 31, 2021 of AIG for the next four quarters:
First Second Third Fourth
Quarter Quarter Quarter Quarter
(in millions) 2022 2022 2022 2022 Total
AIG general borrowings $ - $ - $ - $ 17 $ 17
AIG borrowings supported by assets - 19 19 12 50
Other subsidiaries' notes, bonds, loans
and mortgages payable - - - 1 1
Total $ - $ 19 $ 19 $ 30 $ 68
For additional information on debt outstanding see Note 14 to the Consolidated
Financial Statements.
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ITEM 7 | Liquidity and Capital Resources
Credit Ratings
Credit ratings estimate a company's ability to meet its obligations and may directly affect the cost and availability of financing to that company. The following table presents the credit ratings of AIG and certain of its subsidiaries as of the date of this filing. Figures in parentheses indicate the relative ranking of the ratings within the agency's rating categories; that ranking refers only to the major rating category and not to the modifiers assigned by the rating agencies.
Short-Term Debt Senior Long-Term Debt
Moody's S&P Moody's(a) S&P(b) Fitch(c)
American International A-2 (2nd Baa 2 (4th
Group, Inc. P-2 (2nd of 3) of 8) of 9) BBB+ (4th of 9) BBB+ (4th of 9)
/ Stable
outlook CreditWatch Rating Watch
Negative Negative
AIG Financial Products Baa 2 (4th
Corp.(d) P-2 A-2 of 9) BBB+
/ Stable
outlook CreditWatch
Negative
(a)Moody's appends numerical modifiers 1, 2 and 3 to the generic rating categories to show relative position within the rating categories.
(b)S&P ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(c)Fitch Ratings Inc. (Fitch) ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
(d)AIG guarantees all obligations of AIG Financial Products Corp.
These credit ratings are current opinions of the rating agencies. They may be changed, suspended or withdrawn at any time by the rating agencies as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at our request. For a discussion of rating agency actions in response to AIG's announced intention to separate its Life and Retirement business from AIG, see Rating Agency Actions Related to the Announced Separation of Life and Retirement below.
We are party to some agreements that contain "ratings triggers." Depending on the ratings maintained by one or more rating agencies, these triggers could result in (i) the termination or limitation of credit availability or a requirement for accelerated repayment, (ii) the termination of business contracts or (iii) a requirement to post collateral for the benefit of counterparties.
In the event of a downgrade of AIG's long-term senior debt ratings, AIG Financial Products Corp. and related subsidiaries (collectively AIGFP) and certain other AIG entities would be required to post additional collateral under some derivative and other transactions, or certain of the counterparties of AIGFP or of such other AIG entities would be permitted to terminate such transactions early.
The actual amount of collateral that we would be required to post to counterparties in the event of such downgrades, or the aggregate amount of payments that we could be required to make, depends on market conditions, the fair value of outstanding affected transactions and other factors prevailing at the time of the downgrade. For information regarding the effects of downgrades in our credit ratings see Note 10 to the Consolidated Financial Statements and Part I, Item 1A. Risk Factors - Liquidity, Capital and Credit - "A downgrade by one or more of the rating agencies in the Insurer Financial Strength ratings of our insurance or reinsurance companies could limit their ability to write or prevent them from writing new business and impair their retention of customers and in-force business, and a downgrade in our credit ratings could adversely affect our business, results of operations, financial condition and liquidity". 148 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Liquidity and Capital Resources
FINANCIAL STRENGTH Ratings
Financial Strength ratings estimate an insurance company's ability to pay its
obligations under an insurance policy. The following table presents the ratings
of our significant insurance subsidiaries as of the date of this filing.
A.M. Best S&P Fitch Moody's
National Union Fire Insurance Company of Pittsburgh, Pa. A A+ A
A2
Lexington Insurance Company A A+ A
A2
American Home Assurance Company A A+ A
A2
American General Life Insurance Company A A+ A+ A2 The Variable Annuity Life Insurance Company A A+ A+
A2
United States Life Insurance Company in the City of New York A A+ A+
A2
AIG Europe S.A. NR A+ NR
A2
American International Group UK Ltd. A A+ NR A2 AIG General Insurance Co. Ltd.
NR A+ NR NR
Validus Reinsurance, Ltd. A A+ NR A2
These financial strength ratings are current opinions of the rating agencies.
They may be changed, suspended or withdrawn at any time by the rating agencies
as a result of changes in, or unavailability of, information or based on other
circumstances.
For a discussion of the effects of downgrades in our financial strength ratings
see Note 10 to the Consolidated Financial Statements and Part I, Item 1A. Risk
Factors - Liquidity, Capital and Credit - "A downgrade by one or more of the
rating agencies in the Insurer Financial Strength ratings of our insurance or
reinsurance companies could limit their ability to write or prevent them from
writing new business and impair their retention of customers and in-force
business, and a downgrade in our credit ratings could adversely affect our
business, results of operations, financial condition and liquidity".
Rating Agency Actions RELATED TO the ANNOUNCED SEPARATION OF LIFE AND RETIREMENT
On October 26, 2020, AIG announced its intention to separate its Life and Retirement business from AIG. On November 2, 2021, AIG and Blackstone completed the acquisition by Blackstone of a 9.9 percent equity stake in SAFG. In response to such announcements, the rating agencies in the tables above took the following actions: ?On October 27, 2020, A.M. Best issued a comment stating that its financial strength and issuer credit ratings on AIG and subsidiaries are unchanged as a result of the announcement. On October 7, 2021, A.M. Best affirmed all of the financial strength and issuer credit ratings of AIG and subsidiaries with stable outlooks. ?On October 28, 2020, Fitch placed the credit ratings of AIG on "Rating Watch Negative." Fitch also affirmed the financial strength ratings and outlooks on AIG's insurance subsidiaries. ?On October 28, 2020, Moody's placed the debt ratings of AIG on review for downgrade. Moody's also affirmed the financial strength ratings and outlooks on AIG's insurance subsidiaries. On July 15, 2021, Moody's lowered its debt ratings of AIG to Baa2 from Baa1 and assigned a stable outlook. Moody's also revised the outlook on the A2 financial strength ratings of the Life and Retirement subsidiaries to negative from stable. The ratings of the General Insurance subsidiaries were unaffected by these announcements. ?On October 27, 2020, S&P placed the credit ratings of AIG and the financial strength ratings of most of the General Insurance subsidiaries on CreditWatch with negative implications. S&P also placed the financial strength ratings of the Life and Retirement subsidiaries on CreditWatch with developing implications.
Regulation and Supervision
For information regarding our regulation and supervision by different regulatory
authorities in the United States and abroad, including with respect to our
liquidity and capital resources see Part 1, Item 1. Business - Regulation and
Item 1A. Risk Factors - Regulation.
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ITEM 7 | Liquidity and Capital Resources
Dividends
The following table presents declaration date, record date, payment date and
dividends paid per common share on AIG Common Stock in the twelve months ended
December 31, 2021:
Dividends Paid
Declaration Date Record Date Payment Date Per Common Share
November 4, 2021 December 16, 2021 December 30, 2021 $ 0.32 August 5, 2021 September 16, 2021 September 30, 2021 0.32 May 6, 2021 June 15, 2021 June 29, 2021 0.32 February 16, 2021 March 16, 2021 March 30, 2021
0.32
On February 16, 2022, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 31, 2022 to shareholders of record on March 17, 2022.
The following table presents declaration date, record date, payment date and dividends paid per preferred share and per depository share on the Series A Preferred Stock in the twelve months ended December 31, 2021:
Dividends Paid
Per Preferred
Declaration Date Record Date Payment Date Share Per Depositary Share
November 4, 2021 November 30, 2021 December 15, 2021 $ 365.625 $ 0.365625
August 5, 2021 August 31, 2021 September 15, 2021 365.625
0.365625
May 6, 2021 May 31, 2021 June 15, 2021 365.625
0.365625
February 16, 2021 February 26, 2021 March 15, 2021 365.625
0.365625
On February 16, 2022, our Board of Directors declared a cash dividend on AIG's Series A Preferred Stock of $365.625 per share, payable on March 15, 2022 to holders of record on February 28, 2022. The payment of any future dividends will be at the discretion of our Board of Directors and will depend on various factors, as discussed further in Note 16 to the Consolidated Financial Statements.
Repurchases of AIG Common Stock
Our Board of Directors has authorized the repurchase of shares of AIG Common Stock through a series of actions. On August 3, 2021, our Board of Directors authorized a share repurchase authorization of AIG Common Stock of $6.0 billion (inclusive of the approximately $908 million remaining under the Board's prior share repurchase authorization). During 2021, AIG Parent repurchased approximately 50 million shares of AIG Common Stock for an aggregate purchase price of $2.6 billion, including approximately $6 million of shares purchased from certain Life and Retirement companies. Pursuant to an Exchange Act Rule 10b5-1 repurchase plan, from January 1, 2022 to February 15, 2022, we repurchased approximately $522 million of additional shares of AIG Common Stock. As of February 15, 2022, approximately $3.4 billion remained under the share repurchase authorization. Shares may be repurchased from time to time in the open market, private purchases, through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise. Certain of our share repurchases have been and may from time to time be effected through the Exchange Act Rule 10b5-1 repurchase plans. The timing of any future share repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors, as discussed further in Note 16 to the Consolidated Financial Statements.
Dividend Restrictions
Payments of dividends to AIG by its insurance subsidiaries are subject to certain restrictions imposed by regulatory authorities.
For information regarding restrictions on payments of dividends by our subsidiaries see Note 18 to the Consolidated Financial Statements.
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ITEM 7 | Enterprise Risk Management
Enterprise Risk Management
Risk management includes the identification and measurement of various forms of
risk, the establishment of risk thresholds and the creation of processes
intended to maintain risks within these thresholds while optimizing returns. We
consider risk management an integral part of managing our core businesses and a
key element of our approach to corporate governance.
Overview
We have an integrated process for managing risks throughout our organization in
accordance with our firm-wide risk appetite. Our Board of Directors has
oversight responsibility for the management of risk. Our Enterprise Risk
Management Department supervises and integrates the risk management functions in
each of our business units, providing senior management with a consolidated view
of AIG's major risk positions. Within each business unit, senior leaders and
executives approve targeted risk tolerances within the framework provided by
ERM. ERM supports our businesses and management by embedding risk management in
our key day-to-day business processes and in identifying, assessing,
quantifying, monitoring, reporting, and mitigating the risks taken by our
businesses and AIG overall. Nevertheless, our risk management efforts may not
always be successful and material adverse effects on our business, results of
operations, cash flows, liquidity or financial condition may occur.
AIG employs a Three Lines of Defense model. AIG's business leaders assume full
accountability for the risks and controls in their operating units, and ERM
performs a review, challenge and oversight function. The third line consists of
our Internal Audit Group that provides independent assurance for AIG's Board of
Directors.
Risk Governance Structure
Our risk governance structure fosters the development and maintenance of a risk
and control culture that encompasses all significant risk categories impacting
our lines of business and functions. Accountability for the implementation and
oversight of risk policies is aligned with individual corporate executives, with
the risk committees receiving regular reports regarding compliance with each
policy to support risk governance at our corporate level as well as in each
business unit. We review our governance and committee structure on a regular
basis and make changes as appropriate to continue to effectively manage and
govern both our risks and risk-taking activities.
Our Board of Directors oversees the management of risk through its Risk and
Capital Committee (RCC) and Audit Committee. These committees regularly interact
with other committees of the Board of Directors which are further described
below. Our Chief Risk Officer (CRO) reports to both the RCC and our Chairman and
Chief Executive Officer.
The Group Risk Committee (GRC): The GRC is the senior management group
responsible for assessing all significant risk issues on a global basis to
protect our financial strength and reputation. The GRC is chaired by our CRO.
Our CRO reports periodically on behalf of the GRC to both the RCC and the Audit
Committee of the Board of Directors. Our CRO is also a member of the Executive
Leadership Team providing ERM the opportunity to contribute to, review, monitor
and consider the impact of changes in strategy.
Management committees that support the GRC are described below. These committees
are comprised of senior executives and experienced business representatives from
a range of functions and business units throughout AIG and its subsidiaries.
These committees are charged with identifying, analyzing and reviewing specific
risk matters within their respective mandates. In addition, various working
groups are in place in support of the GRC to manage and monitor the various
risks across the organization.
Financial Risk Group (FRG): The FRG is responsible for the oversight of
financial risks taken by AIG and our subsidiaries. Its mandate includes
overseeing our aggregate credit, market, interest rate, capital, liquidity and
model risks, as well as asset-liability management, derivatives activity, and
foreign exchange transactions. It provides the primary corporate-level review
function for all proposed transactions and business practices that are
significant in size, complex in scope, or that present heightened legal,
reputational, accounting or regulatory risks. The FRG is chaired by our CRO.
Membership of the FRG also includes our CFO, Chief Investment Officer and
Treasurer.
Business Unit Risk Committees: Each of our major insurance businesses have
established a risk committee that serves as the senior management committee
responsible for risk oversight at the individual business unit level. The risk
committees are responsible for the identification, assessment and monitoring of
all sources of risk within their respective portfolios. Specific
responsibilities include setting risk tolerances or limits, reviewing the
capital allocation framework, considering insurance portfolio optimization,
decisions with material impact on the risk profile and providing oversight of
risk-adjusted metrics. In performing these responsibilities, the business unit
risk committees may leverage input provided by other business unit committees
and working groups.
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ITEM 7 | Enterprise Risk Management
In addition to the above, where needed and appropriate, there are risk
committees at the legal entity level that support the Business Unit Risk
Committees in executing their duties. These duties include ensuring policies are
adhered to and transactions are within the AIG risk appetite and have
appropriate operational controls or plans for establishing such controls within
a reasonable amount of time, as well as ensuring appropriate risk governance at
the legal entity level.
[[Image Removed: Picture 1]]
Risk Appetite, Limits, Identification and Measurement
Risk Appetite Framework
Our Risk Appetite Framework integrates stakeholder interests, strategic business goals and available financial resources. We balance these by seeking to take measured risks that are expected to generate repeatable, sustainable earnings and create long-term value for our shareholders. The framework includes our risk appetite statement approved by the Board of Directors and a set of supporting tools, including risk tolerances, risk limits and policies, which we use to manage our risk profile and financial resources. We articulate our aggregate risk-taking by setting risk tolerances and thresholds on capital and liquidity measures. These measures are set at the AIG Parent level as well as the legal entity level and cover consolidated and insurance company capital and liquidity ratios. We must comply with standards for capital adequacy and maintain sufficient liquidity to meet all our obligations as they come due in accordance with our capital management and liquidity management policies. Our risk tolerances take into consideration regulatory requirements, rating agency expectations, and business needs. The GRC routinely reviews the level of risk taken by the consolidated organization in relation to the established risk tolerances. A consolidated risk report is also presented periodically to the RCC by our CRO. 152 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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ITEM 7 | Enterprise Risk Management
Risk Limits
A key component of our Risk Appetite Framework is having a process in place that establishes and maintains appropriate tolerances and limits on the material risks identified for our core businesses and facilitates the monitoring and meeting of both internal and external stakeholder expectations. Framework objectives include:
?Establishing risk monitoring, providing early warning indicators, and ensuring timely oversight and enforceability of limits;
?Defining a consistent and transparent approach to limits governance; and
?Aligning our business activities with our risk appetite statement.
To support the monitoring and management of AIG's and its business units' material risks, ERM has an established limits framework that employs a three-tiered hierarchy:
?Board-level risk tolerances are AIG's aggregate consolidated capital and liquidity limits. They define the minimum level of consolidated capital and liquidity that we should maintain. These board-level risk tolerances are approved by the Board of Directors and monitored by the RCC.
?AIG management level limits are risk type specific limits at the AIG consolidated level. These limits are approved by our CRO with consultation from the GRC.
?Business unit and legal entity level limits are set to address key risks identified for the business unit and legal entities, protect capital and liquidity at legal entities and/or meet legal entity specific requirements of regulators and rating agencies. These limits are defined by the business unit and legal entity risk officers.
All limits are reviewed by the GRC or relevant business unit risk committees on a periodic basis and revisions, if applicable, are approved by those committees.
The business units are responsible for measuring and monitoring their risk exposures. ERM is responsible for monitoring compliance with limits and providing regular, timely reporting to our senior management and risk committees. Limit breaches are required to be reported in a timely manner and are documented and escalated in accordance with their level of severity or materiality.
Risk Identification and Measurement
We conduct risk identification through a number of processes at the business unit and corporate level focused on capturing our material risks. A key initiative is our integrated bottom-up risk identification and assessment process which is conducted down to the product-line level. In addition, we perform an annual top-down risk assessment to identify top risks and assign owners to ensure these risks are appropriately addressed and managed. These processes are used as a critical input to enhance and develop our analytics for measuring and assessing risks across the organization. We employ various approaches to measure, monitor and manage risk exposures, including the utilization of a variety of metrics and early warning indicators. We use a proprietary internal capital and stress testing framework to measure our quantifiable risks. The internal capital framework quantifies our aggregate economic risk at a given confidence interval, after taking into account diversification benefits between risk factors and business lines. We leverage the internal capital framework to help inform our consolidated risk consumption and profile as well as risk and capital allocation for our businesses. The stress testing framework assesses our aggregate exposure to our most significant financial and insurance risks, including the risks in each of our key insurance company subsidiaries in relation to its capital needs under stress, risks inherent in our non-insurance company subsidiaries, and risks to AIG consolidated capital. The framework measures risk over multiple time horizons and under different levels of stress, and includes multi-factor stresses as well as single factor sensitivities that are designed to reflect AIG's risk characteristics. We use this information to support the assessment of resources needed at the AIG Parent level to support our subsidiaries and capital resources required to maintain consolidated company target capitalization levels.
We evaluate and manage risk in material topics as shown below. These topics are discussed in further detail in the following pages: ?Credit Risk Management ?Liquidity Risk Management ?Insurance Risks ?Market Risk Management ?Operational Risk ?Other Business Risks
Management
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ITEM 7 | Enterprise Risk Management
Credit Risk Management
Overview
Credit risk is defined as the risk that our customers or counterparties are
unable or unwilling to repay their contractual obligations when they become due.
Credit risk may also result from a downgrade of a counterparty's credit ratings
or a widening of its credit spreads.
We devote considerable resources to managing our direct and indirect credit
exposures. These exposures may arise from, but are not limited to, fixed income
investments, equity securities, deposits, commercial paper investments, reverse
repurchase agreements and repurchase agreements, corporate and consumer loans,
leases, reinsurance and retrocessional insurance recoverables, counterparty risk
arising from derivatives activities, collateral extended to counterparties,
insurance risk cessions to third parties, financial guarantees, letters of
credit, and certain General Insurance businesses.
Governance
Our credit risks are managed by teams of credit professionals, subject to ERM oversight and various control processes. Their primary role is to ensure appropriate credit risk management in accordance with our credit policies and procedures relative to our credit risk parameters. ERM is primarily responsible for the development, implementation and maintenance of a risk management framework, which includes the following elements related to our credit risks:
?developing and implementing our company-wide credit policies and procedures;
?approving delegated credit authorities to our credit executives and qualified credit professionals;
?developing methodologies for quantification and assessment of credit risks, including the establishment and maintenance of our internal risk rating process;
?managing a system of credit and program limits, as well as the approval process for credit transactions, above limit exposures, and concentrations of risk that may exist or be incurred;
?evaluating, monitoring, reviewing and reporting of credit risks and concentrations regularly with senior management; and
?approving appropriate credit reserves, credit-related other-than-temporary impairments and corresponding methodologies for all credit portfolios.
We monitor and control our company-wide credit risk concentrations and attempt to avoid unwanted or excessive risk accumulations, whether funded or unfunded. To minimize the level of credit risk in some circumstances, we may require mitigants, such as third-party guarantees, reinsurance or collateral, including commercial bank-issued letters of credit and trust collateral accounts. We treat these guarantees, reinsurance recoverables, and letters of credit as credit exposure and include them in our risk concentration exposure data. We also closely monitor the quality of any trust collateral accounts.
For additional information on our credit concentrations and credit exposures see Investments - Credit Ratings - Available-for-Sale Investments.
Our credit risk management framework incorporates the following elements:
Risk Identification including the ongoing capture and monitoring of all
existing, contingent, potential and emerging credit risk
exposures, whether funded or unfunded
Risk Measurement comprising risk ratings, default probabilities, loss given
default and expected loss parameters, exposure calculations,
stress testing and other risk analytics
Risk Limits including, but not limited to, a system of single obligor or
risk group-based AIG-wide house limits and sub-limits for
corporates, financial institutions, sovereigns and
sub-sovereigns when appropriate and a defined process for
identifying, evaluating, documenting and approving, if
appropriate, breaches of and exceptions to such limits
Risk Delegations a comprehensive credit risk delegation framework to
authorized credit professionals throughout the company
Risk Evaluation, including the ongoing analysis and assessment of credit
Monitoring and risks, trending of those risks and reporting of other key
Reporting risk metrics and limits, as may be required
Credit Reserving including but not limited to development of a proper
framework, policies and procedures for establishing accurate
identification of (i) reserves for credit losses and (ii)
other-than-temporary impairments for securities portfolios
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ITEM 7 | Enterprise Risk Management
Market Risk Management
Overview
Market risk is defined as the risk of adverse impact due to systemic movements
in one or more of the following market risk drivers: equity and commodity
prices, residential and commercial real estate values, interest rates, credit
spreads, foreign exchange, inflation, and their respective levels of volatility.
We are engaged in a variety of insurance, investment and other financial
services businesses that expose us to market risk, directly and indirectly. We
are exposed to market risks primarily within our insurance and capital markets
activities, on both the asset and the liability sides of our balance sheet
through on- and off-balance sheet exposures. Within each business, the risk
officer is responsible for creating a framework for proper identification of
market risks, and ensuring that the risks are appropriately measured, monitored
and managed, and are in accordance with the risk governance framework
established by the CRO.
The scope and magnitude of our market risk exposures is managed under a robust
framework that contains defined risk limits and minimum standards for managing
market risk in a manner consistent with our risk appetite statement. Our market
risk management framework focuses on quantifying the financial repercussions of
changes in the above mentioned market risk drivers.
Many of our market risk exposures, including exposures to changes in levels of
interest rates and equity prices, are associated with the asset and liability
exposures of our Life and Retirement companies. These exposures are generally
long-term in nature. Examples of liability-related exposures include interest
rate sensitive surrenders in our fixed deferred annuity product portfolio. Also,
we have equity market risk sensitive surrenders in our variable annuity product
portfolio. These interactive asset-liability types of risk exposures are
regularly monitored in accordance with the risk governance framework noted
above.
Governance
Market risk is overseen at the corporate level within ERM through the CRO. The CRO is supported by a dedicated team of professionals within ERM. Market risk is managed by our finance, treasury and investment management corporate functions, collectively, and in partnership with ERM. The CRO is responsible for the development and maintenance of a risk management framework that includes the following key components:
?written policies that define the rules for our market risk-taking activities and provide clear guidance regarding their execution and management;
?a limit framework that aligns with our Board-approved risk appetite statement;
?independent measurement, monitoring and reporting for line of business, business unit and enterprise-wide market risks; and
?clearly defined authorities for all individuals and committee roles and responsibilities related to market risk management.
These components facilitate the CRO's identification, measurement, monitoring, reporting and management of our market risks.
Risk Identification
Market risk focuses on quantifying the financial repercussions of changes in
broad, external, predominantly market-observable variables. Financial
repercussions can include an adverse impact on results of operations, financial
condition, liquidity and capital of AIG.
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ITEM 7 | Enterprise Risk Management
Each of the following systemic risks is considered a market risk:
Equity prices We are exposed to changes in equity market prices affecting a
variety of instruments. Changes in equity prices can affect the
valuation of publicly traded equity shares, investments in
private equity, hedge funds, mutual funds, exchange-traded funds,
alternative risk premia investment strategies, and other
equity-linked capital market instruments as well as equity-linked
insurance products, including but not limited to index annuities,
variable annuities, indexed universal life insurance and variable
universal life insurance.
Residential and Our investment portfolios are exposed to the risk of changing
commercial real values in a variety of residential and commercial real estate
estate values investments. Changes in residential/commercial real estate prices
can affect the valuation of residential/commercial mortgages,
residential/commercial mortgage-backed securities and other
structured securities with underlying assets that include
residential/commercial mortgages, trusts that include
residential/commercial real estate and/or mortgages, residential
mortgage insurance and reinsurance contracts and commercial real
estate investments.Interest rates Interest rate risk can arise from a mismatch in the interest rate
exposure of assets versus liabilities. Lower interest rates
generally result in lower investment income and make some of our
product offerings less attractive to investors. Conversely,
higher interest rates are typically beneficial for the opposite
reasons. However, when rates rise quickly, there can be an
asymmetric GAAP accounting effect where the existing securities
lose market value, which is largely reported through Other
comprehensive income, and the offsetting decrease in the value of
certain liabilities may not be recognized. Changes in interest
rates can affect the valuation of fixed maturity securities,
financial liabilities, insurance contracts including but not
limited to universal life, fixed rate annuities, variable
annuities and derivative contracts. Additionally, for variable
annuity, index annuity, and equity indexed universal life
products, deviations in actual versus expected policyholder
behavior can be driven by fluctuations in various market
variables, including interest rates. Policies with guaranteed
living benefit options or riders are also subject to the risk of
actual benefit utilization being different than expected.Credit spreads Credit spreads measure an instrument's risk premium or yield
relative to that of a comparable duration, default-free
instrument. Changes in credit spreads can affect the valuation of
fixed maturity securities, including but not limited to corporate
bonds, asset backed securities, mortgage-backed securities,
AIG-issued debt obligations, credit derivatives, derivative
credit valuation adjustments and economic valuation of insurance
liabilities. Much like higher interest rates, wider credit
spreads paired with unchanged expectations about default losses
imply higher investment income in the long term. In the short
term, quickly rising spreads will cause a loss in the value of
existing fixed maturity securities, which is largely reported
through Other comprehensive income. A precipitous widening of
credit spreads may also signal a fundamental weakness in the
credit worthiness of bond obligors, potentially resulting in
default losses.
Foreign We are a globally diversified enterprise with income, assets and
exchange (FX) liabilities denominated in, and capital deployed in, a variety of
rates currencies. Changes in FX rates can affect the valuation of a
broad range of balance sheet and income statement items as well
as the settlement of cash flows exchanged in specific
transactions.
Commodity Changes in commodity prices (the value of commodities) can affect
prices the valuation of publicly-traded commodities, commodity indices,
derivatives on commodities and commodity indices, and other
commodity-linked investments and insurance contracts. We are
exposed to commodity prices primarily through their impact on the
prices and credit quality of commodity producers' debt and equity
securities in our investment portfolio.
Inflation Changes in inflation can affect the valuation of fixed maturity
securities, including AIG-issued debt obligations, derivatives
and other contracts explicitly linked to inflation indices, and
insurance contracts where the claims are linked to inflation
either explicitly, via indexing, or implicitly, through medical
costs or wage levels.
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ITEM 7 | Enterprise Risk Management
Risk Measurement
Our market risk measurement framework was developed with the main objective of
communicating the range and scale of our market risk exposures. At the firm-wide
level, market risk is measured in a manner that is consistent with AIG's risk
appetite statement. This is designed to ensure that we remain within our stated
risk tolerance levels and can determine how much additional market risk taking
capacity is available within our framework. The framework measures our overall
exposure to change in each of the systemic market risk factors on an economic
basis.
In addition, we monitor risks through multiple lenses that include economic, GAAP and statutory reporting frameworks at various levels of business consolidation. This process aims to establish a comprehensive coverage of potential implications from adverse market risk developments.
We use a number of approaches to measure our market risk exposure, including:
Examples include:
Sensitivity measures the impact from a •a one basis point increase in yield on
analysis unit change in a market fixed maturity securities,
risk input •a one basis point increase in credit
spreads of fixed maturity securities,
and
•a one percent increase in prices of
equity securities.
Scenario uses historical, •a 100 basis point parallel shift in the
analysis hypothetical, or yield curve, or
forward-looking •a 20 percent immediate and simultaneous
macroeconomic scenarios to decrease in world-wide equity markets.
assess and report exposures Scenarios may also utilize a stochastic
framework to arrive at a probability
distribution of losses.
Stress a special form of scenario •the stock market crash of October 1987
testing analysis in which the or the widening of yields or spreads of
scenarios are designed to RMBS or CMBS during 2008.
lead to a material adverse
outcome
is tailored to
single-factor exposure and
comprehensive stress
scenarios that cover
multiple risk factors.
Stress testing analysis
includes evaluation of
exposures to instantaneous
market shocks as well as to
adverse market developments
over forward time horizons
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ITEM 7 | Enterprise Risk Management
Market Risk Sensitivities
The following table provides estimates of sensitivity to changes in yield
curves, equity prices and foreign currency exchange rates on our financial
instruments and excludes approximately $178.1 billion and $174.2 billion as of
December 31, 2021 and December 31, 2020 respectively, of insurance liabilities.
AIG believes that the interest rate sensitivities of these insurance and other
liabilities serve as an offset to the net interest rate risk of the financial
assets presented in the table below. In addition, the table excludes $37.4
billion of interest rate sensitive assets and $1.8 billion of equity and
alternative investments supporting the Fortitude Re funds withheld arrangements
as the contractual returns related to the assets are transferred to Fortitude
Re, as well as $40.6 billion of related funds withheld payables.
Balance Sheet Exposure Economic Effect
December 31, December 31, December 31, December 31,
(dollars in millions) 2021 2020 2021 2020
100 bps parallel increase in all yield
Sensitivity factor curves
Interest rate sensitive
assets:
Fixed maturity securities $ 248,632 $ 239,694 $ (17,017) $ (15,325)
Mortgage and other loans
receivable(a) 40,085 38,490 (1,928) (1,973)
Derivatives:
Interest rate contracts 240 201 (1,702) (1,895)
Equity contracts 628 907 (228) (392)
Other contracts 439 (125) (2) 32
Total interest rate
sensitive assets $ 290,024 (b) $ 279,167 (b) $ (20,877) $ (19,553)
Interest rate sensitive
liabilities:
Policyholder contract
deposits:
Investment-type contracts(a) $ (130,643) $ (128,204) $ 10,375 $ 10,857
Variable annuity and other
embedded
derivatives (9,736) (9,797) 2,550 2,675
Long-term debt(a) (c) (22,686) (26,747) 2,183 2,568
Total interest rate
sensitive liabilities $ (163,065) $ (164,748) $ 15,108 $ 16,100
Sensitivity factor 20% decline in stock prices and
alternative investments
Derivatives:
Equity contracts(d) $ 628 $ 908 $ 542 $ 440
Equity and alternative
investments:
Real estate investments 2,526 7,572 (505) (1,514)
Private equity 7,533 6,294 (1,507) (1,259)
Hedge funds 1,812 2,110 (362) (422)
Common equity 728 1,042 (146) (208)
Other investments 1,328 912 (266) (182)
Total derivatives, equity
and alternative
investments $ 14,555 $ 18,838 $ (2,244) $ (3,145)
Policyholder contract
deposits:
Variable annuity and other
embedded derivatives(d) $ (9,736) $ (9,797) $ (269) $ (59)
Total liability $ (9,736) $ (9,797) $ (269) $ (59)
10% depreciation of all foreign
Sensitivity factor currency
exchange rates against the U.S.
dollar
Foreign currency-denominated
net
asset position:
Great Britain pound $ 1,046 $ 1,281 $ (105) $ (128)
Canada dollar 758 762 (76) (76)
South Korea won 367 349 (37) (35)
All other foreign currencies 1,486 1,669 (149) (167)
Total foreign
currency-denominated net
asset position(e) $ 3,657 $ 4,061 $ (367) $ (406)
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(a)The economic effect is the difference between the estimated fair value and
the effect of a 100 bps parallel increase in all yield curves on the estimated
fair value. The estimated fair values for Mortgage and other loans receivable,
Policyholder contract deposits (Investment-type contracts) and Long-term debt
were $45.7 billion, $143.1 billion and $25.7 billion at December 31, 2021,
respectively. The estimated fair values for Mortgage and other loans receivable,
Policyholder contract deposits (Investment-type contracts) and Long-term debt
were $45.1 billion, $144.6 billion and $31.2 billion at December 31, 2020,
respectively.
(b)At December 31, 2021, the analysis covered $290.0 billion of $331.5 billion
interest-rate sensitive assets. As indicated above, excluded were $33.7 billion
and $3.6 billion of fixed maturity securities and loans, respectively,
supporting the Fortitude Re funds withheld arrangements. In addition, $2.3
billion of loans and $2.0 billion of assets across various asset categories were
excluded due to modeling limitations. At December 31, 2020, the analysis covered
$279.2 billion of $324.0 billion interest-rate sensitive assets. As indicated
above, excluded were $36.2 billion and $3.6 billion of fixed maturity securities
and loans, respectively, supporting the Fortitude Re funds withheld
arrangements. In addition, $3.4 billion of loans and $1.6 billion of assets
across various asset categories were excluded due to modeling limitations.
(c)At December 31, 2021, the analysis excluded $0.4 billion of AIG Life
Holdings, Inc. (AIGLH) borrowings, $0.3 billion of Validus borrowings, $2
million of borrowings from Glatfelter Insurance Group (Glatfelter) and $0.3
billion of AIG Japan Holdings loans. At December 31, 2020, the analysis excluded
$0.6 billion of AIGLH borrowings, $0.3 billion of Validus borrowings, $4 million
of borrowings from Glatfelter and $0.4 billion of AIG Japan Holdings loans.
(d)The balance sheet exposures for equity contracts and variable annuity and
other embedded derivatives are also reflected under "Interest rate sensitive
liabilities" above, and are not additive.
(e)The majority of the foreign currency exposure is reported on a one quarter lag.
The sensitivity analysis is an estimate and should not be viewed as predictive of our future financial performance. We cannot ensure that actual financial impacts in any particular period will not exceed the amounts indicated above.
Interest rate sensitivity is defined as change in value with respect to a 100 basis point parallel shift up in the interest rate environment, calculated as: scenario value minus base value, where base value is the value under the yield curves as of the period end and scenario value is the value reflecting a 100 basis point parallel increase in all yield curves. We evaluate our interest rate risk without considering effects of correlation of changes in levels of interest rate with other key market risks or other assumptions used for calculating the values of our financial assets and liabilities. This scenario does not measure changes in values resulting from non-parallel shifts in the yield curves, which could produce different results. We evaluate our equity price risk without considering effects of correlation of changes in equity prices with other key market risks or other assumptions used for calculating the values of our financial assets and liabilities. The stress scenario does not reflect the impact of basis risk, such as projections about the future performance of the underlying contract holder funds and actual fund returns, which we use as a basis for developing our hedging strategy. Foreign currency-denominated net asset position reflects our aggregated non-U.S. dollar assets less our aggregated non-U.S. dollar liabilities on a GAAP basis, with certain adjustments. We use a bottom-up approach in managing our foreign currency exchange rate exposures with the objective of protecting statutory surplus at the regulated insurance entity level. At the AIG consolidated level, we monitor our foreign currency exposures against single currency and aggregate currency portfolio limits. For illustrative purposes, we modeled our sensitivities based on a 100 basis point parallel increase in yield curves, a 20 percent decline in equity prices and prices of alternative assets, and a 10 percent depreciation of all foreign currency exchange rates against the U.S. dollar.
Risk Monitoring and Limits
The risk monitoring responsibilities, owned by the business units, include ensuring compliance with market risk limits and escalation and remediation of limit breaches. Such activities must be reported to the ERM Market Risk team by the relevant business unit. This monitoring approach is aligned with our overall risk limits framework.
To control our exposure to market risk, we rely on a three-tiered hierarchy of limits that are closely monitored by ERM and reported to our CRO, senior management and risk committees.
For additional information on our three-tiered hierarchy of limits see Risk Appetite, Limits, Identification and Measurement - Risk Limits.
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ITEM 7 | Enterprise Risk Management
Liquidity Risk Management
Overview
Liquidity risk is defined as the risk that our financial condition will be
adversely affected by the inability or perceived inability to meet our
short-term cash, collateral or other financial obligations as they come due.
Failure to appropriately manage liquidity risk can result in insolvency, reduced
operating flexibility, increased costs, reputational harm and regulatory action.
AIG and its legal entities seek to maintain sufficient liquidity both during the
normal course of business and under defined liquidity stress scenarios to ensure
that sufficient cash will be available to meet the obligations as they come due.
AIG Parent liquidity risk tolerance levels are designed to allow us to meet our
financial obligations for a minimum of six months under a liquidity stress
scenario. We maintain liquidity limits and minimum coverage ratios designed to
ensure that funding needs are met under stress conditions. If we project that we
could breach these tolerances, we assess and determine appropriate liquidity
management actions. However, market or other conditions in effect at that time
may not permit us to achieve an increase in liquidity sources or a reduction in
liquidity requirements.
Governance
Liquidity risk is overseen at the corporate level within ERM. The CRO has
responsibility for the oversight of the Liquidity Risk Management Framework and
delegates the day-to-day implementation of this framework to the AIG Treasurer.
Our treasury function manages liquidity risk, subject to ERM oversight and
various control processes.
The Liquidity Risk Management Framework is guided by the liquidity risk tolerance as set forth in the Board-approved risk appetite statement. The principal objective of this framework is to establish minimum liquidity requirements that protect our long-term viability and ability to fund our ongoing business, and to meet short-term financial obligations in a timely manner in both normal and stressed conditions.
Our Liquidity Risk Management Framework includes liquidity and funding policies and monitoring tools to address AIG-specific, broader industry and market-related liquidity events.
Risk Identification
The following sources of liquidity and funding risks could impact our ability to meet short-term financial obligations as they come due.
Market/Monetization Risk Assets may not be readily transformed into cash due to
unfavorable market conditions. Market liquidity risk may limit
our ability to sell assets at reasonable values or necessary
volumes to meet liquidity needs. Unfavorable market conditions
could arise from credit deterioration, volatile interest rates,
shocks in commodity prices or inflation, foreign exchange risk,
equity volatility as well as adverse shocks in housing,
employment, trade or other underlying market factors.
Cash Flow Mismatch Risk Discrete and cumulative cash flow mismatches or gaps over
short-term horizons under both expected and adverse business
conditions may create future liquidity shortfalls.
Event Funding Risk Additional funding may be required as the result of a trigger
event. Event funding risk comes in many forms and may result from
a downgrade in credit ratings, a market event, or some other
event that creates a funding obligation or limits existing
funding options.
Financing Risk We may be unable to raise additional cash on a secured or
unsecured basis due to unfavorable market conditions,
AIG-specific issues, or any other issue that impedes access to
additional funding.
Risk Measurement
Comprehensive cash flow projections under normal conditions are the primary
component for identifying and measuring liquidity risk. We produce comprehensive
liquidity projections over varying time horizons that incorporate all relevant
liquidity sources and uses and include known and likely cash inflows and
outflows. In addition, we perform stress testing by identifying liquidity stress
scenarios and assessing the effects of these scenarios on our cash flow and
liquidity.
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We use a number of approaches to measure our liquidity risk exposure, including:
Minimum Minimum Liquidity Limits specify the amount of asset liquidity
Liquidity required to be maintained in order to meet obligations as they
Limits arise over a specified time horizon under stressed liquidity
conditions.
Coverage Coverage Ratios measure the adequacy of available liquidity
Ratios sources, including the ability to monetize assets to meet the
forecasted cash flows over a specified time horizon. The
portfolio of assets is selected based on our ability to convert
those assets into cash under the assumed stressed conditions and
within the specified time horizon.Cash Flow Cash Flow Forecasts measure the liquidity needed for a specific Forecasts legal entity over a specified time horizon. Stress Testing Asset liquidity and Coverage Ratios are re-measured under defined
liquidity stress scenarios that will impact net cash flows,
liquid assets and/or other funding sources.
Relevant liquidity reporting is produced and reported regularly to AIG Parent and business unit risk committees. The frequency, content, and nature of reporting will vary for each business unit and legal entity, based on its complexity, risk profile, activities and size.
Operational Risk Management
Overview
Operational risk is defined as the risk of loss, or other adverse consequences, resulting from inadequate or failed internal processes, people, systems, or from external events. Operational risk includes legal, regulatory, technology, compliance, third-party and business continuity risks, but excludes business and strategy risks. Operational risk is inherent in each of our business units and functions and can have many impacts, including but not limited to: unexpected economic losses or gains, reputational harm due to negative publicity, regulatory action from supervisory agencies and operational and business disruptions, and/or damage to customer relationships. Governance AIG and its consolidated subsidiaries establish and maintain operational risk and controls governance forums that include representatives from the relevant business units and functions to appropriately manage significant operational risk exposures. Operational risk is overseen at the corporate level within ERM through the Head of Governance and Operational Controls. The Head of Governance and Operational Controls is responsible for the development and maintenance of the operational risk framework that includes policies, standards and deployment of systems.
Risk Identification, Measurement and Monitoring
The Operational Risk Management (ORM) function within ERM oversees adherence to the operational risk policy and risk and control framework, which includes risk identification, assessment, measurement, management and monitoring of operational risk exposures. ORM supports the Head of Governance and Operational Controls and has responsibility to provide an aggregate view of our operational risk profile. In line with the Three Lines of Defense Model, the ORM program includes, but is not limited to, several key components outlined below: ?Risk Event Capture - enables every employee to identify, document, and escalate operational risk events, with a view to enhancing processes, promoting lessons learned and embedding a culture of risk management. ?Risk Assessments - allows for the assessment, measurement and management of the key operational risks within our business units and helps inform on the efficacy of our control environment.
?Key Risk Indicators - enhances the ongoing monitoring and mitigation of operational risks and facilitate risk reporting.
?Issues Management - enables a consistent tracking and remediation of issues across the firm, including policy and process exceptions, control deficiencies and findings from risk and control assessment activities.
?Scenario Analyses - executed by first- and second-line professionals to identify potential risks that could result in financial losses to the firm and support the prioritization of operational risk treatment.
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ORM, working together with other control and assurance functions (e.g.,
Compliance, Financial Controls Unit / Sarbanes Oxley, Enterprise Resiliency, and
Internal Audit) through the risk and control framework, provides an independent
view of operational risks for each business, and works with the business units,
corporate functions, and the first line Risk and Control Owners. The first line
responsibilities include coordinating identification, assessment, control and
mitigation of risks to the operating environment and promoting awareness to
facilitate implementation of the above programs. This includes coverage of
operational risks related to core insurance activities, corporate functions,
investing, model risk, technology, third-party providers, as well as compliance
and regulatory matters. Based on the results of the risk identification and
assessment efforts above, business leaders are accountable for tracking and
remediating identified issues in line with our risk-monitoring procedures.
Governance committees support these efforts and promote transparency enabling
improved management decision making.
The risk and control framework facilitates the identification and mitigation of
operational risk issues and is designed to:
?ensure first line accountability and ownership of risks and controls;
?promote role clarity among the business and risk and control functions;
?enhance transparency, risk management governance and culture;
?foster greater consistency in identifying, measuring and ranking material
risks;
?proactively address potential risk issues and assign clear ownership and
accountability for risk treatment; and
?manage the development of technology solutions that support the objectives
above.
Cybersecurity Risk
Cybersecurity risk is an important, constant, and evolving focus for AIG and the
insurance and financial services industries in general. The goal of unauthorized
parties, using a variety of attack methods, is to gain access to AIG's data and
systems to obtain confidential information, destroy data, disrupt or degrade
service, sabotage systems or cause other damage. AIG, like other global
companies, continues to witness the increased sophistication and activities of
unauthorized parties attempting cyber and other computer-related penetrations
such as "denial of service" attacks, phishing, untargeted but sophisticated and
automated attacks, and other disruptive software in an effort to compromise
systems, networks and obtain sensitive information. Cybersecurity risks may also
derive from unintentional human error or intentional malice on the part of AIG
employees or third parties who have authorized access to AIG's systems or
information.
ERM works closely with and supports the risk management practices of Information
Technology, the Information Security Office and the business units and functions
that form the lines of defense against the cybersecurity risks that we face.
This includes the risks that emerge as a result of the execution of our business
strategies and our corresponding exposure to new products, clients, service
providers, industry segments and regions. AIG seeks to mitigate these risks
through initiatives such as investments in technological infrastructure,
education and training for employees and vendors, and monitoring of industry
developments. As part of our overarching cybersecurity strategy, ERM monitors
and assesses the programs designed to remediate our exposures and enhance our
systems and applications security.
AIG's Board of Directors is regularly briefed by management on AIG's
cybersecurity matters, including threats, policies, practices and ongoing
efforts to improve security. As part of our disclosure controls and procedures,
the Cyber Incident Management team, a cross functional group, is responsible for
ensuring that the members of management responsible for disclosure controls are
informed in a timely manner of known cybersecurity risks and incidents that may
materially impact our operations so that timely notifications and public
disclosures can be made as appropriate. There is no guarantee that the measures
AIG takes and the resources AIG devotes to protect against cybersecurity risk
will provide absolute security or recoverability of AIG's systems given the
complexity and frequency of the risk which AIG may not always be able to
anticipate or adequately address. For additional information regarding the
privacy data protection and cybersecurity regulations to which we are subject,
see Part I, Item 1. Business - Regulation - U.S. Regulation - Privacy, Data
Protection and Cybersecurity and - International Regulation - Privacy, Data
Protection and Cybersecurity. For additional discussion of cybersecurity risks,
see Part I, Item 1A. Risk Factors - Business and Operations.
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ITEM 7 | Enterprise Risk Management
Insurance Risks
Overview
Insurance risk is defined as the risk of actual claims experience and/or
policyholder behavior being materially different than initially expected at the
inception of an insurance contract. Uncertainties related to insurance risk can
lead to deviations in magnitude and/or timing of prospective cash flows
associated with our liabilities compared to what we expected.
Except as described above, we manage our business risk oversight activities through our insurance operations. A primary goal in managing our insurance operations is to achieve an acceptable risk-adjusted return on equity. To achieve this goal, we must be disciplined in risk selection, premium adequacy, and appropriate terms and conditions to cover the risk accepted.
We operate our insurance businesses on a global basis, and we are exposed to a wide variety of risks with different time horizons. We manage these risks throughout the organization, both centrally and locally, through a number of processes and procedures, including, but not limited to:
?pricing and risk selection models including regular monitoring;
?pricing approval processes;
?pre-launch approval of product design, development and distribution;
?underwriting approval processes and authorities;
?modeling and reporting of aggregations and limit concentrations at multiple levels (policy, line of business, product group, country, individual/group, correlation and catastrophic risk events);
?risk transfer tools such as reinsurance, both internal and third-party;
?review and challenge of reserves to ensure comprehensive analysis with established escalation procedures to provide appropriate transparency in reserving decisions and judgments made in the establishment of reserves;
?management of relationship between assets and liabilities, including hedging;
?model risk management framework and validation processes;
?actuarial profitability and reserve reviews; and
?experience monitoring and assumption updates.
We closely manage insurance risk by monitoring and controlling the nature and geographic location of the risks in each underwritten line of business, concentrations in industries, the terms and conditions of the underwriting and the premiums we charge for taking on the risk. We analyze concentrations of risks using various modeling techniques, including both probability distributions (stochastic) and/or single-point estimates (deterministic) approaches.
Governance
Insurance risks are monitored at the business unit level and overseen by the business unit's chief risk officer. As part of our established governance practices, key decisions and considerations related to insurance risks can, and in certain instances, must be raised and deferred for discussion and consideration to the business unit's risk committees that are chaired by the business unit's chief risk officer. In addition, in some business units, pricing committees review insurance risk considerations associated with pricing of new insurance products. The insurance risk oversight framework includes the following key components:
?articulation of risk appetite by line of business that integrates strategy, financial objectives and capital resources;
?written policies that define the rules for our insurance risk-taking activities;
?a limit / threshold framework focused on key insurance risks that aligns with our Board-approved risk appetite statement;
?clearly defined authorities for all individuals and committee roles and responsibilities related to insurance risk management;
?identification of client segments that meet our selection criteria and a focus on distribution channels that target these customers; and
?underwriting and claims quality/compliance reviews.
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Risk Identification
?General Insurance companies - risks covered include property, casualty,
fidelity/surety, accident and health, aviation, mortgage insurance, professional
liability, cyber and management liability. We manage risks in the General
Insurance business through aggregations and limitations of concentrations at
multiple levels: policy, line of business, geography, industry and legal entity.
?Life and Retirement companies - risks include mortality and morbidity in the
individual and group life insurance and health coverage products, longevity risk
in the individual retirement, group retirement and institutional markets
products, and policyholder behavior across all product lines. We manage risks
through product design, sound medical and non-medical underwriting, reinsurance
and at times hedging instruments in the market.
We purchase reinsurance for our insurance and reinsurance operations.
Reinsurance facilitates insurance risk management (retention, volatility,
concentrations) and capital planning. We may purchase reinsurance on a pooled
basis. Pooling of our reinsurance risks enables us to purchase reinsurance more
efficiently at a consolidated level, manage global counterparty risk and
relationships and manage global catastrophe risks.
Risk Measurement, Monitoring and Limits
We use a number of approaches to measure our insurance risk exposure, including: Sensitivity analysis. Deterministic analyses are used to measure statistical variances from best estimate assumptions on important risk factors, as well as different distributions risk categories. Stochastic methods. Stochastic methods are used to measure and monitor risks including natural catastrophe, reserve and premium risk. We develop probabilistic estimates of risk based on our exposures, historical observed volatility or industry-recognized models in the case of catastrophe risk. In addition, stochastic methods are used to measure risks of impacts of policyholder behavior on values of options and guarantees offered across annuity and life insurance products. Scenario analysis. Scenario or deterministic analysis is used to measure and monitor risks such as terrorism and pandemic or to estimate losses due to man-made catastrophic scenarios. Experience studies. Ongoing assessment of mortality, longevity, morbidity and policyholder behavior experience relative to that assumed in pricing and valuation and that experienced in the general market.
Additionally, there are risk-specific assessment tools, both internal and third-party, in place to better manage the variety of insurance risks to which we are exposed.
We monitor concentrations of exposure through insurance limits and thresholds aggregated along dimensions such as geography, industry, or counterparty.
The risk monitoring responsibilities of the business units include ensuring compliance with insurance risk limits and escalation and remediation of limit breaches. Such activities are reported to management by all business units for informative decision-making on a regular basis. This monitoring approach is aligned with our overall risk limits framework. Risk limits have a consistent framework used across AIG, its business units, and legal entities.
For additional information on our three-tiered hierarchy of limits see Risk Appetite, Limits, Identification and Measurement - Risk Limits.
General Insurance Companies' Key Risks
We manage our risks through risk review and selection processes, exposure limitations, exclusions, deductibles, self-insured retentions, coverage limits, attachment points, and reinsurance. This management is supported by sound underwriting practices, pricing procedures and the use of actuarial analysis to help determine overall adequacy of provisions for insurance. Underwriting practices and pricing procedures incorporate historical experience, changes in underlying exposure, current regulation and judicial decisions as well as proposed or anticipated regulatory changes or societal trends. 164 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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For General Insurance companies, risks primarily include the following:
?Loss Reserves - The potential inadequacy of the liabilities we establish for unpaid losses and loss adjustment expenses is a key risk faced by the General Insurance companies. There is significant uncertainty in factors that may drive the ultimate development of losses compared to our estimates of losses and loss adjustment expenses. We manage this uncertainty through internal controls and oversight of the loss reserve setting process, as well as reviews by external experts. For further information see Critical Accounting Estimates - Loss Reserves. ?Underwriting - The potential inadequacy of premiums charged for future risk periods on risks underwritten in our portfolios can impact the General Insurance companies' ability to achieve an underwriting profit. We develop pricing based on our estimates of losses and expenses, but factors such as market pressures and the inherent uncertainty and complexity in estimating losses may result in premiums that are inadequate to generate underwriting profit. This may be driven by adverse economic conditions, unanticipated emergence of risks or increase in frequency of claims, or unexpected or increased costs or expenses. ?Catastrophe Exposure - Our business is exposed to various catastrophic events in which multiple losses can occur and affect multiple lines of business in any calendar year. Natural disasters, such as hurricanes, earthquakes and other catastrophes, have the potential to adversely affect our operating results. Other risks, such as man-made catastrophes or pandemic disease, could also adversely affect our business and operating results to the extent they are covered by our insurance products. Concentration of exposure in certain industries or geographies may cause us to suffer disproportionate losses. ?Single Risk Loss Exposure - Our business is exposed to loss events that have the potential to generate losses from a single insured client. Events such as fires or explosions can result in loss activity for our clients. The net risk to us is managed to acceptable limits established by the Chief Underwriting Officer through a combination of internal underwriting standards and external reinsurance. Furthermore, single risk loss exposure is managed and monitored on both a segregated and aggregated basis. ?Reinsurance - Since we use reinsurance to limit our losses, we are exposed to risks associated with reinsurance including the unrecoverability of expected payments from reinsurers due to either an inability or unwillingness to pay, contracts that do not respond properly to the event or actual reinsurance coverage that is different than anticipated. The inability or unwillingness to pay is considered credit risk and is monitored through our credit risk management framework.
Natural Catastrophe Risk
We manage catastrophe exposure with multiple approaches such as setting risk
limits based on aggregate Probable Maximum Loss (PML) modeling, monitoring
overall exposures and risk accumulations, modifying our gross underwriting
standards, and purchasing catastrophe reinsurance through both the traditional
reinsurance and capital markets in addition to other reinsurance protections.
We use third-party catastrophe risk models and other tools to evaluate and
simulate frequency and severity of catastrophic events and associated losses to
our portfolios of exposures. We apply adjustments to modeled losses to account
for loss adjustment expenses, model biases, data quality and non-modeled risks.
We perform post-catastrophe event studies to identify model inefficiencies,
underwriting gaps, and improvement opportunities. Lessons learned from
post-catastrophe event studies are incorporated into the modeling and
underwriting processes of risk pricing and selection. The majority of policies
exposed to catastrophic risks are one-year contracts that allow us to adjust our
underwriting guidelines, pricing and exposure accumulation in a relatively short
period.
We recognize that climate change has implications for insurance industry
exposure to natural catastrophe risk. With multiple levels of risk management
processes in place, we actively analyze the latest climate science and policies
to anticipate potential changes to our risk profile, pricing models and
strategic planning. For example, we continually consider changes in climate and
weather patterns as an integral part of the underwriting process. In addition,
we provide insurance products and services to help our clients be proactive
against the threat of climate change. Our internal product development,
underwriting, and modeling, will continue to adapt to and evolve with the
developing risk exposures attributed to climate change.
Our natural catastrophe exposure to primary modeled perils is principally driven
by the U.S. and secondarily Japan, though our overall exposure is diversified
across multiple countries and perils. We have exposures to additional perils
such as European windstorms and wildfire exposures across multiple countries.
Within the U.S., we have significant hurricane exposure in Florida, the Gulf of
Mexico, the Northeast U.S. and mid-Atlantic regions and significant earthquake
exposure in California and the Pacific Northwest regions. Earthquakes impacting
the Pacific Northwest region may result in a higher share of industry losses
than other regions primarily due to our relative share of exposure in these
regions. Additionally, we have significant gross wildfire exposures in
California.
The table below details our modeled estimates of PML, net of reinsurance, on an
annual aggregate basis. The 1-in-100 and 1-in-250 PMLs are the annual aggregate
probable maximum losses with probability of 1 percent and 0.4 percent in a year,
respectively. Estimates as of December 31, 2021 reflect our in-force portfolio
for exposures as of October 1, 2021 and all inuring reinsurance covers as of
December 31, 2021, except for the catastrophe reinsurance programs, which are as
of January 1, 2022.
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The following table presents an overview of annual aggregate modeled losses for
world-wide all perils and exposures arising from our largest primarily modeled
perils:
At December 31, 2021 Net of Net of Percent of Total
Reinsurance,
(in millions) Reinsurance After Tax(f) Shareholder Equity
Exposures:
World-wide all peril (1-in-250)(a) $ 4,197 $ 3,316 5.0 %
U.S. Hurricane (1-in-100)(b) 1,165 920 1.4
U.S. Earthquake (1-in-250)(c) 1,105 873
1.3
Japanese Typhoon (1-in-100)(d) 573 453
0.7
Japanese Earthquake (1-in-250)(e) 492 388
0.6
(a)The world-wide all peril loss estimate includes wildfire exposure.
(b)The U.S. hurricane loss estimate includes losses to Commercial and Personal Property from hurricane hazards of wind and storm surge.
(c)The U.S. earthquake loss estimates represent exposure to Commercial and Personal Property, Workers' Compensation (U.S.) and A&H business lines.
(d)Japan Typhoon loss estimate represents exposure to Commercial and Personal Property.
(e)Japan Earthquake loss estimate represents exposure to Commercial and Personal Property and A&H business lines.
(f)Taxed at the statutory tax rate of 21 percent for both the U.S. and Japanese modeled losses. The majority of Japan exposures are ceded to our U.S. Pool.
AIG, along with other property casualty insurance and reinsurance companies, uses industry-recognized catastrophe models and applies proprietary modeling processes and assumptions to arrive at loss estimates. The use of different methodologies and assumptions could materially change the projected losses. Since there is no industry standard for assumptions and preparation of insured data for use in these models, our modeled losses may not be comparable to estimates made by other companies. Also, the modeled results are based on the assumption that all reinsurers fulfill their obligations to us under the terms of the reinsurance arrangements. However, reinsurance recoverables may not be fully collectible. Therefore, these estimates are inherently uncertain and may not accurately reflect our net exposure, inclusive of credit risk, to these events. Our 2022 property catastrophe reinsurance program is a worldwide program providing both aggregate and per occurrence protection, with differing per occurrence and aggregate attachment points for North America, Japan, and Rest of World (for these purposes, Hawaii is included in Rest of World and Mexico and the Caribbean are included in North America). The program includes $1.0 billion of per occurrence limit that is shared across the regional towers, as well as $1.1 billion of aggregate limit that is also shared across the regional towers.
Our coverage for North America includes:
?$1.275 billion of per occurrence protection, the first $275 million of which is partially placed, covering our U.S and Caribbean personal lines business, with varying attachment points in specific geographies and for specific perils ranging from $50 million to $150 million ?Per occurrence protection of up to $1.75 billion (inclusive of the shared per occurrence limit) excess of $250 million, primarily covering commercial exposures but also personal lines exposures not covered by the above personal lines protection
?Aggregate protection utilizing the $1.1 billion of shared limit attaching excess $400 million with per occurrence deductibles of $25 million or $50 million, depending on region/event, primarily covering commercial exposures
Our coverage for exposure outside North America includes:
?Japan per occurrence coverage of $1.45 billion (inclusive of the shared per occurrence limit) excess of $200 million and includes both personal and commercial exposure
?Rest of World per occurrence coverage of $1.3 billion (inclusive of the shared per occurrence limit) excess of $100 million, including both personal and commercial exposure
?Rest of World and Japan $1.1 billion of aggregate shared limit attaching excess of $100 million and $200 million, respectively, with per occurrence deductibles of $20 million Although the $1.1 billion of aggregate shared limit coverage for North America, Japan and Rest of World has varying retentions per region, the maximum aggregate retention globally, after the impact of the per occurrence deductibles, is $600 million for 2022. We have also purchased property per risk covers that provide protection against large losses globally, which include those emanating from non-critical catastrophe events (all events except for named windstorm and earthquake) globally as well as critical catastrophe events (named windstorm and earthquake) outside North America. 166 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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For Validus Re, our catastrophe protection comes from a variety of reinsurance
protections but is largely providing $400 million of per occurrence limit in
excess of a $150 million retention for US windstorm and earthquake, $150 million
of per occurrence limit in excess of a $200 million retention for Europe, Japan
and other US perils and in excess of $125 million retention for rest of the
world perils. Further to the occurrence protection, there is $175 million of
limit in excess of a $350 million retention (subject to per event caps) placed
on a worldwide aggregate excess of loss cover and $400 million of limit excess
$550 million on an aggregate index basis via the renewed Tailwind Re Cat Bond
which covers U.S., Puerto Rico and Canada named storm losses.
Actual results in any period are likely to vary, perhaps materially, from the
modeled scenarios. The occurrence of one or more severe events could have a
material adverse effect on our financial condition, results of operations and
liquidity.
For additional information see also Part 1, Item 1A. Risk Factors - Reserves and Exposures.
Terrorism Risk We actively monitor terrorism risk and manage exposures to losses from terrorist attacks. We have set risk limits based on modeled losses from certain terrorism attack scenarios. Terrorism risks are modeled using a third-party vendor model for various terrorism attack modes and scenarios. Adjustments are made to account for vendor model gaps and the nature of the General Insurance companies' exposures. Examples of modeled scenarios are conventional bombs of different sizes, anthrax attacks and nuclear attacks. Our largest terrorism concentrations are in New York City, and estimated losses are largely driven by the Property and Workers' Compensation lines of business. At our largest exposure location, modeled losses for a five-ton bomb attack net of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) and reinsurance recoveries are estimated to be $1.3 billion based on the exposures as of October 1, 2021. Our exposure to terrorism risk in the U.S. is mitigated by TRIPRA in addition to limited private reinsurance protections. TRIPRA covers certified terrorist attacks within the United States or U.S. missions and against certain U.S. carriers or vessels and excludes certain lines of business as specified by applicable law. In 2021, TRIPRA covers 80 percent of insured losses above a deductible. The current estimate of our deductible is approximately $1.7 billion for 2021. We offer terrorism coverage in many other countries through various insurance products and participate in country terrorism pools when applicable. International terrorism exposure is estimated using scenario-based modeling and exposure concentration is monitored routinely. Targeted reinsurance purchases are made for some lines of business to cover potential losses due to terrorist attacks. We also rely on the government-sponsored and government-arranged terrorism reinsurance programs, including pools, in force in applicable non-U.S. jurisdictions.
Life and Retirement Companies' Key Risks
We manage risk through product design, experience monitoring, pricing and underwriting discipline, risk limits and thresholds, reinsurance and active monitoring and management of the alignment between risk and cash flow profiles of assets and liabilities, and hedging instruments.
For Life and Retirement companies, risks include the following:
?Longevity risk - represents the risk of an increase in liabilities associated
with an insurance product, e.g. an annuity policy or a payout benefit as a
result of actual mortality experience being lower than the expected mortality
experience. This risk could arise from medical advancement and longer-term
societal health changes. This risk exists in a number of our product lines but
is most significant for our annuity products.
?Morbidity risk - represents the risk arising from actual morbidity (e.g.
illness, disability or disease) incidence rate being higher than expected or the
length of the claims extending longer than expected resulting in a higher
overall benefit payout. This risk could arise from longer-term medical advances
in detection and treatment for various diseases and medical conditions resulting
in higher claim amounts. This risk exists in a number of our product lines such
as individual and group accident and health and long-term care businesses which
for the most part are in run-off, and ceded to Fortitude Re.
?Mortality (including pandemic) risk - represents the risk of unexpected loss
arising from current actual mortality experience being higher than expected
mortality experience. This risk could arise from pandemics or other events,
including longer-term societal changes that cause higher-than-expected current
mortality. This risk exists in a number of our product lines, but is most
significant for our life insurance products.
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?Policyholder behavior risk (including full and partial surrender/lapses) -
represents the risk that actual policyholder behavior differs from expected
behavior in a manner that has an adverse effect on our operating results. There
are many related assumptions made when products are sold, including how long the
contracts will persist and other assumptions which impact the expected
utilization of contract benefits, options and guarantees. Actual experience can
vary significantly from these assumptions. This risk is impacted by a number of
factors including changes in personal policyholder situations and market
conditions, especially changes in the levels of yields, equity prices, tax law,
regulations, competitive landscape and policyholder preferences. This risk
exists in many of our product lines, but most notably within the annuity and
individual life portfolio of business.
The emergence of significant adverse experience compared to the experience we
expected and priced for could require an adjustment to benefit reserves and/or
DAC, which could have a material adverse effect on our consolidated financial
results of operations for a particular period.
For additional information on the impact of actual and expected experience on
DAC and benefit reserves see Critical Accounting Estimates - Future Policy
Benefit Reserves for Life and Accident and Health Insurance Contracts and
Critical Accounting Estimates - Liabilities for Guaranteed Benefit Features of
Variable Annuity, Fixed Annuity and Fixed Index Annuity Products. For additional
information on business risks see Part I, Item 1A. Risk Factors - Business and
Operations.
Variable Annuity, Index Annuity and Universal Life Risk Management and Hedging Programs
Our Individual and Group Retirement businesses offer variable and index annuity products with guaranteed living benefit (GLB) riders that guarantee a certain level of lifetime benefits. Under GAAP rules, variable and certain index annuity GLBs are accounted for as embedded derivatives measured at fair value, with changes in the fair value recorded in Other realized gains (losses). GLB features subject the Life and Retirement companies to market risk, including exposure to changes in levels of interest rates, equity prices, credit spreads and market volatility. Product design is the first step in managing our exposure to these market risks. Risk mitigation features of our variable annuity product designs include GLB rider fees indexed to a broad equity market volatility index, which can provide additional fee assessments in periods of increased market volatility, required minimum allocations to fixed accounts to reduce overall equity exposure, and for some of the variable annuity products, the utilization of volatility control funds, which have an ability to adjust equity exposures in these funds in response to changes in market volatility, even under sudden or extreme market movements. We utilize asset liability management and hedging programs to manage economic exposure to market risks that are not fully mitigated through product designs. Our hedging program is designed to offset certain changes in the economic value of embedded derivatives associated with our variable annuity, index annuity and index universal life liabilities, within established thresholds. The hedging program is designed to provide additional protection against large and combined movements in levels of interest rates, equity prices, credit spreads and market volatility under multiple scenarios. Our hedging program utilizes an economic hedge target, which represents our estimate of the underlying economic risks in the embedded derivatives. For example, for variable annuity GLBs, the hedge targets are calculated as a difference between present value of the future expected benefit payments for the GLB and the present value of future GLB rider fees, with present values determined over numerous equally weighted stochastic scenarios. This stochastic projection method uses best estimate assumptions for policyholder behavior (including mortality, lapses, withdrawals and benefit utilization) in conjunction with market scenarios calibrated to observable equity and interest rate option prices. Policyholder behaviors are regularly evaluated to compare current assumptions to actual experience and, if appropriate, changes are made to the policyholder behavior assumptions. The risk of changes in policyholder behavior is not explicitly hedged, and such differences between expected and actual policyholder behaviors will result in hedge ineffectiveness. Due to differences between the calculation of the value of the economic hedge target and the U.S. GAAP valuation of the embedded derivative, which include differences in the treatment of rider fees and exclusion of certain risk margins and other differences in discount rates, we expect relative movements in the economic hedge target and the U.S. GAAP embedded derivative valuation will vary over time with changes in levels of equity markets, interest rates, credit spreads and volatility. For information on the impact on our consolidated pre-tax income from the change in fair value of the embedded derivatives and the hedging portfolio, as well as additional discussion of differences between the economic hedge target and the valuation of the embedded derivatives see Insurance Reserves - Life and Annuity Future Policy Benefits, Policyholder Contract Deposits and DAC - Variable Annuity Guaranteed Benefits and Hedging Results. 168 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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In designing the hedging portfolio for our variable annuity hedging program, we
make assumptions that are used in projections of future performance of the
underlying mutual funds elected by the variable annuity policyholders. We use
these assumptions to project future policy level account value changes. We map
the mutual funds to a set of publicly traded indices that we believe best
represent the liability to be hedged. Basis risk exists due to the variance
between funds returns projected under these assumptions and actual fund returns,
which may result in variances between changes in the value of the hedging
portfolio and changes in the economic value of the hedge liability target. Net
hedge results and the associated cost of hedging are also impacted by
differences between realized volatility and implied volatility.
Our hedging programs associated with index annuity and index universal life
products, are designed to manage market risk associated with the index crediting
strategies offered on these product platforms. These hedging programs are
designed to offset the economic risk arising in conjunction with index returns,
associated with the crediting strategies that will be occurring during the
current crediting rate reset period. Similarly, as with the variable annuities,
there are differences between the calculation of the value of the economic
liability hedge target and the U.S. GAAP valuation of the index annuity and
index universal life embedded derivatives, which can lead to variances in their
relative movements.
To manage the capital market exposures embedded within the economic liability
hedge targets, we identify and hedge market sensitivities to changes in equity
markets, interest rates, volatility and for variable annuities, credit spreads.
Each hedge program purchases derivative instruments or securities having
sensitivities that offset corresponding sensitivities in the associated economic
hedge targets, within internally defined threshold limits. Since the relative
movements of the hedging portfolio and the economic hedge target vary over time
or with market changes, the net exposure can be outside the threshold limits. As
such, periodic adjustments are made to the hedging portfolio in order to return
the net exposure to within the threshold limits.
Our hedging programs utilize various derivative instruments, including but not
limited to equity options, futures contracts, interest rate swaps and swaptions,
as well as other hedging instruments. In addition, within the variable annuities
hedging program, we purchase certain fixed income securities classified as
available for sale. To minimize counterparty credit risk, the majority of the
derivative instruments utilized within the hedging programs are cleared through
global exchanges. Over the counter derivatives utilized within the hedging
programs are subject to two-way collateralization, managed under a net zero
collateral threshold.
The hedging programs are monitored on a daily basis to ensure that the economic
liability hedge targets and the associated derivative portfolios stay within the
threshold limits, pursuant to the approved hedging strategies. In addition,
monthly stress tests are performed to determine the program's effectiveness
relative to the applicable limits, under an array of combined severe market
stresses in equity prices, interest rates, volatility and credit spreads.
Finally, hedging strategies are reviewed regularly to gauge their effectiveness
in managing our market exposures in the context of our overall risk appetite.
Reinsurance Activities
Reinsurance is used primarily to manage overall capital adequacy and mitigate the insurance loss (Life and Non-Life) exposure related to certain events, such as natural and man-made catastrophes, death events, or single policy level events. Our subsidiaries operate worldwide primarily by underwriting and accepting risks for their direct account on a gross basis and reinsuring a portion of the exposure on either an individual risk or an aggregate basis to the extent those risks exceed the desired retention level. In addition, as a condition of certain direct underwriting transactions, we may be required by clients, agents or regulation to cede all or a portion of risks to specified reinsurance entities, such as captives, other insurers, local reinsurers and compulsory pools. Reinsurance markets include: ?Traditional local and global reinsurance markets including those in the United States, Bermuda, London and Europe, accessed directly and through reinsurance intermediaries;
?Capital markets through insurance-linked securities and collateralized reinsurance transactions, such as catastrophe bonds, sidecars and similar vehicles; and
?Other insurers that engage in both direct and assumed reinsurance.
The form of reinsurance we may choose from time to time will generally depend on whether we are seeking: ?proportional reinsurance, whereby we cede a specified percentage of premiums and losses to reinsurers;
?non-proportional or excess of loss reinsurance, whereby we cede all or a specified portion of losses in excess of a specified amount on a per risk, per occurrence (including catastrophe reinsurance) or aggregate basis; or
?facultative contracts that reinsure individual policies.
We continually evaluate the relative attractiveness of different forms of reinsurance contracts and different markets that may be used to achieve our risk and profitability objectives.
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Reinsurance contracts do not relieve our subsidiaries from their direct obligations to insureds. However, an effective reinsurance program substantially mitigates our exposure to potentially significant losses.
In certain markets, we are required to participate on a proportional basis in reinsurance pools based on our relative share of direct writings in those markets. Such mandatory reinsurance generally covers higher-risk consumer exposures such as assigned-risk automobile and earthquake, as well as certain commercial exposures such as workers' compensation.
Reinsurance Recoverable
AIG's reinsurance recoverable assets are comprised of:
?Paid losses recoverable - balances due from reinsurers for losses and loss adjustment expenses paid by our subsidiaries and billed, but not yet collected.
?Ceded loss reserves - ultimate ceded reserves for losses and loss adjustment expenses, including reserves for claims reported but not yet paid and estimates for IBNR.
?Ceded reserves for unearned premiums.
?Life and Annuity reinsurance recoverables (ceded policy and claim reserves and policyholder contract deposits).
At December 31, 2021, total reinsurance recoverable assets were $74.3 billion. These assets include general reinsurance paid losses recoverable of $3.3 billion, ceded loss reserves of $35.3 billion including reserves for IBNR claims, and ceded reserves for unearned premiums of $4.3 billion, as well as life reinsurance recoverable of $31.4 billion. The methods used to estimate IBNR and to establish the resulting ultimate losses involve projecting the frequency and severity of losses over multiple years. These methods are continually reviewed and updated by management. Any adjustments are reflected in income. We believe that the amount recorded for ceded loss reserves at December 31, 2021 reflects a reasonable estimate of the ultimate losses recoverable. Actual losses may, however, differ from the reserves currently ceded. The Reinsurance Credit Department (RCD) conducts periodic detailed assessments of the financial strength and condition of current and potential reinsurers, both foreign and domestic. The RCD monitors both the financial condition of reinsurers as well as the total reinsurance recoverable ceded to reinsurers, and sets limits with regard to the amount and type of exposure we are willing to take with reinsurers. As part of these assessments, we attempt to identify whether a reinsurer is appropriately licensed, assess its financial capacity and liquidity, and evaluate the local economic and financial environment in which a foreign reinsurer operates. The RCD reviews the nature of the risks ceded and the need for measures, including collateral to mitigate credit risk. For example, in our treaty reinsurance contracts, we frequently include provisions that require a reinsurer to post collateral or use other measures to reduce exposure when a referenced event occurs. Furthermore, we limit our unsecured exposure to reinsurers through the use of credit triggers such as insurer financial strength rating downgrades, declines in regulatory capital, or relevant RBC ratios fall below certain levels. We also set maximum limits for reinsurance recoverable exposure, which in some cases is the recoverable amount plus an estimate of the maximum potential exposure from unexpected events for a reinsurer. In addition, credit executives within ERM review reinsurer exposures and credit limits and approve reinsurer credit limits above specified levels. Finally, even where we conclude that uncollateralized credit risk is acceptable, we require collateral from active reinsurance counterparties where it is necessary for our subsidiaries to recognize the reinsurance recoverable assets for statutory accounting purposes. At December 31, 2021, we held $77.5 billion of collateral, in the form of funds withheld, securities in reinsurance trust accounts and/or irrevocable letters of credit, in support of reinsurance recoverable assets from unaffiliated reinsurers.
The following table presents information for each reinsurer representing in excess of five percent of our total reinsurance recoverable assets:
At December 31, 2021 A.M. Gross Percent of Uncollateralized
S&P Best Reinsurance Reinsurance Collateral Reinsurance
(in millions) Rating(a) Rating(a) Assets Assets(b) Held(c) Assets
Reinsurer:
Fortitude Re NR A $ 34,228 46.1 % $ 34,228 $ -
Berkshire Hathaway Group of
Companies AA+ A++ $ 13,051 (d) 17.6 % $ 12,827 $ 224
Swiss Reinsurance Group of
Companies AA- A+ $ 4,229 5.7 % $ 1,397 $ 2,832
(a)The financial strength ratings reflect the ratings of the various reinsurance subsidiaries of the companies listed as of January 27, 2022.
(b)Total reinsurance assets include both Property Casualty and Life and Retirement reinsurance recoverable.
(c)Excludes collateral held in excess of recoverable balances.
(d)Includes $11.9 billion recoverable under the 2011 retroactive asbestos reinsurance transaction and the 2017 adverse development reinsurance agreement. 170 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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At December 31, 2021, we had no significant reinsurance recoverable due from any
individual reinsurer that was financially troubled. Reduced profitability
associated with lower interest rates, market volatility and catastrophe losses
(including COVID-19), could potentially result in reduced capacity or rating
downgrades for some reinsurers. The RCD, in conjunction with the credit
executives within ERM, reviews these developments, monitors compliance with
credit triggers that may require the reinsurer to post collateral, and seeks to
use other appropriate means to mitigate any material risks arising from these
developments.
For additional information on reinsurance recoverable see Critical Accounting Estimates - Reinsurance Assets.
Other BUSINESS RiskS
Derivative Transactions
We utilize derivatives principally to enable us to hedge exposure associated with changes in levels of interest rates, currencies, credit, commodities, equity prices and other risks. Credit risk associated with derivative counterparties exists for a derivative contract when that contract has a positive fair value to us. The maximum potential exposure will increase or decrease during the life of the derivative commitments as a function of maturity and market conditions. All derivative transactions must be transacted within counterparty limits that have been approved by ERM. We evaluate counterparty credit quality via an internal analysis that is consistent with the AIG Credit Policy. We utilize various credit enhancements, including letters of credit, guarantees, collateral, credit triggers, credit derivatives, margin agreements and subordination to reduce the credit risk related to outstanding financial derivative transactions. We require credit enhancements in connection with specific transactions based on, among other things, the creditworthiness of the counterparties, and transaction size and maturity. Furthermore, we enter into certain agreements that have the benefit of set-off and close-out netting provisions, such as ISDA Master Agreements. These provisions provide that, in the case of an early termination of a transaction, we can set off receivables from a counterparty against payables to the same counterparty arising out of all covered transactions. As a result, where a legally enforceable netting agreement exists, the fair value of the transaction with the counterparty represents the net sum of estimated fair values. The fair value of our interest rate, currency, credit, commodity and equity swaps, options, swaptions, and forward commitments, futures, and forward contracts reported as a component of Other assets, was approximately $0.8 billion at both December 31, 2021 and December 31, 2020. Where applicable, these amounts have been determined in accordance with the respective master netting agreements.
The following table presents the fair value of our derivatives portfolios in asset positions by internal counterparty credit rating:
At December 31, (in millions) 2021 2020 Rating: AAA $ 41 $ 8 AA 201 12 A 107 130 BBB 473 601 Below investment grade* 21 23 Total $ 843 $ 774
*Below investment grade includes not rated.
For additional information related to derivative transactions see Note 10 to the Consolidated Financial Statements.
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Glossary
Glossary
Accident year The annual calendar accounting period in which loss events occurred, regardless of when the losses are actually reported, booked or paid.
Accident year combined ratio, as adjusted (Accident year combined ratio, ex-CAT) The combined ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting. Accident year loss ratio, as adjusted (Accident year loss ratio, ex-CAT) The loss ratio excluding catastrophe losses and related reinstatement premiums, prior year development, net of premium adjustments, and the impact of reserve discounting. Acquisition ratio Acquisition costs divided by net premiums earned. Acquisition costs are those costs incurred to acquire new and renewal insurance contracts and also include the amortization of VOBA and DAC. Acquisition costs vary with sales and include, but are not limited to, commissions, premium taxes, direct marketing costs and certain costs of personnel engaged in sales support activities such as underwriting.
Additional premium represents a premium on an insurance policy over and above the initial premium imposed at the beginning of the policy. An additional premium may be assessed if the insured's risk is found to have increased significantly.
Adjusted revenues exclude Net realized 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.
Assets under administration include assets under management and Retail Mutual Funds and Group Retirement mutual fund assets that we sell or administer.
Assets under management include assets in the general and separate accounts of our subsidiaries that support liabilities and surplus related to our life and annuity insurance products and the notional value of stable value wrap contracts.
Attritional losses are losses recorded in the current accident year, which are not catastrophe losses.
Base spread Net investment income excluding income from alternative investments and other enhancements, less interest credited excluding amortization of deferred sales inducements.
Base yield Net investment income excluding income from alternative investments and other enhancements, as a percentage of average base invested asset portfolio, which excludes alternative investments, other bond securities and certain other investments for which the fair value option has been elected. Book value per common share, excluding accumulated other comprehensive income (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 a non-GAAP measure and is used to show the amount of our net worth on a per-common share basis. 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. Casualty insurance Insurance that is primarily associated with the losses caused by injuries to third persons, i.e., not the insured, and the legal liability imposed on the insured as a result.
Combined ratio Sum of the loss ratio and the acquisition and general operating expense ratios.
CSA Credit Support Annex A legal document generally associated with an ISDA Master Agreement that provides for collateral postings which could vary depending on ratings and threshold levels.
Credit Valuation Adjustment (CVA)/Non-Performance Risk Adjustment (NPA) The CVA/NPA adjusts the valuation of derivatives to account for nonperformance risk of our counterparty with respect to all net derivative assets positions. Also, the CVA/NPA reflects the fair value movement in AIGFP's asset portfolio that is attributable to credit movements only, without the impact of other market factors such as interest rates and foreign exchange rates. Finally, the CVA/NPA also accounts for our own credit risk in the fair value measurement of all derivative net liability positions and liabilities where AIG has elected the fair value option, when appropriate. DAC Deferred Policy Acquisition Costs Deferred costs that are incremental and directly related to the successful acquisition of new business or renewal of existing business. 172 AIG | 2021 Form 10-K --------------------------------------------------------------------------------
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Glossary
DAC Related to Unrealized Appreciation (Depreciation) of Investments An
adjustment to DAC and Reserves for investment-oriented products, equal to the
change in DAC and unearned revenue amortization that would have been recorded if
fixed maturity securities available for sale at fair value had been sold at
their stated aggregate fair value and the proceeds reinvested at current yields.
An adjustment to benefit reserves for investment-oriented products is also
recognized to reflect the application of the benefit ratio to the accumulated
assessments that would have been recorded if fixed maturity securities available
for sale at fair value had been sold at their stated aggregate fair value and
the proceeds reinvested at current yields.
For long-duration traditional products, significant unrealized appreciation of
investments in a sustained low interest rate environment may cause additional
future policy benefit liabilities to be recorded.
Deferred gain on retroactive reinsurance Retroactive reinsurance is a
reinsurance contract in which an assuming entity agrees to reimburse a ceding
entity for liabilities incurred as a result of past insurable events. If the
amount of premium paid by the ceding reinsurer is less than the related ceded
loss reserves, the resulting gain is deferred and amortized over the settlement
period of the reserves. Any related development on the ceded loss reserves
recoverable under the contract would increase the deferred gain if unfavorable,
or decrease the deferred gain if favorable.
DSI Deferred Sales Inducements Represents enhanced crediting rates or bonus payments to contract holders on certain annuity and investment contract products that meet the criteria to be deferred and amortized over the life of the contract.
Expense ratio Sum of acquisition expenses and general operating expenses, divided by net premiums earned.
General operating expense ratio General operating expenses divided by net premiums earned. General operating expenses are those costs that are generally attributed to the support infrastructure of the organization and include but are not limited to personnel costs, projects and bad debt expenses. General operating expenses exclude losses and loss adjustment expenses incurred, acquisition expenses, and investment expenses.
GIC/GIA Guaranteed Investment Contract/Guaranteed Investment Agreement A contract whereby the seller provides a guaranteed repayment of principal and a fixed or floating interest rate for a predetermined period of time.
IBNR Incurred But Not Reported Estimates of claims that have been incurred but not reported to us.
ISDA Master Agreement An agreement between two counterparties, which may have multiple derivative transactions with each other governed by such agreement, that generally provides for the net settlement of all or a specified group of these derivative transactions, as well as pledged collateral, through a single payment, in a single currency, in the event of a default on, or affecting any, one derivative transaction or a termination event affecting all, or a specified group of, derivative transactions.
LAE Loss Adjustment Expenses The expenses directly attributed to settling and paying claims of insureds and include, but are not limited to, legal fees, adjuster's fees and the portion of general expenses allocated to claim settlement costs.
Loan-to-value ratio Principal amount of loan amount divided by appraised value of collateral securing the loan.
Loss ratio Losses and loss adjustment expenses incurred divided by net premiums earned.
Loss reserve development The increase or decrease in incurred losses and loss adjustment expenses related to prior years as a result of the re-estimation of loss reserves at successive valuation dates for a given group of claims. Loss reserves Liability for unpaid losses and loss adjustment expenses. The estimated ultimate cost of settling claims relating to insured events that have occurred on or before the balance sheet date, whether or not reported to the insurer at that date.
Master netting agreement An agreement between two counterparties who have multiple derivative contracts with each other that provides for the net settlement of all contracts covered by such agreement, as well as pledged collateral, through a single payment, in a single currency, in the event of default on or upon termination of any one such contract.
Natural catastrophe losses are generally weather or seismic events having a net impact on AIG in excess of $10 million each and man-made catastrophe losses, such as terrorism and civil disorders that exceed the $10 million threshold. Net premiums written represent the sales of an insurer, adjusted for reinsurance premiums assumed and ceded, during a given period. Net premiums earned are the revenue of an insurer for covering risk during a given period. Net premiums written are a measure of performance for a sales period, while net premiums earned are a measure of performance for a coverage period.
Noncontrolling interests The portion of equity ownership in a consolidated subsidiary not attributable to the controlling parent company.
Policy fees An amount added to a policy premium, or deducted from a policy cash
value or contract holder account, to reflect the cost of issuing a policy,
establishing the required records, sending premium notices and other related
expenses.
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Glossary
Pool A reinsurance arrangement whereby all of the underwriting results of the
pool members are combined and then shared by each member in accordance with its
pool participation percentage.
Premiums and deposits - Life and Retirement includes direct and assumed amounts
received and earned on traditional life insurance policies, group benefit
policies and life-contingent payout annuities, as well as deposits received on
universal life, investment-type annuity contracts, FHLB funding agreements and
mutual funds.
Prior year development See Loss reserve development.
RBC Risk-Based Capital A formula designed to measure the adequacy of an insurer's statutory surplus compared to the risks inherent in its business.
Reinstatement premiums Additional premiums payable to reinsurers or receivable from insurers to restore coverage limits that have been reduced or exhausted as a result of reinsured losses under certain excess of loss reinsurance contracts. Reinsurance The practice whereby one insurer, the reinsurer, in consideration of a premium paid to that insurer, agrees to indemnify another insurer, the ceding company, for part or all of the liability of the ceding company under one or more policies or contracts of insurance which it has issued.
Retroactive reinsurance See Deferred gain on retroactive reinsurance.
Return on common equity - Adjusted after-tax income excluding AOCI adjusted for the cumulative unrealized gains and losses related to Fortitude Re funds withheld assets and DTA (Adjusted return on common equity) is a non-GAAP measure and is used to show the rate of return on common shareholders' equity. Adjusted return on common equity is derived by dividing actual or annualized adjusted after-tax income attributable to AIG common shareholders by average Adjusted Common Shareholders' Equity.
Return premium represents amounts given back to the insured in the case of a cancellation, an adjustment to the rate or an overpayment of an advance premium.
Solvency II Legislation in the European Union which reforms the insurance industry's solvency framework, including minimum capital and solvency requirements, governance requirements, risk management and public reporting standards. The Solvency II Directive (2009/138/EEC) was adopted on November 25, 2009 and became effective on January 1, 2016.
Subrogation The amount of recovery for claims we have paid our policyholders, generally from a negligent third party or such party's insurer.
Surrender charge A charge levied against an investor for the early withdrawal of funds from a life insurance or annuity contract, or for the cancellation of the agreement.
Surrender rate represents annualized surrenders and withdrawals as a percentage of average reserves and Group Retirement mutual fund assets under administration.
Unearned premium reserve Liabilities established by insurers and reinsurers to reflect unearned premiums, which are usually refundable to policyholders if an insurance or reinsurance contract is canceled prior to expiration of the contract term.
VOBA Value of Business Acquired Present value of projected future gross profits from in-force policies of acquired businesses.
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Acronyms
Acronyms
A&H Accident and Health Insurance GMWB Guaranteed Minimum Withdrawal
Benefits
ABS Asset-Backed Securities ISDA International Swaps and
Derivatives Association, Inc.
APTI Adjusted pre-tax income Moody's Moody's Investors' Service Inc.
AUM Assets Under Management NAIC National Association of Insurance
CommissionersCDO Collateralized Debt Obligations NM Not Meaningful CDS Credit Default Swap
ORR Obligor Risk Ratings
CMA Capital Maintenance Agreement OTC Over-the-Counter
CMBS Commercial Mortgage-Backed OTTI Other-Than-Temporary Impairment
Securities
EGPs Estimated Gross Profits RMBS Residential Mortgage-Backed
Securities
FASB Financial Accounting Standards S&P Standard & Poor's Financial Board
Services LLC
FRBNY Federal Reserve Bank of New York SEC Securities and Exchange Commission
GAAP Accounting Principles Generally URR Unearned Revenue Reserve
Accepted in the United
States of America VIE Variable Interest Entity
GMDB Guaranteed Minimum Death Benefits
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ITEM 7A | Quantitative and Qualitative Disclosures about Market Risk
ITEM 7A | Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is set forth in the Enterprise Risk Management section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.
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Part II
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