The projected benefit cash flows under the U.S. AIG Retirement Plan were discounted using the spot rates derived from the Mercer U.S. Pension Discount Yield Curve at December 31, 2019 and 2018, which resulted in a single discount rate that would produce the same liability at the respective measurement dates. The discount rates were 3.16 percent at December 31, 2019 and 4.22 percent at December 31, 2018. The methodology was consistently applied for the respective years in determining the discount rates for the other U.S. pension plans.
The projected benefit obligation for AIG’s Japan pension plans represents approximately 53 percent and 52 percent of the total projected benefit obligations for our non-U.S. pension plans at December 31, 2019 and 2018, respectively. The weighted average discount rate of 0.42 percent and 0.72 percent at December 31, 2019 and 2018, respectively, was selected by reference to the Mercer Yield Curve for Japan.
The assets of the qualified plan are monitored by the AIG U.S. Investment Committee and actively managed by the investment managers, which involves allocating the plan’s assets among approved asset classes within ranges as permitted by the strategic allocation. The long-term strategic asset allocation historically has been reviewed and revised approximately every three years. The investment strategy is focused on de-risking the Plan via regular monitoring through liability driven investing and the glide path approach, where the glide path defines the target allocation for the “Return-Seeking” portion of the portfolio (i.e., growth assets) based on the funded ratio and level of interest rates. Under this approach, the allocation to growth assets is reduced and the allocation to liability-hedging assets is increased as the Plan’s funded ratio increases in accordance with the defined glide path.
The expected weighted average long-term rate of return for the plan was 6.20 percent and 6.75 percent for 2019 and 2018, respectively. The expected weighted average rate of return is an aggregation of expected returns within each asset class category, weighted for the investment mix of the assets. The combination of the expected asset return and any contributions made by us are expected to maintain the plan’s ability to meet all required benefit obligations. The expected asset return for each asset class was developed based on an approach that considers key fundamental drivers of the asset class returns in addition to historical returns, current market conditions, asset volatility and the expectations for future market returns.
The following table presents information about our plan assets and indicates the level of the fair value measurement based on the observability of the inputs used. The inputs and methodology used in determining the fair value of these assets are consistent with those used to measure our assets as discussed in Note 6 herein.
(g)Comprised of private capital financing including private debt and private equity securities.
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. Based on our investment strategy, we had no significant concentrations of risks at December 31, 2019.
Our annual pension contribution in 2020 is expected to be approximately $65 million for our U.S. and non-U.S. pension plans. This estimate is subject to change, since contribution decisions are affected by various factors including our liquidity, market performance and management’s discretion.
We sponsor several defined contribution plans for U.S. employees that provide for pre-tax salary reduction contributions by employees. The most significant plan is the AIG Incentive Savings Plan, for which the matching contribution is 100 percent of the first six percent of a participant’s contributions, subject to the IRS-imposed limitations. Effective January 1, 2016, participants in the AIG Incentive Savings Plan receive an additional fully vested, non-elective, non-discretionary contribution equal to three percent of the participant’s annual base compensation for the plan year, paid each pay period regardless of whether the participant currently contributes to the plan, and subject to the IRS-imposed limitations. Our pre-tax expenses associated with these plans were $195 million, $210 million and $209 million in 2019, 2018 and 2017, respectively.
The Tax Act includes provisions for Global Intangible Low-Taxed Income (GILTI) under which taxes are imposed on the excess of a deemed return on tangible assets of certain foreign subsidiaries and for Base Erosion and Anti-Abuse Tax (BEAT) under which taxes are imposed on certain base eroding payments to affiliated foreign companies. While the U.S. tax authorities issued formal guidance, including recently issued proposed and final regulations for BEAT and other provisions of the Tax Act, there are still certain aspects of the Tax Act that remain unclear and subject to substantial uncertainties. Additional guidance is expected in future periods. Such guidance may result in changes to the interpretations and assumptions we made and actions we may take, which may impact amounts recorded with respect to international provisions of the Tax Act, possibly materially. Consistent with accounting guidance, we treat BEAT as a period tax charge in the period the tax is incurred and have made an accounting policy election to treat GILTI taxes in a similar manner.
In February 2018, the FASB issued an accounting standard that allows the optional reclassification of stranded tax effects within Accumulated Other Comprehensive Income (AOCI) that arise due to the enactment of the Tax Act to retained earnings. We elected to early adopt the standard for the three-month period ended March 31, 2018. As a result of adopting this standard, we reclassified $248 million from AOCI to retained earnings. The amount reclassified includes stranded effects related to the change in the U.S. federal corporate income tax rate on the gross temporary differences and related valuation allowances.
We use an item-by-item approach to release the stranded or disproportionate income tax effects in AOCI related to our available-for-sale securities. Under this approach, a portion of the disproportionate tax effects is assigned to each individual security lot at the date the amount becomes lodged. When the individual securities are sold, mature, or are otherwise impaired on an other-than-temporary basis, the assigned portion of the disproportionate tax effect is reclassified from AOCI to income from continuing operations.
As a result of the Tax Act, the majority of accumulated foreign earnings that were previously untaxed were subject to a one-time deemed repatriation tax. Going forward, certain foreign earnings of our foreign affiliates will be exempt from U.S. tax upon repatriation. Notwithstanding the changes, U.S. tax on foreign exchange gain or loss and certain non-U.S. withholding taxes will continue to be applicable upon future repatriations of foreign earnings.
For the year ended December 31, 2019, we consider our foreign earnings with respect to certain operations in Canada, South Africa, the Far East, Latin America, Bermuda as well as the European, Asia Pacific and Middle East regions to be indefinitely reinvested. These earnings relate to ongoing operations and have been reinvested in active business operations. While, following the enactment of the Tax Act, distributions from foreign affiliates are, generally, not subject to U.S. income tax, such distributions may be subject to non-U.S. withholding taxes. A deferred tax liability of approximately $110 million related to such withholding taxes has not been recorded for those foreign subsidiaries whose earnings are considered to be indefinitely reinvested. Additionally, as of December 31, 2019, we do not project any significant potential U.S. tax with respect to foreign currency gains or losses accumulated on previously taxed unremitted foreign earnings and therefore no deferred tax has been recorded. Deferred taxes, if necessary, have been provided on earnings of non-U.S. affiliates whose earnings are not indefinitely reinvested.
The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December 31, 2019.
the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;
For the year ended December 31, 2019, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, resulting in a deferred tax liability related to net unrealized tax capital gains. As of December 31, 2019, based on all available evidence, we concluded that no valuation allowance is required. For the year ended December 31, 2019, we released $290 million of valuation allowance associated with the unrealized tax losses in the U.S. Life Insurance Companies’ available for sale securities portfolio, all of which was allocated to other comprehensive income. We released the full amount of valuation allowance previously recorded during the three-month period ended March 31, 2019 and no additional activity was recorded for the remainder of 2019.
In January 2018, the parties reached non-binding agreements in principle on issues presented in the dispute and are currently reviewing the computations reflecting the settlement terms. The resolution is not final and is subject to various reviews. In 2019, we agreed with the IRS to execute an agreement for the tax years at issue in which AIG waives restrictions on the assessment of additional tax related to the settlement of the underlying issues in those tax years. The litigation has been stayed pending the outcome of the review process. We can provide no assurance regarding the outcome of any such litigation or whether binding compromised settlements with the parties will ultimately be reached. We currently believe that we have adequate reserves for the potential liabilities that may result from these matters.
At December 31, 2019, 2018 and 2017, our unrecognized tax benefits related to tax positions that, if recognized, would not affect the effective tax rate because they relate to such factors as the timing, rather than the permissibility, of the deduction were $43 million, $38 million and $28 million, respectively. Accordingly, at December 31, 2019, 2018 and 2017, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $4.7 billion, $4.7 billion and $4.7 billion, respectively.
(a)At December 31, 2019, includes restricted cash of $102 million and $86 million for American International Group, Inc. (as Guarantor) and Other Subsidiaries, respectively. At December 31, 2018, includes restricted cash of $124 million and $18 million for American International Group, Inc. (as Guarantor) and Other Subsidiaries, respectively.
(d)At December 31, 2019, includes restricted cash of $1 million and $242 million for American International Group, Inc. (as Guarantor) and Other Subsidiaries, respectively. At December 31, 2018, includes restricted cash of $1 million and $342 million for American International Group, Inc. (as Guarantor) and Other Subsidiaries, respectively.
(e)The Investment in consolidated subsidiaries amounts for AIGLH and Reclassifications and Eliminations in 2018 have been revised from $26.3 billion to $25.1 billion and from $(63.7) billion to $(62.4) billion, respectively, to correct Total assets in 2018. The AIG shareholders’ equity amounts for AIGLH and Reclassifications and Eliminations in 2018 have been revised from $25.7 billion to $24.4 billion and from $(63.7) billion to $(62.4) billion, respectively, to correct Total equity in 2018. These corrections in 2018 have no impact on AIG’s consolidated financial statements and are not considered material to previously issued financial statements.
(a)Net income (loss) amounts for AIGLH and Reclassifications and Eliminations in 2018 have been revised from $2.8 billion to $3.3 billion and from $(2.0) billion to $(2.5) billion, respectively, to correct Comprehensive income (loss) in 2018. Net income (loss) amounts for AIGLH and Reclassifications and Eliminations in 2017 have been revised from $1.9 billion to $1.3 billion and from $(1.8) billion to $(1.2) billion, respectively, to correct Comprehensive income (loss) in 2017. These corrections in 2018 and 2017 have no impact on AIG’s consolidated financial statements and are not considered material to previously issued financial statements.
(b)The Other comprehensive income (loss) amounts for AIGLH, Other Subsidiaries, and Reclassifications and Eliminations in 2018 have been revised from $2.5 billion to $(4.6) billion, from $12.3 billion to $(6.8) billion, and from $(14.8) billion to $11.4 billion, respectively, to correct Comprehensive income (loss) in 2018. The Other comprehensive income (loss) amounts for AIGLH, Other Subsidiaries, and Reclassifications and Eliminations in 2017 have been revised from $7.8 billion to $1.8 billion, from $17.8 billion to $2.0 billion, and from $(25.7) billion to $(3.9) billion, respectively, to correct Comprehensive income (loss) in 2017. These corrections in 2018 and 2017 have no impact on AIG’s consolidated financial statements and are not considered material to previously issued financial statements.