For surrender rates, a key judgment involves the correlation between expected increases/decreases in interest rates and increases/decreases in surrender rates. To support this judgment, we compare crediting rates on our products to expected rates on competing products under different interest rate scenarios.
whether the balance is in dispute or subject to legal collection;
For an additional discussion of the Tax Act see Note 23 to the Consolidated Financial Statements.
higher investment returns in our alternative investments portfolio due to robust equity market returns in 2019, income from an initial public offering of a holding in the private equity portfolio, and an increase in income from fixed maturity securities for which the fair value option was elected. This compares to lower returns in the prior year as a result of an increase in interest rates and widening credit spreads that occurred, lower hedge fund performance, as well as negative performance of our fair value option equity securities portfolio;
lower losses incurred from General Insurance operations driven by significantly lower catastrophe losses and lower unfavorable prior year loss reserve development, partially offset by higher severe losses; and
over capacity in certain lines of business that creates downward market pressure on pricing;
favorable prior year loss reserve development in 2019 compared to unfavorable prior year loss reserve development in 2018;
lower investment returns on alternative investments, primarily driven by less robust private equity and hedge fund performance compared to 2017, and a decline in income from securities for which the fair value option was elected as well as lower interest and dividends due to lower invested assets resulting from the first quarter 2017 funding of the adverse development reinsurance agreement with NICO;
lower accident year loss ratio, as adjusted, primarily driven by a change in business mix including the Validus and Glatfelter acquisitions, improved new business and renewal terms, reduced net severity of loss events and changes in 2019 reinsurance programs which have reduced volatility;
higher net investment income driven by prior year weaker market performance of equity securities for which the fair value option was elected as well as higher income from fixed income securities;
For Individual Retirement, premiums primarily represent amounts received on life-contingent payout annuities. Premiums increased in 2019 compared to the prior year. Premiums decreased in 2018 compared to 2017, primarily due to increased market rates competition.
lower Legacy General Insurance earnings compared to 2017 due to lower net investment income, Japanese catastrophe losses in 2018 and a change in premium earning patterns on certain environmental business in 2018; and
While invested assets backing reserves of the General Insurance companies are primarily invested in conventional liquid fixed maturity securities, we have continued to allocate to asset classes that offer higher yields through structural and liquidity premiums, particularly in the domestic operations. In addition, we continue to invest in both fixed rate and floating rate asset-backed investments to manage our exposure to potential changes in interest rates and inflation. We seek to diversify the portfolio across asset classes, sectors, and issuers to mitigate idiosyncratic portfolio risks.
In addition, the Life and Retirement companies seek to enhance surplus portfolio returns through investments in a diversified portfolio of alternative investments. Although these alternative investments are subject to periodic earnings fluctuations, they have historically achieved yields in excess of the fixed maturity portfolio yields.
while NAIC Designations of ‘3’ through ‘6’ generally include fixed maturity securities referred to as below investment grade. The NAIC has adopted revised rating methodologies for certain structured securities, including non-agency RMBS and CMBS, which are intended to enable a more precise assessment of the value of such structured securities and increase the accuracy in assessing expected losses to better determine the appropriate capital requirement for such structured securities. These methodologies result in an improved NAIC Designation for such securities compared to the rating typically assigned by the three major rating agencies. The following tables summarize the ratings distribution of AIG subsidiaries fixed maturity security portfolio by NAIC Designation, and the distribution by composite AIG credit rating, which is generally based on ratings of the three major rating agencies.
The following table presents the fixed maturity security portfolio categorized by composite AIG credit rating, at fair value:
*At both December 31, 2019 and December 31, 2018, approximately 89 percent of these investments were rated investment grade.
Unfavorable development on European Casualty & Financial Lines, notably Commercial Auto, Employers Liability, Directors & Officers, and Financial Institutions business.
During 2019, AIG Parent received $3.8 billion in dividends from subsidiaries. Of this amount, $2.2 billion consisted of dividends in the form of cash and fixed maturity securities from our General Insurance companies and $1.6 billion consisted of dividends and loan repayments in the form of cash from our Life and Retirement companies.
AIG Parent also received a net amount of $1.2 billion in tax sharing payments in the form of cash and fixed maturity securities from our insurance businesses in 2019, including $134 million of such payments in the fourth quarter of 2019. The tax sharing payments may be subject to further adjustment in future periods.
In March 2019, we issued 20,000 shares of Series A Preferred Stock, with a par value of $5.00 per share and a liquidation preference of $25,000 per share, for net proceeds of approximately $485 million.
In February 2019, AIG Parent made a capital contribution of $300 million to our General Insurance companies.
(e)Excludes commitments with respect to pension plans. The annual pension contribution for 2020 is expected to be approximately $65 million for U.S. and non-U.S. plans.
(c)Fitch ratings may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
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.
including the ongoing capture and monitoring of all existing, contingent, potential and emerging credit risk exposures, whether funded or unfunded
The sensitivity factors utilized for 2019 and presented above were selected based on historical data from 1999 to 2019, as follows (see the table below):
Key Risk Indicators - enhances the ongoing monitoring and mitigation of operational risks and facilitate risk reporting.
Insurance risks are monitored at the business unit level and overseen by the business unit risk officer. As part of our established governance practices, key decisions and considerations related to insurance risks can be raised and deferred for discussion and consideration to business unit risk committees that are chaired by the business unit’s chief risk officer. In addition, in some business units, pricing committees review insurance risk considerations associated with pricing of new insurance products. The insurance risk oversight framework includes the following key components:
(c)The U.S. earthquake loss estimates represent exposure to Commercial and Personal Property, Workers’ Compensation (U.S.) and A&H business lines.
For Validus Reinsurance Ltd., our catastrophe protection comes from a variety of reinsurance protections but is largely providing $400 million of limit excess $300 million of retention from world-wide exposure via an aggregate excess of loss cover with an additional $450 million of limit excess $700 million via the Tailwind Re Cat Bond for U.S., Puerto Rico and Canada named storm losses.
The fair value of our interest rate, currency, credit, commodity and equity swaps, options, swaptions, and forward commitments, futures, and forward contracts reported as a component of Other assets, was approximately $0.8 billion at December 31, 2019 and $0.9 billion at December 31, 2018. Where applicable, these amounts have been determined in accordance with the respective master netting agreements.
The principal considerations for our determination that performing procedures relating to the recoverability of the net U.S. federal deferred tax asset is a critical audit matter are (i) there was significant judgment by management when developing their estimate of the recoverability, which led to a high degree of auditor subjectivity and judgment in performing the audit procedures relating to the forecasts of future income for each of the businesses, assumptions about future macroeconomic and company specific conditions and events, tax attribute carryforward periods, and tax planning strategies, (ii) there was significant audit effort and judgment in evaluating the audit evidence related to the recoverability of the net U.S. federal deferred tax asset, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained.
impairment charges, including other-than-temporary impairments on available for sale securities, impairments on other invested assets, including investments in life settlements, allowances for loan losses, and goodwill impairment;
Non-redeemable noncontrolling interest is the portion of equity (net assets) and net income (loss) in a subsidiary not attributable, directly or indirectly, to AIG.
Requires the review and if necessary update of future policy benefit assumptions at least annually for traditional and limited pay long duration contracts, with the recognition and separate presentation of any resulting re-measurement gain or loss (except for discount rate changes as noted below) in the income statement.
International - consists of regional insurance businesses in Japan, the United Kingdom, Europe, Asia Pacific, Latin America and Caribbean, Middle East and Africa, and China. This also includes the results of Talbot Holdings, Ltd. as of its acquisition date.
Interest expense attributable to AIG long-term debt as well as debt associated with consolidated investment entities.
(b)Excludes investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent), which totaled $5.5 billion and $5.0 billion as of December 31, 2019 and December 31, 2018, respectively.
The following table presents the difference between fair values and the aggregate contractual principal amounts of long-term debt for which the fair value option was elected:
During the year ended December 31, 2019, loans with a carrying value of $86 million were modified in TDRs. Loans that had been modified in TDRs during the year ended December 31, 2018 have been fully paid off.
(f)Freestanding derivatives only, excludes embedded derivatives. Derivative instrument assets and liabilities are recorded in Other Assets and Liabilities, respectively. Fair value of assets related to bifurcated embedded derivatives was zero at both December 31, 2019 and December 31, 2018. Fair value of liabilities related to bifurcated embedded derivatives was $6.9 billion and $4.1 billion, respectively, at December 31, 2019 and December 31, 2018. A bifurcated embedded derivative is generally presented with the host contract in the Consolidated Balance Sheets. Embedded derivatives are primarily related to guarantee features in variable annuity products, which include equity and interest rate components.
Collateral posted by us to third parties for derivative transactions was $2.2 billion and $1.7 billion at December 31, 2019 and 2018, respectively. In the case of collateral posted under derivative transactions that are not subject to clearing, this collateral can generally be repledged or resold by the counterparties. Collateral provided to us from third parties for derivative transactions was $2.2 billion and $2.1 billion at December 31, 2019 and 2018, respectively. In the case of collateral provided to us under derivative transactions that are not subject to clearing, we generally can repledge or resell collateral.
We use foreign currency denominated debt and cross-currency swaps as hedging instruments in net investment hedge relationships to mitigate the foreign exchange risk associated with our non-U.S. dollar functional currency foreign subsidiaries. For net investment hedge relationships where issued debt is used as a hedging instrument, we assess the hedge effectiveness and measure the amount of ineffectiveness based on changes in spot rates. For net investment hedge relationships that use derivatives as hedging instruments, we assess hedge effectiveness and measure hedge ineffectiveness using changes in forward rates. For the years ended December 31, 2019, 2018 and 2017, we recognized gains (losses) of $116 million, $34 million and $(106) million, respectively, included in Change in foreign currency translation adjustment in Other comprehensive income related to the net investment hedge relationships.
(a)Includes goodwill of $2.0 billion, $492 million and $46 million relating to the acquisitions of Validus, Glatfelter and Ellipse, respectively.
Loss reserves represent the accumulation of estimates of unpaid claims, including estimates for IBNR claims, less applicable discount. We regularly review and update the methods used to determine loss reserve estimates. Any adjustments resulting from this review are reflected currently in pre-tax income. Because these estimates are subject to the outcome of future events, changes in estimates are common given that loss trends vary and time is often required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development.
(d) Includes benefit (charge) from change in discount on retroactive insurance in the amount of $469 million, $(180) million and $(1.5) billion for the periods ended December 31, 2019, 2018 and 2017, respectively.
Unfavorable development in Primary General Liability where we reacted to adverse frequency and severity trends especially in Construction Wrap business in recent accident years.
Favorable development on Europe Property and Special Risks, Europe and Japan Personal Insurance and Other product lines.
Unfavorable development in U.S. Financial Lines, primarily from Directors & Officers (D&O) and Employment Practices Liability (EPLI) policies covering Corporate and National Insureds as well as Private and Not-for-Profit insureds. This development was predominantly in accident years 2014-2017 and resulted largely from increases in severity associated with an increase in frequency of class action lawsuits from those years.
third-party claims reviews that are periodically performed for key classes of claims such as toxic tort, environmental and other complex casualty claims;
The following tables present undiscounted, incurred and paid losses and allocated loss adjustment expenses by accident year, on a net basis after reinsurance, with a separate presentation of the Adverse Development Reinsurance Agreement excluding the related amortization of the deferred gain:
During 2017, we recognized $31 million of favorable prior year development in U.S. workers’ compensation business, particularly guaranteed cost business in the states of California and New York. Actual loss emergence during the year, particularly for guaranteed cost business in these two states, was significantly less than expected on a reported loss basis. We did recognize some offsetting unfavorable development in our DBA business that covers government contractors in U.S. and non-U.S. military installations, as well as from a Pennsylvania Supreme Court decision that overturned a ruling that provided limitations on payments for certain permanent injuries (the Protz decision).
Liabilities for losses and loss adjustment expenses and prior year loss
U.S. Personal Insurance consists of accident and health and personal lines. Accident and health products include voluntary and sponsor-paid personal accident and supplemental health products for individuals, employees, associations and other organizations as well as a broad range of travel insurance products and services for leisure and business travelers. Personal lines include automobile and homeowners’ insurance, extended warranty, and consumer specialty products, such as identity theft and credit card protection. Personal lines also provides insurance for high net worth individuals offered through AIG Private Client Group, including auto, homeowners, umbrella, yacht, fine art and collections insurance. Personal lines are generally short-tail in nature.
the long latency period between asbestos exposure and disease manifestation, and pollution events occurring undetected over many years, leading to the potential for involvement of multiple policy periods for individual claims;
Certain asbestos claims are discounted when allowed by the regulator and when payments are fixed and determinable, based on the investment yields of the companies and the payout pattern for the claims.
Future policy benefits primarily include reserves for traditional life and annuity payout contracts, which represent an estimate of the present value of future benefits less the present value of future net premiums. Included in Future policy benefits are liabilities for annuities issued in structured settlement arrangements whereby a claimant has agreed to settle a general insurance claim in exchange for fixed payments over a fixed determinable period of time with a life contingency feature. In addition, reserves for contracts in loss recognition are adjusted to reflect the effect of unrealized gains on fixed maturity securities available for sale and prior to 2018, equity securities at fair value, with related changes recognized through Other comprehensive income.
The following summarizes GMDB liability related to variable annuity contracts, excluding assumed reinsurance:
On July 11, 2013, the AIGLH junior subordinated debentures were distributed to holders of the capital securities, the capital securities were cancelled and the trusts were dissolved. At December 31, 2019, the junior subordinated debentures outstanding consisted of $113 million of 8.5 percent junior subordinated debentures due July 2030, $211 million of 8.125 percent junior subordinated debentures due March 2046 and $37 million of 7.57 percent junior subordinated debentures due December 2045, each guaranteed by AIG Parent.
Overview. In the normal course of business, AIG and our subsidiaries are subject to regulatory and government investigations and actions, and litigation and other forms of dispute resolution in a large number of proceedings pending in various domestic and foreign jurisdictions. Certain of these matters involve potentially significant risk of loss due to potential for significant jury awards and settlements, punitive damages or other penalties. Many of these matters are also highly complex and may seek recovery on behalf of a class or similarly large number of plaintiffs. It is therefore inherently difficult to predict the size or scope of potential future losses arising from these matters. In our insurance and reinsurance operations, litigation and arbitration concerning the scope of coverage under insurance and reinsurance contracts, and litigation and arbitration in which our subsidiaries defend or indemnify their insureds under insurance contracts, are generally considered in the establishment of our loss reserves. Separate and apart from the foregoing matters involving insurance and reinsurance coverage, AIG, our subsidiaries and their respective officers and directors are subject to a variety of additional types of legal proceedings brought by holders of AIG securities, customers, employees and others, alleging, among other things, breach of contractual or fiduciary duties, bad faith, indemnification and violations of federal and state statutes and regulations. With respect to these other categories of matters not arising out of claims for insurance or reinsurance coverage, we establish reserves for loss contingencies when it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated. In many instances, we are unable to determine whether a loss is probable or to reasonably estimate the amount of such a loss and, therefore, the potential future losses arising from legal proceedings may exceed the amount of liabilities that we have recorded in our financial statements covering these matters. While such potential future charges could be material, based on information currently known to management, management does not believe, other than as may be discussed below, that any such charges are likely to have a material adverse effect on our financial position or results of operation.
Additionally, from time to time, various regulatory and governmental agencies review the transactions and practices of AIG and our subsidiaries in connection with industry-wide and other inquiries into, among other matters, the business practices of current and former operating insurance subsidiaries. Such investigations, inquiries or examinations could develop into administrative, civil or criminal proceedings or enforcement actions, in which remedies could include fines, penalties, restitution or alterations in our business practices, and could result in additional expenses, limitations on certain business activities and reputational damage. For example, among other matters, we are currently responding to governmental investigations and examinations pertaining to certain sales and compensation practices and payments and related disclosures in connection with financial planning services and the sale and distribution of related products, including 403(b) and similar retirement plans, by the Individual and Group Retirement business segments. We have cooperated, and will continue to cooperate, in producing documents and other information with respect to these matters.
We are party to pending tax litigation before the Southern District of New York. For additional information see Note 23 to the Consolidated Financial Statements.
Rent expense was $232 million, $283 million and $269 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The following table presents declaration date, record date, payment date and dividends paid per common share on AIG Common Stock:
(c)Compensation increases are no longer applicable as the plan is frozen effective January 1, 2016.
(c)Includes investments in U.S. and non-U.S. government issued bonds, U.S. government agency or sponsored agency bonds, and investment grade corporate bonds.
the carryforward period for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and