A Dark Vector Cognition product

Item 8. Report of Independent Registered Public Accounting Firm

671K characters. Original on sec.gov · Markdown

Item 8. Report of Independent Registered Public Accounting Firm

Recoverability of U.S. Federal Deferred Tax Asset

As described in Note 22 to the consolidated financial statements, as of December 31, 2020, the Company had a net U.S. federal deferred tax asset of $12.0 billion, $8.1 billion of which related to federal U.S. tax attributes with a limited carryforward period. Management evaluates the recoverability of the deferred tax asset and the need for a valuation allowance based on the weight of all positive and negative evidence to reach a conclusion of whether it is more likely than not that all or some portion of the deferred tax asset will not be realized. As disclosed by management, in assessing the recoverability of the deferred tax asset, management considers a number of factors, which include forecasts of future income for each of the businesses and actual and planned business and operational changes, using assumptions about future macroeconomic and company specific conditions and events. Management subjects the forecasts to changes in key assumptions and evaluates the effect on tax attribute utilization, including tax attribute carryforward periods. Management also applies changes to assumptions about the effectiveness of relevant prudent and feasible tax planning strategies. As of December 31, 2020, management determined that it is no longer more-likely-than-not that $150 million of the Company’s deferred tax assets related to foreign tax credit carryforwards will be utilized prior to expiration.

The principal considerations for our determination that performing procedures relating to the recoverability of the U.S. federal deferred tax asset is a critical audit matter are (i) the significant judgment by management when developing their estimate of the recoverability, which in turn 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) the significant audit effort and judgment in evaluating the audit evidence related to the recoverability of the U.S. federal deferred tax asset, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the recoverability of the U.S. federal deferred tax asset, including controls over the accuracy of input data relevant to the analysis, such as cumulative loss measurement, reversal of temporary differences, adjustments to forecasted pre-tax income to calculate future taxable income, and enacted and effective tax law considerations. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in (i) evaluating management’s assessment of the recoverability of the U.S. federal deferred tax asset and the need for a valuation allowance, including the reasonableness of the application of tax law, (ii) testing management’s process for forecasting future income for each of the businesses, which included evaluating the impact of actual and planned business and operational changes, the reasonableness of assumptions about future macroeconomic and company specific conditions and events, as well as considering whether management demonstrated their ability and intent in executing planned strategies, (iii) testing the tax attribute carryforward periods, and (iv) evaluating the prudence and feasibility of the implementation of available tax planning strategies that impact the recoverability of the U.S. federal deferred tax asset.

/s/ PricewaterhouseCoopers LLP

New York, New York

February 19, 2021

We have served as the Company’s auditor since 1980.

AIG | 2020 Form 10-K 183

American International Group, Inc.

Consolidated Balance Sheets

December 31,December 31,
(in millions, except for share data)20202019
Assets:
Investments:
Fixed maturity securities:
Bonds available for sale, at fair value, net of allowance for credit losses of $186 in 2020
(amortized cost: 2020 - $244,337; 2019 - $233,230)*$271,496$251,086
Other bond securities, at fair value (See Note 6)*5,2916,682
Equity securities, at fair value (See Note 6)*1,056841
Mortgage and other loans receivable, net of allowance for credit losses of $814 in 2020 and $438 in 2019*45,56246,984
Other invested assets (portion measured at fair value: 2020 - $8,422; 2019 - $6,827)*19,06018,792
Short-term investments, including restricted cash of $180 in 2020 and $188 in 2019
(portion measured at fair value: 2020 - $5,968; 2019 - $5,343)*18,20313,230
Total investments360,668337,615
Cash*2,8272,856
Accrued investment income*2,2712,334
Premiums and other receivables, net of allowance for credit losses and disputes of $205 in 2020 and $178 in 201911,33310,274
Reinsurance assets - Fortitude Re, net of allowance for credit losses and disputes of $0 in 202034,578-
Reinsurance assets - other, net of allowance for credit losses and disputes of $326 in 2020 and $151 in 201938,96337,977
Deferred income taxes12,62413,146
Deferred policy acquisition costs9,80511,207
Other assets, net of allowance for credit losses of $49 in 2020, including restricted cash of $223 in 2020 and $243 in 2019
(portion measured at fair value: 2020 - $887; 2019 - $3,151)*13,12216,383
Separate account assets, at fair value100,29093,272
Total assets$586,481$525,064
Liabilities:
Liability for unpaid losses and loss adjustment expenses, including allowance for credit losses of $14 in 2020$77,720$78,328
Unearned premiums18,66018,269
Future policy benefits for life and accident and health insurance contracts51,09750,512
Policyholder contract deposits (portion measured at fair value: 2020 - $9,798; 2019 - $6,910)160,251151,869
Other policyholder funds3,5483,428
Fortitude Re funds withheld payable (portion measured at fair value: 2020 - $6,042)43,060-
Other liabilities (portion measured at fair value: 2020 - $570; 2019 - $1,100)*27,12226,609
Long-term debt (portion measured at fair value: 2020 - $2,097; 2019 - $2,062)*28,10325,479
Debt of consolidated investment entities*9,4319,871
Separate account liabilities100,29093,272
Total liabilities519,282457,637
Contingencies, commitments and guarantees (See Note 16)--
AIG shareholders’ equity:
Series A Non-cumulative preferred stock and additional paid in capital, $5.00 par value; 100,000,000 shares
authorized; shares issued: 2020 - 20,000 and 2019 - 20,000; liquidation preference $ 500485485
Common stock, $2.50 par value; 5,000,000,000 shares authorized; shares issued: 2020 - 1,906,671,492 and
2019 - 1,906,671,4924,7664,766
Treasury stock, at cost; 2020 - 1,045,113,443 shares; 2019 - 1,036,672,461 shares of common stock**(**49,322)(48,987)
Additional paid-in capital81,41881,345
Retained earnings15,50423,084
Accumulated other comprehensive income13,5114,982
Total AIG shareholders’ equity66,36265,675
Non-redeemable noncontrolling interests8371,752
Total equity67,19967,427
Total liabilities and equity$586,481$525,064
  • See Note 10 for details of balances associated with variable interest entities.

See accompanying Notes to Consolidated Financial Statements.

184 AIG | 2020 Form 10-K

American International Group, Inc.

Consolidated Statements of Income (Loss)

Years Ended December 31,
(dollars in millions, except per common share data)202020192018
Revenues:
Premiums$28,523$30,561$30,614
Policy fees2,9173,0152,791
Net investment income:
Net investment income - excluding Fortitude Re funds withheld assets12,57814,61913,086
Net investment income - Fortitude Re funds withheld assets*1,053--
Total net investment income13,63114,61913,086
Net realized capital gains (losses):
Net realized capital gains (losses) - excluding Fortitude Re funds withheld
assets and embedded derivative**(**56)632(51)
Net realized capital gains on Fortitude Re funds withheld assets*463--
Net realized capital losses on Fortitude Re funds withheld embedded derivative***(**2,645)--
Total net realized capital gains (losses)**(**2,238)632(51)
Other income903919949
Total revenues43,73649,74647,389
Benefits, losses and expenses:
Policyholder benefits and losses incurred24,80625,40227,412
Interest credited to policyholder account balances3,6223,8323,754
Amortization of deferred policy acquisition costs4,2115,1645,386
General operating and other expenses8,3968,5379,302
Interest expense1,4571,4171,309
Loss on extinguishment of debt12327
Net (gain) loss on sale of divested businesses8,52575(38)
Total benefits, losses and expenses51,02944,45947,132
Income (loss) from continuing operations before income tax expense (benefit)**(**7,293)5,287257
Income tax expense (benefit):
Current217545336
Deferred**(**1,677)621(182)
Income tax expense (benefit)**(**1,460)1,166154
Income (loss) from continuing operations**(**5,833)4,121103
Income (loss) from discontinued operations, net of income taxes448(42)
Net income (loss)**(**5,829)4,16961
Less:
Net income from continuing operations attributable to noncontrolling interests11582167
Net income (loss) attributable to AIG**(**5,944)3,348(6)
Less: Dividends on preferred stock2922-
Net income (loss) attributable to AIG common shareholders$**(**5,973)$3,326$(6)
Income (loss) per common share attributable to AIG common shareholders:
Basic:
Income (loss) from continuing operations$**(**6.88)$3.74$0.04
Income (loss) from discontinued operations$-$0.05$(0.05)
Net income (loss) attributable to AIG common shareholders$**(**6.88)$3.79$(0.01)
Diluted:
Income (loss) from continuing operations$**(**6.88)$3.69$0.04
Income (loss) from discontinued operations$-$0.05$(0.05)
Net income (loss) attributable to AIG common shareholders$**(**6.88)$3.74$(0.01)
Weighted average shares outstanding:
Basic869,309,458876,750,264898,405,537
Diluted869,309,458889,511,946910,141,242
  • Represents activity subsequent to the deconsolidation of Fortitude Reinsurance Company Ltd. on June 2, 2020.

See accompanying Notes to Consolidated Financial Statements.

AIG | 2020 Form 10-K 185

American International Group, Inc.

Consolidated Statements of Comprehensive Income (Loss)

Years Ended December 31,
(in millions)202020192018
Net income (loss)$**(**5,829)$4,169$61
Other comprehensive income (loss), net of tax
Change in unrealized depreciation of fixed maturity securities on
which allowance for credit losses was taken**(**95)--
Change in unrealized appreciation (depreciation) of fixed maturity securities on
which other-than-temporary credit impairments were taken-661(1,000)
Change in unrealized appreciation (depreciation) of all other investments8,3545,689(4,975)
Change in foreign currency translation adjustments359104(349)
Change in retirement plan liabilities adjustment**(**106)(36)28
Change in fair value of liabilities under fair value option attributable to changes in own credit risk1(3)3
Other comprehensive income (loss)8,5136,415(6,293)
Comprehensive income (loss)2,68410,584(6,232)
Comprehensive income attributable to noncontrolling interests9984176
Comprehensive income (loss) attributable to AIG$2,585$9,743$(6,308)
See accompanying Notes to Consolidated Financial Statements.

186 AIG | 2020 Form 10-K

American International Group, Inc.

Consolidated Statements of Equity

PreferredNon-
Stock andAccumulatedTotal AIGredeemable
AdditionalAdditionalOtherShare-Non-
Paid-inCommonTreasuryPaid-inRetainedComprehensiveholders'controllingTotal
(in millions)CapitalStockStockCapitalEarningsIncome (Loss)EquityInterestsEquity
Balance, January 1, 2018$-$4,766$(47,595)$81,078$21,457$5,465$65,171$537$65,708
Cumulative effect of change in accounting
principle, net of tax----568(576)(8)-(8)
Common stock issued under stock plans--189(344)--(155)-(155)
Purchase of common stock--(1,739)---(1,739)-(1,739)
Net income (loss) attributable to AIG or
noncontrolling interests----(6)-(6)6761
Dividends on common stock----(1,138)-(1,138)-(1,138)
Other comprehensive income (loss)-----(6,302)(6,302)9(6,293)
Net increase due to divestitures
and acquisitions-------6363
Contributions from noncontrolling interests-------373373
Distributions to noncontrolling interests-------(96)(96)
Other--15343-538(5)533
Balance, December 31, 2018$-$4,766$(49,144)$81,268$20,884$(1,413)$56,361$948$57,309
Preferred stock issued485-----485-485
Common stock issued under stock plans--156(236)--(80)-(80)
Purchase of common stock---------
Net income attributable to AIG or
noncontrolling interests----3,348-3,3488214,169
Dividends on preferred stock----(22)-(22)-(22)
Dividends on common stock----(1,114)-(1,114)-(1,114)
Other comprehensive income-----6,3956,395206,415
Net increase due to divestitures
and acquisitions-------6565
Contributions from noncontrolling interests-------1919
Distributions to noncontrolling interests-------(131)(131)
Other--1313(12)-30210312
Balance, December 31, 2019$485$4,766$(48,987)$81,345$23,084$4,982$65,675$1,752$67,427
Cumulative effect of change in accounting
principle, net of tax----**(**487)-**(**487)-**(**487)
Preferred stock issued---------
Common stock issued under stock plans--172**(**271)--**(**99)-**(**99)
Purchase of common stock--**(**500)---**(**500)-**(**500)
Net income (loss) attributable to AIG or
noncontrolling interests----**(**5,944)-**(**5,944)115**(**5,829)
Dividends on preferred stock----**(**29)-**(**29)-**(**29)
Dividends on common stock----**(**1,103)-**(**1,103)-**(**1,103)
Other comprehensive income (loss)-----8,5298,529**(**16)8,513
Net decrease due to divestitures
and acquisitions-------**(**958)**(**958)
Contributions from noncontrolling interests-------108108
Distributions to noncontrolling interests-------**(**156)**(**156)
Other--**(**7)344**(**17)-320**(**8)312
Balance, December 31, 2020$485$4,766$**(**49,322)$81,418$15,504$13,511$66,362$837$67,199

See accompanying Notes to Consolidated Financial Statements.

AIG | 2020 Form 10-K 187

American International Group, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31,
(in millions)202020192018
Cash flows from operating activities:
Net income (loss)$**(**5,829)$4,169$61
(Income) loss from discontinued operations**(**4)(48)42
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Noncash revenues, expenses, gains and losses included in income (loss):
Net (gains) losses on sales of securities available for sale and other assets**(**1,179)(862)98
Net (gain) loss on sale of divested businesses8,52575(38)
Losses on extinguishment of debt12327
Unrealized gains in earnings - net**(**735)(1,306)(186)
Equity in loss from equity method investments, net of dividends or distributions246260363
Depreciation and other amortization4,1205,0065,362
Impairments of assets98299425
Changes in operating assets and liabilities:
Insurance reserves461(4,590)1,239
Premiums and other receivables and payables - net2,586437887
Reinsurance assets and funds held under reinsurance treaties**(**693)217(3,289)
Capitalization of deferred policy acquisition costs**(**4,292)(5,403)(5,832)
Current and deferred income taxes - net**(**2,434)912-
Other, net156(1,005)467
Total adjustments6,871(5,928)(497)
Net cash provided by (used in) operating activities1,038(1,807)(394)
Cash flows from investing activities:
Proceeds from (payments for)
Sales or distributions of:
Available for sale securities23,10322,14525,143
Other securities2,5337,9183,755
Other invested assets3,8964,1854,365
Divested businesses, net2,173210
Maturities of fixed maturity securities available for sale27,62025,48824,777
Principal payments received on and sales of mortgage and other loans receivable7,8055,8264,272
Purchases of:
Available for sale securities**(**58,284)(54,410)(44,109)
Other securities**(**617)(1,638)(1,318)
Other invested assets**(**3,522)(3,346)(2,839)
Mortgage and other loans receivable**(**5,990)(9,515)(10,286)
Acquisition of businesses, net of cash and restricted cash acquired--(5,717)
Net change in short-term investments**(**4,925)(3,633)1,524
Other, net61,503200
Net cash used in investing activities**(**6,202)(5,475)(223)
Cash flows from financing activities:
Proceeds from (payments for)
Policyholder contract deposits22,38525,45327,320
Policyholder contract withdrawals**(**17,854)(19,823)(20,686)
Issuance of long-term debt4,1967342,657
Issuance of debt of consolidated investment entities2,1283,1472,077
Repayments of long-term debt**(**1,923)(1,504)(3,044)
Repayments of debt of consolidated investment entities**(**2,783)(1,698)(628)
Issuance of preferred stock, net of issuance costs-485-
Purchase of common stock**(**500)-(1,739)
Dividends paid on preferred stock**(**29)(22)-
Dividends paid on common stock**(**1,103)(1,114)(1,138)
Other, net5411,600(3,570)
Net cash provided by financing activities5,0587,2581,249
Effect of exchange rate changes on cash and restricted cash4916(11)
Net increase (decrease) in cash and restricted cash**(**57)(8)621
Cash and restricted cash at beginning of year3,2873,3582,737
Change in cash of businesses held for sale-(63)-
Cash and restricted cash at end of year$3,230$3,287$3,358

188 AIG | 2020 Form 10-K

American International Group, Inc.

Consolidated Statements of Cash Flows (continued)

Supplementary Disclosure of Consolidated Cash Flow Information
Years Ended December 31,
(in millions)202020192018
Cash$2,827$2,856$2,873
Restricted cash included in Short-term investments*180188142
Restricted cash included in Other assets*223243343
Total cash and restricted cash shown in the Consolidated Statements of Cash Flows$3,230$3,287$3,358
Cash paid during the period for:
Interest$1,147$1,326$1,312
Taxes$975$252$154
Non-cash investing activities:
Fixed maturity securities available for sale received in connection with pension risk
transfer transactions$1,140$1,072$-
Fixed maturity securities received in connection with reinsurance transactions$362$-$-
Fixed maturity securities transferred in connection with reinsurance transactions$**(**266)$-$-
Non-cash financing activities:
Interest credited to policyholder contract deposits included in financing activities$3,734$3,792$3,574
Fee income debited to policyholder contract deposits included in financing activities$**(**1,710)$(1,733)$(1,701)
  • Includes funds held for tax sharing payments to AIG Parent, security deposits, replacement reserve deposits related to our affordable housing investments, and security deposits for certain leased aircraft and escrow funds related to our investment in Castle Holdings LLC’s aircraft assets, which was sold in 2018.

See accompanying Notes to Consolidated Financial Statements.

AIG | 2020 Form 10-K 189

ITEM 8 | Notes to Consolidated Financial Statements | 1. Basis of Presentation

  1. Basis of Presentation

American International Group, Inc. (AIG) is a leading global insurance organization serving customers in approximately 80 countries and jurisdictions. AIG companies serve commercial and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG Common Stock, par value $2.50 per share (AIG Common Stock), is listed on the New York Stock Exchange (NYSE: AIG). Unless the context indicates otherwise, the terms “AIG,” “we,” “us” or “our” mean American International Group, Inc. and its consolidated subsidiaries and the term “AIG Parent” means American International Group, Inc. and not any of its consolidated subsidiaries.

The consolidated financial statements include the accounts of AIG Parent, our controlled subsidiaries (generally through a greater than 50 percent ownership of voting rights and voting interests), and variable interest entities (VIEs) of which we are the primary beneficiary. Equity investments in entities that we do not consolidate, including corporate entities in which we have significant influence and partnership and partnership-like entities in which we have more than minor influence over the operating and financial policies, are accounted for under the equity method unless we have elected the fair value option.

Certain of our foreign subsidiaries included in the Consolidated Financial Statements report on the basis of a fiscal period ending November 30. The effect on our consolidated financial condition and results of operations of all material events occurring at these subsidiaries through the date of each of the periods presented in these Consolidated Financial Statements has been considered for adjustment and/or disclosure.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). All material intercompany accounts and transactions have been eliminated.

AcquisitionS of Businesses

Validus

On July 18, 2018, we completed the purchase of Validus Holdings, Ltd. (Validus), a leading provider of reinsurance, primary insurance, and asset management services, for $5.5 billion in cash. The results of Validus following the date of the acquisition are included in our General Insurance segment starting in the third quarter of 2018. Our North America results include the results of Validus Reinsurance, Ltd. and Western World Insurance Group, Inc., while our International results include the results of Talbot Holdings Ltd.

For additional information relating to the acquisition of Validus, see Note 4.

Glatfelter

On November 6, 2018 AIG completed the purchase of Glatfelter Insurance Group (Glatfelter), a full-service broker and insurance company providing services for specialty programs and retail operations.

Ellipse

On December 31, 2018, AIG Life Ltd., a UK AIG Life and Retirement company, completed the acquisition of Ellipse, a specialist provider of group life risk protection in the UK.

Sales/disposals of Businesses

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 by and among AIG, Fortitude Holdings, Carlyle FRL, Carlyle, T&D and T&D Holdings, Inc. (the Majority Interest Fortitude Sale). AIG established Fortitude Reinsurance Company Ltd. (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, 2020, approximately $30.5 billion of reserves from AIG’s Life and Retirement Run-Off Lines and approximately $4.1 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

190 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 1. Basis of Presentation

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. (TCG), an affiliate of Carlyle, in November 2018 (the 2018 Fortitude Sale). 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 include (i) the $1.8 billion under the Majority Interest Fortitude Sale, which is subject to a post-closing purchase price adjustment pursuant to which AIG will pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur on or prior to December 31, 2023, up to a maximum payment of $500 million; 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.

AIG recorded a total after-tax reduction to total AIG shareholders’ equity of $4.3 billion related to the sale of the majority interest in and deconsolidation of Fortitude Holdings in the second quarter of 2020. The impact to equity was primarily due to a $6.7 billion after-tax loss partially offset by a $2.4 billion increase in accumulated other comprehensive income (AOCI) due to the release of shadow adjustments primarily related to future policy benefits. The $6.7 billion after-tax loss was comprised of (i) a $2.7 billion loss related to the write-off of prepaid insurance assets and DAC upon deconsolidation of Fortitude Holdings and (ii) $4.0 billion related to the loss on the sale primarily as a result of increases in Fortitude Holdings’ equity principally related to mark to market movements from the December 31, 2018 date as of which Fortitude Holdings’ equity was calculated for purposes of the purchase price determination, through the June 2, 2020 closing date.

In connection with the Majority Interest Fortitude Sale, AIG, Fortitude Holdings, and TCG agreed that, effective as of the closing, (i) AIG’s investment commitment targets under the 2018 Fortitude Sale (whereby AIG had agreed to invest certain amounts into various Carlyle strategies and to make certain minimum investment management fee payments by November 2021) were assumed by Fortitude Holdings and AIG was released therefrom, (ii) the purchase price adjustment that AIG had agreed to provide TCG in the 2018 Fortitude Sale (whereby AIG had agreed to reimburse TCG for adverse development in property casualty related reserves, based on an agreed methodology, that may occur on or prior to December 31, 2023, up to the value of TCG’s investment in Fortitude Holdings) has been terminated, and (iii) TCG remains obligated to pay AIG $115 million of deferred consideration upon settlement of the post-closing purchase price adjustment referred to above. This latter amount is composed of $95 million of deferred consideration contemplated as part of the 2018 Fortitude Sale, together with $19.9 million in respect of TCG’s 19.9 percent share of the unpaid portion of the $500 million non-pro rata dividend to be paid to AIG under the 2018 Fortitude Sale (TCG paid $79.6 million to AIG on May 26, 2020). In addition, the 2018 capital maintenance agreement between AIG and Fortitude Re and the letters of credit issued in support of Fortitude Re and subject to reimbursement by AIG in the event of a drawdown were terminated as of the closing of the Majority Interest Fortitude Sale. Upon closing of the Majority Interest Fortitude Sale, AIG entered into a transition services agreement with Fortitude Holdings for the provision of transition services for a period after closing, and letter of credit agreements with certain financial institutions, which issued letters of credit in support of certain General Insurance subsidiaries that have reinsurance agreements in place with Fortitude Re in the amount of $600 million. These letters of credit are subject to reimbursement by AIG in the event of a drawdown by these insurance subsidiaries.

Following closing, in the second quarter of 2020, AIG contributed $700 million of the proceeds of the Majority Interest Fortitude Sale to certain of its General Insurance subsidiaries and $135 million of the proceeds of the Majority Interest Fortitude Sale to certain of its Life and Retirement subsidiaries.

For further details on this transaction see Note 8 to the Consolidated Financial Statements.

Blackboard

At the end of March 2020, Blackboard U.S. Holdings, Inc. (Blackboard), AIG’s technology-driven subsidiary, was placed into run-off. As a result of this decision, during the three months ended March 31, 2020 and the year ended December 31, 2020, AIG recognized a pre-tax loss of $210 million, primarily consisting of asset impairment charges.

Life and Retirement

On October 26, 2020, AIG announced its intention to separate its Life and Retirement business from AIG.

AIG | 2020 Form 10-K 191

ITEM 8 | Notes to Consolidated Financial Statements | 1. Basis of Presentation

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment. Accounting policies that we believe are most dependent on the application of estimates and assumptions are considered our critical accounting estimates and are related to the determination of:

 liability for unpaid losses and loss adjustment expenses (loss reserves);

 valuation of future policy benefit liabilities and timing and extent of loss recognition;

 valuation of liabilities for guaranteed benefit features of variable annuity products;

 valuation of embedded derivatives for fixed index annuity and life products;

 estimated gross profits to value deferred policy acquisition costs for investment-oriented products;

 reinsurance assets, including the allowance for credit losses;

 goodwill impairment;

 allowances for credit losses primarily on loans and available for sale fixed maturity securities;

 liability for legal contingencies;

 fair value measurements of certain financial assets and liabilities; and

 income tax assets and liabilities, including recoverability of our net deferred tax asset and the predictability of future tax operating profitability of the character necessary to realize the net deferred tax asset and estimates associated with the Tax Cuts and Jobs Act (the Tax Act).

These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated financial condition, results of operations and cash flows could be materially affected.

Out of Period Adjustments

For the year ended December 31, 2018, our results include out of period adjustments relating to prior periods that decreased net income attributable to AIG by $77 million, and decreased Income from continuing operations before income taxes by $98 million. The out of period adjustments are primarily related to decreases in deferred policy acquisition costs and increases in policyholder contract deposits. We determined that these adjustments were not material to 2018 or to any previously reported annual financial statements.

REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS

During the fourth quarter of 2020, we identified certain cash flows that had been incorrectly classified in our Consolidated Statements of Cash Flows. Specifically, misclassifications were identified related to policyholder contract deposits that impacted several line items within the previously issued Consolidated Statements of Cash Flows. While these items affect the cash flows from operating and financing activities, they had no impact on the net increase (decrease) in cash and restricted cash for the previously reported periods.

We assessed the materiality of the misclassification on prior period financial statements in accordance with SEC Staff Accounting Bulletin (SAB) Number 99, Materiality, as codified in ASC 250-10, Accounting Changes and Error Corrections. We have determined that these misclassifications were not material to the financial statements of any prior annual or interim period. Accordingly, the annual periods ended December 31, 2019 and 2018 have been corrected in the comparative Consolidated Statements of Cash Flows. Additionally, impacted prior interim periods will be revised within the Quarterly Report on Form 10-Q to be filed for the periods ending March 31, 2021, June 30, 2021, and September 30, 2021.

For the year ended December 31, 2019, the unrealized (gains) losses in earnings – net and Insurance reserves line items in the Consolidated Statements of Cash Flows were adjusted by $(1,513) million and $634 million, respectively. The total net cash provided by (used in) operating activities were adjusted by $(879) million. Additionally, the Policyholder contract deposits and Policyholder contract withdrawals line items in the Consolidated Statements of Cash Flows were adjusted by $3,146 million and $(2,267) million, respectively. The total net cash provided by financing activities was adjusted by $879 million.

For the year ended December 31, 2018, the unrealized (gains) losses in earnings – net and Insurance reserves line items in the Consolidated Statements of Cash Flows were adjusted by $(629) million and $174 million, respectively. The total net cash provided by (used in) operating activities were adjusted by $(455) million. Additionally, the policyholder contract deposits and policyholder contract withdrawals line items in the Consolidated Statements of Cash Flows were adjusted by $3,142 million and $(2,687) million, respectively. The total net cash provided by financing activities was adjusted by $455 million.

192 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 2. Summary of Significant Accounting Policies

  1. Summary of Significant Accounting Policies

The following table identifies our significant accounting policies presented in other Notes to these Consolidated Financial Statements, with a reference to the Note where a detailed description can be found:

Note 6. Investments

 Fixed maturity and equity securities

 Other invested assets

 Short-term investments

 Net investment income

 Net realized capital gains (losses)

 Allowance for credit losses/Other-than-temporary impairments

Note 7. Lending Activities

 Mortgage and other loans receivable – net of allowance

Note 8. Reinsurance

 Reinsurance assets – net of allowance

 Retroactive reinsurance

Note 9. Deferred Policy Acquisition Costs

 Deferred policy acquisition costs

 Amortization of deferred policy acquisition costs

Note 10. Variable Interest Entities

Note 11. Derivatives and Hedge Accounting

 Derivative assets and liabilities, at fair value

Note 12. Goodwill and Other Intangible Assets

Note 13. Insurance Liabilities

 Liability for unpaid losses and loss adjustment expenses

 Discounting of reserves

 Future policy benefits

 Policyholder contract deposits

 Other policyholder funds

Note 14. Variable Life and Annuity Contracts

Note 15. Debt

 Long-term debt

 Debt of consolidated investment entities

Note 16. Contingencies, Commitments and Guarantees

 Legal contingencies

Note 18. Earnings Per Common Share

Note 22. Income Taxes

AIG | 2020 Form 10-K 193

ITEM 8 | Notes to Consolidated Financial Statements | 2. Summary of Significant Accounting Policies

Other significant accounting policies

Premiums for short-duration contracts are recorded as written on the inception date of the policy. Premiums are earned primarily on a pro rata basis over the term of the related coverage. Sales of extended services contracts are reflected as premiums written and earned on a pro rata basis over the term of the related coverage. In addition, certain miscellaneous income is included as premiums written and earned. The reserve for unearned premiums includes the portion of premiums written relating to the unexpired terms of coverage. Reinsurance premiums are typically earned over the same period as the underlying policies or risks covered by the contract. As a result, the earnings pattern of a reinsurance contract may extend up to 24 months, reflecting the inception dates of the underlying policies throughout the year.

Reinsurance premiums ceded under prospective reinsurance agreements are recognized as a reduction in revenues over the period the reinsurance coverage is provided in proportion to the risks to which the premiums relate.

Reinsurance premiums for assumed business are estimated based on information received from brokers, ceding companies and reinsureds. Any subsequent differences that arise regarding such estimates are recorded in the periods in which they are determined.

Premiums for long-duration insurance products and life contingent annuities are recognized as revenues when due. Estimates for premiums due but not yet collected are accrued.

Policy fees represent fees recognized from universal life and investment-type products consisting of policy charges for the cost of insurance, policy administration charges, surrender charges and amortization of unearned revenue reserves. Policy fees are recognized as revenues in the period in which they are assessed against policyholders, unless the fees are designed to compensate AIG for services to be provided in the future. Fees deferred as unearned revenue are amortized in relation to the incidence of expected gross profits to be realized over the estimated lives of the contracts, similar to DAC.

Other income includes advisory fee income from the Life and Retirement broker dealer business.

Cash represents cash on hand and demand deposits.

Short-term investments Short-term investments include highly liquid securities and other investments with remaining maturities of one year or less, but greater than three months, at the time of purchase. Securities included within short-term investments are stated at estimated fair value, while other investments included within short-term investments are stated at amortized cost, which approximates estimated fair value.

Premiums and other receivables – net of allowance for credit losses and disputes include premium balances receivable, amounts due from agents and brokers and policyholders, trade receivables for the Direct Investment book (DIB) and Global Capital Markets (GCM) and other receivables. Trade receivables for GCM include cash collateral posted to derivative counterparties that is not eligible to be netted against derivative liabilities. The allowance for credit losses and disputes on premiums and other receivables was $205 million and $178 million at December 31, 2020 and 2019, respectively.

Deposit assets and liabilities: We have entered into certain insurance and reinsurance contracts, primarily in our General Insurance companies, that do not contain sufficient insurance risk to be accounted for as insurance or reinsurance. When we receive premiums on such contracts, the premiums received, after deduction for certain related expenses, are recorded as deposits within Other liabilities in the Consolidated Balance Sheets. Net proceeds of these deposits are invested and generate Net investment income. When we pay premiums on such contracts, the premiums paid are recorded as deposits within Other assets in the Consolidated Balance Sheets. The deposit asset or liability is adjusted as amounts are paid, consistent with the underlying contracts.

Other assets consist of sales inducement assets, prepaid expenses, deposits, other deferred charges, real estate, other fixed assets, capitalized software costs, goodwill, intangible assets other than goodwill, restricted cash, derivative assets and assets of businesses classified as held-for-sale.

We offer sales inducements which include enhanced crediting rates or bonus payments to contract holders (bonus interest) on certain annuity and investment contract products. Such amounts are deferred and amortized over the life of the contract using the same methodology and assumptions used to amortize DAC (see Note 9 herein). To qualify for such accounting treatment, the bonus interest must be explicitly identified in the contract at inception. We must also demonstrate that such amounts are incremental to amounts we credit on similar contracts without bonus interest, and are higher than the contract’s expected ongoing crediting rates for periods after the bonus period. The deferred bonus interest and other deferred sales inducement assets totaled $281 million and $430 million at December 31, 2020 and 2019, respectively. The amortization expense associated with these assets is reported within Interest credited to policyholder account balances in the Consolidated Statements of Income. Such amortization expense totaled $60 million, $79 million and $156 million for the years ended December 31, 2020, 2019 and 2018, respectively.

194 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 2. Summary of Significant Accounting Policies

The cost of buildings and furniture and equipment is depreciated principally on the straight-line basis over their estimated useful lives (maximum of 40 years for buildings and 10 years for furniture and equipment). Expenditures for maintenance and repairs are charged to income as incurred and expenditures for improvements are capitalized and depreciated. We periodically assess the carrying amount of our real estate for purposes of determining any asset impairment. Capitalized software costs, which represent costs directly related to obtaining, developing or upgrading internal use software, are capitalized and amortized using the straight-line method over a period generally not exceeding ten years.

Separate accounts represent funds for which investment income and investment gains and losses accrue directly to the policyholders who bear the investment risk. Each account has specific investment objectives and the assets are carried at fair value. The assets of each account are legally segregated and are not subject to claims that arise from any of our other businesses. The liabilities for these accounts are equal to the account assets. Separate accounts may also include deposits for funds held under stable value wrap funding agreements, although the majority of stable value wrap sales are measured based on the notional amount included in assets under management and do not include the receipt of funds. For a more detailed discussion of separate accounts see Note 14 herein.

Other liabilities consist of other funds on deposit, other payables, securities sold under agreements to repurchase, securities sold but not yet purchased, derivative liabilities, deferred gains on retroactive reinsurance agreements and liabilities of businesses classified as held-for-sale. Also included in Other liabilities are trade payables for the DIB and GCM, which include balances due to clearing brokers and exchanges. Trade payables for GCM also include cash collateral received from derivative counterparties that contractually cannot be netted against derivative assets.

Securities sold but not yet purchased represent sales of securities not owned at the time of sale. The obligations arising from such transactions are recorded on a trade-date basis and carried at fair value. Fair values of securities sold but not yet purchased are based on current market prices.

Foreign currency: Financial statement accounts expressed in foreign currencies are translated into U.S. dollars. Functional currency assets and liabilities are translated into U.S. dollars generally using rates of exchange prevailing at the balance sheet date of each respective subsidiary and the related translation adjustments are recorded as a separate component of Accumulated other comprehensive income, net of any related taxes, in Total AIG shareholders’ equity. Income statement accounts expressed in functional currencies are translated using average exchange rates during the period. Functional currencies are generally the currencies of the local operating environment. Financial statement accounts expressed in currencies other than the functional currency of a consolidated entity are remeasured into that entity’s functional currency resulting in exchange gains or losses recorded in income. The adjustments resulting from translation of financial statements of foreign entities operating in highly inflationary economies are recorded in income.

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.

Accounting Standards Adopted During 2020

Financial Instruments – Credit Losses

In June 2016, the FASB issued an accounting standard that changed how entities account for current expected credit losses (CECL) for most financial assets, premiums receivable, trade receivables, off-balance sheet exposures and reinsurance receivables (the Financial Instruments Credit Losses Standard). The standard requires an allowance for credit losses based on the expectation of lifetime credit losses related to such financial assets subject to credit losses, including loans measured at amortized cost, reinsurance receivables and certain off-balance sheet credit exposures. Additionally, the impairment of available-for-sale debt securities, including purchased credit deteriorated (PCD) securities, is subject to the new guidance and is measured in a similar manner, except that losses are recognized as allowances rather than reductions in the amortized cost of the securities. The standard allows for reversals of credit impairments in the event that the credit of an issuer improves. The standard also requires additional disclosures.

We adopted the standard on its effective date of January 1, 2020 using a modified retrospective method, which requires a cumulative effect adjustment to retained earnings. As of January 1, 2020, the impact of the adoption of the standard was a reduction in opening retained earnings of $487 million (after-tax) primarily driven by commercial mortgage loans, and, to a lesser extent, reinsurance receivables and recoverables.

AIG | 2020 Form 10-K 195

ITEM 8 | Notes to Consolidated Financial Statements | 2. Summary of Significant Accounting Policies

The following table provides a rollforward of our allowance, including credit losses, in connection with the adoption of the Financial Instruments Credit Losses Standard as well as cross references to the applicable notes herein for additional information:

Year Ended December 31, 2020Balance,Cumulative EffectPurchased CreditIncrementalWrite-offs and
BeginningAdjustment as ofDeteriorated InitialIncrease (Decrease)Other ChangesBalance,
(in millions)of YearJanuary 1, 2020AllowanceRecognized in Incomein the Allowance(h)End of Year
Securities available for sale(a)$-$-$33$280$(127)$186
Mortgage and other loan receivables(b)438318-75(17)814
Reinsurance recoverables (inclusive of
deposit accounted assets)(c)151224-9(9)375
Premiums and other receivables(d)17834-6(13)205
Contractual deductible recoverables(e)-14---14
Commercial mortgage loan commitments(f)-51-28-79
Total$767$641$33$398$(166)$1,673
Secondary impacts to certain long-duration
insurance contracts(g)(27)
Tax impact(127)
Total cumulative effect adjustment$487

(a)The allowance for credit losses is reported in Bonds available for sale in the Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Net realized capital gains (losses) in the Consolidated Statements of Income. Refer to Note 6 for additional information.

(b) The allowance for credit losses is reported in Mortgage and other loans receivable in the Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Net realized capital gains (losses) in the Consolidated Statements of Income. Refer to Note 7 for additional information.

(c) The allowance for credit losses and disputes is reported in Reinsurance assets – other and Reinsurance assets – Fortitude Re for reinsurance contracts that contain sufficient insurance risk, and the allowance for credit losses is reported in Other assets for insurance and reinsurance contracts that do not contain sufficient insurance risk in the Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Policyholder benefits and losses incurred for reinsurance contracts that do contain sufficient insurance risk and premiums for contracts that do not contain sufficient insurance risk in the Consolidated Statements of Income. Refer to Note 8 for additional information.

(d) The allowance for credit losses and disputes is reported in Premiums and other receivables in the Consolidated Balance Sheets. Changes in the allowance for credit losses and disputes are reported in General operating and other expenses in the Consolidated Statements of Income. Refer to Note 2 for additional information.

(e) The allowance for credit losses is reported in Liability for unpaid losses and loss adjustment expenses in the Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Policyholder benefits and losses incurred in the Consolidated Statements of Income. Refer to Note 13 for additional information.

(f) The allowance for credit losses is reported in Other liabilities in the Consolidated Balance Sheets. Changes in the allowance for credit losses are reported in Net realized capital gains (losses) in the Consolidated Statements of Income. Refer to Note 7 for additional information.

(g) This reflects adjustments to the amortization of DAC, unearned revenue reserve and sales inducement assets as well as impacts on the future policy benefits for certain universal life and variable annuity contracts.

(h) A write-off does not generally result in an incremental loss to AIG. Prior to a write-off occurring, the allowance for the credit loss is increased or decreased to reflect AIG’s expectation of the credit loss to be incurred. Accordingly, when a write-off occurs, the allowance is reversed for the same amount, resulting in no incremental loss to AIG.

The following presents the impact of the adoption of the standard on premiums and other receivables.

Premiums and other receivables – Credit Losses

Premiums and other receivables, net of allowance for credit losses include premium balances receivable, amounts due from agents and brokers and policyholders, trade receivables for GCM and other receivables. Trade receivables for GCM include cash collateral posted to derivative counterparties that is not eligible to be netted against derivative liabilities. The allowance for credit losses and disputes for premiums and other receivables was $205 million at December 31, 2020. Our allowance for credit losses for premium receivables considers a combination of internal and external information relating to past events, current conditions and reasonable and supportable forecasts. Our allowance contemplates our contractual provisions. Upon default or delinquency of the policyholder we may be able to cease coverage for the remaining period. In certain jurisdictions we are unable to cancel coverage even in the event of delinquency or default by the policyholder. We consider premium and other receivable balances to be past due if the payment is not received after 90 days from the contractual obligation due date and record an allowance for disputes when there is reasonable uncertainty of the collectability of a disputed amount during the reporting period.

For further information regarding the impacts of the adoption of this standard see Notes 6, 7, 8 and 13 to the Consolidated Financial Statements.

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued an accounting standard that eliminates the requirement to calculate the implied fair value of goodwill, through a hypothetical purchase price allocation, to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value not to exceed the total amount of goodwill allocated to that reporting unit. An entity should also consider income tax effects from tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

196 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 2. Summary of Significant Accounting Policies

We adopted the standard on its effective date of January 1, 2020. The adoption of the standard did not have a material impact on our financial position, results of operations or cash flows.

Cloud Computing Arrangements

In August 2018, the FASB issued an accounting standard that aligns the requirements for capitalizing implementation costs incurred in a cloud computing (or hosting) arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). Capitalized implementation costs must be amortized over the term of the hosting arrangement. The accounting for the service element is not affected by the amendments in this update.

We adopted the standard prospectively on its effective date of January 1, 2020. The adoption of the standard did not have a material impact on our consolidated financial position, results of operations or cash flows.

Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates

In March 2020, the Securities and Exchange Commission (SEC) adopted amendments to simplify and streamline the disclosure requirements for guarantors and issuers of guaranteed securities registered or being registered, and issuers’ affiliates whose securities collateralize securities registered or being registered. Currently, the SEC permits the omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met and the parent company provides summarized financial information of the subsidiary issuers and guarantors. The amendments, among other things, allow companies to cease providing summarized financial information if the subsidiary issuer’s or guarantor’s reporting obligation has been suspended.

The amendments are effective January 4, 2021, with early adoption permitted. Effective March 31, 2020, AIG early adopted the amendment and ceased providing the summarized information for the subsidiary issuers and guarantors because the subsidiaries issuer’s reporting obligations have been suspended.

Future Application of Accounting Standards

Targeted Improvements to the Accounting for Long-Duration Contracts

In August 2018, the FASB issued an accounting standard update with the objective of making targeted improvements to the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The standard prescribes significant and comprehensive changes to recognition, measurement, presentation and disclosure as summarized below:

 Requires the review and if necessary update of future policy benefit assumptions at least annually for traditional and limited pay long duration contracts, with the recognition and separate presentation of any resulting re-measurement gain or loss (except for discount rate changes as noted below) in the income statement.

 Requires the discount rate assumption to be updated at the end of each reporting period using an upper medium grade (low-credit risk) fixed income instrument yield that maximizes the use of observable market inputs and recognizes the impact of changes to discount rates in other comprehensive income.

 Simplifies the amortization of DAC to a constant level basis over the expected term of the related contracts with adjustments for unexpected terminations, but no longer requires an impairment test.

 Requires the measurement of all market risk benefits associated with deposit (or account balance) contracts at fair value through the income statement with the exception of instrument-specific credit risk changes, which will be recognized in other comprehensive income.

 Increased disclosures of disaggregated rollforwards of policy benefits, account balances, market risk benefits, separate account liabilities and information about significant inputs, judgments and methods used in measurement and changes thereto and impact of those changes.

In November 2020, the FASB issued ASU 2020-11, which deferred the effective date of the standard for all entities. Our implementation efforts are underway for a January 1, 2023 effective date; we continue to evaluate the method of adoption and impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures The adoption of this standard is expected to have a significant impact on our consolidated financial condition, results of operations, cash flows and required disclosures, as well as systems, processes and controls.

AIG | 2020 Form 10-K 197

ITEM 8 | Notes to Consolidated Financial Statements | 2. Summary of Significant Accounting Policies

Income Tax

On December 18, 2019, the FASB issued an accounting standard that simplifies the accounting for income taxes by eliminating certain exceptions to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendments also simplified other areas including the accounting for franchise taxes and enacted tax laws or rates, and clarified the accounting for transactions that result in the step-up in the tax basis of goodwill. The standard is effective on January 1, 2021, with early adoption permitted. The impact is not material to our consolidated financial condition, results of operations and cash flows.

Reference Rate Reform

On March 12, 2020, the FASB issued an accounting standard that provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The standard allows us to account for certain contract modifications that result from the discontinuation of the London Inter-Bank Offered Rate (LIBOR) or another reference rate as a continuation of the existing contract without additional analysis.

This guidance is not expected to have a significant impact on our consolidated financial statements and notes to the consolidated financial statements. Where applicable, we would account for the change for the modification due to the discontinuation of LIBOR or another reference rate as a continuation of the existing contract. As part of our implementation efforts, we will continue to assess our operational readiness and current and alternative reference rates’ merits, limitations, risks and suitability for our investment and insurance processes.

This standard may be elected and applied prospectively over time from March 12, 2020 through December 31, 2022 as reference rate reform activities occur. We are evaluating the method of adoption and impact of the standard on our reported consolidated financial condition, results of operations, cash flows and required disclosures.

Clarification of Accounting for Certain Equity Method Investments

On January 16, 2020, the FASB issued an accounting standard to clarify how a previously issued standard regarding a company’s ability to measure the fair value of certain equity securities without a readily determinable fair value should interact with equity method investments standards. The previously issued standard provides that such equity securities could be measured at cost, minus impairment, if any, unless an observable transaction for an identical or similar security occurs (measurement alternative). The new standard clarifies that a company should consider observable transactions that require the company to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with the equity method immediately before applying or upon discontinuing the equity method.

The standard further clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.

The standard is effective for interim and annual reporting periods beginning after December 15, 2020. We do not expect the adoption of this standard to be material to our reported consolidated financial condition, results of operations, cash flows and required disclosures.

GOODWILL

Effective July 1, 2019, we changed the date of our annual goodwill impairment testing from December 31 to July 1. This change does not represent a material change to our method of applying current accounting guidance and is preferable as it better aligns with our strategic planning and forecasting process. This change did not delay, accelerate or avoid any impairment charge and was applied prospectively. We performed our annual goodwill impairment tests of all reporting units using a combination of both qualitative and quantitative assessments and concluded that our goodwill was not impaired. Our goodwill balance was $4.1 billion at December 31, 2020. For further information on goodwill see Note 12 to the Consolidated Financial Statements.

198 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 3. Segment Information

  1. Segment Information

We report our results of operations consistent with the manner in which our chief operating decision makers review the business to assess performance and allocate resources.

Prior to the fourth quarter of 2020, we reported our results as follows:

 General Insurance included our North America and International operating segments;

 Life and Retirement included our Individual Retirement, Group Retirement, Life Insurance and Institutional Markets operating segments;

 Other operations consisted primarily of businesses and items not allocated to our operating segments, amortization of value of distribution network acquired (VODA) related to the Validus and Glatfelter acquisitions and Interest expense attributable to AIG; and long-term debt as well as debt associated with consolidated investment entities; and

 Legacy Portfolio included exited or discontinued product lines, policy forms or distribution channels.

In the fourth quarter of 2020, our chief operating decision makers modified their view of our businesses and how they allocate resources and assess performance. Prior periods’ presentation has been revised to conform to our new structure. The new operating structure no longer includes a Legacy segment. We now report the results of our businesses as follows:

General Insurance

General Insurance business is presented as two operating segments:

North America – consists of insurance businesses in the United States, Canada, Bermuda, and our global reinsurance business, AIG Re. The results of Validus Reinsurance, Ltd., Western World Insurance Group, Inc. and Glatfelter were included as of their respective acquisition dates.

International – consists of regional insurance businesses in Japan, the United Kingdom, Europe, Middle East and Africa (EMEA region), Asia Pacific, Latin America and Caribbean, and China. International also includes the results of Talbot Holdings, Ltd (Talbot), as of its acquisition date, as well as AIG’s global specialty business.

North America and International operating segments consist of the following products:

– Commercial Lines – consists of Liability, Financial Lines, Property and Global Specialty.

– Personal Insurance – consists of Personal Lines and Accident & Health.

Life and Retirement

Life and Retirement business is presented as four operating segments:

Individual Retirement – consists of fixed annuities, fixed index annuities, variable annuities and retail mutual funds.

Group Retirement – consists of group mutual funds, group annuities, individual annuity and investment products, financial planning and advisory services, and plan administrative and compliance services.

Life Insurance – primary products in the U.S. include term life and universal life insurance. International operations include distribution of life and health products in the UK and Ireland. Certain run-off life insurance portfolios previously reported in our Legacy segment have been realigned into the Life Insurance operating segment.

Institutional Markets – consists of stable value wrap products, structured settlement and pension risk transfer annuities, corporate- and bank-owned life insurance, and guaranteed investment contracts (GICs). The run-off high net worth (private placement variable universal life and private placement variable annuity) and structured settlement portfolios previously reported in our Legacy segment have been realigned into the Institutional Markets operating segment.

On October 26, 2020, AIG announced its intention to separate its Life and Retirement business from AIG.

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 previously reported within Legacy as well as the historical results of our legacy insurance lines ceded to Fortitude Re.

AIG | 2020 Form 10-K 199

ITEM 8 | Notes to Consolidated Financial Statements | 3. Segment Information

The accounting policies of the segments are the same as those described in Note 2. We evaluate segment performance based on adjusted revenues and adjusted pre-tax income (loss). Adjusted revenues and adjusted pre-tax income (loss) are derived by excluding certain items from total revenues and net income (loss) attributable to AIG, respectively. These items generally fall into one or more of the following broad categories: legacy matters having no relevance to our current businesses or operating performance; adjustments to enhance transparency to the underlying economics of transactions; and measures that we believe to be common to the industry. Legal entities are attributed to each segment based upon the predominance of activity in that legal entity. For the items excluded from adjusted revenues and adjusted pre-tax income (loss) see the table below.

The following table presents AIG’s continuing operations by operating segment:

Adjusted
NetUnderwritingPre-tax
AdjustedInvestmentIncomeInterestAmortizationIncome
(in millions)RevenuesIncome(Loss)Expenseof DAC(Loss)
2020
General Insurance
North America$10,302$**(**1,301)$1,365
International13,3602772,173
Net investment income2,925$2,925--
Total General Insurance$26,587$2,925$**(**1,024)$-$3,538$1,901
Life and Retirement
Individual Retirement5,7144,131-725901,938
Group Retirement2,9702,236-4271,013
Life Insurance4,8771,526-3030142
Institutional Markets3,714988-115438
Total Life and Retirement17,2758,881-1556323,531
Other Operations1,3851,087-1,30650**(**1,963)
AIG consolidation and eliminations**(**562)**(**572)-**(**70)-**(**466)
Total$44,685$12,321$**(**1,024)$1,391$4,220$3,003
Reconciling items to pre-tax income (loss):
Changes in fair value of securities used to hedge guaranteed
living benefits5656---41
Changes in benefit reserves and DAC, VOBA and SIA related to
net realized capital gains (losses)----**(**9)12
Changes in the fair value of equity securities200200---200
Other income (expense) - net4999-99--
Loss on extinguishment of debt-----**(**12)
Net investment income on Fortitude Re funds withheld assets(a)1,0531,053---1,053
Net realized capital gains (losses) on Fortitude Re funds withheld assets(a)463----463
Net realized capital gains (losses) on Fortitude Re funds withheld
embedded derivative(a)**(**2,645)----**(**2,645)
Net realized capital gains (losses)(b)**(**148)**(**98)-**(**33)-**(**97)
Loss from divested businesses-----**(**8,525)
Non-operating litigation reserves and settlements23----21
Unfavorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements-----221
Net loss reserve discount charge-----**(**516)
Integration and transaction costs associated with acquiring or divesting
businesses-----**(**12)
Restructuring and other costs-----**(**435)
Non-recurring costs related to regulatory or accounting changes-----**(**65)
Revenues and pre-tax income (loss)$43,736$13,631$**(**1,024)$1,457$4,211$**(**7,293)
2019
General Insurance
North America$12,136$(365)$1,923
International14,3024542,559
Net investment income3,444$3,444--
Total General Insurance$29,882$3,444$89$-$4,482$3,533
Life and Retirement
Individual Retirement5,6434,122-774491,977
Group Retirement2,9472,240-4481937
Life Insurance4,8251,483-30137331
Institutional Markets2,941888-115308
Total Life and Retirement16,3568,733-1626723,553
Other Operations3,0602,598-1,26064(1,312)
AIG consolidation and eliminations(388)(385)-(55)-(304)
Total$48,910$14,390$89$1,367$5,218$5,470

200 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 3. Segment Information

Reconciling items to pre-tax income:
Changes in fair value of securities used to hedge guaranteed
living benefits228228---194
Changes in benefit reserves and DAC, VOBA and SIA related to
net realized capital gains (losses)----(54)56
Changes in the fair value of equity securities158158---158
Other income (expense) - net4685-87--
Loss on extinguishment of debt-----(32)
Net realized capital gains (losses)(b)395(242)-(37)-456
Loss from divested businesses-----(75)
Non-operating litigation reserves and settlements9----2
Favorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements-----267
Net loss reserve discount charge-----(955)
Integration and transaction costs associated with acquiring or divesting
businesses-----(24)
Restructuring and other costs-----(218)
Non-recurring costs related to regulatory or accounting changes-----(12)
Revenues and pre-tax income$49,746$14,619$89$1,417$5,164$5,287
2018
General Insurance
North America$11,815$(2,430)$1,744
International15,690(707)2,852
Net investment income2,843$2,843--
Total General Insurance$30,348$2,843(3,137)$-4,596$(294)
Life and Retirement
Individual Retirement5,3323,821-826301,678
Group Retirement2,8942,175-4295936
Life Insurance4,5221,450-29(30)472
Institutional Markets1,932792-135257
Total Life and Retirement14,6808,238-1667003,343
Other Operations2,8662,406-1,09194(1,489)
AIG consolidation and eliminations103114-83-39
Total$47,997$13,601$(3,137)$1,340$5,390$1,599
Reconciling items to pre-tax income:
Changes in fair value of securities used to hedge guaranteed
living benefits(128)(128)---(154)
Changes in benefit reserves and DAC, VOBA and SIA related to
net realized capital gains (losses)----(4)6
Changes in the fair value of equity securities(184)(184)---(184)
Other income (expense) - net(53)-----
Loss on extinguishment of debt-----(7)
Net realized capital losses(b)(254)(203)-(31)-(199)
Income from divested businesses-----38
Non-operating litigation reserves and settlements11----(19)
Unfavorable prior year development and related amortization
changes ceded under retroactive reinsurance agreements-----(675)
Net loss reserve discount benefit-----371
Integration and transaction costs associated with acquiring or divesting
businesses-----(124)
Restructuring and other costs-----(395)
Non-recurring costs related to regulatory or accounting changes------
Revenues and pre-tax income$47,389$13,086$(3,137)$1,309$5,386$257

(a) Represents activity subsequent to the deconsolidation of Fortitude Re on June 2, 2020.

(b) Includes all net realized capital gains and losses except earned income (periodic settlements and changes in settlement accruals) on derivative instruments used for non-qualifying (economic) hedging or for asset replication and net realized gains and losses on Fortitude Re funds withheld assets held by AIG in support of Fortitude Re’s reinsurance obligations to AIG (Fortitude Re funds withheld assets).

AIG | 2020 Form 10-K 201

ITEM 8 | Notes to Consolidated Financial Statements | 3. Segment Information

The following table presents AIG’s year-end identifiable assets and capital expenditures by segment:

Year-End Identifiable AssetsCapital Expenditures
(in millions)2020201920202019
General Insurance$156,590$156,358$156$105
Life and Retirement396,275371,742107104
Other Operations33,616(3,036)9095
Total Assets$586,481$525,064$353$304

The following table presents AIG’s consolidated total revenues and real estate and other fixed assets, net of accumulated depreciation, by major geographic area:

Real Estate and Other Fixed Assets,
Total Revenues*Net of Accumulated Depreciation
(in millions)202020192018202020192018
North America$30,204$36,930$31,376$1,230$1,333$1,479
International13,53212,81616,013610620693
Consolidated$43,736$49,746$47,389$1,840$1,953$2,172

*Revenues are generally reported according to the geographic location of the segment. International revenues consists of revenues from our General Insurance International operating segment.

  1. Business Combination

On July 18, 2018, we completed the purchase of a 100 percent voting interest in Validus, a leading provider of reinsurance, primary insurance, and asset management services, for $5.5 billion in cash.

The purchase was accounted for under the acquisition method. Accordingly, the total purchase price was allocated to the estimated fair values of assets acquired and liabilities assumed. This allocation resulted in the purchase price exceeding the fair value of net assets acquired, which results in a difference recorded as goodwill. Goodwill generated from the acquisition is attributable to expected synergies from future growth and potential future monetization opportunities. Goodwill related to the purchase of Validus assigned to our General Insurance operating segments was $1.8 billion for North America and $157 million for International.

In addition, Validus participates in the market for insurance-linked securities (ILS) primarily through AlphaCat Managers, Ltd (AlphaCat). AlphaCat is an asset manager primarily for third-party investors and in connection with the issuance of ILS invests in AlphaCat funds which are considered VIEs. ILS are financial instruments for which the values are determined based on insurance losses caused primarily by natural catastrophes such as major earthquakes and hurricanes. We report the investment in AlphaCat funds, which is approximately $118 million and $124 million at December 31, 2020 and December 31, 2019, respectively, in Other Invested Assets in the Consolidated Balance Sheets.

The following unaudited summarized pro forma consolidated income statement information assumes that the acquisition of Validus occurred as of January 1, 2017. The pro forma amounts are for comparative purposes only and may not necessarily reflect the results of operations that would have resulted had the acquisition been completed at the beginning of the applicable period and may not be indicative of the results that will be attained in the future.

Year Ended December 31,
(dollars in millions, except per common share data)2018*
Total revenues$48,588
Net income16
Net loss attributable to AIG common shareholders(51)
Loss per common share attributable to AIG common shareholders:
Basic:
Net loss attributable to AIG common shareholders(0.06)
Diluted:
Net loss attributable to AIG common shareholders(0.06)

*Pro forma adjustments were made to Validus’ external reporting results prior to the acquisition date for the deconsolidation of certain asset management entities consistent with AIG’s post acquisition accounting, which had no impact on Net income attributable to Validus.

202 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

  1. Fair Value Measurements

Fair Value Measurements on a Recurring Basis

We carry certain of our financial instruments at fair value. We define the fair value of a financial instrument as the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We are responsible for the determination of the value of the investments carried at fair value and the supporting methodologies and assumptions.

The degree of judgment used in measuring the fair value of financial instruments generally inversely correlates with the level of observable valuation inputs. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Conversely, financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction, liquidity and general market conditions.

Fair Value Hierarchy

Assets and liabilities recorded at fair value in the Consolidated Balance Sheets are measured and classified in accordance with a fair value hierarchy consisting of three “levels” based on the observability of valuation inputs:

Level 1: Fair value measurements based on quoted prices (unadjusted) in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments.

Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions about the inputs a hypothetical market participant would use to value that asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the levels discussed above, and it is the observability of the inputs used that determines the appropriate level in the fair value hierarchy for the respective asset or liability.

Valuation Methodologies of Financial Instruments Measured at Fair Value

Incorporation of Credit Risk in Fair Value Measurements

Our Own Credit Risk. Fair value measurements for certain liabilities incorporate our own credit risk by determining the explicit cost for each counterparty to protect against its net credit exposure to us at the balance sheet date by reference to observable AIG credit default swaps (CDS) or cash bond spreads. We calculate the effect of credit spread changes using discounted cash flow techniques that incorporate current market interest rates. A derivative counterparty’s net credit exposure to us is determined based on master netting agreements, when applicable, which take into consideration all derivative positions with us, as well as collateral we post with the counterparty at the balance sheet date. For a description of how we incorporate our own credit risk in the valuation of embedded derivatives related to certain annuity and life insurance products see – Embedded Derivatives within Policyholder Contract Deposits below.

AIG | 2020 Form 10-K 203

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Counterparty Credit Risk. Fair value measurements for freestanding derivatives incorporate counterparty credit by determining the explicit cost for us to protect against our net credit exposure to each counterparty at the balance sheet date by reference to observable counterparty CDS spreads, when available. When not available, other directly or indirectly observable credit spreads will be used to derive the best estimates of the counterparty spreads. Our net credit exposure to a counterparty is determined based on master netting agreements, which take into consideration all derivative positions with the counterparty, as well as collateral posted by the counterparty at the balance sheet date.

Fair values for fixed maturity securities based on observable market prices for identical or similar instruments implicitly incorporate counterparty credit risk. Fair values for fixed maturity securities based on internal models incorporate counterparty credit risk by using discount rates that take into consideration cash issuance spreads for similar instruments or other observable information.

For fair values measured based on internal models, the cost of credit protection is determined under a discounted present value approach considering the market levels for single name CDS spreads for each specific counterparty, the mid-market value of the net exposure (reflecting the amount of protection required) and the weighted average life of the net exposure. CDS spreads are provided to us by an independent third party. We utilize an interest rate based on the benchmark LIBOR curve to derive our discount rates.

While this approach does not explicitly consider all potential future behavior of the derivative transactions or potential future changes in valuation inputs, we believe this approach provides a reasonable estimate of the fair value of the assets and liabilities, including consideration of the impact of non-performance risk.

Fixed Maturity Securities

Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to measure fixed maturity securities at fair value. Market price data is generally obtained from dealer markets.

We employ independent third-party valuation service providers to gather, analyze, and interpret market information to derive fair value estimates for individual investments, based upon market-accepted methodologies and assumptions. The methodologies used by these independent third-party valuation service providers are reviewed and understood by management, through periodic discussion with and information provided by the independent third-party valuation service providers. In addition, as discussed further below, control processes are applied to the fair values received from independent third-party valuation service providers to ensure the accuracy of these values.

Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of market-accepted valuation methodologies, which may utilize matrix pricing, financial models, accompanying model inputs and various assumptions, provide a single fair value measurement for individual securities. The inputs used by the valuation service providers include, but are not limited to, market prices from completed transactions for identical securities and transactions for comparable securities, benchmark yields, interest rate yield curves, credit spreads, prepayment rates, default rates, recovery assumptions, currency rates, quoted prices for similar securities and other market-observable information, as applicable. If fair value is determined using financial models, these models generally take into account, among other things, market observable information as of the measurement date as well as the specific attributes of the security being valued, including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other security or issuer-specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased.

We have control processes designed to ensure that the fair values received from independent third-party valuation service providers are accurately recorded, that their data inputs and valuation techniques are appropriate and consistently applied and that the assumptions used appear reasonable and consistent with the objective of determining fair value. We assess the reasonableness of individual security values received from independent third-party valuation service providers through various analytical techniques, and have procedures to escalate related questions internally and to the independent third-party valuation service providers for resolution. To assess the degree of pricing consensus among various valuation service providers for specific asset types, we conduct comparisons of prices received from available sources. We use these comparisons to establish a hierarchy for the fair values received from independent third-party valuation service providers to be used for particular security classes. We also validate prices for selected securities through reviews by members of management who have relevant expertise and who are independent of those charged with executing investing transactions.

204 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

When our independent third-party valuation service providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting brokers who are knowledgeable about these securities to provide a price quote, which is generally non-binding, or by employing market accepted valuation models. Broker prices may be based on an income approach, which converts expected future cash flows to a single present value amount, with specific consideration of inputs relevant to particular security types. For structured securities, such inputs may include ratings, collateral types, geographic concentrations, underlying loan vintages, loan delinquencies and defaults, loss severity assumptions, prepayments, and weighted average coupons and maturities. When the volume or level of market activity for a security is limited, certain inputs used to determine fair value may not be observable in the market. Broker prices may also be based on a market approach that considers recent transactions involving identical or similar securities. Fair values provided by brokers are subject to similar control processes to those noted above for fair values from independent third-party valuation service providers, including management reviews. For those corporate debt instruments (for example, private placements) that are not traded in active markets or that are subject to transfer restrictions, valuations reflect illiquidity and non-transferability, based on available market evidence. When observable price quotations are not available, fair value is determined based on discounted cash flow models using discount rates based on credit spreads, yields or price levels of comparable securities, adjusted for illiquidity and structure. Fair values determined internally are also subject to management review to ensure that valuation models and related inputs are reasonable.

The methodology above is relevant for all fixed maturity securities including residential mortgage backed securities (RMBS), commercial mortgage backed securities (CMBS), collateralized debt obligations (CDO), other asset-backed securities (ABS) and fixed maturity securities issued by government sponsored entities and corporate entities.

Equity Securities Traded in Active Markets

Whenever available, we obtain quoted prices in active markets for identical assets at the balance sheet date to measure equity securities at fair value. Market price data is generally obtained from exchange or dealer markets.

Mortgage and Other Loans Receivable

We estimate the fair value of mortgage and other loans receivable that are measured at fair value by using dealer quotations, discounted cash flow analyses and/or internal valuation models. The determination of fair value considers inputs such as interest rate, maturity, the borrower’s creditworthiness, collateral, subordination, guarantees, past-due status, yield curves, credit curves, prepayment rates, market pricing for comparable loans and other relevant factors.

Other Invested Assets

We initially estimate the fair value of investments in certain hedge funds, private equity funds and other investment partnerships by reference to the transaction price. Subsequently, we generally obtain the fair value of these investments from net asset value information provided by the general partner or manager of the investments, the financial statements of which are generally audited annually. We consider observable market data and perform certain control procedures to validate the appropriateness of using the net asset value as a fair value measurement. The fair values of other investments carried at fair value, such as direct private equity holdings, are initially determined based on transaction price and are subsequently estimated based on available evidence such as market transactions in similar instruments, other financing transactions of the issuer and other available financial information for the issuer, with adjustments made to reflect illiquidity as appropriate.

Short-term Investments

For short-term investments that are measured at amortized cost, the carrying amounts of these assets approximate fair values because of the relatively short period of time between origination and expected realization, and their limited exposure to credit risk. Securities purchased under agreements to resell (reverse repurchase agreements) are generally treated as collateralized receivables. We report certain receivables arising from securities purchased under agreements to resell as Short-term investments in the Consolidated Balance Sheets. When these receivables are measured at fair value, we use market-observable interest rates to determine fair value.

Separate Account Assets

Separate account assets are composed primarily of registered and unregistered open-end mutual funds that generally trade daily and are measured at fair value in the manner discussed above for equity securities traded in active markets.

AIG | 2020 Form 10-K 205

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Freestanding Derivatives

Derivative assets and liabilities can be exchange-traded or traded over-the-counter (OTC). We generally value exchange-traded derivatives such as futures and options using quoted prices in active markets for identical derivatives at the balance sheet date.

OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in the instrument, as well as the availability of pricing information in the market. We generally use similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be corroborated by observable market data by correlation or other means, and model selection does not involve significant management judgment.

For certain OTC derivatives that trade in less liquid markets, where we generally do not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, the transaction price may provide the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so the model value at inception equals the transaction price. We will update valuation inputs in these models only when corroborated by evidence such as similar market transactions, independent third-party valuation service providers and/or broker or dealer quotations, or other empirical market data. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

We value our super senior credit default swap portfolio using prices obtained from vendors and/or counterparties. The valuation of the super senior credit derivatives is complex because of the limited availability of market observable information due to the lack of trading and price transparency in certain structured finance markets. Our valuation methodologies for the super senior CDS portfolio have evolved over time in response to market conditions and the availability of market observable information. We have sought to calibrate the methodologies to available market information and to review the assumptions of the methodologies on a regular basis.

Embedded Derivatives within Policyholder Contract Deposits

Certain variable annuity and equity-indexed annuity and life contracts contain embedded derivatives that we bifurcate from the host contracts and account for separately at fair value, with changes in fair value recognized in earnings. These embedded derivatives are classified within Policyholder contract deposits. We have concluded these contracts contain either (i) a written option that guarantees a minimum accumulation value at maturity, (ii) a written option that guarantees annual withdrawals regardless of underlying market performance for a specific period or for life, or (iii) equity-indexed written options that meet the criteria of derivatives and must be bifurcated.

The fair value of embedded derivatives contained in certain variable annuity and equity-indexed annuity and life contracts is measured based on policyholder behavior and capital market assumptions related to projected cash flows over the expected lives of the contracts. These discounted cash flow projections primarily include benefits and related fees assessed, when applicable. In some instances, the projected cash flows from fees may exceed projected cash flows related to benefit payments and therefore, at a point in time, the carrying value of the embedded derivative may be in a net asset position. The projected cash flows incorporate best estimate assumptions for policyholder behavior (including mortality, lapses, withdrawals and benefit utilization), along with an explicit risk margin to reflect a market participant’s estimates of projected cash flows and policyholder behavior. Estimates of future policyholder behavior assumptions are subjective and based primarily on our historical experience.

Because of the dynamic and complex nature of the projected cash flows with respect to embedded derivatives in our variable annuity contracts, risk neutral valuations are used, which are calibrated to observable interest rate and equity option prices. Estimating the underlying cash flows for these products involves judgments regarding the capital market assumptions related to expected market rates of return, market volatility, credit spreads, correlations of certain market variables, fund performance and discount rates. Additionally, estimating the underlying cash flows for these products also involves judgments regarding policyholder behavior. The portion of fees attributable to the fair value of expected benefit payments are included within the fair value measurement of these embedded derivatives, and related fees are classified in net realized gain/loss as earned, consistent with other changes in the fair value of these embedded policy derivatives. Any portion of the fees not attributed to the embedded derivatives are excluded from the fair value measurement and classified in policy fees as earned.

With respect to embedded derivatives in our equity-indexed annuity and life contracts, option pricing models are used to estimate fair value, taking into account the capital market 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.

206 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Projected cash flows are discounted using the interest rate swap curve (swap curve), which is commonly viewed as being consistent with the credit spreads for highly-rated financial institutions (S&P AA-rated or above). A swap curve shows the fixed-rate leg of a non-complex swap against the floating rate (for example, LIBOR) leg of a related tenor. We also incorporate our own risk of non-performance in the valuation of the embedded derivatives associated with variable annuity and equity-indexed annuity and life contracts. The non-performance risk adjustment (NPA) reflects a market participant’s view of our claims-paying ability by incorporating an additional spread to the swap curve used to discount projected benefit cash flows in the valuation of these embedded derivatives. The non-performance risk adjustment is calculated by constructing forward rates based on a weighted average of observable corporate credit indices to approximate the claims-paying ability rating of our Life and Retirement companies.

Fortitude Re funds withheld payable

The reinsurance transactions between AIG and Fortitude Re were structured as modified coinsurance (modco) and loss portfolio transfer arrangements with funds withheld (funds withheld). As a result of the deconsolidation resulting from the Majority Interest Fortitude Sale, AIG has established a funds withheld payable to Fortitude Re while simultaneously establishing a reinsurance asset representing reserves for the insurance coverage that Fortitude Re has assumed. The funds withheld payable contains an embedded derivative and changes in fair value of the embedded derivative related to the funds withheld payable are recognized in earnings through realized capital gains (losses). This embedded derivative is considered a total return swap with contractual returns that are attributable to various assets and liabilities associated with these reinsurance agreements. The fair value of the underlying assets is generally based on market observable inputs using industry standard valuation techniques. The valuation also requires certain significant inputs, which are generally not observable and accordingly, the valuation is considered Level 3 in the fair value hierarchy.

Long-Term Debt

The fair value of non-structured liabilities is generally determined by using market prices from exchange or dealer markets, when available, or discounting expected cash flows using the appropriate discount rate for the applicable maturity. We determine the fair value of structured liabilities and hybrid financial instruments (where performance is linked to structured interest rates, inflation or currency risks) using the appropriate derivative valuation methodology (described above) given the nature of the embedded risk profile. In addition, adjustments are made to the valuations of both non-structured and structured liabilities to reflect our own creditworthiness based on the methodology described under the caption “Incorporation of Credit Risk in Fair Value Measurements – Our Own Credit Risk” above.

Borrowings under obligations of guaranteed investment agreements (GIAs), which are guaranteed by us, are recorded at fair value using discounted cash flow calculations based on interest rates currently being offered for similar contracts and our current market observable implicit credit spread rates with maturities consistent with those remaining for the contracts being valued. Obligations may be called at various times prior to maturity at the option of the counterparty. Interest rates on these borrowings are primarily fixed, vary by maturity and range up to 7.15 percent.

Other Liabilities

Other liabilities measured at fair value include certain securities sold under agreements to repurchase and certain securities sold but not yet purchased. Liabilities arising from securities sold under agreements to repurchase are generally treated as collateralized borrowings. We estimate the fair value of liabilities arising under these agreements by using market-observable interest rates. This methodology considers such factors as the coupon rate, yield curves and other relevant factors. Fair values for securities sold but not yet purchased are based on current market prices.

AIG | 2020 Form 10-K 207

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents information about assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value measurement based on the observability of the inputs used:

December 31, 2020CounterpartyCash
(in millions)Level 1Level 2Level 3Netting(a)CollateralTotal
Assets:
Bonds available for sale:
U.S. government and government sponsored entities$73$4,053$-$-$-$4,126
Obligations of states, municipalities and political subdivisions-14,0192,105--16,124
Non-U.S. governments2815,3125--15,345
Corporate debt-166,9492,349--169,298
RMBS-19,77111,694--31,465
CMBS-15,211922--16,133
CDO/ABS-9,1919,814--19,005
Total bonds available for sale101244,50626,889--271,496
Other bond securities:
U.S. government and government sponsored entities-1,845---1,845
Non-U.S. governments------
Corporate debt-12---12
RMBS-290139--429
CMBS-27347--320
CDO/ABS-1732,512--2,685
Total other bond securities-2,5932,698--5,291
Equity securities9297651--1,056
Other invested assets(b)-1021,827--1,929
Derivative assets:
Interest rate contracts-4,637---4,637
Foreign exchange contracts-1,0202--1,022
Equity contracts9923198--1,130
Credit contracts--2--2
Other contracts--14--14
Counterparty netting and cash collateral---**(**3,812)**(**2,219)**(**6,031)
Total derivative assets96,580216**(**3,812)**(**2,219)774
Short-term investments2,3793,589---5,968
Other assets--113--113
Separate account assets96,5603,730---100,290
Total$99,978$261,176$31,794$**(**3,812)$**(**2,219)$386,917
Liabilities:
Policyholder contract deposits$-$-$9,798$-$-$9,798
Derivative liabilities:
Interest rate contracts14,435---4,436
Foreign exchange contracts-1,090---1,090
Equity contracts1416247--223
Credit contracts-2344--67
Other contracts--6--6
Counterparty netting and cash collateral---**(**3,812)**(**1,441)**(**5,253)
Total derivative liabilities155,71097**(**3,812)**(**1,441)569
Fortitude Re funds withheld payable--6,042--6,042
Other liabilities-1---1
Long-term debt-2,097---2,097
Total$15$7,808$15,937$**(**3,812)$**(**1,441)$18,507

208 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

December 31, 2019CounterpartyCash
(in millions)Level 1Level 2Level 3Netting(a)CollateralTotal
Assets:
Bonds available for sale:
U.S. government and government sponsored entities$135$5,245$-$-$-$5,380
Obligations of states, municipalities and political subdivisions-13,1972,121--15,318
Non-U.S. governments6014,809---14,869
Corporate debt-147,9731,663--149,636
RMBS-19,39713,408--32,805
CMBS-13,3771,053--14,430
CDO/ABS-10,9627,686--18,648
Total bonds available for sale195224,96025,931--251,086
Other bond securities:
U.S. government and government sponsored entities-2,121---2,121
Non-U.S. governments------
Corporate debt-18---18
RMBS-346143--489
CMBS-27250--322
CDO/ABS-1873,545--3,732
Total other bond securities-2,9443,738--6,682
Equity securities756778--841
Other invested assets(b)-861,192--1,278
Derivative assets:
Interest rate contracts13,199---3,200
Foreign exchange contracts-1,0346--1,040
Equity contracts5593171--769
Credit contracts--3--3
Other contracts--14--14
Counterparty netting and cash collateral---(2,427)(1,806)(4,233)
Total derivative assets64,826194(2,427)(1,806)793
Short-term investments2,2993,044---5,343
Other assets572,21289--2,358
Separate account assets89,0694,203---93,272
Total$92,382$242,352$31,152$(2,427)$(1,806)$361,653
Liabilities:
Policyholder contract deposits$-$-$6,910$-$-$6,910
Derivative liabilities:
Interest rate contracts42,745---2,749
Foreign exchange contracts-1,025---1,025
Equity contracts811120--139
Credit contracts-2465--89
Other contracts--7--7
Counterparty netting and cash collateral---(2,427)(527)(2,954)
Total derivative liabilities123,90592(2,427)(527)1,055
Other liabilities-45---45
Long-term debt-2,062---2,062
Total$12$6,012$7,002$(2,427)$(527)$10,072

(a)Represents netting of derivative exposures covered by qualifying master netting agreements.

(b) Excludes investments that are measured at fair value using the net asset value (NAV) per share (or its equivalent), which totaled $6.5 billion and $5.5 billion as of December 31, 2020 and December 31, 2019, respectively.

AIG | 2020 Form 10-K 209

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Changes in Level 3 Recurring Fair Value Measurements

The following tables present changes during the years ended December 31, 2020 and 2019 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains (losses) related to the Level 3 assets and liabilities in the Consolidated Balance Sheets at December 31, 2020 and 2019:

NetChanges in
RealizedUnrealized Gains
andPurchases,Changes in(Losses) Included in
UnrealizedSales,Unrealized GainsOther Comprehensive
GainsIssuances(Losses) IncludedIncome (Loss) for
Fair Value(Losses)OtherandGrossGrossFair Valuein Income onRecurring Level 3
BeginningIncludedComprehensiveSettlements,TransfersTransfersDivestedEndInstruments HeldInstruments Held
(in millions)of Yearin IncomeIncome (Loss)NetInOutBusinessesof Yearat End of Yearat End of Year
December 31, 2020
Assets:
Bonds available for sale:
Obligations of states,
municipalities and
political subdivisions$2,121$7$211$123$27$**(**384)$-$2,105$-$208
Non-U.S. governments---47**(**6)-5--
Corporate debt1,663**(**110)65111,482**(**762)-2,349-79
RMBS13,408745**(**337)**(**1,200)29**(**951)-11,694-**(**172)
CMBS1,0531860**(**1)23**(**231)-922-55
CDO/ABS7,686351233592,531**(**920)-9,814-106
Total bonds available for sale(a)25,931695122**(**704)4,099**(**3,254)-26,889-276
Other bond securities:
RMBS1439-**(**13)---1395-
CMBS50--**(**3)---47**(**2)-
CDO/ABS3,545293-**(**1,326)---2,51217-
Total other bond securities3,738302-**(**1,342)---2,69820-
Equity securities8**(**1)63540**(**37)-51--
Other invested assets1,192100**(**3)388150--1,82751-
Other assets89--62--**(**38)113--
Total$30,958$1,096$125$**(**1,561)$4,289$**(**3,291)$**(**38)$31,578$71$276
NetChanges in
RealizedUnrealized Gains
andPurchases,Changes in(Losses) Included in
UnrealizedSales,Unrealized GainsOther Comprehensive
(Gains)Issuances(Losses) IncludedIncome (Loss) for
Fair ValueLossesOtherandGrossGrossFair Valuein Income onRecurring Level 3
BeginningIncludedComprehensiveSettlements,TransfersTransfersDivestedEndInstruments HeldInstruments Held
(in millions)of Yearin IncomeIncome (Loss)NetInOutBusinessesof Yearat End of Yearat End of Year
Liabilities:
Policyholder contract deposits$6,910$2,681$-$207$-$-$-$9,798$**(**1,515)$-
Derivative liabilities, net:
Interest rate contracts-**(**1)-1----2-
Foreign exchange contracts**(**6)3-1---**(**2)1-
Equity contracts**(**151)4-**(**8)**(**1)5-**(**151)**(**33)-
Credit contracts62**(**47)-27---428-
Other contracts**(**7)**(**63)-62---**(**8)62-
Total derivative liabilities, net(b)**(**102)**(**104)-83**(**1)5-**(**119)40-
Fortitude Re funds withheld payable-2,645-**(**276)--3,6736,042**(**1,377)-
Total$6,808$5,222$-$14$**(**1)$5$3,673$15,721$**(**2,852)$-

210 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

NetPurchases,Changes in
Realized andSales,Unrealized Gains
UnrealizedIssuances(Losses) Included
Fair ValueGains (Losses)OtherandGrossGrossReclassificationFair Valuein Income on
BeginningIncludedComprehensiveSettlements,TransfersTransfersof HeldDivestedEndInstruments Held
(in millions)of Yearin IncomeIncome (Loss)NetInOutfor Sale(c)Businessesof Yearat End of Year
December 31, 2019
Assets:
Bonds available for sale:
Obligations of states,
municipalities and
political subdivisions$2,000$(2)$247$282$51$(457)$-$-$2,121$-
Non-U.S. governments1151(6)5(16)----
Corporate debt864(7)88(540)1,513(255)--1,663-
RMBS14,19978255(1,403)83(287)(21)-13,408-
CMBS917244744858(441)--1,053-
CDO/ABS9,10233116112120(1,780)(17)-7,686-
Total bonds available for sale27,093835554(1,107)1,830(3,236)(38)-25,931-
Other bond securities:
RMBS1,29080-(1,227)----1432
CMBS775-(18)-(14)--506
CDO/ABS4,478361-(1,198)-(96)--3,545149
Total other bond securities5,845446-(2,443)-(110)--3,738157
Equity securities27--(20)2(1)--81
Other invested assets587202(33)616---1,19222
Other assets58--(7)--38-89-
Total$33,610$1,301$556$(3,610)$2,448$(3,347)$-$-$30,958$180
NetPurchases,Changes in
Realized andSales,Unrealized Gains
UnrealizedIssuances(Losses) Included
Fair Value(Gains) LossesOtherandGrossGrossReclassificationFair Valuein Income on
BeginningIncludedComprehensiveSettlements,TransfersTransfersof HeldDivestedEndInstruments Held
(in millions)of Yearin IncomeIncome (Loss)NetInOutfor Sale(a)Businessesof Yearat End of Year
Liabilities:
Policyholder contract deposits$4,116$1,947$-$847$-$-$-$-$6,910$(1,307)
Derivative liabilities, net:
Interest rate contracts153-(18)-----1
Foreign exchange contracts(5)(7)-6----(6)3
Equity contracts(75)(43)-(33)----(151)51
Credit contracts227(84)-(81)----6246
Other contracts(9)(67)-69----(7)66
Total derivative liabilities, net(b)153(198)-(57)----(102)167
Total$4,269$1,749$-$790$-$-$-$-$6,808$(1,140)

(a) As a result of the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020, credit losses are included in net realized and unrealized (gains) losses included in income.

(b) Total Level 3 derivative exposures have been netted in these tables for presentation purposes only.

(c) Reported in Other assets in the Consolidated Balance Sheet.

AIG | 2020 Form 10-K 211

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Net realized and unrealized gains and losses included in income related to Level 3 assets and liabilities shown above are reported in the Consolidated Statements of Income as follows:

NetNet Realized
InvestmentCapitalOther
(in millions)IncomeGains (Losses)IncomeTotal
December 31, 2020
Assets:
Bonds available for sale*$733$**(**38)$-$695
Other bond securities34268-302
Equity securities-**(**1)-**(**1)
Other invested assets982-100
December 31, 2019
Assets:
Bonds available for sale$862$(27)$-$835
Other bond securities226220-446
Equity securities----
Other invested assets20--20
NetNet Realized
InvestmentCapitalOther
(in millions)Income(Gains) LossesIncomeTotal
December 31, 2020
Liabilities:
Policyholder contract deposits$-$2,681$-$2,681
Derivative liabilities, net-**(**47)**(**57)**(**104)
Fortitude Re funds withheld payable-2,645-2,645
December 31, 2019
Liabilities:
Policyholder contract deposits$-$1,947$-$1,947
Derivative liabilities, net-(134)(64)(198)
  • As a result of the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020, credit losses are included in net realized capital gains (losses).

212 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

The following table presents the gross components of purchases, sales, issuances and settlements, net, shown above, for years ended December 31, 2020 and 2019 related to Level 3 assets and liabilities in the Consolidated Balance Sheets:

IssuancesPurchases, Sales,
andIssuances and
(in millions)PurchasesSalesSettlements(a)Settlements, Net(a)
December 31, 2020
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions$219$**(**20)$**(**76)$123
Non-U.S. governments7**(**2)**(**1)4
Corporate debt300**(**24)**(**265)11
RMBS1,118**(**33)**(**2,285)**(**1,200)
CMBS56**(**17)**(**40)**(**1)
CDO/ABS1,904**(**408)**(**1,137)359
Total bonds available for sale3,604**(**504)**(**3,804)**(**704)
Other bond securities:
RMBS37**(**16)**(**34)**(**13)
CMBS--**(**3)**(**3)
CDO/ABS35**(**579)**(**782)**(**1,326)
Total other bond securities72**(**595)**(**819)**(**1,342)
Equity securities40**(**5)-35
Other invested assets480-**(**92)388
Other assets55-762
Total assets$4,251$**(**1,104)$**(**4,708)$**(**1,561)
Liabilities:
Policyholder contract deposits$-$713$**(**506)$207
Derivative liabilities, net**(**68)814383
Fortitude Re funds withheld payable--**(**276)**(**276)
Total liabilities$**(**68)$721$**(**639)$14
December 31, 2019
Assets:
Bonds available for sale:
Obligations of states, municipalities and political subdivisions$362$(19)$(61)$282
Non-U.S. governments--(6)(6)
Corporate debt172(129)(583)(540)
RMBS1,418(27)(2,794)(1,403)
CMBS539-(91)448
CDO/ABS2,145(561)(1,472)112
Total bonds available for sale4,636(736)(5,007)(1,107)
Other bond securities:
RMBS-(1,101)(126)(1,227)
CMBS18(33)(3)(18)
CDO/ABS-(386)(812)(1,198)
Total other bond securities18(1,520)(941)(2,443)
Equity securities8-(28)(20)
Other invested assets97-(130)(33)
Other assets--(7)(7)
Total assets$4,759$(2,256)$(6,113)$(3,610)
Liabilities:
Policyholder contract deposits$-$852$(5)$847
Derivative liabilities, net(44)-(13)(57)
Total liabilities$(44)$852$(18)$790

(a)There were no issuances during the years ended December 31, 2020 and 2019.

AIG | 2020 Form 10-K 213

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3 in the tables above. As a result, the unrealized gains (losses) on instruments held at December 31, 2020 and 2019 may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable inputs (e.g., changes in unobservable long-dated volatilities).

Transfers of Level 3 Assets and Liabilities

The Net realized and unrealized gains (losses) included in income (loss) or Other comprehensive income (loss) as shown in the table above excludes $(183) million and $(46) million of net gains (losses) related to assets and liabilities transferred into Level 3 during 2020 and 2019, respectively, and includes $4 million and $30 million of net gains (losses) related to assets and liabilities transferred out of Level 3 during 2020 and 2019, respectively.

Transfers of Level 3 Assets

During the years ended December 31, 2020 and 2019, transfers into Level 3 assets primarily included certain investments in private placement corporate debt, RMBS, CMBS and CDO/ABS. Transfers of private placement corporate debt and certain ABS into Level 3 assets were primarily the result of limited market pricing information that required us to determine fair value for these securities based on inputs that are adjusted to better reflect our own assumptions regarding the characteristics of a specific security or associated market liquidity. The transfers of investments in RMBS, CMBS and CDO and certain ABS into Level 3 assets were due to diminished market transparency and liquidity for individual security types. Additionally, during 2019, a consolidated investment company acquired certain real estate investments.

During the years ended December 31, 2020 and 2019, transfers out of Level 3 assets primarily included private placement and other corporate debt, CMBS, RMBS, CDO/ABS and certain investments in municipal securities. Transfers of corporate debt, RMBS, CMBS, CDO/ABS and certain investments in municipal securities out of Level 3 assets were based on consideration of market liquidity as well as related transparency of pricing and associated observable inputs for these investments. Transfers of certain investments in private placement corporate debt and certain ABS out of Level 3 assets were primarily the result of using observable pricing information that reflects the fair value of those securities without the need for adjustment based on our own assumptions regarding the characteristics of a specific security or the current liquidity in the market.

Transfers of Level 3 Liabilities

There were no significant transfers of derivative or other liabilities into or out of Level 3 for the years ended December 31, 2020 and 2019.

Divested Businesses

The Level 3 liabilities for the year ended December 31, 2020 includes an embedded derivative associated with the funds withheld payable to Fortitude Re that was established as a result of the Majority Interest Fortitude Sale.

214 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Quantitative Information about Level 3 Fair Value Measurements

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments, and includes only those instruments for which information about the inputs is reasonably available to us, such as data from independent third-party valuation service providers and from internal valuation models. Because input information from third-parties with respect to certain Level 3 instruments (primarily CDO/ABS) may not be reasonably available to us, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities:

Fair Value at
December 31,ValuationRange
(in millions)2020TechniqueUnobservable Input(b)(Weighted Average)(c)
Assets:
Obligations of states, municipalities
and political subdivisions$1,670Discounted cash flowYield2.82% - 3.39% (3.11%)
Corporate debt1,591Discounted cash flowYield2.13% - 7.82% (4.97%)
RMBS(a)11,297Discounted cash flowConstant prepayment rate3.90% - 11.99% (7.94%)
Loss severity30.08% - 78.49% (54.29%)
Constant default rate1.45% - 6.19% (3.82%)
Yield1.69% - 4.25% (2.97%)
CDO/ABS(a)8,324Discounted cash flowYield1.93% - 4.85% (3.39%)
CMBS541Discounted cash flowYield0.92% - 5.89% (3.40%)
Liabilities:(d):
Embedded derivatives within
Policyholder contract deposits:
Variable annuity guaranteed
minimum withdrawal benefits
(GMWB)3,572Discounted cash flowEquity volatility6.45% - 50.85%
Base lapse rate0.16% - 12.60%
Dynamic lapse multiplier50.00% - 143.00%
Mortality multiplier(e)38.00% - 147.00%
Utilization90.00% - 100.00%
Equity / interest rate correlation20.00% - 40.00%
NPA(f)0.06% - 1.48%
Index annuities including certain
GMWB5,538Discounted cash flowLapse rate0.38% - 50.00%
Mortality multiplier(e)24.00% - 180.00%
Utilization(g)80.00% - 100.00%
Option budget0.00% - 4.00%
NPA(f)0.06% - 1.48%
Indexed life649Discounted cash flowBase lapse rate0.00% - 37.97%
Mortality rate0.00% - 100.00%
NPA(f)0.06% - 1.48%

AIG | 2020 Form 10-K 215

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Fair Value at
December 31,ValuationRange
(in millions)2019TechniqueUnobservable Input(b)(Weighted Average)(c)
Assets:
Obligations of states, municipalities
and political subdivisions$1,633Discounted cash flowYield3.35% - 3.95% (3.65%)
Corporate debt1,087Discounted cash flowYield3.48% - 6.22% (4.85%)
RMBS(a)11,746Discounted cash flowConstant prepayment rate4.00% - 12.89% (8.44%)
Loss severity33.68% - 76.91% (55.29%)
Constant default rate1.68% - 6.17% (3.93%)
Yield2.52% - 4.53% (3.52%)
CDO/ABS(a)6,025Discounted cash flowYield2.92% - 4.91% (3.91%)
CMBS476Discounted cash flowYield2.77% - 5.18% (3.97%)
Liabilities:
Embedded derivatives within
Policyholder contract deposits:
GMWB2,474Discounted cash flowEquity volatility6.15% - 48.85%
Base lapse rate0.16% - 12.60%
Dynamic lapse multiplier50.00% - 143.00%
Mortality multiplier(e)38.00% - 147.00%
Utilization90.00% - 100.00%
Equity / interest rate correlation20.00% - 40.00%
NPA(f)0.12% - 1.53%
Index annuities3,895Discounted cash flowLapse rate0.31% - 50.00%
Mortality multiplier(e)24.00% - 180.00%
Option budget1.00% - 4.00%
NPA(f)0.12% - 1.53%
Indexed life510Discounted cash flowBase lapse rate0.00% - 37.97%
Mortality rate0.00% - 100.00%
NPA(f)0.12% - 1.53%

(a) Information received from third-party valuation service providers. The ranges of the unobservable inputs for constant prepayment rate, loss severity and constant default rate relate to each of the individual underlying mortgage loans that comprise the entire portfolio of securities in the RMBS and CDO securitization vehicles and not necessarily to the securitization vehicle bonds (tranches) purchased by us. The ranges of these inputs do not directly correlate to changes in the fair values of the tranches purchased by us, because there are other factors relevant to the fair values of specific tranches owned by us including, but not limited to, purchase price, position in the waterfall, senior versus subordinated position and attachment points.

(b) Represents discount rates, estimates and assumptions that we believe would be used by market participants when valuing these assets and liabilities.

(c) The weighted averaging for fixed maturity securities is based on the estimated fair value of the securities. Because the valuation methodology for embedded derivatives within Policyholder contract deposits uses a range of inputs that vary at the contract level over the cash flow projection period, management believes that presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.

(d) The Fortitude Re funds withheld payable has been excluded from the above table. As discussed in Note 8, the Fortitude Re funds withheld payable is created through modco and funds withheld reinsurance arrangements where the investments supporting the reinsurance agreements are withheld by, and continue to reside on AIG’s balance sheet. This embedded derivative is valued as a total return swap with reference to the fair value of the invested assets held by AIG. Accordingly, the unobservable inputs utilized in the valuation of the embedded derivative are a component of the invested assets supporting the reinsurance agreements that are held on AIG’s balance sheet.

(e) Mortality inputs are shown as multipliers of the 2012 Individual Annuity Mortality Basic table.

(f) The non-performance risk adjustment (NPA) applied as a spread over risk-free curve for discounting.

(g) The partial withdrawal utilization unobservable input range shown applies only to policies with guaranteed minimum withdrawal benefit riders that are accounted for as an embedded derivative. The total embedded derivative liability at December 31, 2020 is approximately $726 million. The remaining guaranteed minimum riders on the index annuities are valued under the accounting guidance for certain nontraditional long-duration contracts.

The ranges of reported inputs for Obligations of states, municipalities and political subdivisions, Corporate debt, RMBS, CDO/ABS, and CMBS valued using a discounted cash flow technique consist of one standard deviation in either direction from the value-weighted average. The preceding table does not give effect to our risk management practices that might offset risks inherent in these Level 3 assets and liabilities.

216 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Interrelationships between Unobservable Inputs

We consider unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset or liability. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The following paragraphs provide a general description of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply.

Fixed Maturity Securities

The significant unobservable input used in the fair value measurement of fixed maturity securities is yield. The yield is affected by the market movements in credit spreads and U.S. Treasury yields. The yield may be affected by other factors including constant prepayment rates, loss severity, and constant default rates. In general, increases in the yield would decrease the fair value of investments, and conversely, decreases in the yield would increase the fair value of investments.

Embedded derivatives within Policyholder contract deposits

Embedded derivatives reported within Policyholder contract deposits include interest crediting rates based on market indices within index annuities, indexed life, and GICs as well as GMWB within variable annuity and certain index annuity products. For any given contract, assumptions for unobservable inputs vary throughout the period over which cash flows are projected for purposes of valuing the embedded derivative. The following unobservable inputs are used for valuing embedded derivatives measured at fair value:

 Long-term equity volatilities represent equity volatility beyond the period for which observable equity volatilities are available. Increases in assumed volatility will generally increase the fair value of both the projected cash flows from rider fees as well as the projected cash flows related to benefit payments. Therefore, the net change in the fair value of the liability may be either a decrease or an increase, depending on the relative changes in projected rider fees and projected benefit payments.

 Equity / interest rate correlation estimates the relationship between changes in equity returns and interest rates in the economic scenario generator used to value our GMWB embedded derivatives. In general, a higher positive correlation assumes that equity markets and interest rates move in a more correlated fashion, which generally increases the fair value of the liability.

 Base lapse rate assumptions are determined by company experience and are adjusted at the contract level using a dynamic lapse function, which reduces the base lapse rate when the contract is in-the-money (when the contract holder’s guaranteed value, as estimated by the company, is worth more than their underlying account value). Lapse rates are also generally assumed to be lower in periods when a surrender charge applies. Increases in assumed lapse rates will generally decrease the fair value of the liability, as fewer policyholders would persist to collect guaranteed withdrawal amounts.

 Mortality rate assumptions, which vary by age and gender, are based on company experience and include a mortality improvement assumption. Increases in assumed mortality rates will decrease the fair value of the liability, while lower mortality rate assumptions will generally increase the fair value of the liability, because guaranteed payments will be made for a longer period of time.

 Utilization assumptions estimate the timing when policyholders with a GMWB will elect to utilize their benefit and begin taking withdrawals. The assumptions may vary by the type of guarantee, tax-qualified status, the contract’s withdrawal history and the age of the policyholder. Utilization assumptions are based on company experience, which includes partial withdrawal behavior. Increases in assumed utilization rates will generally increase the fair value of the liability.

 Option budget estimates the expected long-term cost of options used to hedge exposures associated with equity price changes. The level of option budgets determines future costs of the options, which impacts the growth in account value and the valuation of embedded derivatives.

Embedded derivatives within reinsurance contracts

The fair value of embedded derivatives associated with funds withheld reinsurance contracts is determined based upon a total return swap technique with reference to the fair value of the investments held by AIG related to AIG’s funds withheld payable. The fair value of the underlying assets is generally based on market observable inputs using industry standard valuation techniques. The valuation also requires certain significant inputs, which are generally not observable and accordingly, the valuation is considered Level 3 in the fair value hierarchy.

AIG | 2020 Form 10-K 217

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Investments in Certain Entities Carried at Fair Value Using Net Asset Value Per Share

The following table includes information related to our investments in certain other invested assets, including private equity funds, hedge funds and other alternative investments that calculate net asset value per share (or its equivalent). For these investments, which are measured at fair value on a recurring basis, we use the net asset value per share to measure fair value.

December 31, 2020December 31, 2019
Fair ValueFair Value
Using NAVUsing NAV
Per Share (orUnfundedPer Share (orUnfunded
(in millions)Investment Category Includesits equivalent)Commitmentsits equivalent)Commitments
Investment Category
Private equity funds:
Leveraged buyoutDebt and/or equity investments made as part of a transaction in which assets of mature companies are acquired from the current shareholders, typically with the use of financial leverage$1,752$1,960$1,189$1,543
Real assetsInvestments in real estate properties, agricultural and infrastructure assets, including power plants and other energy producing assets908445400290
Venture capitalEarly-stage, high-potential, growth companies expected to generate a return through an eventual realization event, such as an initial public offering or sale of the company167171111155
Growth equityFunds that make investments in established companies for the purpose of growing their businesses7035542257
MezzanineFunds that make investments in the junior debt and equity securities of leveraged companies400155325414
OtherIncludes distressed funds that invest in securities of companies that are in default or under bankruptcy protection, as well as funds that have multi-strategy, and other strategies683365773206
Total private equity funds4,6133,1513,2202,665
Hedge funds:
Event-drivenSecurities of companies undergoing material structural changes, including mergers, acquisitions and other reorganizations411-727-
Long-shortSecurities that the manager believes are undervalued, with corresponding short positions to hedge market risk361-539-
MacroInvestments that take long and short positions in financial instruments based on a top-down view of certain economic and capital market conditions807-894-
OtherIncludes investments held in funds that are less liquid, as well as other strategies which allow for broader allocation between public and private investments30111691
Total hedge funds1,88012,3291
Total$6,493$3,152$5,549$2,666

218 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Private equity fund investments included above are not redeemable, because distributions from the funds will be received when underlying investments of the funds are liquidated. Private equity funds are generally expected to have 10-year lives at their inception, but these lives may be extended at the fund manager’s discretion, typically in one or two-year increments.

The hedge fund investments included above, which are carried at fair value, are generally redeemable subject to the redemption notices period. The majority of our hedge fund investments are redeemable monthly or quarterly.

Fair Value Option

Under the fair value option, we may elect to measure at fair value financial assets and financial liabilities that are not otherwise required to be carried at fair value. Subsequent changes in fair value for designated items are reported in earnings. We elect the fair value option for certain hybrid securities given the complexity of bifurcating the economic components associated with the embedded derivatives.

For additional information related to embedded derivatives refer to Note 11 herein.

Additionally, we elect the fair value option for certain alternative investments when such investments are eligible for this election. We believe this measurement basis is consistent with the applicable accounting guidance used by the respective investment company funds themselves.

For additional information on securities and other invested assets for which we have elected the fair value option refer to Note 6 herein.

The following table presents the gains or losses recorded related to the eligible instruments for which we elected the fair value option:

Years Ended December 31,Gain (Loss)
(in millions)202020192018
Assets:
Bond and equity securities$552$1,046$343
Alternative investments(a)685591213
Liabilities:
Long-term debt(b)**(**176)(181)(1)
Total gain$1,061$1,456$555

(a) Includes certain hedge funds, private equity funds and other investment partnerships.

(b) Includes GIAs, notes, bonds and mortgages payable.

Interest income and dividend income on assets measured under the fair value option are recognized and included in Net investment income in the Consolidated Statements of Income. Interest expense on liabilities measured under the fair value option is reported in Other Income in the Consolidated Statements of Income.

For additional information about our policies for recognition, measurement, and disclosure of interest and dividend income see Note 6 herein.

As a result of the adoption of the Financial Instruments Recognition and Measurement Standard on January 1, 2018, we are required to record unrealized gains and losses attributable to the observable effect of changes in credit spreads on our liabilities for which the fair value option was elected in Other Comprehensive Income. We calculate the effect of these credit spread changes using discounted cash flow techniques that incorporate current market interest rates, our observable credit spreads on these liabilities and other factors that mitigate the risk of nonperformance such as cash collateral posted.

The following table presents the difference between fair value and the aggregate contractual principal amount of long-term debt for which the fair value option was elected:

December 31, 2020December 31, 2019
OutstandingOutstanding
(in millions)Fair ValuePrincipal AmountDifferenceFair ValuePrincipal AmountDifference
Liabilities:
Long-term debt*$2,097$1,479$618$2,062$1,502$560

*Includes GIAs, notes, bonds, loans and mortgages payable.

AIG | 2020 Form 10-K 219

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

FAIR VALUE MEASUREMENTS ON A NON-RECURRING BASIS

We measure the fair value of certain assets on a non-recurring basis, generally quarterly, annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include cost and equity-method investments, commercial mortgage loans and commercial loans, investments in real estate and other fixed assets, goodwill and other intangible assets.

For additional information about how we test various asset classes for impairment see Notes 6 and 7 herein.

Information regarding the estimation of fair value for financial instruments measured at fair value on a non-recurring basis is discussed below.

Impairments for Other investments primarily relate to real estate investments as well as commercial loans and commercial mortgage loans, the fair value determination for which is discussed above under the heading Valuation Methodologies of Financial Instruments Measured at Fair Value.

The following table presents assets measured at fair value on a non-recurring basis at the time of impairment and the related impairment charges recorded during the periods presented:

Assets at Fair ValueImpairment Charges
Non-Recurring BasisDecember 31,
(in millions)Level 1Level 2Level 3Total202020192018
December 31, 2020
Other investments$-$-$376$376$77$76$97
Other assets--2828147464
Total$-$-$404$404$91$150$161
December 31, 2019
Other investments$-$-$329$329
Other assets--11
Total$-$-$330$330

FAIR VALUE INFORMATION ABOUT FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE

Information regarding the estimation of fair value for financial instruments not carried at fair value (excluding insurance contracts and lease contracts) is discussed below:

Mortgage and other loans receivable: Fair values of loans on commercial real estate and other loans receivable are estimated for disclosure purposes using discounted cash flow calculations based on discount rates that we believe market participants would use in determining the price that they would pay for such assets. For certain loans, our current incremental lending rates for similar types of loans are used as the discount rates, because we believe this rate approximates the rates market participants would use. Fair values of residential mortgage loans are generally determined based on market prices, using market based adjustments for credit and servicing as appropriate. The fair values of policy loans are generally estimated based on unpaid principal amount as of each reporting date. No consideration is given to credit risk because policy loans are effectively collateralized by the cash surrender value of the policies.

Other invested assets: The majority of the Other invested assets that are not measured at fair value represent time deposits with the original maturity at purchase greater than one year. The fair value of long-term time deposits is determined using the expected discounted future cash flow.

Cash and short-term investments: The carrying amounts of these assets approximate fair values because of the relatively short period of time between origination and expected realization, and their limited exposure to credit risk.

Policyholder contract deposits associated with investment-type contracts: Fair values for policyholder contract deposits associated with investment-type contracts not accounted for at fair value are estimated using discounted cash flow calculations based on interest rates currently being offered for similar contracts with maturities consistent with those of the contracts being valued. When no similar contracts are being offered, the discount rate is the appropriate swap rate (if available) or current risk-free interest rate consistent with the currency in which the cash flows are denominated. To determine fair value, other factors include current policyholder account values and related surrender charges and other assumptions include expectations about policyholder behavior and an appropriate risk margin.

Other liabilities: The majority of Other liabilities that are financial instruments not measured at fair value represent secured financing arrangements, including repurchase agreements. The carrying amounts of these liabilities approximate fair value, because the financing arrangements are short-term and are secured by cash or other liquid collateral.

220 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 5. Fair Value Measurements

Fortitude Re funds withheld payable: The funds withheld payable contains an embedded derivative and the changes in its fair value are recognized in earnings each period. The difference between the total Fortitude Re funds withheld payable and the embedded derivative represents the host contract.

Long-term debt and debt of consolidated investment entities: Fair values of these obligations were determined by reference to quoted market prices, when available and appropriate, or discounted cash flow calculations based upon our current market-observable implicit-credit-spread rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued.

Separate Account Liabilities – Investment Contracts: Only the portion of separate account liabilities related to products that are investment contracts are reflected in the table below. Separate account liabilities are recorded at the amount credited to the contract holder, which reflects the change in fair value of the corresponding separate account assets including contract holder deposits less withdrawals and fees; therefore, carrying value approximates fair value.

The following table presents the carrying amounts and estimated fair values of our financial instruments not measured at fair value and indicates the level in the fair value hierarchy of the estimated fair value measurement based on the observability of the inputs used:

Estimated Fair ValueCarrying
(in millions)Level 1Level 2Level 3TotalValue
December 31, 2020
Assets:
Mortgage and other loans receivable$-$95$48,541$48,636$45,562
Other invested assets-8376843843
Short-term investments-12,235-12,23512,235
Cash2,827--2,8272,827
Other assets20914-223223
Liabilities:
Policyholder contract deposits associated
with investment-type contracts-214144,357144,571130,435
Fortitude Re funds withheld payable--37,01837,01837,018
Other liabilities-3,695-3,6953,695
Long-term debt and debt of consolidated investment entities-32,0568,33040,38635,437
Separate account liabilities - investment contracts-95,610-95,61095,610
December 31, 2019
Assets:
Mortgage and other loans receivable$-$101$48,904$49,005$46,984
Other invested assets-7356741742
Short-term investments-7,887-7,8877,887
Cash2,856--2,8562,856
Other assets29120-311311
Liabilities:
Policyholder contract deposits associated
with investment-type contracts-255132,991133,246126,137
Other liabilities153,048-3,0633,063
Long-term debt and debt of consolidated investment entities-27,0248,88335,90733,288
Separate account liabilities - investment contracts-88,770-88,77088,770

AIG | 2020 Form 10-K 221

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

  1. Investments

Fixed Maturity Securities

Subsequent to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020

Bonds held to maturity are carried at amortized cost when we have the ability and positive intent to hold these securities until maturity. When we do not have the ability or positive intent to hold bonds until maturity, these securities are classified as available for sale or are measured at fair value at our election. None of our fixed maturity securities met the criteria for held to maturity classification at December 31, 2020 or 2019.

Unrealized gains and losses from available for sale investments in fixed maturity securities carried at fair value were reported as a separate component of AOCI, net of policy related amounts and deferred income taxes, in shareholders’ equity. Realized and unrealized gains and losses from fixed maturity securities measured at fair value at our election are reflected in Net investment income. Investments in fixed maturity securities are recorded on a trade-date basis.

Interest income is recognized using the effective yield method and reflects amortization of premium and accretion of discount. Premiums and discounts arising from the purchase of bonds classified as available for sale are treated as yield adjustments over their estimated holding periods, until maturity, or call date, if applicable. For investments in certain structured securities, recognized yields are updated based on current information regarding the timing and amount of expected undiscounted future cash flows. For high credit quality structured securities, effective yields are recalculated based on actual payments received and updated prepayment expectations, and the amortized cost is adjusted to the amount that would have existed had the new effective yield been applied since acquisition with a corresponding charge or credit to net investment income. For structured securities that are not high credit quality, the structured securities yields are based on expected cash flows which take into account both expected credit losses and prepayments.

An allowance for credit losses is not established upon initial recognition of the asset (unless the security is determined to be a PCD asset which is discussed in more detail below). Subsequently, differences between actual and expected cash flows and changes in expected cash flows are recognized as adjustments to the allowance for credit losses. Changes that cannot be reflected as adjustments to the allowance for credit losses are accounted for as prospective adjustments to yield.

Prior to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020

Premiums and discounts arising from the purchase of bonds classified as available for sale are treated as yield adjustments over their estimated holding periods, until maturity, or call date, if applicable. For investments in certain RMBS, CMBS and CDO/ABS, (collectively, structured securities), recognized yields are updated based on current information regarding the timing and amount of expected undiscounted future cash flows. For high credit quality structured securities, effective yields are recalculated based on actual payments received and updated prepayment expectations, and the amortized cost is adjusted to the amount that would have existed had the new effective yield been applied since acquisition with a corresponding charge or credit to net investment income. For structured securities that are not high credit quality, effective yields are recalculated and adjusted prospectively based on changes in expected undiscounted future cash flows. For purchased credit impaired (PCI) securities, at acquisition, the difference between the undiscounted expected future cash flows and the recorded investment in the securities represents the initial accretable yield, which is to be accreted into net investment income over the securities’ remaining lives on an effective level-yield basis. Subsequently, effective yields recognized on PCI securities are recalculated and adjusted prospectively to reflect changes in the contractual benchmark interest rates on variable rate securities and any significant increases in undiscounted expected future cash flows arising due to reasons other than interest rate changes.

222 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

Securities Available for Sale

The following table presents the amortized cost or cost and fair value of our available for sale securities:

December 31, 2020AmortizedAllowanceGrossGross
Cost orfor CreditUnrealizedUnrealizedFair
(in millions)CostLosses(a)GainsLossesValue
Bonds available for sale:
U.S. government and government sponsored entities$3,640$-$503$**(**17)$4,126
Obligations of states, municipalities and political subdivisions13,915-2,216**(**7)16,124
Non-U.S. governments14,231**(**4)1,181**(**63)15,345
Corporate debt150,111**(**164)19,905**(**554)169,298
Mortgage-backed, asset-backed and collateralized:
RMBS28,551**(**16)3,000**(**70)31,465
CMBS15,182**(**1)1,023**(**71)16,133
CDO/ABS18,707**(**1)425**(**126)19,005
Total mortgage-backed, asset-backed and collateralized62,440**(**18)4,448**(**267)66,603
Total bonds available for sale(b)$244,337$**(**186)$28,253$**(**908)$271,496
December 31, 2019Other-Than-
AmortizedGrossGrossTemporary
Cost orUnrealizedUnrealizedFairImpairments
(in millions)CostGainsLossesValuein AOCI(c)
Bonds available for sale:
U.S. government and government sponsored entities$5,108$316$(44)$5,380$-
Obligations of states, municipalities and political subdivisions13,9601,390(32)15,318-
Non-U.S. governments14,042884(57)14,869(18)
Corporate debt138,04612,090(500)149,6367
Mortgage-backed, asset-backed and collateralized:
RMBS29,8023,067(64)32,8051,149
CMBS13,879576(25)14,43034
CDO/ABS18,393348(93)18,64814
Total mortgage-backed, asset-backed and collateralized62,0743,991(182)65,8831,197
Total bonds available for sale(b)$233,230$18,671$(815)$251,086$1,186

(a)Represents the allowance for credit losses that has been recognized. Changes in the allowance for credit losses are recorded through Net Realized Capital Gains and Losses and are not recognized in other comprehensive income.

(b)At December 31, 2020 and 2019, bonds available for sale held by us that were below investment grade or not rated totaled $28.2 billion and $27.8 billion, respectively.

(c) Represents the amount of other-than-temporary impairments recognized in AOCI. Amount includes unrealized gains and losses on impaired securities relating to changes in the fair value of such securities subsequent to the impairment measurement date.

AIG | 2020 Form 10-K 223

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

Securities Available for Sale in a Loss Position for Which No Allowance for Credit Loss Has Been Recorded

The following table summarizes the fair value and gross unrealized losses on our available for sale securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position for which no allowance for credit loss has been recorded:

Less than 12 Months12 Months or MoreTotal
GrossGrossGross
FairUnrealizedFairUnrealizedFairUnrealized
(in millions)ValueLossesValueLossesValueLosses
December 31, 2,020.0
Bonds available for sale:
U.S. government and government sponsored entities$649$17$-$-$649$17
Obligations of states, municipalities and political
subdivisions26747833457
Non-U.S. governments1,28728262331,54961
Corporate debt11,7153481,2838112,998429
RMBS3,48640282183,76858
CMBS1,64458346121,99070
CDO/ABS5,456813,063458,519126
Total bonds available for sale$24,504$576$5,314$192$29,818$768

Securities Available for Sale in a Loss Position

The following table summarizes the fair value and gross unrealized losses on our available for sale securities, aggregated by major investment category and length of time that individual securities have been in a continuous unrealized loss position:

Less than 12 Months12 Months or MoreTotal
GrossGrossGross
FairUnrealizedFairUnrealizedFairUnrealized
(in millions)ValueLossesValueLossesValueLosses
December 31, 2019
Bonds available for sale:
U.S. government and government sponsored entities$1,461$44$63$-$1,524$44
Obligations of states, municipalities and political
subdivisions672212461191832
Non-U.S. governments1,10512343451,44857
Corporate debt11,8683192,40518114,273500
RMBS3,428281,367364,79564
CMBS1,8771636792,24425
CDO/ABS3,920532,571406,49193
Total bonds available for sale$24,331$493$7,362$322$31,693$815

At December 31, 2020, we held 5,105 individual fixed maturity securities that were in an unrealized loss position and for which no allowance for credit losses has been recorded (including 949 individual fixed maturity securities that were in a continuous unrealized loss position for 12 months or more). At December 31, 2019, we held 5,695 individual fixed maturity securities that were in an unrealized loss position, of which 1,254 individual fixed maturity securities were in a continuous unrealized loss position for 12 months or more. We did not recognize the unrealized losses in earnings on these fixed maturity securities at December 31, 2020 because it was determined that such losses were due to non-credit factors. Additionally, we neither intend to sell the securities nor do we believe that it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. For fixed maturity securities with significant declines, we performed fundamental credit analyses on a security-by-security basis, which included consideration of credit enhancements, liquidity position, expected defaults, industry and sector analysis, forecasts and available market data.

224 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

Contractual Maturities of Fixed Maturity Securities Available for Sale

The following table presents the amortized cost and fair value of fixed maturity securities available for sale by contractual maturity:

Total Fixed Maturity Securities
Available for Sale
Amortized Cost,
(in millions)Net of AllowanceFair Value
December 31, 2020
Due in one year or less$10,619$10,734
Due after one year through five years43,40545,248
Due after five years through ten years40,92745,241
Due after ten years86,778103,670
Mortgage-backed, asset-backed and collateralized62,42266,603
Total$244,151$271,496

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.

The following table presents the gross realized gains and gross realized losses from sales or maturities of our available for sale securities:

Years Ended December 31,
202020192018
GrossGrossGrossGrossGrossGross
RealizedRealizedRealizedRealizedRealizedRealized
(in millions)GainsLossesGainsLossesGainsLosses
Fixed maturity securities$1,824$810$650$330$331$476
Equity securities----16-
Total$1,824$810$650$330$347$476

For the year ended December 31, 2020, the aggregate fair value of available for sale securities sold was $23.0 billion, which resulted in net realized capital gains (losses) of $1.0 billion. Included within the net realized capital gains (losses) is $707 million of realized capital gains for the year ended December 31, 2020, which relate to the Fortitude Re funds withheld assets held by AIG in support of Fortitude Re’s reinsurance obligations to AIG (Fortitude Re funds withheld assets) for the period after deconsolidation of Fortitude Re. These realized capital gains are included in Net realized capital gains (losses) on Fortitude Re funds withheld assets.

For the years ended December 31, 2019 and 2018, the aggregate fair value of available for sale securities sold was $22.0 billion and $25.1 billion, respectively, which resulted in net realized capital gains (losses) of $320 million and $(129) million, respectively.

AIG | 2020 Form 10-K 225

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

Other Securities Measured at Fair Value

The following table presents the fair value of fixed maturity securities measured at fair value based on our election of the fair value option, which are reported in the other bond securities caption in the financial statements, and equity securities measured at fair value:

December 31, 2020December 31, 2019
FairPercentFairPercent
(in millions)Valueof TotalValueof Total
Fixed maturity securities:
U.S. government and government sponsored entities$1,84529%$2,12128%
Corporate debt12-18-
Mortgage-backed, asset-backed and collateralized**:**
RMBS42974897
CMBS32053224
CDO/ABS and other collateralized2,685423,73250
Total mortgage-backed, asset-backed and collateralized3,434544,54361
Total fixed maturity securities5,291836,68289
Equity securities1,0561784111
Total$6,347100%$7,523100%

Other Invested Assets

The following table summarizes the carrying amounts of other invested assets:

December 31,December 31,
(in millions)20202019
Alternative investments(a) (b)$9,572$8,845
Investment real estate(c)7,9308,491
All other investments(d)1,5581,456
Total$19,060$18,792

(a)At December 31, 2020, included hedge funds of $2.3 billion, private equity funds of $7.0 billion, and affordable housing partnerships of $257 million. At December 31, 2019, included hedge funds of $3.3 billion, private equity funds of $5.2 billion, and affordable housing partnerships of $331 million.

(b) At December 31, 2020, approximately 68 percent of our hedge fund portfolio is available for redemption in 2021. The remaining 32 percent will be available for redemption between 2022 and 2027.

(c) Net of accumulated depreciation of $756 million and $703 million in 2020 and 2019, respectively.

(d) Includes AIG’s 3.5 percent ownership interest in Fortitude Holdings which is recorded using the measurement alternative for equity securities and is carried at cost, which was $100 million as of December 31, 2020.

Other Invested Assets Carried at Fair Value

Certain hedge funds, private equity funds, and other investment partnerships for which we have elected the fair value option are reported at fair value with changes in fair value recognized in Net investment income.

Other Invested Assets – Equity Method Investments

We account for hedge funds, private equity funds, affordable housing partnerships and other investment partnerships using the equity method of accounting unless our interest is so minor that we may have virtually no influence over partnership operating and financial policies, or we have elected the fair value option. Under the equity method of accounting, our carrying amount generally is our share of the net asset value of the funds or the partnerships, and changes in our share of the net asset values are recorded in Net investment income. In applying the equity method of accounting, we consistently use the most recently available financial information provided by the general partner or manager of each of these investments. Hedge funds are reported as of the balance sheet date. Private equity funds are generally reported on a one-quarter lag. The financial statements of these investees are generally audited annually.

226 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

Summarized Financial Information of Equity Method Investees

The following is the aggregated summarized financial information of our equity method investees, including those for which the fair value option has been elected:

Years Ended December 31,
(in millions)202020192018
Operating results:
Total revenues$13,090$8,045$15,310
Total expenses**(**2,897)(3,115)(3,200)
Net income$10,193$4,930$12,110
At December 31,
(in millions)20202019
Balance sheet:
Total assets$85,083$93,773
Total liabilities$**(**10,462)$(14,218)

The following table presents the carrying amount and ownership percentage of equity method investments at December 31, 2020 and 2019:

20202019
CarryingOwnershipCarryingOwnership
(in millions)ValuePercentageValuePercentage
Equity method investments$4,548Various$5,911Various

Summarized financial information for these equity method investees may be presented on a lag, due to the unavailability of information for the investees at our respective balance sheet dates, and is included for the periods in which we held an equity method ownership interest.

Other Investments

Also included in Other invested assets are real estate held for investment. These investments are reported at cost, less depreciation and are subject to impairment review, as discussed below.

Net Investment Income

Net investment income represents income primarily from the following sources:

 Interest income and related expenses, including amortization of premiums and accretion of discounts with changes in the timing and the amount of expected principal and interest cash flows reflected in yield, as applicable.

 Dividend income from common and preferred stocks.

 Realized and unrealized gains and losses from investments in other securities and investments for which we elected the fair value option.

 Earnings from alternative investments.

 Prepayment premiums.

AIG | 2020 Form 10-K 227

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

The following table presents the components of Net investment income:

Years Ended December 31,202020192018
Excluding FortitudeFortitude Re
Re FundsFunds Withheld
(in millions)Withheld AssetsAssets(d)TotalTotalTotal
Available for sale fixed maturity securities, including short-term
investments$9,508$851$10,359$10,768$10,494
Other fixed maturity securities(a)540135531,015437
Equity securities200-200159(170)
Interest on mortgage and other loans1,8831061,9892,0301,883
Alternative investments(b)913991,0121,088655
Real estate195-195304307
Other investments(c)**(**120)1**(**119)(220)(27)
Total investment income13,1191,07014,18915,14413,579
Investment expenses54117558525493
Net investment income$12,578$1,053$13,631$14,619$13,086

(a)Included in the years ended December 31, 2020, 2019 and 2018 was income of $195 million, $177 million and $19 million, respectively, related to fixed maturity securities measured at fair value that economically hedge liabilities described in (c) below.

(b) Included income from hedge funds, private equity funds and affordable housing partnerships. Hedge funds are recorded as of the balance sheet date. Private equity funds are generally reported on a one-quarter lag.

(c) Included in the years ended December 31, 2020, 2019 and 2018 were losses of $162 million, $161 million and $21 million, respectively, related to liabilities measured at fair value that are economically hedged with fixed maturity securities as described in (a) above.

(d) Represents activity subsequent to the deconsolidation of Fortitude Re on June 2, 2020.

Net Realized Capital Gains and Losses

Net realized capital gains and losses are determined by specific identification. The net realized capital gains and losses are generated primarily from the following sources:

 Sales of available for sale fixed maturity securities, real estate and other alternative investments.

 Reductions to the amortized cost basis of available for sale fixed maturity securities that have been written down due to our intent to sell them or it being more likely than not that we will be required to sell them.

 Changes in the allowance for credit losses on bonds available for sale, mortgage and other loans receivable, and loans commitments.

 Changes in fair value of free standing and embedded derivatives, including changes in the non-performance adjustment, except for those instruments that are designated as hedging instruments when the change in the fair value of the hedged item is not reported in Net realized capital gains (losses).

 Foreign exchange gains and losses resulting from foreign currency transactions.

 Changes in fair value of the embedded derivative related to the Fortitude Re funds withheld assets.

228 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

The following table presents the components of Net realized capital gains (losses):

Years Ended December 31,202020192018
ExcludingFortitude Re
Fortitude ReFunds
FundsWithheld
(in millions)Withheld AssetsAssets(c)TotalTotalTotal
Sales of fixed maturity securities$307$707$1,014$320$(145)
Sales of equity securities----16
Other-than-temporary impairments---(174)(251)
Intent to sell(a)**(**3)-**(**3)--
Change in allowance for credit losses on fixed maturity securities**(**270)**(**10)**(**280)--
Change in allowance for credit losses on loans**(**105)2**(**103)(46)(92)
Foreign exchange transactions36513378227(182)
Variable annuity embedded derivatives, net of related hedges166-166(294)304
All other derivatives and hedge accounting**(**672)**(**249)**(**921)(22)417
Loss on sale of private equity funds----(321)
Other(b)156-156621203
Net realized capital gains (losses) – excluding Fortitude Re
funds withheld embedded derivative**(**56)463407632(51)
Net realized capital gains (losses) on Fortitude Re funds withheld
embedded derivative-**(**2,645)**(**2,645)--
Net realized capital gains (losses)$**(**56)$**(**2,182)$**(**2,238)$632$(51)

(a)In 2019 and 2018, Intent to sell was included in Other-than-temporary impairments.

(b) 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. In 2018, primarily includes $96 million and $49 million of realized gains on the sale of shares of OneMain Holdings, Inc. and an investment in Castle Holdings LLC’s aircraft assets, respectively.

(c) Represents activity subsequent to the deconsolidation of Fortitude Re on June 2, 2020.

Change in Unrealized Appreciation (Depreciation) of Investments

The following table presents the increase (decrease) in unrealized appreciation (depreciation) of our available for sale securities and other investments:

Years Ended
December 31,
(in millions)20202019
Increase (decrease) in unrealized appreciation (depreciation) of investments:
Fixed maturity securities$9,489$14,245
Other investments2(70)
Total increase (decrease) in unrealized appreciation (depreciation) of investments*****$9,491$14,175

*Excludes net unrealized gains and losses attributable to businesses held for sale at December 31, 2019.

The following table summarizes the unrealized gains and losses recognized in Net Investment Income during the reporting period on equity securities still held at the reporting date:

Years Ended December 31,20202019
OtherOther
InvestedInvested
(in millions)EquitiesAssetsTotalEquitiesAssetsTotal
Net gains and losses recognized during the year on equity securities$200$832$1,032$159$744$903
Less: Net gains and losses recognized during the year on equity
securities sold during the year**(**23)462339159198
Unrealized gains and losses recognized during the reporting
period on equity securities still held at the reporting date$223$786$1,009$120$585$705

AIG | 2020 Form 10-K 229

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

Evaluating Investments for AN ALLOWANCE FOR CREDIT LOSSES/OTHER-than-TEMPORARY IMPAIRMENTS

Fixed Maturity Securities

Subsequent to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020

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 capital losses. No allowance is established in these situations and any previously recorded allowance is reversed. The new cost basis is not adjusted for subsequent increases in estimated fair value. 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 capital 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). Accrued interest is excluded from the measurement of the allowance for credit losses.

When estimating future cash flows for structured fixed maturity securities (e.g., RMBS, CMBS, CDO, ABS) management considers the historical performance of underlying assets and available market information as well as bond-specific structural considerations, such as credit enhancement and the priority of payment structure of the security. In addition, the process of estimating future cash flows includes, but is not limited to, the following critical inputs, which vary by asset class:

 Current delinquency rates;

 Expected default rates and the timing of such defaults;

 Loss severity and the timing of any recovery; and

 Expected prepayment speeds.

When estimating future cash flows for corporate, municipal and sovereign fixed maturity securities determined to be credit impaired, management considers:

 Expected default rates and the timing of such defaults;

 Loss severity and the timing of any recovery; and

 Scenarios specific to the issuer and the security, which may also include estimates of outcomes of corporate restructurings, political and macroeconomic factors, stability and financial strength of the issuer, the value of any secondary sources of repayment and the disposition of assets.

We consider severe price declines in our assessment of potential credit impairments. We may also modify our model inputs when we determine that price movements in certain sectors are indicative of factors not captured by the cash flow models.

Credit losses are reassessed each period. The allowance for credit losses and the corresponding charge to realized capital losses can be reversed if conditions change, however, the allowance for credit losses will never be reduced below zero. When we determine that all or a portion of a fixed maturity security is uncollectable, the uncollectable amortized cost amount is written off with a corresponding reduction to the allowance for credit losses. If we collect cash flows that were previously written off the recovery is recognized by decreasing realized capital losses.

Prior to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020

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 other-than-temporary impairment has occurred and the amortized cost is written down to current fair value, with a corresponding charge to realized capital losses. 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

230 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

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 credit impairment has occurred, the amortized cost is written down to the estimated recoverable value with a corresponding charge to realized capital losses. 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 related to a credit impairment is presented in unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were recognized (a separate component of accumulated other comprehensive income).

We consider severe price declines in our assessment of potential credit impairments. We may also modify our model inputs when we determine that price movements in certain sectors are indicative of factors not captured by the cash flow models.

In periods subsequent to the recognition of an other-than-temporary impairment charge for available for sale fixed maturity securities that is not foreign exchange related, we prospectively accrete into earnings the difference between the new amortized cost and the expected undiscounted recoverable value over the remaining expected holding period of the security.

Credit Impairments

The following table presents a rollforward of the changes in allowance for credit losses on available for sale fixed maturity securities by major investment category:

Year Ended December 31,2020
Non-
(in millions)StructuredStructuredTotal
Balance, beginning of year*$7$-$7
Additions:
Securities for which allowance for credit losses were not previously recorded38290328
Purchases of available for sale debt securities accounted for as purchased credit deteriorated assets26-26
Accretion of available for sale debt securities accounted for as purchased credit deteriorated assets1-1
Reductions:
Securities sold during the period(5)(26)**(**31)
Intent to sell security or more likely than not will be required to sell the security before recovery of
its amortized cost basis---
Additional net increases or decreases to the allowance for credit losses on securities that had an
allowance recorded in a previous period, for which there was no intent to sell before recovery
amortized cost basis(50)33**(**17)
Write-offs charged against the allowance-(128)**(**128)
Recoveries of amounts previously written off---
Other---
Balance, end of year$17$169$186
  • The beginning balance incorporates the Day 1 gross up on PCD assets held as of January 1, 2020.

The following table presents a rollforward of the cumulative credit losses in other-than-temporary impairments recognized in earnings for available for sale fixed maturity securities:

Years Ended December 31,
(in millions)20192018
Balance, beginning of year$-$526
Increases due to:
Credit impairments on new securities subject to impairment losses13659
Additional credit impairments on previously impaired securities1790
Reductions due to:
Credit impaired securities fully disposed for which there was no
prior intent or requirement to sell(64)(145)
Accretion on securities previously impaired due to credit*(20)(530)
Balance, end of year$69$-

*Represents both accretion recognized due to changes in cash flows expected to be collected over the remaining expected term of the credit impaired securities and the accretion due to the passage of time.

AIG | 2020 Form 10-K 231

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

Other Invested Assets

Our equity method investments in private equity funds, hedge funds and other entities are evaluated for impairment each reporting period. Such evaluation considers market conditions, events and volatility that may impact the recoverability of the underlying investments within these private equity funds and hedge funds and is based on the nature of the underlying investments and specific inherent risks. Such risks may evolve based on the nature of the underlying investments.

Our investments in aircraft assets and real estate are periodically evaluated for recoverability whenever changes in circumstances indicate the carrying amount of an asset may be impaired. When impairment indicators are present, we compare expected investment cash flows to carrying amount. When the expected cash flows are less than the carrying amount, the investments are written down to fair value with a corresponding charge to earnings. We sold the remaining portion of our aircraft assets in 2018.

Purchased Credit Deteriorated/Impaired Securities

Subsequent to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020

We purchase certain RMBS securities that have experienced more-than-insignificant deterioration in credit quality since origination. Subsequent to the adoption of the Financial Instruments Credit Losses Standard these are referred to as PCD assets. At the time of purchase an allowance is recognized for these PCD assets by adding it to the purchase price to arrive at the initial amortized cost. There is no credit loss expense recognized upon acquisition of a PCD asset. When determining the initial allowance for credit losses, management considers the historical performance of underlying assets and available market information as well as bond-specific structural considerations, such as credit enhancement and the priority of payment structure of the security. In addition, the process of estimating future cash flows includes, but is not limited to, the following critical inputs:

 Current delinquency rates;

 Expected default rates and the timing of such defaults;

 Loss severity and the timing of any recovery; and

 Expected prepayment speeds.

Subsequent to the acquisition date, the PCD assets follow the same accounting as other structured securities that are not high credit quality.

During the twelve-month period ended December 31, 2020, we purchased certain securities which had more than insignificant credit deterioration since their origination. These PCD securities are held in the portfolio of bonds available for sale in their natural classes at December 31, 2020.

The following table presents a reconciliation of the purchase price to the unpaid principal balance at the acquisition date of the PCD securities that were purchased with credit deterioration during the twelve-month period ended December 31, 2020:

(in millions)December 31, 2020
Unpaid principal balance$644
Allowance for expected credit losses at acquisition**(**26)
Purchase (discount) premium**(**149)
Purchase price$469

Prior to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020

We purchase certain RMBS securities that have experienced deterioration in credit quality since their issuance. We determine whether it is probable at acquisition that we will not collect all contractually required payments for these PCI securities, including both principal and interest. At acquisition, the timing and amount of the undiscounted future cash flows expected to be received on each PCI security is determined based on our best estimate using key assumptions, such as interest rates, default rates and prepayment speeds. At acquisition, the difference between the undiscounted expected future cash flows of the PCI securities and the recorded investment in the securities represents the initial accretable yield, which is accreted into Net investment income over their remaining lives on an effective yield basis. Additionally, the difference between the contractually required payments on the PCI securities and the undiscounted expected future cash flows represents the non-accretable difference at acquisition. The accretable yield and the non-accretable difference will change over time, based on actual payments received and changes in estimates of undiscounted expected future cash flows, which are discussed further below.

232 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

On a quarterly basis, the undiscounted expected future cash flows associated with PCI securities are re-evaluated based on updates to key assumptions. Declines in undiscounted expected future cash flows due to further credit deterioration as well as changes in the expected timing of the cash flows can result in the recognition of an other-than-temporary impairment charge, as PCI securities are subject to our policy for evaluating investments for other-than-temporary impairment. Changes to undiscounted expected future cash flows due solely to the changes in the contractual benchmark interest rates on variable rate PCI securities will change the accretable yield prospectively. Significant increases in undiscounted expected future cash flows for reasons other than interest rate changes are recognized prospectively as adjustments to the accretable yield.

The following tables present information on our PCI securities, which are included in bonds available for sale as of December 31, 2019:

(in millions)At Date of Acquisition
Contractually required payments (principal and interest)$35,139
Cash flows expected to be collected*28,720
Recorded investment in acquired securities19,382

*Represents undiscounted expected cash flows, including both principal and interest.

December 31,
(in millions)2019
Outstanding principal balance$10,476
Amortized cost6,970
Fair value8,664

The following table presents activity for the accretable yield on PCI securities:

Years Ended December 31,
(in millions)2019
Balance, beginning of year$7,210
Newly purchased PCI securities17
Accretion(624)
Effect of changes in interest rate indices(541)
Net reclassification from (to) non-accretable difference, including effects of prepayments(350)
Activities related to businesses reclassified to held for sale(7)
Balance, end of year$5,705

Pledged Investments

Secured Financing and Similar Arrangements

We enter into secured financing transactions whereby certain securities are sold under agreements to repurchase (repurchase agreements), in which we transfer securities in exchange for cash, with an agreement by us to repurchase the same or substantially similar securities. Our secured financing transactions also include those that involve the transfer of securities to financial institutions in exchange for cash (securities lending agreements). In all of these secured financing transactions, the securities transferred by us (pledged collateral) may be sold or repledged by the counterparties. These agreements are recorded at their contracted amounts plus accrued interest, other than those that are accounted for at fair value.

Pledged collateral levels are monitored daily and are generally maintained at an agreed-upon percentage of the fair value of the amounts borrowed during the life of the transactions. In the event of a decline in the fair value of the pledged collateral under these secured financing transactions, we may be required to transfer cash or additional securities as pledged collateral under these agreements. At the termination of the transactions, we and our counterparties are obligated to return the amounts borrowed and the securities transferred, respectively.

The following table presents the fair value of securities pledged to counterparties under secured financing transactions, including repurchase and securities lending agreements:

(in millions)December 31, 2020December 31, 2019
Fixed maturity securities available for sale$3,636$3,030

AIG | 2020 Form 10-K 233

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

At December 31, 2020 and 2019, amounts borrowed under repurchase and securities lending agreements totaled $3.7 billion and $3.1 billion, respectively.

The following table presents the fair value of securities pledged under our repurchase agreements by collateral type and by remaining contractual maturity:

Remaining Contractual Maturity of the Agreements
Overnightup to
and3031 - 9091 - 364365 days
(in millions)Continuousdaysdaysdaysor greaterTotal
December 31, 2020
Bonds available for sale:
Non-U.S. governments$63$-$-$-$-$63
Corporate debt9697---193
Total$159$97$-$-$-$256
December 31, 2019
Bonds available for sale:
Non-U.S. governments$2$71$-$-$-$73
Corporate debt225582--159
Total$24$126$82$-$-$232

The following table presents the fair value of securities pledged under our securities lending agreements by collateral type and by remaining contractual maturity:

Remaining Contractual Maturity of the Agreements
Overnightup to
and3031 - 9091 - 364365 days
(in millions)Continuousdaysdaysdaysor greaterTotal
December 31, 2020
Bonds available for sale:
Obligations of states, municipalities and political
subdivisions$-$-$103$-$-$103
Corporate debt-9822,295--3,277
RMBS------
Total$-$982$2,398$-$-$3,380
December 31, 2019
Bonds available for sale:
Obligations of states, municipalities and political
subdivisions$-$-$386$-$-$386
Corporate debt-1,071947--2,018
RMBS---394-394
Total$-$1,071$1,333$394$-$2,798

We also enter into agreements in which securities are purchased by us under agreements to resell (reverse repurchase agreements), which are accounted for as secured financing transactions and reported as short-term investments or other assets, depending on their terms. These agreements are recorded at their contracted resale amounts plus accrued interest, other than those that are accounted for at fair value. In all reverse repurchase transactions, we take possession of or obtain a security interest in the related securities, and we have the right to sell or repledge this collateral received.

The following table presents information on the fair value of securities pledged to us under reverse repurchase agreements:

(in millions)December 31, 2020December 31, 2019
Securities collateral pledged to us$5,359$2,567
Amount sold or repledged by us-121

At December 31, 2020 and December 31, 2019, amounts loaned under reverse repurchase agreements totaled $5.4 billion and $2.6 billion, respectively.

234 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 6. Investments

We do not currently offset any secured financing transactions. All such transactions are collateralized and margined daily consistent with market standards and subject to enforceable master netting arrangements with rights of set off.

Insurance – Statutory and Other Deposits

The total carrying value of cash and securities deposited by our insurance subsidiaries under requirements of regulatory authorities or other insurance-related arrangements, including certain annuity-related obligations and certain reinsurance contracts, was $11.2 billion and $8.7 billion at December 31, 2020 and 2019, respectively.

Other Pledges and Restrictions

Certain of our subsidiaries are members of Federal Home Loan Banks (FHLBs) and such membership requires the members to own stock in these FHLBs. We owned an aggregate of $191 million and $194 million of stock in FHLBs at December 31, 2020 and 2019, respectively. In addition, our subsidiaries have pledged securities available for sale and residential loans associated with borrowings and funding agreements from FHLBs, with a fair value of $5.7 billion and $1.2 billion, respectively, at December 31, 2020 and $4.3 billion and $1.8 billion, respectively, at December 31, 2019.

Certain GIAs have provisions that require collateral to be posted or payments to be made by us upon a downgrade of our long-term debt ratings. The actual amount of collateral required to be posted to the counterparties in the event of such downgrades, and the aggregate amount of payments that we could be required to make, depend on market conditions, the fair value of outstanding affected transactions and other factors prevailing at and after the time of the downgrade. The fair value of securities pledged as collateral with respect to these obligations was approximately $1.5 billion at both December 31, 2020 and 2019. 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.

Investments held in escrow accounts or otherwise subject to restriction as to their use were $494 million and $330 million, comprised of bonds available for sale and short-term investments at December 31, 2020 and 2019, respectively.

Reinsurance transactions between AIG and Fortitude Re were structured as modco and loss portfolio transfer arrangements with funds withheld. Following closing of the Majority Interest Fortitude Sale, a portion of the proceeds were contributed to AIG subsidiaries.

For further discussion on the sale of Fortitude Holdings see Note 1 and Note 8 to the Consolidated Financial Statements.

  1. Lending Activities

Mortgage and other loans receivable include commercial mortgages, residential mortgages, life insurance policy loans, commercial loans, and other loans and notes receivable. Commercial mortgages, residential mortgages, commercial loans, and other loans and notes receivable are carried at unpaid principal balances less allowance for credit losses and plus or minus adjustments for the accretion or amortization of discount or premium. Interest income on such loans is accrued as earned.

Direct costs of originating commercial mortgages, commercial loans, and other loans and notes receivable, net of nonrefundable points and fees, are deferred and included in the carrying amount of the related receivables. The amount deferred is amortized to income as an adjustment to earnings using the interest method. Premiums and discounts on purchased residential mortgages are also amortized to income as an adjustment to earnings using the interest method.

Life insurance policy loans are carried at unpaid principal balances. There is no allowance for policy loans because these loans serve to reduce the death benefit paid when the death claim is made and the balances are effectively collateralized by the cash surrender value of the policy.

Interest income is not accrued when payment of contractual principal and interest is not expected. Any cash received on impaired loans is generally recorded as a reduction of the current carrying amount of the loan. Accrual of interest income is generally resumed when delinquent contractual principal and interest is repaid or when a portion of the delinquent contractual payments are made and the ongoing required contractual payments have been made for an appropriate period. As of December 31, 2020, $14 million and $238 million of residential mortgage loans and commercial mortgage loans, respectively, were placed on nonaccrual status.

Accrued interest is presented separately and is included in Other assets on the Consolidated Balance Sheets. As of December 31, 2020, accrued interest receivable was $14 million and $129 million associated with residential mortgage loans and commercial mortgage loans, respectively.

AIG | 2020 Form 10-K 235

ITEM 8 | Notes to Consolidated Financial Statements | 7. Lending Activities

A significant majority of commercial mortgages in the portfolio are non-recourse loans and, accordingly, the only guarantees are for specific items that are exceptions to the non-recourse provisions. It is therefore extremely rare for us to have cause to enforce the provisions of a guarantee on a commercial real estate or mortgage loan.

The following table presents the composition of Mortgage and other loans receivable, net:

December 31,December 31,
(in millions)20202019
Commercial mortgages(a)$36,424$36,170
Residential mortgages4,6456,683
Life insurance policy loans1,9862,065
Commercial loans, other loans and notes receivable3,3212,504
Total mortgage and other loans receivable46,37647,422
Allowance for credit losses(b)**(**814)(438)
Mortgage and other loans receivable, net$45,562$46,984

(a) Commercial mortgages primarily represent loans for apartments, offices and retail properties, with exposures in New York and California representing the largest geographic concentrations (aggregating approximately 24 percent and 10 percent, respectively, at December 31, 2020, and 23 percent and 10 percent, respectively, at December 31, 2019).

(b) Does not include $79 million of expected credit loss liability at December 31, 2020 in relation to off-balance-sheet commitments to fund commercial mortgage loans, which is recorded in Other liabilities.

Nonperforming loans are generally those loans where payment of contractual principal or interest is more than 90 days past due. Nonperforming loans were not significant for any of the periods presented.

Credit Quality of Commercial Mortgages

The following table presents debt service coverage ratios(a) for commercial mortgages by year of vintage:

December 31, 2020
(in millions)20202019201820172016PriorTotal
>1.2X$1,914$5,596$5,649$3,941$4,592$10,730$32,422
1.00 - 1.20X7704674561441611,1063,104
<1.00X4863438796282898
Total commercial mortgages$2,688$6,149$6,448$4,172$4,849$12,118$36,424

The following table presents loan-to-value ratios(b) for commercial mortgages by year of vintage:

December 31, 2020
(in millions)20202019201820172016PriorTotal
Less than 65%$2,382$3,755$3,855$2,565$2,852$8,145$23,554
65% to 75%2742,3302,3631,3061,2002,55110,024
76% to 80%284530-70515688
Greater than 80%4192003017279072,158
Total commercial mortgages$2,688$6,149$6,448$4,172$4,849$12,118$36,424

The following table presents debt service coverage ratios and loan-to-value ratios for commercial mortgages:

December 31, 2019Debt Service Coverage Ratios(a)
(in millions)>1.20X1.00X - 1.20X<1.00XTotal
Loan-to-Value Ratios(b)
Less than 65%$23,013$2,440$245$25,698
65% to 75%9,007899409,946
76% to 80%2006-206
Greater than 80%1842134320
Total commercial mortgages$32,404$3,347$419$36,170

(a) The debt service coverage ratio compares a property’s net operating income to its debt service payments, including principal and interest. Our weighted average debt service coverage ratio was 2.2X and 2.0X at December 31, 2020 and 2019, respectively. The debt service coverage ratios have been updated within the last three months.

236 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 7. Lending Activities

(b) The loan-to-value ratio compares the current unpaid principal balance of the loan to the estimated fair value of the underlying property collateralizing the loan. Our weighted average loan-to-value ratio was 60 percent and 56 percent at December 31, 2020, and 2019, respectively. The loan-to-value ratios have been updated within the last three to nine months.

The following table presents the credit quality performance indicators for commercial mortgages:

NumberPercent
ofClassof
(dollars in millions)LoansApartmentsOfficesRetailIndustrialHotelOthersTotal(c)Total $
December 31, 2020
Credit Quality Performance
Indicator:
In good standing688$13,969$10,506$5,144$3,766$2,064$460$35,90999%
Restructured(a)5-5250-4-106-
90 days or less delinquent3-87--114-201-
>90 days delinquent or in
process of foreclosure4-6755-86-2081
Total(b)700$13,969$10,712$5,249$3,766$2,268$460$36,424100%
Allowance for credit losses$145$267$145$53$65$10$6852%
December 31, 2019
Credit Quality Performance
Indicator:
In good standing736$13,698$10,553$5,332$3,663$2,211$522$35,97999%
Restructured(a)3-89--101-1901
90 days or less delinquent11-----1-
>90 days delinquent or in
process of foreclosure---------
Total(b)740$13,699$10,642$5,332$3,663$2,312$522$36,170100%
Allowance for credit losses:
Specific$-$2$1$-$6$-$9-%
General8115344301453271
Total allowance for credit losses$81$155$45$30$20$5$3361%

(a) Loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. For additional discussion of troubled debt restructurings see below.

(b) Does not reflect allowance for credit losses.

(c) Our commercial mortgage loan portfolio is current as to payments of principal and interest, for both periods presented. There were no significant amounts of nonperforming commercial mortgages (defined as those loans where payment of contractual principal or interest is more than 90 days past due) during any of the periods presented.

The following table presents credit quality performance indicators for residential mortgages by year of vintage:

December 31, 2020
(in millions)20202019201820172016PriorTotal
FICO:*
780 and greater$522$619$283$469$539$484$2,916
720 - 7794783491031551801561,421
660 - 719196128425158259
600 - 659156741235
Less than 600--122914
Total residential mortgages$1,020$1,034$421$675$776$719$4,645

*Fair Isaac Corporation (FICO) is the credit quality indicator used to evaluate consumer credit risk for residential mortgage loan borrowers and have been updated within the last three months.

Methodology Used to Estimate the Allowance for Credit Losses

Subsequent to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020

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 capital losses. This allowance

AIG | 2020 Form 10-K 237

ITEM 8 | Notes to Consolidated Financial Statements | 7. Lending Activities

reflects the risk of loss, even when that risk is remote, and reflects losses 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, 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.

Accrued interest is excluded from the measurement of the allowance for credit losses and accrued interest is reversed through interest income once a loan is placed on nonaccrual.

When all or a portion of a loan is deemed uncollectible, the uncollectible portion of the carrying amount of the loan is charged off against the allowance.

We also have off-balance sheet commitments related to our commercial mortgage loans. The liability for expected credit losses related to these commercial mortgage loan commitments is reported in Other liabilities in the Consolidated Balance Sheets. When a commitment is funded, we record a loan receivable and reclassify the liability for expected credit losses related to the commitment into loan allowance for expected credit losses. Other changes in the liability for expected credit losses on loan commitments are recorded in Net realized capital gains (losses) in the Consolidated Statements of Income.

Prior to the adoption of the Financial Instruments Credit Losses Standard on January 1, 2020

Mortgage and other loans receivable are considered impaired when collection of all amounts due under contractual terms is not probable. Impairment is measured using either i) the present value of expected future cash flows discounted at the loan’s effective interest rate, ii) the loan’s observable market price, if available, or iii) the fair value of the collateral if the loan is collateral dependent. Impairment of commercial mortgages is typically determined using the fair value of collateral while impairment of other loans is typically determined using the present value of cash flows or the loan’s observable market price. An allowance is typically established for the difference between the impaired value of the loan and its current carrying amount. Additional allowance amounts are established for incurred but not specifically identified impairments, based on statistical models primarily driven by past-due status, debt service coverage, loan-to-value ratio, property type and location, loan term, profile of the borrower and of the major property tenants, and loan seasoning. When all or a portion of a loan is deemed uncollectable, the uncollectable portion of the carrying amount of the loan is charged off against the allowance.

The following table presents a rollforward of the changes in the allowance for losses on Mortgage and other loans receivable(a):

Years Ended December 31,202020192018
CommercialOtherCommercialOtherCommercialOther
(in millions)MortgagesLoansTotalMortgagesLoansTotalMortgagesLoansTotal
Allowance, beginning of year$336$102$438$318$79$397$247$75$322
Initial allowance upon CECL adoption3117318------
Loans charged off**(**12)**(**5)**(**17)(2)(3)(5)(17)(2)(19)
Recoveries of loans previously
charged off-------11
Net charge-offs**(**12)**(**5)**(**17)(2)(3)(5)(17)(1)(18)
Provision for loan losses50257520264688593
Allowance, end of year$685$129$814$336(b)$102$438$318(b)$79$397

(a) Does not include $79 million of expected credit loss liability at December 31, 2020 in relation to off-balance-sheet commitments to fund commercial mortgage loans, which is recorded in Other liabilities.

(b) The December 31, 2019 and 2018 total allowance was calculated prior to the adoption of ASC 326 on January 1, 2020. Of the total allowance, $10 million and $3 million relates to individually assessed credit losses on $148 million and $54 million of commercial mortgages at December 31, 2019 and 2018, respectively.

As a result of the COVID-19 crisis, including the significant global economic slowdown and general market decline, our expectations and models used to estimate the allowance for losses on commercial and residential mortgage loans have been updated to reflect the current economic environment. The full impact of COVID-19 on real estate valuations remains uncertain and we will continue to review our valuations as further information becomes available.

238 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 7. Lending Activities

Troubled Debt Restructurings

We modify loans to optimize their returns and improve their collectability, among other things. When we undertake such a modification with a borrower that is experiencing financial difficulty and the modification involves us granting a concession to the troubled debtor, the modification is a troubled debt restructuring (TDR). We assess whether a borrower is experiencing financial difficulty based on a variety of factors, including the borrower’s current default on any of its outstanding debt, the probability of a default on any of its debt in the foreseeable future without the modification, the insufficiency of the borrower’s forecasted cash flows to service any of its outstanding debt (including both principal and interest), and the borrower’s inability to access alternative third-party financing at an interest rate that would be reflective of current market conditions for a non-troubled debtor. Concessions granted may include extended maturity dates, interest rate changes, principal or interest forgiveness, payment deferrals and easing of loan covenants.

In response to the COVID-19 pandemic, there was an increase in the volume of loan modifications in our commercial mortgage, residential mortgage and leveraged loan portfolios. The COVID-19 related modifications were primarily in the form of short-term payment deferrals (one to six months). Short-term payment deferrals are not considered a concession and therefore these modifications are not considered a TDR.

During the years ended December 31, 2020 and 2019, loans with a carrying value of $106 million and $86 million, respectively, were modified in TDRs.

  1. Reinsurance

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. In addition, our General Insurance subsidiaries assume reinsurance from other insurance companies. We determine the portion of the incurred but not reported (IBNR) loss that will be recoverable under our reinsurance contracts by reference to the terms of the reinsurance protection purchased. This determination is necessarily based on the estimate of IBNR and accordingly, is subject to the same uncertainties as the estimate of IBNR. 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. Amounts related to paid and unpaid losses and benefits and loss expenses with respect to these reinsurance agreements are substantially collateralized. We remain liable to the extent that our reinsurers do not meet their obligation under the reinsurance contracts, and as such, we regularly evaluate the financial condition of our reinsurers and monitor concentration of our credit risk. The estimation of the allowance for credit losses and disputes requires judgment for which key inputs typically include historical trends regarding uncollectible balances, disputes and credit events as well as specific reviews of balances in dispute or subject to credit impairment. The allowance for credit losses and disputes on reinsurance assets was $326 million and $151 million at December 31, 2020 and 2019, respectively. Changes in the allowance for credit losses and disputes on reinsurance assets are reflected in Policyholder benefits and losses incurred within the Consolidated Statements of Income.

The following table provides supplemental information for loss and benefit reserves, gross and net of ceded reinsurance:

At December 31,20202019
AsNet ofAsNet of
(in millions)ReportedReinsuranceReportedReinsurance
Liability for unpaid losses and loss adjustment expenses$**(**77,720)$**(**43,154)$(78,328)$(47,259)
Future policy benefits for life and accident and health insurance contracts**(**51,097)**(**25,121)(50,512)(49,670)
Policyholder contract deposits**(**160,251)**(**155,072)(151,869)(150,944)
Reserve for unearned premiums**(**18,660)**(**14,606)(18,269)(15,067)
Other policyholder funds**(**3,548)**(**2,933)(3,428)(3,420)
Reinsurance assets(a)70,39036,046

(a)Reinsurance assets excludes (i) allowance for credit losses and disputes of $326 million (of which $135 million pertains to CECL reserve for Liability for unpaid losses and loss adjustment expenses) and $151 million for the years ended December 31, 2020 and 2019, respectively, (ii) paid loss recoveries of $3,157 million and $1,970 million for the years ended December 31, 2020 and 2019, respectively, and (iii) policy and contract claims recoverable of $320 million and $112 million for the years ended December 31, 2020 and 2019, respectively.

AIG | 2020 Form 10-K 239

ITEM 8 | Notes to Consolidated Financial Statements | 8. Reinsurance

Short-Duration Reinsurance

Short-duration reinsurance is effected under reinsurance treaties and by negotiation on individual risks. Certain of these reinsurance arrangements consist of excess of loss contracts that protect us against losses above stipulated amounts. Ceded premiums are considered prepaid reinsurance premiums and are recognized as a reduction of premiums earned over the contract period in proportion to the protection received. Amounts recoverable from reinsurers on short-duration contracts are estimated in a manner consistent with the claims liabilities associated with the reinsurance and presented as a component of Reinsurance assets. Reinsurance premiums for assumed business are estimated based on information received from brokers, ceding companies and reinsurers. Any subsequent differences arising on such estimates are recorded in the periods in which they are determined. Assumed reinsurance premiums are earned primarily on a pro-rata basis over the terms of the reinsurance contracts and the portion of premiums relating to the unexpired terms of coverage is included in the reserve for unearned premiums. Reinsurance premiums for assumed business are estimated based on information received from brokers, ceding companies and reinsureds. Any subsequent differences arising on such estimates are recorded in the periods in which they are determined. For both ceded and assumed reinsurance, risk transfer requirements must be met for reinsurance accounting to apply. If risk transfer requirements are not met, the contract is accounted for as a deposit, resulting in the recognition of cash flows under the contract through a deposit asset or liability and not as revenue or expense. To meet risk transfer requirements, a reinsurance contract must include both insurance risk, consisting of both underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. Similar risk transfer criteria are used to determine whether directly written insurance contracts should be accounted for as insurance or as a deposit.

The following table presents short-duration insurance premiums written and earned:

Years Ended December 31,
(in millions)202020192018
Premiums written:
Direct$28,521$29,338$30,368
Assumed5,9475,8084,186
Ceded**(**11,012)(9,692)(7,757)
Net$23,456$25,454$26,797
Premiums earned:
Direct$28,596$30,017$31,450
Assumed5,9846,3954,638
Ceded**(**10,435)(9,526)(8,164)
Net$24,145$26,886$27,924

For the years ended December 31, 2020, 2019 and 2018, reinsurance recoveries, which reduced losses and loss adjustment expenses incurred, amounted to $7.7 billion, $4.7 billion and $9.8 billion, respectively.

Retroactive reinsurance agreements are reinsurance agreements under which our reinsurer agrees to reimburse us as a result of past insurable events. For these agreements, the excess of the amounts ultimately collectible under the agreement over the consideration paid is recognized as a deferred gain liability and amortized into income over the settlement period of the ceded reserves. The amount of the deferral is recalculated each period based on loss payments and updated estimates. If the consideration paid exceeds the ultimate losses collectible under the agreement, the net loss on the agreement is recognized in income immediately. Ceded loss reserves under retroactive agreements were $18.9 billion and $13.9 billion, and the deferred gain liability was $1.7 billion and $1.8 billion, as of December 31, 2020 and 2019, respectively. The effect on income from amortization of the deferred gain was $237 million, $219 million and $394 million for the years ended December 31, 2020, 2019 and 2018, respectively.

In the first quarter of 2017, we entered into an adverse development reinsurance agreement with National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc., under which we transferred to NICO 80 percent of the reserve risk on substantially all of our U.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 U.S. 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.

240 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 8. Reinsurance

Long-Duration Reinsurance

Long-duration reinsurance is effected principally under yearly renewable term (YRT) treaties, along with a large modco treaty with a former affiliate, Fortitude Re, that was deconsolidated following the Majority Interest Fortitude Sale. This modco treaty reinsures the majority of our long-duration run-off business. The premiums with respect to YRT treaties are earned over the contract period in proportion to the protection provided, while ceded premiums related to modco treaties are recognized when due. Amounts recoverable on YRT treaties are recognized when claims are incurred on the reinsured policies and are presented as a component of reinsurance assets. Amounts recoverable on the modco treaty are estimated in a manner consistent with the assumptions used for the underlying policy benefits and are presented as a separate reinsurance asset.

The following table presents premiums earned and policy fees for our long-duration life insurance and annuity operations:

Years Ended December 31,
(in millions)202020192018
Premiums
Direct$4,381$4,363$3,489
Assumed1,05822856
Ceded**(**1,061)(916)(855)
Net$4,378$3,675$2,690
Policy Fees
Direct$2,957$3,016$2,792
Assumed---
Ceded**(**40)(1)(1)
Net$2,917$3,015$2,791

Long-duration reinsurance recoveries, which reduced Policyholder benefits and losses incurred, was approximately $1.1 billion, $1.0 billion and $778 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The following table presents long-duration insurance in-force ceded to other insurance companies:

At December 31,
(in millions)202020192018
Long-duration insurance in force ceded$292,517$264,732$228,846

Long-duration insurance in-force assumed as a percentage of gross long-duration insurance in-force was 0.02 percent, 0.02 percent, and 0.03 percent at December 31, 2020, 2019 and 2018, respectively; and premiums assumed represented 19.5 percent, 5 percent and 1.6 percent of gross premiums for the years ended December 31, 2020, 2019 and 2018, respectively.

The U.S. Life and Retirement companies manage the capital impact of their statutory reserve requirements, including those resulting from the National Association of Insurance Commissioners (NAIC) Model Regulation “Valuation of Life Insurance Policies” (Regulation XXX) and NAIC Actuarial Guideline 38 (Guideline AXXX), through unaffiliated and affiliated reinsurance transactions. Effective July 1, 2016, one of the U.S. Life and Retirement companies entered into an agreement to cede approximately $5 billion of statutory reserves for certain whole life and universal life policies to an unaffiliated reinsurer. Effective December 31, 2016, the same life insurance subsidiary recaptured term and universal life reserves subject to Regulation XXX and Guideline AXXX, previously ceded to an affiliate, and ceded approximately $14 billion of such statutory reserves to an unaffiliated reinsurer under an amendment to the December 31, 2016 agreement. Under U.S. GAAP, these unaffiliated reinsurance transactions use deposit accounting with a reinsurance risk charge recorded in income, whereas such affiliated transactions are eliminated in consolidation. Under one affiliated reinsurance arrangement, one of the U.S. Life and Retirement companies obtains letters of credit to support statutory recognition of the ceded reinsurance. As of December 31, 2020, this subsidiary had a bilateral letter of credit totaling $250 million, which was issued on February 7, 2014 and expires on February 7, 2024. The letter of credit is subject to reimbursement by AIG Parent in the event of a drawdown.

In addition, a domestic life insurance subsidiary domiciled in Texas further manages the capital impact of statutory reserve requirements related to fixed index annuities with guaranteed living benefits through two unaffiliated excess of loss reinsurance agreements effective December 31, 2019 and 2020, respectively. Pursuant to a permitted statutory accounting practice, the subsidiary recognizes an admitted asset of approximately $0.6 billion related to the notional value of coverage defined in the excess of loss reinsurance agreements, net of specified amounts. Under U.S. GAAP, an asset will only be recognized if claims accumulate in an amount in excess of the attachment point specified in the agreements.

For additional information on the use of affiliated reinsurance for Regulation XXX and Guideline AXXX reserves see Note 19.

AIG | 2020 Form 10-K 241

ITEM 8 | Notes to Consolidated Financial Statements | 8. Reinsurance

Sale of Fortitude Holdings

On June 2, 2020, we completed 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, 2020, approximately $30.5 billion of reserves from AIG’s Life and Retirement Run-Off Lines and approximately $4.1 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.

These reinsurance transactions between AIG and Fortitude Re were structured as modco and loss portfolio transfer arrangements with funds withheld (funds withheld). In modco and funds withheld arrangements, the investments supporting the reinsurance agreements, and which reflect the majority of the consideration that would be paid to the reinsurer for entering into the transaction, are withheld by, and therefore continue to reside on the balance sheet of, the ceding company (i.e., AIG) thereby creating an obligation for the ceding company to pay the reinsurer (i.e., Fortitude Re) at a later date. Additionally, as AIG maintains ownership of these investments, AIG will maintain its existing accounting for these assets (e.g., the changes in fair value of available for sale securities will be recognized within other comprehensive income). As a result of the deconsolidation resulting from the Majority Interest Fortitude Sale, AIG has established a funds withheld payable to Fortitude Re while simultaneously establishing a reinsurance asset representing reserves for the insurance coverage that Fortitude Re has assumed. The funds withheld payable contains an embedded derivative and changes in fair value of the embedded derivative related to the funds withheld payable are recognized in earnings through realized capital gains (losses). This embedded derivative is considered a total return swap with contractual returns that are attributable to various assets and liabilities associated with these reinsurance agreements.

There is a diverse pool of assets supporting the funds withheld arrangements with Fortitude Re. The following summarizes the composition of the pool of assets as of December 31, 2020:

December 31, 2020CarryingFair
(in millions)ValueValueCorresponding Accounting Policy
Fixed maturity securities - available for sale(a)$36,047$36,047Fair value through other comprehensive income
Fixed maturity securities - fair value option200200Fair value through net investment income
Commercial mortgage loans3,6794,010Amortized cost
Real estate investments358585Amortized cost
Private equity funds / hedge funds1,1681,168Fair value through net investment income
Policy loans413413Amortized cost
Short-term Investments3434Fair value through net investment income
Funds withheld investment assets41,89942,457
Derivative assets, net(b)(1)(1)Fair value through realized capital gains (losses)
Other(c)604604Amortized cost
Total$42,502$43,060

(a) The change in the net unrealized gains (losses) on available for sale securities related to the Fortitude Re funds withheld assets was $1.0 billion ($812 million after-tax) during the post deconsolidation period (June 2, 2020-December 31, 2020).

(b) The derivative assets have been presented net of collateral. The derivative assets supporting the Fortitude Re funds withheld arrangements had a fair market value of $357 million as of December 31, 2020. These derivative assets are fully collateralized.

(c) Primarily comprised of Cash and Accrued investment income.

242 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 8. Reinsurance

The impact of the funds withheld arrangements with Fortitude Re for the period post June 2, 2020 deconsolidation was as follows:

Twelve Months Ended
(in millions)December 31, 2020
Net underwriting income$-
Net investment income - Fortitude Re funds withheld assets1,053
Net realized capital losses on Fortitude Re funds withheld assets:
Net realized capital gains - Fortitude Re funds withheld assets463
Net realized capital losses - Fortitude Re embedded derivatives(2,645)
Net realized capital losses on Fortitude Re funds withheld assets(2,182)
Loss from continuing operations before income tax benefit**(**1,129)
Income tax benefit(a)(237)
Net loss**(**892)
Change in unrealized appreciation of all other investments(a)812
Comprehensive loss$**(**80)

(a)The income tax expense (benefit) and the tax impact in accumulated other comprehensive income was computed using AIG’s U.S. statutory tax rate of 21 percent.

Various assets supporting the Fortitude Re funds withheld arrangements are reported at amortized cost, and as such, changes in the fair value of these assets are not reflected in the financial statements. However, changes in the fair value of these assets are included in the embedded derivative in the Fortitude Re funds withheld arrangement and the appreciation of these assets is the primary driver of the comprehensive loss reflected above.

Reinsurance Security

Our third-party reinsurance arrangements do not relieve us from our direct obligations to our beneficiaries. Thus, a credit exposure exists with respect to both short-duration and long-duration reinsurance ceded to the extent that any reinsurer fails to meet the obligations assumed under any reinsurance agreement. We hold substantial collateral as security under related reinsurance agreements in the form of funds, securities, and/or letters of credit. A provision has been recorded for estimated unrecoverable reinsurance. In light of collateral held, we believe that no exposure to a single reinsurer represents an inappropriate concentration of credit risk to AIG. Gross reinsurance assets due from reinsurers exceeding 5 percent of our total reinsurance assets were approximately $54.0 billion and $19.0 billion at December 31, 2020 and 2019, respectively, of which approximately $2.6 billion and $2.8 billion at December 31, 2020 and 2019, respectively, was not secured by collateral.

Reinsurance – Credit Losses

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 on uncollectable reinsurance that reduces the carrying amount of reinsurance and other assets on the consolidated balance sheets (collectively, the reinsurance recoverable balances). This estimate requires significant judgment for which key considerations include:

 paid and unpaid amounts recoverable;

 whether the balance is in dispute or subject to legal collection;

 the relative financial health of the reinsurer as determined by the Obligor Risk Ratings (ORRs) we assign to each reinsurer based upon our financial reviews; insurers that are financially troubled (i.e., in run-off, have voluntarily or involuntarily been placed in receivership, are insolvent, are in the process of liquidation or otherwise subject to formal or informal regulatory restriction) are assigned ORRs that will generate a significant allowance; and

 whether collateral and collateral arrangements exist.

AIG | 2020 Form 10-K 243

ITEM 8 | Notes to Consolidated Financial Statements | 8. Reinsurance

An estimate of the reinsurance recoverable’s lifetime expected credit losses is established utilizing a probability of default and loss given default method, which reflects the reinsurer’s ORR rating. The allowance for credit losses excludes disputed amounts. An allowance for disputes is established for a reinsurance recoverable using the losses incurred model for contingencies.

The total reinsurance recoverables as of December 31, 2020 were $75.8 billion. As of that date, utilizing AIG’s ORRs, (i) approximately 92 percent of the reinsurance recoverables were investment grade, of which 52 percent related to General Insurance and 40 percent related to Life and Retirement; (ii) approximately 7 percent of the reinsurance recoverables were non-investment grade, the majority of which related to General Insurance; (iii) less than one percent of the non-investment grade reinsurance recoverables related to Life and Retirement and (iv) approximately one percent of the reinsurance recoverables related to entities that were not rated by AIG.

As of December 31, 2020, approximately 64 percent of our non-investment grade reinsurance exposure related to captive insurers. These arrangements are typically collateralized by letters of credit, funds withheld or trust agreements.

Reinsurance Recoverable Allowance

The following table presents a rollforward of the reinsurance recoverable allowance:

Year Ended December 31, 2020GeneralLife and
(in millions)InsuranceRetirementTotal
Balance, beginning of period$111$40$151
Initial allowance upon CECL adoption20222224
Current period provision for expected credit losses and disputes(12)219
Write-offs charged against the allowance for credit losses and disputes(9)-**(**9)
Balance, end of year$292$83$375

There were no material recoveries of credit losses previously written off for the year ended December 31, 2020.

Past-Due Status

We consider a reinsurance asset to be past due when it is 90 days past due. The allowance for credit losses is estimated excluding disputed amounts. An allowance for disputes is established using the losses incurred method for contingencies. Past due balances on claims that are not in dispute were not material for any of the periods presented.

  1. Deferred Policy Acquisition Costs

Deferred policy acquisition costs (DAC) represent those costs that are incremental and directly related to the successful acquisition of new or renewal of existing insurance contracts. We defer incremental costs that result directly from, and are essential to, the acquisition or renewal of an insurance contract. Such deferred policy acquisition costs generally include agent or broker commissions and bonuses, premium taxes, and medical and inspection fees that would not have been incurred if the insurance contract had not been acquired or renewed. Each cost is analyzed to assess whether it is fully deferrable. We partially defer costs, including certain commissions, when we do not believe that the entire cost is directly related to the acquisition or renewal of insurance contracts.

We also defer a portion of employee total compensation and payroll-related fringe benefits directly related to time spent performing specific acquisition or renewal activities, including costs associated with the time spent on underwriting, policy issuance and processing, and sales force contract selling. The amounts deferred are derived based on successful efforts for each distribution channel and/or cost center from which the cost originates.

Short-duration insurance contracts: Policy acquisition costs are deferred and amortized over the period in which the related premiums written are earned, generally 12 months. DAC is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts. Investment income is anticipated in assessing the recoverability of DAC. We assess the recoverability of DAC on an annual basis or more frequently if circumstances indicate an impairment may have occurred. This assessment is performed by comparing recorded net unearned premiums and anticipated investment income on in-force business to the sum of expected losses and loss adjustment expenses incurred, unamortized DAC and maintenance costs. If the sum of these costs exceeds the amount of recorded net unearned premiums and anticipated investment income, the excess is recognized as an offset against the asset established for DAC. This offset is referred to as a premium deficiency charge. Increases in expected losses and loss adjustment expenses incurred can have a significant impact on the likelihood and amount of a premium deficiency charge.

244 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 9. Deferred Policy Acquisition Costs

Long-duration insurance contracts: Policy acquisition costs for participating life, traditional life and accident and health insurance products are generally deferred and amortized, with interest, over the premium paying period. The assumptions used to calculate the benefit liabilities and DAC for these traditional products are set when a policy is issued and do not change with changes in actual experience, unless a loss recognition event occurs. These “locked-in” assumptions include mortality, morbidity, persistency, maintenance expenses and investment returns, and include margins for adverse deviation to reflect uncertainty given that actual experience might deviate from these assumptions. A loss recognition event occurs when there is a shortfall between the carrying amount of future policy benefit liabilities, net of DAC, and what the future policy benefit liabilities, net of DAC, would be when applying updated current assumptions. When we determine a loss recognition event has occurred, we first reduce any DAC related to that block of business through amortization of acquisition expense, and after DAC is depleted, we record additional liabilities through a charge to Policyholder benefits and losses incurred. Groupings for loss recognition testing are consistent with our manner of acquiring, servicing and measuring the profitability of the business and applied by product groupings. We perform separate loss recognition tests for traditional life products, payout annuities and long-term care products. 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.

Investment-oriented contracts: Certain policy acquisition costs and policy issuance costs related to universal life and investment-type products (collectively, investment-oriented products) are deferred and amortized, with interest, in relation to the incidence of estimated gross profits to be realized over the estimated lives of the contracts. DAC on investment-oriented contracts were approximately $5.1 billion and $6.1 billion at December 31, 2020 and 2019, respectively. Estimated gross profits are affected by a number of factors, including levels of current and expected interest rates, net investment income and spreads, net realized capital gains and losses, fees, surrender rates, mortality experience, policyholder behavior experience and equity market returns and volatility. In each reporting period, current period amortization expense is adjusted to reflect actual gross profits. If the assumptions used for estimating gross profit change significantly, DAC is recalculated using the new assumptions, including actuarial assumptions such as mortality, lapse, benefit utilization, and premium persistency, and any resulting adjustment is included in income. If the new assumptions indicate that future estimated gross profits are higher than previously estimated, DAC will be increased resulting in a decrease in amortization expense and increase in income in the current period; if future estimated gross profits are lower than previously estimated, DAC will be decreased resulting in an increase in amortization expense and decrease in income in the current period. Updating such assumptions may result in acceleration of amortization in some products and deceleration of amortization in other products. DAC is grouped consistent with the manner in which the insurance contracts are acquired, serviced and measured for profitability and is reviewed for recoverability based on the current and projected future profitability of the underlying insurance contracts.

To estimate future estimated gross profits for variable annuity products, a long-term annual asset growth assumption is applied to determine 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 long-term annual rate assumptions 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 in the five-year reversion to the mean period falling below a certain rate (floor) or rising 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.

Shadow DAC and Shadow Loss Recognition: DAC related to investment-oriented products is also adjusted to reflect the effect of unrealized gains or losses on fixed maturity securities available for sale, with related changes recognized through Other comprehensive income (shadow DAC). The adjustment is made at each balance sheet date, as if the securities had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. Similarly, for long-duration traditional insurance contracts, if the assets supporting the liabilities are in a net unrealized gain position at the balance sheet date, loss recognition testing assumptions are updated to exclude such gains from future cash flows by reflecting the impact of reinvestment rates on future yields. If a future loss is anticipated under this basis, any additional shortfall indicated by loss recognition tests is recognized as a reduction in accumulated other comprehensive income (shadow loss recognition). Similar to other loss recognition on long-duration insurance contracts, such shortfall is first reflected as a reduction in DAC and secondly as an increase in liabilities for future policy benefits. The change in these adjustments, net of tax, is included with the change in net unrealized appreciation of investments that is credited or charged directly to Other comprehensive income.

AIG | 2020 Form 10-K 245

ITEM 8 | Notes to Consolidated Financial Statements | 9. Deferred Policy Acquisition Costs

Internal Replacements of Long-duration and Investment-oriented Products: For some products, policyholders can elect to modify product benefits, features, rights or coverages by exchanging a contract for a new contract or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. These transactions are known as internal replacements. If the modification does not substantially change the contract, we do not change the accounting and amortization of existing DAC and related actuarial balances. If an internal replacement represents a substantial change, the original contract is considered to be extinguished and any related DAC or other policy balances are charged or credited to income, and any new deferrable costs associated with the replacement contract are deferred.

Value of Business Acquired (VOBA) is determined at the time of acquisition and is reported in the Consolidated Balance Sheets with DAC. This value is based on the present value of future pre-tax profits discounted at yields applicable at the time of purchase. For participating life, traditional life and accident and health insurance products, VOBA is amortized over the life of the business in a manner similar to that for DAC based on the assumptions at purchase. For investment-oriented products, VOBA is amortized in relation to estimated gross profits and adjusted for the effect of unrealized gains or losses on fixed maturity securities available for sale and prior to 2018, equity securities at fair value in a manner similar to DAC.

The following table presents a rollforward of DAC and VOBA:

Years Ended December 31,
(in millions)202020192018
Balance, beginning of year$11,207$12,694$10,994
Acquisitions--298
Dispositions**(**467)--
Acquisition costs deferred4,2925,4035,832
Amortization expense**(**4,211)(5,164)(5,386)
Change related to unrealized appreciation (depreciation) of investments**(**1,096)(1,768)1,063
Other, including foreign exchange8042(107)
Balance, end of year(a)$9,805$11,207$12,694
Supplemental Information:
VOBA amortization expense included in DAC amortization(b)$192$171$243
VOBA, end of year included in DAC balance(c)126317438

(a) Net of reductions in DAC of $1.0 billion, $1.8 billion and $1.0 billion at December 31, 2020, 2019 and 2018, respectively, related to shadow DAC.

(b) In connection with the Majority Interest Fortitude Sale, and the subsequent deconsolidation of Fortitude Re, AIG wrote off $169 million of VOBA.

(c)Includes $101 million of VOBA from the acquisition of Validus in 2018, the majority of which was amortized in 2019 with the remainder fully amortized in 2020.

The percentage of the unamortized balance of VOBA at December 31, 2020 expected to be amortized in 2021 through 2025 by year is: 11.2 percent, 10.4 percent, 10.4 percent, 8.8 percent and 8.8 percent, respectively, with 50.4 percent being amortized after five years. These projections are based on current estimates for investment income and spreads, persistency, mortality and morbidity assumptions.

DAC, VOBA and SIA for insurance-oriented and investment-oriented products are reviewed for recoverability, which involves estimating the future profitability of current business. This review involves significant management judgment. If actual profitability is substantially lower than estimated, AIG’s DAC, VOBA and SIA may be subject to an impairment charge and AIG’s results of operations could be significantly affected in the period the impairment charge is recognized and in future periods. VOBA is reported with the DAC balance and SIAs are included in Other assets.

  1. Variable Interest Entities

A variable interest entity (VIE) is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations through voting rights or do not substantively participate in the gains and losses of the entity. Consolidation of a VIE by its primary beneficiary is not based on majority voting interest, but is based on other criteria discussed below.

We enter into various arrangements with VIEs in the normal course of business and consolidate the VIEs when we determine we are the primary beneficiary. This analysis includes a review of the VIE’s capital structure, related contractual relationships and terms, nature of the VIE’s operations and purpose, nature of the VIE’s interests issued and our involvement with the entity. When assessing the need to consolidate a VIE, we evaluate the design of the VIE as well as the related risks to which the entity was designed to expose the variable interest holders.

246 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 10. Variable Interest Entities

The primary beneficiary is the entity that has both (i) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation conclusion depends on the breadth of our decision-making ability and our ability to influence activities that significantly affect the economic performance of the VIE.

Balance Sheet Classification and Exposure to Loss

Creditors or beneficial interest holders of VIEs for which the Company is the primary beneficiary generally have recourse only to the assets and cash flows of the VIEs and do not have recourse to the Company, except in limited circumstances when the Company has provided a guarantee to the VIE’s interest holders. The following table presents the total assets and total liabilities associated with our variable interests in consolidated VIEs, as classified in the Consolidated Balance Sheets:

Real Estate andAffordable
InvestmentSecuritizationHousing
(in millions)Entities(d)Vehicles(e)PartnershipsOtherTotal
December 31, 2020
Assets:
Bonds available for sale$-$6,089$-$-$6,089
Other bond securities-2,367--2,367
Equity securities507---507
Mortgage and other loans receivable-3,135--3,135
Other invested assets
Alternative investments(a)2,689---2,689
Investment Real Estate3,378-3,558-6,936
Short-term investments3651,534-271,926
Accrued investment income-38--38
Cash129-203-332
Other assets166120243-529
Other3--25
Total assets(b)$7,237$13,283$4,004$29$24,553
Liabilities:
Debt of consolidated investment entities$2,559$3,961$2,287$2$8,809
Other(c)18018718710564
Total liabilities$2,739$4,148$2,474$12$9,373
December 31, 2019
Assets:
Bonds available for sale$-$7,416$-$-$7,416
Other bond securities-3,324-13,325
Mortgage and other loans receivable-3,860--3,860
Other invested assets
Alternative investments(a)1,436--171,453
Investment Real Estate3,795-3,464257,284
Short-term investments3151,861-262,202
Accrued investment income-83-83
Cash132-2347373
Other assets161562352454
Other3--710
Total assets(b)$5,842$16,600$3,933$85$26,460
Liabilities:
Debt of consolidated investment entities$2,691$4,475$2,074$4$9,244
Other(c)21637919524814
Total liabilities$2,907$4,854$2,269$28$10,058

(a) Comprised primarily of investments in real estate joint ventures at December 31, 2020 and 2019.

(b) The assets of each VIE can be used only to settle specific obligations of that VIE.

(c) Comprised primarily of Other liabilities at December 31, 2020 and 2019.

(d) At December 31, 2020 and 2019, off-balance sheet exposure primarily consisting of commitments to real estate and investment entities was $1.8 billion and $2.6 billion, respectively.

AIG | 2020 Form 10-K 247

ITEM 8 | Notes to Consolidated Financial Statements | 10. Variable Interest Entities

(e) At December 31, 2020 and 2019, the company had contributed total assets of $12.5 billion and $15.6 billion, respectively, into consolidated securitization vehicles.

We calculate our maximum exposure to loss to be (i) the amount invested in the debt or equity of the VIE, (ii) the notional amount of VIE assets or liabilities where we have also provided credit protection to the VIE with the VIE as the referenced obligation, and (iii) other commitments and guarantees to the VIE.

Under the terms of six transactions entered into between 2012 and 2014 securitizing portfolios of certain debt securities previously owned by AIG and its affiliates, an indirectly wholly-owned subsidiary of AIG is obligated to make certain capital contributions to such a securitization VIE in the event that the VIE is unable to redeem any rated notes it has in issue on the relevant redemption date. AIG has provided a guarantee to the six securitization VIEs of the obligations of its indirectly wholly-owned subsidiary to make such capital contributions when due. At December 31, 2020, in aggregate, $175 million of rated notes issued by such VIEs were outstanding and held by investors other than AIG and its consolidated affiliates.

SunAmerica Affordable Housing Partners, Inc. (SAAHP) provides a Base Internal Rate of Return (IRR) guarantee to its third party investors, so that on a specified date if the Investor has not received distributions of cash and allocations of certain tax benefits required to achieve their Base IRR as provided for in the Partnership Agreement, SAAHP shall distribute cash to effectively generate the Base IRR to the investor. In addition, SAAHP has from time to time guaranteed certain debt issued by third parties related to its business activities. As of December 31, 2020, the off balance sheet amount of that guarantee was approximately $4 million.

The following table presents total assets of unconsolidated VIEs in which we hold a variable interest, as well as our maximum exposure to loss associated with these VIEs:

Maximum Exposure to Loss
Total VIEOn-BalanceOff-Balance
(in millions)AssetsSheet(b)SheetTotal
December 31, 2020
Real estate and investment entities(a)$321,716$6,420$3,273(c)$9,693
Affordable housing partnerships2,8013684372
Other1,733195546(d)741
Total$326,250$6,983$3,823$10,806
December 31, 2019
Real estate and investment entities(a)$283,349$6,519$3,286(c)$9,805
Affordable housing partnerships3,351453-453
Other5,320310561(d)871
Total$292,020$7,282$3,847$11,129

(a) Comprised primarily of hedge funds and private equity funds.

(b) At December 31, 2020 and 2019, $6.8 billion and $7.0 billion, respectively, of our total unconsolidated VIE assets were recorded as Other invested assets.

(c) These amounts represent our unfunded commitments to invest in private equity funds and hedge funds.

(d) These amounts represent our estimate of the maximum exposure to loss under certain insurance policies issued to VIEs if a hypothetical loss occurred to the extent of the full amount of the insured value. Our insurance policies cover defined risks and our estimate of liability is included in our insurance reserves on the balance sheet.

Real Estate and Investment Entities

Through our insurance operations and AIG Global Real Estate Investment Corp., we are an investor in various real estate investment entities, some of which are VIEs. These investments are typically with unaffiliated third-party developers via a partnership or limited liability company structure. The VIEs’ activities consist of the development or redevelopment of commercial, industrial and residential real estate. Our involvement varies from being a passive equity investor or finance provider to actively managing the activities of the VIEs.

Our insurance operations participate as passive investors in the equity issued by certain third-party-managed hedge and private equity funds that are VIEs. Our insurance operations typically are not involved in the design or establishment of these VIEs, nor do they actively participate in the management of the VIEs.

248 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 10. Variable Interest Entities

Securitization Vehicles

We created certain VIEs that hold investments, primarily in investment-grade debt securities and loans, and issued beneficial interests in these investments. Some of these VIEs were created to facilitate our purchase of asset-backed securities. In these situations, all of the beneficial interests are owned by our insurance operations and are consolidated by AIG. In other instances, we have created VIEs that are securitizations of residential mortgage loans or other forms of collateralized loan obligations. Our insurance subsidiaries own some of the beneficial interests, and we maintain the power to direct the activities of the VIEs that most significantly impact their economic performance. Accordingly, we consolidate these entities and those beneficial interests issued to third parties are reported as debt of consolidated investment entities. This debt is non-recourse to AIG.

Affordable Housing Partnerships

SAAHP organized and invested in limited partnerships that develop and operate affordable housing qualifying for federal, state, and historic tax credits, in addition to a few market rate properties across the United States. The operating partnerships are VIEs, whose debt is generally non-recourse in nature, and the general partners of which are mostly unaffiliated third-party developers. We account for our investments in operating partnerships using the equity method of accounting, unless they are required to be consolidated. We consolidate an operating partnership if the general partner is an affiliated entity or we otherwise have the power to direct activities that most significantly impact the entities’ economic performance. The pre-tax income of SAAHP is reported as a component of the Life and Retirement segment.

RMBS, CMBS, Other ABS and CDOs

Primarily through our insurance operations, we are a passive investor in RMBS, CMBS, other ABS and CDOs, the majority of which are issued by domestic special purpose entities. We generally do not sponsor or transfer assets to, or act as the servicer to these asset-backed structures, and were not involved in the design of these entities.

Our maximum exposure in these types of structures is limited to our investment in securities issued by these entities. Based on the nature of our investments and our passive involvement in these types of structures, we have determined that we are not the primary beneficiary of these entities. We have not included these entities in the above tables; however, the fair values of our investments in these structures are reported in Notes 5 and 6 herein.

  1. Derivatives and Hedge Accounting

We use derivatives and other financial instruments as part of our financial risk management programs and as part of our investment operations. Interest rate derivatives (such as interest rate swaps) are used to manage interest rate risk associated with embedded derivatives contained in insurance contract liabilities, fixed maturity securities, outstanding medium- and long-term notes as well as other interest rate sensitive assets and liabilities. Foreign exchange derivatives (principally foreign exchange forwards and swaps) are used to economically mitigate risk associated with non-U.S. dollar denominated debt, net capital exposures, foreign currency transactions, and foreign denominated investments. Equity derivatives are used to mitigate financial risk embedded in certain insurance liabilities and economically hedge certain investments. We use credit derivatives to manage our credit exposures. The derivatives are effective economic hedges of the exposures that they are meant to offset. In addition to hedging activities, we also enter into derivative instruments with respect to investment operations, which may include, among other things, credit default swaps (CDSs), total return swaps and purchases of investments with embedded derivatives, such as equity-linked notes and convertible bonds.

Interest rate, currency, equity and commodity swaps, credit contracts, swaptions, options and forward transactions are accounted for as derivatives, recorded on a trade-date basis and carried at fair value. Unrealized gains and losses are reflected in income, when appropriate. Aggregate asset or liability positions are netted on the Consolidated Balance Sheets only to the extent permitted by qualifying master netting arrangements in place with each respective counterparty. Cash collateral posted with counterparties in conjunction with transactions supported by qualifying master netting arrangements is reported as a reduction of the corresponding net derivative liability, while cash collateral received in conjunction with transactions supported by qualifying master netting arrangements is reported as a reduction of the corresponding net derivative asset.

Derivatives, with the exception of embedded derivatives, are reported at fair value in the Consolidated Balance Sheets in Other assets and Other liabilities. Embedded derivatives are generally presented with the host contract in the Consolidated Balance Sheets. A bifurcated embedded derivative is measured at fair value and accounted for in the same manner as a free standing derivative contract. The corresponding host contract is accounted for according to the accounting guidance applicable for that instrument.

AIG | 2020 Form 10-K 249

ITEM 8 | Notes to Consolidated Financial Statements | 11. Derivatives and Hedge Accounting

For additional information on embedded derivatives see Notes 5 and 14.

The following table presents the notional amounts of our derivatives and the fair value of derivative assets and liabilities in the Consolidated Balance Sheets:

December 31, 2020December 31, 2019
Gross Derivative AssetsGross Derivative LiabilitiesGross Derivative AssetsGross Derivative Liabilities
NotionalFairNotionalFairNotionalFairNotionalFair
(in millions)AmountValueAmountValueAmountValueAmountValue
Derivatives designated as
hedging instruments:(a)
Interest rate contracts$815$16$356$11$495$3$410$7
Foreign exchange contracts3,4682567,4243794,3283425,230162
Derivatives not designated
as hedging instruments:(a)
Interest rate contracts62,2594,62148,7324,42552,4373,19735,2312,742
Foreign exchange contracts9,51876612,8607118,13369812,093863
Equity contracts22,9241,1307,07622318,5337697,539139
Credit contracts(b)5,7972969678,457392389
Other contracts(c)43,4411454640,58214567
Total derivatives, gross$148,222$6,805$77,471$5,822$132,965$5,026$61,482$4,009
Counterparty netting(d)**(**3,812)**(**3,812)(2,427)(2,427)
Cash collateral(e)**(**2,219)**(**1,441)(1,806)(527)
Total derivatives on
consolidated balance sheets(f)$774$569$793$1,055

(a) Fair value amounts are shown before the effects of counterparty netting adjustments and offsetting cash collateral.

(b) As of December 31, 2020 and 2019, included CDSs on super senior multi-sector CDOs with a net notional amount of $137 million and $152 million (fair value liability of $44 million and $48 million), respectively. The net notional amount represents the maximum exposure to loss on the portfolio.

(c) Consists primarily of stable value wraps and contracts with multiple underlying exposures.

(d) Represents netting of derivative exposures covered by a qualifying master netting agreement.

(e) Represents cash collateral posted and received that is eligible for netting.

(f) Freestanding derivatives only, excludes embedded derivatives. Derivative instrument assets and liabilities are recorded in Other assets and Other liabilities, respectively. Fair value of assets related to bifurcated embedded derivatives was zero at both December 31, 2020 and December 31, 2019. Fair value of liabilities related to bifurcated embedded derivatives was $15.8 billion and $6.9 billion, respectively, at December 31, 2020 and December 31, 2019. 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, and the funds withheld arrangement with Fortitude Re. For additional information see Note 8 to the Consolidated Financial Statements.

Collateral

We engage in derivative transactions that are not subject to a clearing requirement directly with unaffiliated third parties, in most cases, under International Swaps and Derivatives Association, Inc. (ISDA) Master Agreements. Many of the ISDA Master Agreements also include Credit Support Annex provisions, which provide for collateral postings that may vary at various ratings and threshold levels. We attempt to reduce our risk with certain counterparties by entering into agreements that enable collateral to be obtained from a counterparty on an upfront or contingent basis. We minimize the risk that counterparties might be unable to fulfill their contractual obligations by monitoring counterparty credit exposure and collateral value and generally requiring additional collateral to be posted upon the occurrence of certain events or circumstances. In addition, certain derivative transactions have provisions that require collateral to be posted upon a downgrade of our long-term debt ratings or give the counterparty the right to terminate the transaction. In the case of some of the derivative transactions, upon a downgrade of our long-term debt ratings, as an alternative to posting collateral and subject to certain conditions, we may assign the transaction to an obligor with higher debt ratings or arrange for a substitute guarantee of our obligations by an obligor with higher debt ratings or take other similar action. The actual amount of collateral required to be posted 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 and after the time of the downgrade.

250 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 11. Derivatives and Hedge Accounting

Collateral posted by us to third parties for derivative transactions was $3.0 billion and $2.2 billion at December 31, 2020 and 2019, 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 $2.3 billion and $2.2 billion at December 31, 2020 and 2019, 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.

Offsetting

We have elected to present all derivative receivables and derivative payables, and the related cash collateral received and paid, on a net basis on our Consolidated Balance Sheets when a legally enforceable ISDA Master Agreement exists between us and our derivative counterparty. An ISDA Master Agreement is an agreement governing multiple derivative transactions between two counterparties. The ISDA Master Agreement generally provides for the net settlement of all, or a specified group, of these derivative transactions, as well as transferred collateral, through a single payment, and in a single currency, as applicable. The net settlement provisions apply 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 governed by the ISDA Master Agreement.

Hedge Accounting

We designated certain derivatives entered into with third parties as fair value hedges of available for sale investment securities held by our insurance subsidiaries. The fair value hedges include foreign currency forwards and cross currency swaps designated as hedges of the change in fair value of foreign currency denominated available for sale securities attributable to changes in foreign exchange rates. We also designated certain interest rate swaps entered into with third parties as fair value hedges of fixed rate GICs attributable to changes in benchmark interest rates.

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, 2020, 2019 and 2018, we recognized gains (losses) of $(128) million, $116 million and $34 million, respectively, included in Change in foreign currency translation adjustment in Other comprehensive income related to the net investment hedge relationships.

A qualitative methodology is utilized to assess hedge effectiveness for net investment hedges, while regression analysis is employed for all other hedges.

AIG | 2020 Form 10-K 251

ITEM 8 | Notes to Consolidated Financial Statements | 11. Derivatives and Hedge Accounting

The following table presents the gain (loss) recognized in earnings on our derivative instruments in fair value hedging relationships in the Consolidated Statements of Income:

Gains/(Losses) Recognized in Earnings for:
HedgingExcludedHedged
(in millions)Derivatives(a)Components(b)ItemsNet Impact
Year ended December 31, 2020
Interest rate contracts:
Realized capital gains/(losses)$-$-$-$-
Interest credited to policyholder account balances14-**(**14)-
Net investment income**(**6)-5**(**1)
Foreign exchange contracts:
Realized capital gains/(losses)**(**422)4942249
Year ended December 31, 2019
Interest rate contracts:
Realized capital gains/(losses)$-$-$-$-
Interest credited to policyholder account balances16-(16)-
Net investment income(1)-1-
Foreign exchange contracts:
Realized capital gains/(losses)(31)913191
Year ended December 31, 2018
Interest rate contracts:
Realized capital gains/(losses)$(2)$-$2$-
Interest credited to policyholder account balances----
Net investment income----
Foreign exchange contracts:
Realized capital gains/(losses)365106(365)106

(a)Gains and losses on derivative instruments designated and qualifying in fair value hedges that are included in the assessment of hedge effectiveness.

(b)Gains and losses on derivative instruments designated and qualifying in fair value hedges that are excluded from the assessment of hedge effectiveness and recognized in earnings on a mark-to-market basis.

Derivatives Not Designated as Hedging Instruments

The following table presents the effect of derivative instruments not designated as hedging instruments in the Consolidated Statements of Income:

Years Ended December 31,Gains (Losses) Recognized in Earnings
(in millions)202020192018
By Derivative Type:
Interest rate contracts$1,451$1,319$(509)
Foreign exchange contracts**(**389)(25)543
Equity contracts211(316)(56)
Credit contracts526132
Other contracts616465
Embedded derivatives**(**4,722)(1,464)629
Total$**(**3,336)$(361)$704
By Classification:
Policy fees$62$68$67
Net investment income**(**8)(125)(3)
Net realized capital gains (losses) - excluding Fortitude Re funds withheld assets**(**508)(316)642
Net realized capital gains (losses) on Fortitude Re funds withheld assets**(**2,894)--
Policyholder benefits and claims incurred1212(2)
Total$**(**3,336)$(361)$704

252 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 11. Derivatives and Hedge Accounting

Credit Risk-Related Contingent Features

We estimate that at December 31, 2020, based on our outstanding financial derivative transactions, a downgrade of our long-term senior debt ratings to BBB or BBB– by Standard & Poor’s Financial Services LLC, a subsidiary of S&P Global Inc., and/or a downgrade to Baa2 or Baa3 by Moody’s Investors’ Service, Inc. would permit counterparties to make additional collateral calls and permit certain counterparties to elect early termination of contracts, resulting in corresponding collateral postings and termination payments in the total amount of up to approximately $47 million. The aggregate fair value of our derivatives that were in a net liability position and that contain such credit risk-related contingencies which can be triggered below our long-term senior debt ratings of BBB+ or Baa1 was approximately $257 million and $336 million at December 31, 2020 and 2019, respectively. The aggregate fair value of assets posted as collateral under these contracts at December 31, 2020 and 2019, was approximately $306 million and $381 million, respectively.

Hybrid Securities with Embedded Credit Derivatives

We invest in hybrid securities (such as credit-linked notes) with the intent of generating income, and not specifically to acquire exposure to embedded derivative risk. As is the case with our other investments in RMBS, CMBS, CDOs and ABS, our investments in these hybrid securities are exposed to losses only up to the amount of our initial investment in the hybrid security. Other than our initial investment in the hybrid securities, we have no further obligation to make payments on the embedded credit derivatives in the related hybrid securities.

We elect to account for our investments in these hybrid securities with embedded written credit derivatives at fair value, with changes in fair value recognized in Net investment income and Other income. Our investments in these hybrid securities are reported as Other bond securities in the Consolidated Balance Sheets. The fair values of these hybrid securities were $2.4 billion and $3.3 billion at December 31, 2020 and 2019, respectively. These securities have par amounts of $5.0 billion and $7.4 billion at December 31, 2020 and 2019, respectively, and have remaining stated maturity dates that extend to 2052.

  1. Goodwill and Other Intangible Assets

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. At December 31, 2020, as a result of the 2020 segment changes, goodwill is reported within our General Insurance business – North America and International operating segments, our Life and Retirement business – Life Insurance operating segment and our Other Operations segment. When a business is transferred from one reporting unit to another, as occurred as part of the 2020 segment changes, goodwill from the original operating segment is allocated among reporting units based on the fair value of business transferred, relative to business retained by a reporting unit.

The impairment assessment involves an option to first assess qualitative factors to determine whether events or circumstances exist that lead to a determination that it is more likely than not that the fair value of an operating segment is less than its carrying amount. If the qualitative assessment is not performed, or after assessing the totality of the events or circumstances, we determine it is more likely than not that the fair value of an operating segment is less than its carrying amount, a quantitative assessment for potential impairment is performed.

If the qualitative test is not performed or if the test indicates a potential impairment is present, we estimate the fair value of each operating segment and compare the estimated fair value with the carrying amount of the operating segment, including allocated goodwill. The estimate of an operating segment’s fair value involves management judgment and is based on one or a combination of approaches including discounted expected future cash flows, market-based earnings multiples of the unit’s peer companies, external appraisals or, in the case of reporting units being considered for sale, third-party indications of fair value, if available. We consider one or more of these estimates when determining the fair value of an operating segment to be used in the impairment test.

If the estimated fair value of an operating segment exceeds its carrying amount, goodwill is not impaired. If the carrying value of an operating segment exceeds its estimated fair value, goodwill associated with that operating segment potentially is impaired. The amount of impairment, if any, is measured as the excess of a reporting unit’s carrying amount over its fair value not to exceed the total amount of goodwill allocated to that reporting unit and recognized in earnings.

The date of our annual goodwill Impairment testing is July 1. We performed our annual goodwill impairment tests of all reporting units and reassessed goodwill as a result of the aforementioned segment change using a combination of both qualitative and quantitative assessments and concluded that our goodwill was not impaired.

AIG | 2020 Form 10-K 253

ITEM 8 | Notes to Consolidated Financial Statements | 12. Goodwill and Other Intangible Assets

The following table presents the changes in goodwill by operating segment:

General Insurance
NorthLifeOther
(in millions)AmericaInternationalInsuranceOperationsTotal
Balance at January 1, 2018:
Goodwill - gross$1,473$3,269$270$59$5,071
Accumulated impairments(1,145)(2,255)(67)(10)(3,477)
Net goodwill3281,014203491,594
Increase (decrease) due to:
Acquisitions(a)2,3321574692,544
Other(12)(48)(5)9(56)
Balance at December 31, 2018:
Goodwill - gross3,7933,378311777,559
Accumulated impairments(1,145)(2,255)(67)(10)(3,477)
Net goodwill2,6481,123244674,082
Increase (decrease) due to:
Acquisitions-20--20
Other(b)-26(77)(13)(64)
Balance at December 31, 2019:
Goodwill - gross3,7933,424234647,515
Accumulated impairments(1,145)(2,255)(67)(10)(3,477)
Net goodwill2,6481,169167544,038
Increase (decrease) due to:
Dispositions(2)--(4)(6)
Other-3210-42
Balance at December 31, 2020:
Goodwill - gross3,7913,456244607,551
Accumulated impairments**(**1,145)**(**2,255)**(**67)**(**10)**(**3,477)
Net goodwill$2,646$1,201$177$50$4,074

(a)Includes goodwill of $2.0 billion, $492 million and $46 million relating to the acquisitions of Validus, Glatfelter and Ellipse, respectively.

(b)Reflects $98 million of goodwill that has been reclassified to assets held for sale.

Indefinite lived intangible assets are not subject to amortization. Indefinite lived intangible assets primarily include Lloyd’s syndicate capacity and brand names. Finite lived intangible assets are amortized over their useful lives. Finite lived intangible assets primarily include distribution networks and are recorded net of accumulated amortization. The Company tests intangible assets for impairment on an annual basis or whenever events or circumstances suggest that the carrying value of an intangible asset may exceed the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If this condition exists and the carrying value of an intangible asset exceeds its fair value, the excess is recognized as an impairment and is recorded as a charge against net income.

The Other intangible assets and VODA resulted primarily from the acquisition of Validus.

254 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 12. Goodwill and Other Intangible Assets

The following table presents the changes in other intangible assets and the VODA by operating segment:

General Insurance
NorthLifeOther
(in millions)AmericaInternationalInsuranceOperationsTotal
Other intangible assets
Balance at January 1, 2018$27$8$34$37$106
Increase (decrease) due to:
Acquisitions6120716-284
Amortization(2)(3)(4)(2)(11)
Other---(19)(19)
Balance at December 31, 2018$86$212$46$16$360
Increase (decrease) due to:
Acquisitions-----
Amortization(1)(1)(4)(2)(8)
Other(3)-(18)2(19)
Balance at December 31, 2019$82$211$24$16$333
Increase (decrease) due to:
Acquisitions-----
Dispositions---(4)(4)
Amortization(2)(1)(4)(2)(9)
Other(1)-2(2)(1)
Balance at December 31, 2020$79$210$22$8$319
Value of distribution network acquired
Balance at January 1, 2018$-$-$-$-$-
Increase (decrease) due to:
Acquisitions---582582
Amortization---(15)(15)
Other---22
Balance at December 31, 2018$-$-$-$569$569
Increase (decrease) due to:
Acquisitions-----
Amortization---(39)(39)
Other---66
Balance at December 31, 2019$-$-$-$536$536
Increase (decrease) due to:
Acquisitions-----
Amortization---(40)(40)
Other---11
Balance at December 31, 2020$-$-$-$497$497

The percentage of the unamortized balance of Other intangible assets and VODA at December 31, 2020 expected to be amortized in 2021 through 2025 by year is 9.2 percent, 9.3 percent, 9.5 percent, 8.4 percent and 8.2 percent, respectively, with 55.4 percent being amortized after five years.

AIG | 2020 Form 10-K 255

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

  1. Insurance Liabilities

Liability for Unpaid Losses and Loss Adjustment Expenses (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. Any adjustments resulting from this review are reflected currently in pre-tax income, except to the extent such adjustment impacts a deferred gain under a retroactive reinsurance agreement, in which case the ceded portion would be amortized into pre-tax income in subsequent periods. 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. Given the uncertainties around the impact from the COVID-19 crisis, including the significant global economic slowdown and general market decline, the full impact of COVID-19 and how it may ultimately impact the results of our insurance operations remains uncertain. In addition, in response to the crisis, new governmental, legislative and regulatory initiatives have been put in place and continue to be developed that could result in additional restrictions and requirements relating to our policies that may have a negative impact on our business operations. However, we have recorded our estimate of the ultimate liability for claims that have occurred as of the balance sheet date associated with COVID-19 which reflects our expectations given the current facts and circumstances. We will continue to monitor and review the impact. 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.

Our gross loss reserves before reinsurance and discount are net of contractual deductible recoverable amounts due from policyholders of approximately $12.6 billion and $12.2 billion at December 31, 2020 and 2019, respectively. These recoverable amounts are related to certain policies with high deductibles (in excess of high dollar amounts retained by the insured through self-insured retentions, deductibles, retrospective programs, or captive arrangements, each referred to generically as “deductibles”), primarily for U.S. Commercial casualty business. With respect to the deductible portion of the claim, we manage and pay the entire claim on behalf of the insured and are reimbursed by the insured for the deductible portion of the claim. Thus, these recoverable amounts represent a credit exposure to us. At December 31, 2020 and 2019, we held collateral of approximately $9.2 billion and $8.9 billion, respectively, for these deductible recoverable amounts, consisting primarily of letters of credit and funded trust agreements. Allowance for credit losses for the unsecured portion of these recoverable amounts was $14 million at December 31, 2020.

256 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

The following table presents the rollforward of activity in Loss Reserves:

Years Ended December 31,
(in millions)202020192018
Liability for unpaid loss and loss adjustment expenses, beginning of year$78,328$83,639$78,393
Reinsurance recoverable**(**31,069)(31,690)(26,708)
Initial allowance upon CECL adoption164--
Net Liability for unpaid loss and loss adjustment expenses, beginning of year47,42351,94951,685
Losses and loss adjustment expenses incurred:
Current year16,92817,59620,534
Prior years, excluding discount and amortization of deferred gain**(**90)(340)1,429
Prior years, discount charge (benefit)5871,063(252)
Prior years, amortization of deferred gain on retroactive reinsurance(a)**(**237)(219)(395)
Total losses and loss adjustment expenses incurred17,18818,10021,316
Losses and loss adjustment expenses paid:
Current year**(**4,062)(4,894)(5,754)
Prior years**(**14,603)(18,020)(17,768)
Total losses and loss adjustment expenses paid**(**18,665)(22,914)(23,522)
Other changes:
Foreign exchange effect815(6)(677)
Allowance for credit losses**(**15)--
Acquisitions(b)--3,284
Retroactive reinsurance adjustment (net of discount)(c)361130(137)
Fortitude sale(d)**(**3,818)--
Total other changes**(**2,657)1242,470
Liability for unpaid loss and loss adjustment expenses, end of year:
Net liability for unpaid losses and loss adjustment expenses43,28947,25951,949
Reinsurance recoverable34,43131,06931,690
Total$77,720$78,328$83,639

(a) Includes $41 million, $27 million and $51 million for the retroactive reinsurance agreement with NICO covering U.S. asbestos exposures for the year ended December 31, 2020, 2019 and 2018, respectively.

(b) Includes amounts related to the acquisition of Glatfelter in October 2018 and Validus in July 2018.

(c) Includes benefit (charge) from change in discount on retroactive reinsurance in the amount of $340 million, $469 million and $(180) million for the periods ended December 31, 2020, 2019 and 2018, respectively.

(d) On June 2, 2020, AIG completed the Majority Interest Fortitude Sale. Concurrent with the Majority Interest Fortitude Sale, AIG established a reinsurance recoverable. Refer to Note 1 for additional information.

Prior Year Development

During 2020, we recognized favorable prior year loss reserve development of $90 million excluding discount and amortization of deferred gain. The development was primarily driven by:

 Favorable development on U.S. Workers’ Compensation business, both guaranteed cost business and large deductible, where we reacted to favorable loss trends in recent accident years;

 Favorable development across the combination of primary and excess casualty coverages;

 Favorable development in Property, Specialty, and other miscellaneous coverages;

 Unfavorable development in U.S. Financial Lines, notably D&O, Employment Practices Liability (EPLI), Mergers and Acquisitions, Cyber and Non-Medical Professional Errors & Omissions business where we reacted to increasing frequency and severity in recent accident years;

 Unfavorable development in Personal Lines where we reacted to adverse development in Homeowners and Umbrella;

 Unfavorable development on Financial Lines driven by low frequency and high severity seen in D&O, especially in UK/Europe and Australia;

 Favorable development on Property and Special Risks globally driven by UK/Europe;

 Favorable development on Europe and Japan Personal Insurance driven by favorable frequency and severity trends.

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.

AIG | 2020 Form 10-K 257

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

During 2019, we recognized favorable prior year loss reserve development of $340 million excluding discount and amortization of deferred gain. The development was primarily driven by:

 Favorable development on U.S. Workers’ Compensation business, both guaranteed cost business and large deductible and Defense Base Act business (covering government contractors serving at military bases overseas) where we reacted to favorable loss trends in recent accident years;

 Favorable development on 2017 Hurricanes (Harvey, Irma and Maria) and favorable development due to 2017 California wildfire subrogation recoverables in Commercial Property and Personal Lines.

 Unfavorable development in Primary General Liability where we reacted to adverse frequency and severity trends especially in Construction Wrap business in recent accident years.

 Unfavorable development in U.S. Financial Lines, notably D&O, EPLI and Non-Medical Professional Errors & Omissions business where we reacted to increasing frequency and severity in recent accident years.

 Unfavorable development on European Casualty & Financial Lines, notably Commercial Auto, Employers Liability, Directors & Officers, and Financial Institutions business; and

 Favorable development on Europe Property and Special Risks, Europe and Japan Personal Insurance and Other product lines.

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.

During 2018, we recognized adverse prior year loss reserve development of $1.4 billion before impact of the Adverse Development Cover and the asbestos cession to NICO. The key components of this development were as follows:

 Unfavorable development in U.S. Excess Casualty, driven by the combination of construction defect and construction wrap claims from accident year 2015 and prior where we reacted to significant increases in severity and longer claim reporting patterns, as well as higher than expected loss severity in accident years 2016 and 2017, which led to an increase in estimates for these accident years;

 Unfavorable development in U.S. Financial Lines, primarily from D&O and 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.

 Favorable development in U.S. Commercial Property and Specialty Lines due to reductions in our estimates for 2017 Catastrophes, favorable attritional losses in Commercial Property and favorable Specialty emergence.

 Unfavorable development in U.S. Personal Lines reflecting the adverse development on the 2017 California wildfires and Hurricane Irma in 2017.

 Unfavorable development in International Financial Lines driven by increased large loss activity in recent accident years, particularly related to directors and officers class action suits against insureds with global exposure.

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.

258 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

The table below presents the reconciliation of the net liability for unpaid losses and loss adjustment expenses in the following tables to Loss Reserves in the Consolidated Balance Sheets for the year ended December 31, 2020:

Net liability for unpaid lossesReinsurance recoverable onGross liability
and loss adjustment expensesunpaid losses and lossfor unpaid
as presented in theadjustment expenses included inlosses and loss
(in millions)disaggregated tables belowthe disaggregated tables belowadjustment expenses
U.S. Workers' Compensation (before discount)$4,630$6,564$11,194
U.S. Excess Casualty3,7464,5848,330
U.S. Other Casualty3,5204,5688,088
U.S. Financial Lines4,8382,1937,031
U.S. Property and Special Risks6,1812,5718,752
U.S. Personal Insurance1,1161,6262,742
UK/Europe Casualty and Financial lines6,8261,2258,051
UK/Europe Property and Special Risks2,6791,2153,894
UK/Europe and Japan Personal Insurance2,2195052,724
Total$35,755$25,051$60,806
Reconciling Items
Discount on workers' compensation lines(1,636)
Other product lines*15,776
Unallocated loss adjustment expenses2,774
Total Loss Reserves$77,720

*Reinsurance recoverable for other product lines of $9.1 billion resulted in a net liability for unpaid losses and loss adjustment expenses of $6.7 billion for the year ended December 31, 2020.

Loss Development Information

The following is information about incurred and paid loss developments as of December 31, 2020, net of reinsurance. The cumulative number of reported claims, the total of IBNR liabilities and expected development on reported loss included within the net incurred loss amounts are presented in the following section.

Reserving Methodology

We use a combination of methods to project ultimate losses for both long-tail and short-tail exposures, which include:

Paid Development method: The Paid Development method estimates ultimate losses by reviewing paid loss patterns and selecting paid ultimate loss development factors. These factors are then applied to paid losses by applying them to accident years, with further expected changes in paid loss. Since the method does not rely on case reserves, it is not directly influenced by changes in the adequacy of case reserves.

Incurred Development method: The Incurred Development method is similar to the Paid Development method, but it uses case incurred losses instead of paid losses. Since this method uses more data (case reserves in addition to paid losses) than the Paid Development method, the incurred development patterns may be less variable than paid development patterns.

Expected Loss Ratio method: The Expected Loss Ratio method multiplies premiums by an expected loss ratio to produce ultimate loss estimates for each accident year. This method may be useful if loss development patterns are inconsistent, losses emerge very slowly, or there is relatively little loss history from which to estimate future losses.

Bornhuetter-Ferguson method: The Bornhuetter-Ferguson method using premiums and paid losses is a combination of the Paid Development method and the Expected Loss Ratio method where the weight given to each method is the reciprocal of the loss development factor. This method normally determines expected loss ratios similar to the method used for the Expected Loss Ratio method. The Bornhuetter-Ferguson method using premiums and incurred losses is similar to the Bornhuetter-Ferguson method using premiums and paid losses except that it uses case-incurred losses.

Cape Cod method: The Cape Cod method is mechanically similar to the Bornhuetter-Ferguson method with the difference being that the Expected Loss Ratio estimates are determined based on a weighting of the loss estimates that come from the Paid/Incurred Development Methods. This method may be more responsive to recent loss trends than the Bornhuetter-Ferguson method.

AIG | 2020 Form 10-K 259

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Average Loss method: The Average Loss method multiplies a projected number of ultimate claims by an estimated ultimate severity average loss for each accident year to produce ultimate loss estimates. Since projections of the ultimate number of claims are often less variable than projections of ultimate loss, this method can provide more reliable results for reserve categories where loss development patterns are inconsistent or too variable to be relied on exclusively.

In updating our loss reserve estimates, we consider and evaluate inputs from many sources, including actual claims data, the performance of prior reserve estimates, observed industry trends, our internal peer review processes, including challenges and recommendations from our Enterprise Risk Management group, as well as the views of third-party actuarial firms. We use these inputs to improve our evaluation techniques, and to analyze and assess the change in estimated ultimate loss for each accident year by product line. Our analyses produce a range of indications from various methods, from which we select our best estimate.

In determining the actual carried loss reserves, we consider both the internal actuarial best estimate and numerous other internal and external factors, including:

 an assessment of economic conditions, including real GDP growth, inflation, employment rates or unemployment duration, stock market volatility and changes in corporate bond spreads;

 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;

 change in claims handling philosophy, operating model, processes, and related ongoing enhancements;

 third-party claims reviews that are periodically performed for key classes of claims such as toxic tort, environmental and other complex casualty claims;

 third-party actuarial reviews that are periodically performed for key classes of business;

 input from underwriters on pricing, terms, and conditions and market trends; and

 changes in our reinsurance program, pricing and commutations.

The following factors are relevant to the loss development information included in the tables below:

Table organization: The tables are organized by accident year and include policies written on an occurrence and claims- made basis. 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. These reclassifications are shown as development in the respective years in the tables below. Financial Lines business is primarily written on a claims-made basis, while the majority of the workers’ compensation, excess casualty, other casualty, and run-off property and casualty lines of business are written on an occurrence basis. Primarily, all short-tail lines in Property and Special Risks and Personal Insurance are written on an occurrence basis.

Groupings: We believe our groupings have homogenous risk characteristics with similar development patterns and would generally be subject to similar trends and reflect our reportable segments. The incurred losses and loss adjustment expenses and paid losses in the following tables for the current reporting year are allocated to the line of business and accident years based on how the business is coded by profit center and line of business.

Reinsurance: Our reinsurance program varies by exposure type. Historically we have leveraged facultative and treaty reinsurance, both on a pro-rata and excess of loss basis. Our reinsurance program may change from year to year, which may affect the comparability of the data presented in our tables.

260 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Adverse Development Reinsurance Agreement: We have provided the impact of the adverse development reinsurance agreement (ADC) in an additional table below our Incurred Losses and Allocated Loss Adjustment Expenses (ALAE) tables. The impact of the ADC is shown beginning in 2016 given the retroactive date of the contract and coincides with the effective date of the contract. For the lines of business covered by the agreement (U.S. Workers' Compensation, U.S. Excess Casualty, U.S. Other Casualty, U.S. Financial Lines, U.S. Property and Special Risks and U.S. Personal Insurance or collectively, the Covered Lines), an attribution of the loss recoveries to the line of business by calendar year and accident year is performed based on the underlying distribution of the losses subject to the agreement. Specifically, the future claim payments for all subject incurred losses were projected into future years based on the same actuarial assumptions underlying the related reserves. The additional table presented after discussion of prior year development by line of business reconciles the changes in net ultimates to our overall prior year development and provides the reattribution of loss recoveries for the Covered Lines. The reinsurance terms of the ADC were then used to identify the future claims payments for which 80% will be reimbursed by NICO. At each reporting period, the attribution of the ADC recoveries is performed. The factors that could cause the attribution to lines of business and accident year to change include changes in underlying actuarial assumptions as to timing and amount of future claim payments.

Incurred but not reported liabilities (IBNR): We include development from past reported losses in IBNR.

Data excluded from tables: Information with respect to accident years older than ten years is excluded from the development tables. Unallocated loss adjustment expenses are also excluded.

Foreign exchange: The loss development for operations outside of the U.S. is presented for all accident years using the current exchange rate at December 31, 2020. Although this approach requires restating all prior accident year information, the changes in exchange rates do not impact incurred and paid loss development trends.

Acquisitions: We include acquisitions from all accident years presented in the tables. For purposes of this disclosure, we have applied the retrospective method for the acquired reserves, including incurred and paid claim development histories throughout the relevant tables. It should be noted that historical reserves for the acquired businesses were established by the acquired companies using methods, assumptions and procedures then in effect which may differ from our current reserving bases. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the aggregated historical results shown in the triangles.

Dispositions: We exclude dispositions from all accident years presented in the tables.

Claim counts: We consider a reported claim to be one claim for each claimant or feature for each loss occurrence. Claims relating to losses that are 100 percent reinsured are excluded from the reported claims in the tables below. Reported claims for losses from assumed reinsurance contracts are not available and hence not included in the reported claims.

 There are limitations that should be considered on the reported claim count data in the tables below, including:

- Claim counts are presented only on a reported (not an ultimate) basis;

- The tables below include lines of business and geographies at a certain aggregated level which may indicate different frequency and severity trends and characteristics, and may not be as meaningful as the claim count information related to the individual products within those lines of business and geographies;

- Certain lines of business are more likely to be subject to occurrences involving multiple claimants and features, which can distort measures based on the reported claim counts in the table below; and

- Reported claim counts are not adjusted for ceded reinsurance, which may distort the measure of frequency or severity.

Supplemental Information: The information about incurred and paid loss development for all periods preceding year ended December 31, 2020 and the related historical claims payout percentage disclosure is unaudited and is presented as supplementary information.

AIG | 2020 Form 10-K 261

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

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:

U.S. Workers' Compensation

**During 2020, we recognized $**367 million of favorable prior year development, net of external reinsurance but before ADC cessions.

**During 2019, we recognized $**699 million of favorable prior year development, net of external reinsurance but before ADC cessions.

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (in millions)December 31, 2020
Accident Year20112012201320142015201620172018201920202020 Prior Year Development Excluding the Impact of Adverse Development Reinsurance AgreementTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported ClaimsIncurred Impact of Adverse Development Reinsurance AgreementIBNR Impact of Adverse Development Reinsurance Agreement2020 (Net of Impact of Adverse Development Reinsurance Agreement)Total of IBNR Liabilities Net of Impact of Adverse Development Reinsurance Agreement
Unaudited
2011$2,901$2,953$3,091$3,158$3,113$3,152$3,156$3,177$3,141$3,105$**(**36)$299125,646$**(**439)$**(**269)$2,666$30
20122,3822,1942,2862,2602,3342,3082,2592,2472,224**(**23)26071,570**(**398)**(**236)1,82624
20131,9321,8801,9502,0602,0321,9741,9161,886**(**30)22647,620**(**366)**(**196)1,52030
20141,7291,7641,8661,8621,7941,7091,679**(**30)32340,430**(**456)**(**276)1,22347
20151,7081,8641,8661,8141,7221,675**(**47)47936,231**(**570)**(**380)1,10599
20161,2991,3461,3181,1401,090**(**50)32931,104--1,090329
2017789850776763**(**13)30626,914--763306
20189981,021961**(**60)51421,481--961514
2019887873**(**14)47816,094--873478
202059740911,493--597409
Total$14,853$**(**303)$**(**2,229)$12,624
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below**(**9,268)-14**(**9,254)
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2011, net of reinsurance4,714**(**87)**(**3,454)1,260
Unallocated loss adjustment expense prior year development23
Liabilities for losses and loss adjustment expenses and prior year loss
development, net of reinsurance$10,299$**(**367)$**(**5,669)$4,630

262 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Calendar Years Ended December 31, (in millions)Change in Incurred Loss and ALAE
Accident Year20162017201820192020
Unaudited
2011$2,676$2,677$2,682$2,683$2,666$**(**17)
20121,8191,8141,7931,8041,82622
20131,5001,4941,4811,4581,52062
20141,3111,3101,3091,3291,223**(**106)
20151,2791,2791,3181,1341,105**(**29)
20161,2991,3461,3181,1401,090**(**50)
2017-789850776763**(**13)
2018--9981,021961**(**60)
2019---887873**(**14)
2020----597-
Total$9,884$10,709$11,749$12,232$12,624$**(**205)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below**(**9,254)-
Liabilities for losses and allocated loss adjustment expenses before 2011, net of reinsurance1,260**(**137)
Unallocated loss adjustment expense prior year development-20
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$4,630$**(**322)

The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):

Calendar Years Ended December 31, (in millions)Change in Incurred Loss and ALAE
Accident Year20162017201820192020
Unaudited
2011$(476)$(479)$(495)$(458)$**(**439)$19
2012(515)(494)(466)(443)**(**398)45
2013(560)(538)(493)(458)**(**366)92
2014(555)(552)(485)(380)**(**456)**(**76)
2015(585)(587)(496)(588)**(**570)18
2016------
2017------
2018------
2019------
2020------
Total$(2,692)$(2,650)$(2,435)$(2,327)$**(**2,229)$98
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below14-
Liabilities for losses and allocated loss adjustment expenses before 2011, net of reinsurance**(**3,454)**(**46)
Unallocated loss adjustment expense prior year development**(**3)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$**(**5,669)$49

AIG | 2020 Form 10-K 263

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (in millions)
Accident Year2011201220132014201520162017201820192020Paid Impact of Adverse Development Reinsurance Agreement
Unaudited
2011$519$1,129$1,561$1,884$2,129$2,285$2,388$2,451$2,496$2,519$**(**2)
20124158041,0891,2721,4401,5631,6321,6691,719**(**3)
20132826198791,0671,2141,2871,3351,372**(**3)
20142315587869301,0301,0961,137**(**3)
2015234524725854925979**(**3)
2016147378521584630-
201793224294333-
201885215296-
201993219-
202064-
Total$9,268$**(**14)

Reserving Process and Methodology

U.S. Workers’ Compensation is an extremely long-tail line of business, with loss emergence extending for decades. We generally use a combination of loss development, frequency/severity and expected loss ratio methods for workers’ compensation.

Many of our primary casualty policies contain risk-sharing features, including high deductibles, self-insured retentions or retrospective rating features, in addition to a traditional insurance component. These risk-sharing programs generally are large and complex, comprising multiple products, years and structures, and are subject to amendment over time. We group guaranteed cost and excess of deductible business separately and then further by state and industry subset to the extent that meaningful differences are determined to exist. We also separately analyze certain subsets of the portfolio that have unique characteristics (e.g., U.S. government sub-contractor accounts and construction wrap-up business). For excess of deductible business, we also segment by size of deductible and whether the claim is handled by AIG or an outside third-party administrator (TPA). The proportion of large deductible business has increased over time, which has slowed the reporting pattern of claims.

For guaranteed cost business, expected loss ratio methods generally are given significant weight only in the most recent accident year. Workers’ compensation claims are generally characterized by high frequency, low severity, and relatively consistent loss development from one accident year to the next. We historically have been a leading writer of workers’ compensation, and thus have sufficient volume of claims experience to use development methods. We generally segregate California (CA) and New York (NY) businesses from the other states to reflect their different development patterns and changing percentage of the mix by state. The claims development tables above are impacted by two other significant initiatives, which offset each other. In recent years, we instituted claims strategy changes and loss mitigation efforts to accelerate settlements, which we believe results in an overall reduction in claim costs. This strategy resulted in an increase in paid losses along the latest diagonals relative to prior years. In addition, we have been reducing premium volume in recent years and shifting a greater proportion of business to insured risk retention structures such as high deductible policies. These mix and volume changes slowed paid and incurred development since excess of deductible claims will typically take longer to emerge and settle.

Expected loss ratio methods for business written in excess of a deductible may be given significant weight in the most recent five accident years. In the 2016 analysis, we increased our tail factor estimates for states other than NY and CA for guaranteed cost business in recognition of longer medical development patterns that we have been seeing in recent years. We reflected increases in legal costs we have seen across the portfolio, particularly in California.

Additionally, over the years we have written a number of very large accounts which include workers’ compensation coverage. These accounts are generally individually priced by our actuaries, and to the extent appropriate, the indicated losses based on the pricing analysis may be used to record the initial estimated loss reserves for these accounts.

264 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Prior Year Development

During 2020, we recognized $367 million of favorable prior year development in U.S. Workers Compensation business due to continued favorable frequency and severity trends seen across the diagonals for many subsets of US Workers Compensation especially for recent accident years.

During 2019, we recognized $699 million of favorable prior year development in U.S. Workers Compensation business due to favorable frequency and severity trends seen across the diagonals across many subsets of U.S. Workers Compensation especially in the recent accident years.

During 2018, we recognized $51 million of adverse prior year development in U.S. Workers Compensation business with higher claim development factors at older ages (tail factors) for non-California, non-New York and loss sensitive business in older accident years being offset by favorable emergence in recent years. Accident year 2017 was adversely impacted by a change in ceded reinsurance estimates. For our Defense Base Act business, adverse development in recent years was offset by an expansion of the definition of reimbursable War Hazard claims by the U.S. Government.

U.S. Excess Casualty

**During 2020, we recognized $**149 million of favorable prior year development in Excess Casualty, net of external reinsurance but before ADC cessions, driven by favorable emergence on older accident years offset by severity increases in recent accident years.

**During 2019, we recognized $**76 million of unfavorable prior year development in Excess Casualty, net of external reinsurance but before ADC cessions, driven by higher than expected loss emergence for construction wrap claims and increasing loss severity in more recent accident years.

AIG | 2020 Form 10-K 265

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (in millions)December 31, 2020
Accident Year20112012201320142015201620172018201920202020 Prior Year Development Excluding the Impact of Adverse Development Reinsurance AgreementTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported ClaimsIncurred Impact of Adverse Development Reinsurance AgreementIBNR Impact of Adverse Development Reinsurance Agreement2020 (Net of Impact of Adverse Development Reinsurance Agreement)Total of IBNR Liabilities Net of Impact of Adverse Development Reinsurance Agreement
Unaudited
2011$1,787$1,827$1,597$1,429$1,529$1,611$1,627$1,726$1,758$1,713$**(**45)$3123,816$**(**279)$**(**163)$1,434$149
20121,6071,4031,2421,4881,5371,4861,5581,5021,390**(**112)2363,783**(**253)**(**146)1,13790
20131,1231,0351,1691,3081,2411,2821,2921,316242833,171**(**346)**(**197)97086
20149381,0691,2751,2601,3391,2831,248**(**35)3482,669**(**336)**(**187)912161
20159891,4631,4401,6031,6561,694384232,672**(**483)**(**270)1,211153
20168981,1461,1621,1711,2741035262,172--1,274526
20178561,0021,0971,153564911,465--1,153491
201864864672175368865--721368
20195775836477615--583477
2020406399320--406399
Total$11,498$110$**(**1,697)$9,801
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below**(**6,459)-20**(**6,439)
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2011, net of reinsurance2,110**(**237)**(**1,726)384
Unallocated loss adjustment expense prior year development**(**22)
Liabilities for losses and loss adjustment expenses and prior year loss
development, net of reinsurance$7,149$**(**149)$**(**3,403)$3,746
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Calendar Years Ended December 31, (in millions)Change in Incurred Loss and ALAE
Accident Year20162017201820192020
Unaudited
2011$1,369$1,371$1,436$1,416$1,434$18
20121,1751,1631,2541,2141,137**(**77)
20139359329811,032970**(**62)
201490290591584491268
20151,0271,0151,1391,1631,21148
20168981,1461,1621,1711,274103
2017-8561,0021,0971,15356
2018--64864672175
2019---5775836
2020----406-
Total$6,306$7,388$8,537$9,160$9,801$235
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below**(**6,439)-
Liabilities for losses and allocated loss adjustment expenses before 2011, net of reinsurance3844
Unallocated loss adjustment expense prior year development-**(**33)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$3,746$206

266 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):

Calendar Years Ended December 31, (in millions)Change in Incurred Loss and ALAE
Accident Year20162017201820192020
Unaudited
2011$(242)$(256)$(290)$(342)$**(**279)$63
2012(362)(323)(304)(288)**(**253)35
2013(373)(309)(301)(260)**(**346)**(**86)
2014(373)(355)(424)(439)**(**336)103
2015(436)(425)(464)(493)**(**483)10
2016------
2017------
2018------
2019------
2020------
Total$(1,786)$(1,668)$(1,783)$(1,822)$**(**1,697)$125
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below20-
Liabilities for losses and allocated loss adjustment expenses before 2011, net of reinsurance**(**1,726)231
Unallocated loss adjustment expense prior year development**(**11)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$**(**3,403)$345
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (in millions)
Accident Year2011201220132014201520162017201820192020Paid Impact of Adverse Development Reinsurance Agreement
Unaudited
2011$5$63$225$387$716$921$1,069$1,214$1,257$1,330$**(**3)
201231062884956498871,0221,1211,090-
201315105207387578705819882**(**4)
2014377240444590703815**(**6)
201592103917189351,061**(**7)
20162880204388502-
2017145156505-
20181125227-
2019743-
20204-
Total$6,459$**(**20)

Reserving Process and Methodology

U.S. Excess Casualty policies tend to attach at a high layer above underlying policies, which causes the loss development pattern to be lagged significantly. Many of the claims notified to the excess layers are closed without payment because the claims never reach our layer as a result of high deductibles and other underlying coverages, while the claims that reach our layer and close with payment can be large and highly variable in terms of reported timing and amount. For a portion of this business, the underlying primary policies are issued by other insurance companies, which can limit our access to relevant information to help inform our judgments as the loss events evolve and mature.

AIG | 2020 Form 10-K 267

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

We generally use a combination of loss development methods and expected loss ratio methods for excess casualty product lines. We segment our analysis between automobile-related claims and non-automobile claims, due to the shorter-tail nature of the automobile claims. We then further segment the non-automobile claims for certain latent exposures such as construction defects and mass torts where losses have unique emergence patterns. Mass tort claims in particular may develop over an extended period of time and impact multiple accident years when they emerge. The more standard types of claims are then separately analyzed based on attachment point bands, to recognize that the impact of the level of the attachment point can significantly impact the delay in loss reporting and development. In our analyses, losses capped at $10 million were first analyzed using traditional loss development and expected loss ratio methods and then this estimate was used to derive the expected loss estimate for losses above $10 million reflecting the expected relationships between the layers, reflecting the attachment point and limit.

Expected loss ratio methods are generally used for at least the three latest accident years, due to the relatively low credibility of the reported losses. The loss experience is generally reviewed separately by attachment point. The expected loss ratios used for recent accident years are based on the projected ultimate loss ratios for older years adjusted for rate changes and loss trend.

Prior Year Development

During 2020, we recognized $149 million of favorable development driven by favorable emergence on the older years offset by higher severity claim emergence in recent accident years across various excess casualty classes. Auto liability deteriorated slightly in the more recent accident years.

During 2019, we recognized $76 million of unfavorable development driven by higher severity claim emergence in non-admitted construction defect claims in older accident years and auto liability and general liability claims in recent accident years.

During 2018, we recognized $1.3 billion of adverse development driven largely by construction defect and construction wrap claims where actual emergence was significantly worse than expected and our updated analysis significantly increased the severity assumptions and lengthened the claim reporting pattern to recognize the significant deterioration seen in recent calendar periods. We also increased the expected loss ratio assumptions in recent accident years to reflect the high initial reported loss ratios for those years and the incidence of several unusually large claims.

U.S. Other Casualty

U.S Other Casualty includes general liability, commercial auto, medical malpractice, and various other casualty lines of business.

**In 2020, we recognized $**141 million of favorable prior year development in Other Casualty, net of external reinsurance but before ADC cessions.

**In 2019, we recognized $**168 million of unfavorable prior year development in Other Casualty, net of external reinsurance but before ADC cessions, primarily as a result of unfavorable loss emergence in recent accident years.

268 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (in millions)December 31, 2020
Accident Year20112012201320142015201620172018201920202020 Prior Year Development Excluding the Impact of Adverse Development Reinsurance AgreementTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported ClaimsIncurred Impact of Adverse Development Reinsurance AgreementIBNR Impact of Adverse Development Reinsurance Agreement2020 (Net of Impact of Adverse Development Reinsurance Agreement)Total of IBNR Liabilities Net of Impact of Adverse Development Reinsurance Agreement
Unaudited
2011$2,033$2,202$2,302$2,439$2,585$2,620$2,582$2,517$2,515$2,524$9$9475,604$**(**138)$**(**92)$2,386$2
20121,9862,1392,1932,2032,3522,4072,3432,3282,321**(**7)13544,071**(**186)**(**131)2,1354
20131,6531,7291,9122,1482,1852,1642,2112,196**(**15)21739,140**(**276)**(**208)1,9209
20141,7511,7211,9632,0091,9101,9161,9463018137,598**(**245)**(**164)1,70117
20151,3291,7621,8291,7361,7941,8344017134,918**(**281)**(**155)1,55316
20161,3391,3431,3211,3911,340**(**51)32728,356--1,340327
2017602629738674**(**64)21120,389--674211
2018802845837**(**8)42615,626--837426
20191,0591,058**(**1)79918,716--1,058799
20205244577,552--524457
Total$15,254$**(**67)$**(**1,126)$14,128
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below**(**11,056)-24**(**11,032)
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2011, net of reinsurance1,476**(**40)**(**1,052)424
Unallocated loss adjustment expense prior year development**(**34)
Liabilities for losses and loss adjustment expenses and prior year loss
development, net of reinsurance$5,674$**(**141)$**(**2,154)$3,520
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Calendar Years Ended December 31, (in millions)Change in Incurred Loss and ALAE
Accident Year20162017201820192020
Unaudited
2011$2,398$2,395$2,414$2,376$2,386$10
20122,1892,1972,1752,1592,135**(**24)
20131,9481,9601,9291,9481,920**(**28)
20141,6671,6781,6341,6941,7017
20151,3611,3731,4231,4931,55360
20161,3391,3431,3211,3911,340**(**51)
2017-602629738674**(**64)
2018--802845837**(**8)
2019---1,0591,058**(**1)
2020----524-
Total$10,902$11,548$12,327$13,703$14,128$**(**99)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below**(**11,032)-
Liabilities for losses and allocated loss adjustment expenses before 2011, net of reinsurance424**(**24)
Unallocated loss adjustment expense prior year development-**(**32)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$3,520$**(**155)

AIG | 2020 Form 10-K 269

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):

Calendar Years Ended December 31, (in millions)Change in Incurred Loss and ALAE
Accident Year20162017201820192020
Unaudited
2011$(222)$(187)$(103)$(139)$**(**138)$1
2012(163)(210)(168)(169)**(**186)**(**17)
2013(200)(225)(235)(263)**(**276)**(**13)
2014(296)(331)(276)(222)**(**245)**(**23)
2015(401)(456)(313)(301)**(**281)20
2016------
2017------
2018------
2019------
2020------
Total$(1,282)$(1,409)$(1,095)$(1,094)$**(**1,126)$**(**32)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below24-
Liabilities for losses and allocated loss adjustment expenses before 2011, net of reinsurance**(**1,052)30
Unallocated loss adjustment expense prior year development2
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$**(**2,154)$-
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (in millions)
Accident Year2011201220132014201520162017201820192020Paid Impact of Adverse Development Reinsurance Agreement
Unaudited
2011$235$722$1,102$1,481$1,814$2,039$2,210$2,289$2,339$2,381$**(**4)
20124117391,0421,3851,6771,8692,0092,0532,101**(**3)
20131695949621,2481,4851,6881,8091,885**(**4)
20142106208681,1501,3921,5721,653**(**5)
20151053097691,0871,3511,485**(**8)
201677298489703846-
201751111216314-
201843122227-
201953138-
202026-
Total$11,056$**(**24)

270 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Reserving Process and Methodology

U.S. Other Casualty includes general liability, automobile liability, environmental, medical malpractice, and other casualty lines of business. These lines of business are all long-tail in nature and while somewhat diverse in terms of exposures, these lines are often subject to similar trends. These lines are often significantly impacted by the underwriting cycle and external judicial trends. Many of our policies contain risk-sharing features, including high deductibles, self-insured retentions or retrospective rating features, in addition to a traditional insurance component. These risk-sharing programs generally are large and complex, comprising multiple products, years and structures, and are subject to amendment over time.

We generally use a combination of loss development methods, frequency/severity and expected loss ratio methods for primary general liability or products liability product lines. We also supplement the standard actuarial techniques by using evaluations of the ultimate losses on unusual claims or claim accumulations by external specialists on those subsets of claims. The segmentation of the data reflects state differences, industry groups, deductible/non-deductible programs and type of claim.

We segment our analysis by line of business and key coverage structures (claims-made vs. occurrence, large deductible policies, retrospective-rated policies, captives, etc.). Additionally, certain subsets, such as construction defect for general liability, auto liability policies for trucking business, hospital policies for medical malpractice and underground storage tanks for environmental are generally reviewed separately from business in other subsets. We continually refine our loss reserving techniques for the domestic primary casualty product lines and adopt further segmentations based on our analysis of the differing emerging loss patterns for certain subsets of insureds. Due to the long-tail nature of general liability business, and the many subsets that are reviewed individually, there is less credibility given to the reported losses and increased reliance on expected loss ratio methods for recent accident years.

For certain product lines with sufficient loss volume, loss development methods may be given significant weight for all but the most recent one or two accident years. For smaller or more volatile subsets of business and excess of a large deductible business, loss development methods may be given limited weight for the five or more recent accident years. Expected loss ratio methods are used for the more recent accident years for these subsets. The loss experience for primary general liability business is generally reviewed at a level that is believed to provide the most appropriate data for reserve analysis. For other subsets, such as environmental, we utilize a combination of claim analysts’ loss projections and actuarial methods to estimate ultimate losses.

Expected loss ratio methods are generally given significant weight only in the most recent accident year, except for excess of large deductible business, in which expected loss ratio methods may receive weight for several of the most recent accident years. In recent years, the impact of the increase in the frequency of severe claims was projected in the accident years where it was most prevalent. The resulting increase in ultimate loss projections and loss ratios for those years impacted subsequent years through loss development factors and prior expected loss ratio assumptions.

AIG | 2020 Form 10-K 271

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Prior Year Development

Primary General Liability

In 2020, we recognized unfavorable development of $65 million largely driven by non-admitted casualty claims emerging in the last seven accident years.

In 2019, we recognized unfavorable development of $220 million largely driven by construction defect and construction wrap policies where we observed significant increases in severity in recent accident years.

In 2018, we increased our ultimate loss estimates for prior accident years by $214 million mainly due to Construction Casualty business, particularly construction defect (CD) claims. Our updated analyses for the construction casualty business reacted to increased severity of claims for both CD and non-CD claims and lengthened the claim reporting pattern for CD claims.

Primary Commercial Auto Liability

In 2020, we experienced unfavorable development of approximately $11 million mainly due to continued emergence of high severity claims in recent accident years.

In 2019, we experienced unfavorable development of approximately $23 million mainly due to deterioration in severity in the recent accident years in the large deductible business.

In 2018, we reduced our ultimate loss estimates for prior accident years by $142 million mainly due to favorable emergence in recent accident years. Our updated analyses for the auto business reacted to this experience in older years as loss trends have stabilized in the more recent years.

Medical Malpractice

During 2020, we recognized $26 million of favorable development largely driven by favorable trends in large claim emergence.

During 2019, we recognized $30 million of unfavorable development largely driven by a few large cases.

During 2018, we recognized favorable loss development of approximately $158 million as loss emergence was less than expected in older years due to several large cases settling for less than we expected. Severity in recent years continues to be higher than historical norms.

Other Lines

During 2020, we recognized favorable development of $191 million largely driven by favorable development on extra-contractual obligations, environmental impairment business and loss sensitive casualty business.

During 2019, we recognized favorable development of $105 million largely driven by extra contractual obligations, favorable development on loss sensitive casualty business and business internally reinsured from other business units.

During 2018, we recognized favorable loss development of approximately $41 million largely due to our environmental impairment liability business where loss activity was better than expected.

U.S. Financial Lines

During 2020, we recognized $479 million of unfavorable prior year development in U.S. Financial Lines, net of external reinsurance but before ADC cessions, due to adverse experience driven by severity.

During 2019, we recognized $463 million of unfavorable prior year development in U.S. Financial Lines, net of external reinsurance but before ADC cessions, due to adverse experience in the D&O subset of business.

The mix of business has been changing in recent years as we write more cyber and mergers and acquisitions business, which generally report claims faster.

272 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (in millions)December 31, 2020
Accident Year20112012201320142015201620172018201920202020 Prior Year Development Excluding the Impact of Adverse Development Reinsurance AgreementTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported ClaimsIncurred Impact of Adverse Development Reinsurance AgreementIBNR Impact of Adverse Development Reinsurance Agreement2020 (Net of Impact of Adverse Development Reinsurance Agreement)Total of IBNR Liabilities Net of Impact of Adverse Development Reinsurance Agreement
Unaudited
2011$1,844$1,765$1,934$1,925$1,960$1,991$2,023$2,015$2,012$2,004$**(**8)$3120,074$**(**59)$**(**29)$1,945$2
20121,5921,7631,8001,9071,9881,9902,0152,0772,08258620,086**(**134)**(**75)1,94811
20131,7901,7191,6701,6131,5551,4971,5091,550418719,003**(**148)**(**83)1,4024
20141,8121,7771,8921,9271,9601,9812,0001920317,280**(**241)**(**140)1,75963
20151,7371,7621,7431,7881,8301,8744419215,857**(**324)**(**176)1,55016
20161,6051,8551,9932,0642,1397526315,778--2,139263
20171,5641,6751,7561,8469041814,950--1,846418
20181,6401,7661,88211676014,357--1,882760
20191,5031,5363391512,663--1,536915
20201,2131,0169,220--1,2131,016
Total$18,126$415$**(**906)$17,220
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below**(**12,399)-27**(**12,372)
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2011, net of reinsurance20325**(**213)**(**10)
Unallocated loss adjustment expense prior year development39
Liabilities for losses and loss adjustment expenses and prior year loss
development, net of reinsurance$5,930$479$**(**1,092)$4,838
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Calendar Years Ended December 31, (in millions)Change in Incurred Loss and ALAE
Accident Year20162017201820192020
Unaudited
2011$1,966$1,973$1,989$1,958$1,945$**(**13)
20121,9061,9071,9251,9621,948**(**14)
20131,4421,4291,4081,4091,402**(**7)
20141,7331,7291,7531,7411,75918
20151,4291,4301,4621,5521,550**(**2)
20161,6051,8551,9932,0642,13975
2017-1,5641,6751,7561,84690
2018--1,6401,7661,882116
2019---1,5031,53633
2020----1,213-
Total$10,081$11,887$13,845$15,711$17,220$296
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below**(**12,372)-
Liabilities for losses and allocated loss adjustment expenses before 2011, net of reinsurance**(**10)**(**25)
Unallocated loss adjustment expense prior year development-47
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$4,838$318

AIG | 2020 Form 10-K 273

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):

Calendar Years Ended December 31, (in millions)Change in Incurred Loss and ALAE
Accident Year20162017201820192020
Unaudited
2011$(25)$(50)$(26)$(54)$**(**59)$**(**5)
2012(82)(83)(90)(115)**(**134)**(**19)
2013(171)(126)(89)(100)**(**148)**(**48)
2014(159)(198)(207)(240)**(**241)**(**1)
2015(333)(313)(326)(278)**(**324)**(**46)
2016------
2017------
2018------
2019------
2020------
Total$(770)$(770)$(738)$(787)$**(**906)$**(**119)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below27-
Liabilities for losses and allocated loss adjustment expenses before 2011, net of reinsurance**(**213)**(**23)
Unallocated loss adjustment expense prior year development8
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$**(**1,092)$**(**134)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (in millions)
Accident Year2011201220132014201520162017201820192020Paid Impact of Adverse Development Reinsurance Agreement
Unaudited
2011$165$494$886$1,210$1,529$1,752$1,885$1,912$1,918$1,924$**(**1)
2012734038121,2501,4941,6221,6871,8591,904**(**3)
2013413276829451,1391,2351,3141,362**(**3)
2014663668491,1581,3871,5731,658**(**6)
2015633907911,0551,2821,488**(**14)
2016734991,0021,3581,659-
2017643917611,118-
201886486835-
201994367-
202084-
Total$12,399$**(**27)

Reserving Process and Methodology

U.S. Financial Lines business includes D&O, Errors and Omissions (E&O), EPLI policies and various professional liability subsets of business, as well as the fidelity book of business. This includes cyber coverage and mergers and acquisitions coverage, which have been a growing and evolving portion of this portfolio. These product lines are predominantly claims-made in nature, losses are characterized by low frequency and high severity, and results are often significantly impacted by external economic conditions.

Our analysis is segmented by major coverages, such as D&O, E&O, etc. and then further segmented by major industry groups (e.g. corporate accounts, national accounts, financial institutions, private/not-for-profit, etc.). We also separately review primary business from excess business for certain product lines.

274 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

We use a combination of loss development, expected loss ratio, and frequency/severity methods for D&O, E&O, EPLI, and professional liability. These product lines generally are offered on a claims-made basis and losses are characterized by low frequency and high severity. In general, expected loss ratio methods are given more weight in the more recent accident years and loss development methods are given more weight in more mature accident years. The loss development factors for the different segments differ significantly in some cases, based on specific coverage characteristics and other factors such as industry group, attachment points, and limits offered. Individual claims projections for certain claims from accident years ended over eighteen months prior are also used in the analysis.

Frequency/severity methods are generally not used in isolation for these product lines as the overall losses are driven by large losses more than by claim frequency. For commercial D&O segments though, we reflect claims dismissal rates in our frequency estimates as claims severity varies directly with claims jurisprudence. Severity trends have varied significantly from accident year to accident year and care is required in analyzing these trends by claim type. In view of the changing severity profile of the book, we use a capped and excess layer approach on many segments to better reflect the potential impact of large claims on the results by accident year.

We generally use loss development methods for fidelity exposures for all but the latest accident year. For mergers and acquisitions exposure, given the unique profile of each transaction, we use claim department estimates of the ultimate value of each reported claim to supplement and inform the standard actuarial approaches and some weight is given to this method in the more recent accident years.

For surety exposures, we generally use the same method as for short-tail classes whereby frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves.

Expected loss ratio methods are also given weight for the more recent accident years. IBNR factor methods are used, when the nature of losses is low frequency/high severity. The IBNR factors, when applied to earned premium, generate the ultimate expected losses (or other exposure measure) yet to be reported. The factors are determined based on prior accident quarters’ loss costs adjusted to reflect current cost levels and the historical emergence of those loss costs. The factors are continually reevaluated to reflect emerging claim experience, rate changes or other factors that could affect the adequacy of the IBNR factor being employed.

Prior Year Development

During 2020, we recognized $479 million of unfavorable development driven by loss severity emergence in recent accident years in our D&O business especially National and Private and Not For Profit segments, adverse loss emergence and loss trends in EPLI and adverse claim activity in E&O (including Architects and Engineers), Cyber and Mergers and Acquisitions segments.

During 2019, we recognized $463 million of unfavorable development particularly across accident years 2015-2018 driven by increasing severity across most D&O and EPLI classes and M&A policies. We also experienced unfavorable development in E&O due to adverse frequency and severity trends.

During 2018, we recognized $298 million of unfavorable prior year development particularly across accident years 2014-2017. The largest share of the unfavorable development came from D&O and EPLI for Corporate and National accounts and resulted largely from increases in severity as the costs of security class actions increased. Excess D&O also contributed adverse development due to similar causes.

U.S. Property and Special Risks

During 2020, we recognized $80 million of favorable prior year development in U.S. Property and Special Risks, net of external reinsurance but before ADC cessions.

During 2019, we recognized $204 million of favorable prior year development in U.S. Property and Special Risks, net of external reinsurance but before ADC cessions, mainly due to favorable development from the 2017 Catastrophes.

AIG | 2020 Form 10-K 275

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (in millions)December 31, 2020
Accident Year20112012201320142015201620172018201920202020 Prior Year Development Excluding the Impact of Adverse Development Reinsurance AgreementTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported ClaimsIncurred Impact of Adverse Development Reinsurance AgreementIBNR Impact of Adverse Development Reinsurance Agreement2020 (Net of Impact of Adverse Development Reinsurance Agreement)Total of IBNR Liabilities Net of Impact of Adverse Development Reinsurance Agreement
Unaudited
2011$3,854$3,725$3,658$3,653$3,638$3,676$3,683$3,676$3,674$3,670$**(**4)$2949,179$**(**22)$**(**12)$3,648$17
20124,1684,2794,2614,2194,3314,3224,3044,2884,284**(**4)5948,424**(**23)**(**13)4,26146
20132,5312,5362,3932,4382,4502,4532,4442,436**(**8)3849,780**(**36)**(**20)2,40018
20142,9462,7152,7872,7732,7922,7722,752**(**20)7760,227**(**78)**(**43)2,67434
20153,1042,9842,9142,9032,8682,862**(**6)7758,745**(**99)**(**54)2,76323
20163,1523,1893,1033,0893,094510053,912--3,094100
20175,3744,9074,7464,753722678,450--4,753226
20183,7343,8003,777**(**23)33867,915--3,777338
20192,8412,836**(**5)24776,438--2,836247
20204,4922,42659,238--4,4922,426
Total$34,956$**(**58)$**(**258)34,698
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below**(**28,705)-8**(**28,697)
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2011, net of reinsurance311**(**6)**(**131)180
Unallocated loss adjustment expense prior year development**(**16)
Liabilities for losses and loss adjustment expenses and prior year loss
development, net of reinsurance$6,562$**(**80)$**(**381)6,181
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Calendar Years Ended December 31, (in millions)Change in Incurred Loss and ALAE
Accident Year20162017201820192020
Unaudited
2011$3,656$3,664$3,661$3,651$3,648$**(**3)
20124,3044,2974,2854,2624,261**(**1)
20132,4112,4122,4262,4062,400**(**6)
20142,7202,7122,7282,6962,674**(**22)
20152,8432,8162,8162,7742,763**(**11)
20163,1523,1893,1033,0893,0945
2017-5,3744,9074,7464,7537
2018--3,7343,8003,777**(**23)
2019---2,8412,836**(**5)
2020----4,492-
Total$19,086$24,464$27,660$30,265$34,698$**(**59)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below**(**28,697)-
Liabilities for losses and allocated loss adjustment expenses before 2011, net of reinsurance18013
Unallocated loss adjustment expense prior year development-**(**15)
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$6,181$**(**61)

276 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):

Calendar Years Ended December 31, (in millions)Change in Incurred Loss and ALAE
Accident Year20162017201820192020
Unaudited
2011$(20)$(19)$(15)$(23)$**(**22)$1
2012(27)(25)(19)(26)**(**23)3
2013(27)(38)(27)(38)**(**36)2
2014(67)(61)(64)(76)**(**78)**(**2)
2015(141)(98)(87)(94)**(**99)**(**5)
2016------
2017------
2018------
2019------
2020------
Total$(282)$(241)$(212)$(257)$**(**258)$**(**1)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below8-
Liabilities for losses and allocated loss adjustment expenses before 2011, net of reinsurance**(**131)7
Unallocated loss adjustment expense prior year development1
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$**(**381)$7
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (in millions)
Accident Year2011201220132014201520162017201820192020Paid Impact of Adverse Development Reinsurance Agreement
Unaudited
2011$1,025$2,346$2,935$3,204$3,407$3,504$3,560$3,591$3,607$3,616$-
20128412,7123,4073,7723,9894,1174,1494,1834,199-
20137351,5731,8522,0452,1932,3052,3302,348**(**1)
20149141,7632,1152,3292,4692,5612,600**(**3)
20151,0371,8722,2392,4942,6202,690**(**4)
20161,0002,0292,3652,6162,801-
20171,3593,0703,7934,145-
20181,0602,6783,079-
20191,1382,046-
20201,181-
Total$28,705$**(**8)

AIG | 2020 Form 10-K 277

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Reserving Process and Methodology

U.S. Property products include commercial, industrial and energy-related property insurance products and services that cover exposures to manmade and natural disasters, including business interruption. U.S. Special Risk products include aerospace, environmental, political risk, trade credit, surety and marine insurance, and program business for various small and medium sized enterprises insurance lines. The program segments include both property and casualty exposures.

We primarily segment our analysis by line of business. Additionally, we separately review various subsets, including hull, cargo, and liability for marine business, aviation and satellite for aerospace business, and various other specific programs and product lines.

Frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves for short-tail classes such as U.S. Property.

IBNR factor methods are used when the nature of losses is low frequency/high severity. The IBNR factors, when applied to earned premium, generate the ultimate expected losses (or other exposure measure) yet to be reported. The factors are determined based on prior accident quarters’ loss costs adjusted to reflect current cost levels and the historical emergence of those loss costs. The factors are continually reevaluated to reflect emerging claim experience, rate changes or other factors that could affect the adequacy of the IBNR factor being employed.

We generally use a combination of loss development methods and expected loss ratio methods for aviation exposures. Aviation claims are not very long-tail in nature; however, they are driven by claim severity. Thus a combination of both development and expected loss ratio methods is used for all but the latest accident year to determine the loss reserves. Frequency/severity methods are not employed due to the high severity nature of the claims and different mix of claims from year to year.

We generally use loss development methods for fidelity exposures for all but the latest accident year. We also use claim department projections of the ultimate value of each reported claim to supplement and inform the standard actuarial approaches and some weight is given to this method in the more recent accident years. The claims staff also provides specific estimates to assist in the setting of reserves for natural catastrophe losses.

For program business, we use methods which vary by line of business. For property classes, we use methods similar to those noted above. For liability classes, we use methods similar to those described in the casualty sections detailed above.

Expected loss ratio methods are used to determine the loss reserves for the latest accident year. We also use ground-up claim projections provided by our claims staff to assist in developing the appropriate reserve.

Prior Year Development

During 2020, we recognized $80 million of favorable prior year development in U.S. Property and Special Risks driven largely by attritional property and favorable emergence on specialty losses coming in better than expected.

During 2019, we recognized $204 million of favorable prior year development in U.S. Property and Special Risks driven largely by favorable development on the 2017 Hurricanes (Harvey, Irma, Maria) as well as subrogation recoverable on the 2017 California wildfires and by favorable emergence on non-Catastrophe Commercial Property, Program and Specialty classes.

During 2018, we recognized $497 million of favorable prior year development in U.S. Property and Special Risks driven largely by favorable development on the 2017 Catastrophes as well as favorable emergence on non-Catastrophe Commercial Property, and Program and Specialty classes.

U.S. Personal Insurance

During 2020, we recognized $94 million of unfavorable prior year development in U.S. Personal Insurance, net of external reinsurance but before ADC cessions, mainly due to large losses in Homeowners and Umbrella.

During 2019, we recognized $96 million of favorable prior year development in U.S. Personal Insurance, net of external reinsurance but before ADC cessions, mainly due favorable development from the 2017 Catastrophes.

278 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance
Years Ended December 31, (in millions)December 31, 2020
Accident Year20112012201320142015201620172018201920202020 Prior Year Development Excluding the Impact of Adverse Development Reinsurance AgreementTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported ClaimsIncurred Impact of Adverse Development Reinsurance AgreementIBNR Impact of Adverse Development Reinsurance Agreement2020 (Net of Impact of Adverse Development Reinsurance Agreement)Total of IBNR Liabilities Net of Impact of Adverse Development Reinsurance Agreement
Unaudited
2011$1,886$1,908$1,896$1,891$1,890$1,886$1,881$1,879$1,878$1,879$1$1413,231$**(**1)$**(**1)$1,878$-
20122,2082,1282,1092,0832,0772,0942,0952,0992,10122403,986**(**1)**(**1)2,1001
20131,8871,8161,8031,7821,7801,7761,7771,77811335,278**(**2)**(**1)1,776-
20141,5521,5621,5721,5721,5831,5841,58845274,913**(**4)**(**2)1,5843
20151,5111,4981,4941,4831,4821,48539260,773**(**5)**(**2)1,4807
20161,5361,5331,5331,5401,542213246,867--1,54213
20171,8782,1372,0112,05746187218,879--2,057187
20182,1882,1932,154**(**39)156100,658--2,154156
20191,5931,6647125588,410--1,664255
202095427241,698--954272
Total$17,202$91$**(**13)17,189
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below**(**16,002)-2**(**16,000)
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2011, net of reinsurance**(**67)3**(**6)**(**73)
Unallocated loss adjustment expense prior year development-
Liabilities for losses and loss adjustment expenses and prior year loss
development, net of reinsurance$1,133$94$**(**17)1,116
Incurred Losses and Loss Adjustment Expenses, Undiscounted, Net of Reinsurance (including impact of ADC)
Calendar Years Ended December 31, (in millions)Change in Incurred Loss and ALAE
Accident Year20162017201820192020
Unaudited
2011$1,881$1,880$1,878$1,877$1,878$1
20122,0882,0912,0932,0982,1002
20131,7741,7741,7741,7761,776-
20141,5641,5641,5711,5801,5844
20151,4761,4751,4721,4761,4804
20161,5361,5331,5331,5401,5422
2017-1,8782,1372,0112,05746
2018--2,1882,1932,154**(**39)
2019---1,5931,66471
2020----954-
Total$10,319$12,195$14,646$16,144$17,189$91
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below**(**16,000)-
Liabilities for losses and allocated loss adjustment expenses before 2011, net of reinsurance**(**73)3
Unallocated loss adjustment expense prior year development--
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$1,116$94

AIG | 2020 Form 10-K 279

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

The following table provides our attribution of our reinsurance recoverable for the ADC only (included in the table above):

Calendar Years Ended December 31, (in millions)Change in Incurred Loss and ALAE
Accident Year20162017201820192020
Unaudited
2011$(5)$(1)$(1)$(1)$**(**1)$-
201211(3)(2)(1)**(**1)-
2013(8)(6)(2)(1)**(**2)**(**1)
2014(8)(8)(12)(4)**(**4)-
2015(22)(19)(11)(6)**(**5)1
2016------
2017------
2018------
2019------
2020------
Total$(32)$(37)$(28)$(13)$**(**13)$-
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance from the table below2-
Liabilities for losses and allocated loss adjustment expenses before 2011, net of reinsurance**(**6)1
Liabilities for losses and loss adjustment expenses and prior year loss development, net of reinsurance$**(**17)$1
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance
Years Ended December 31, (in millions)
Accident Year2011201220132014201520162017201820192020Paid Impact of Adverse Development Reinsurance Agreement
Unaudited
2011$1,204$1,752$1,814$1,840$1,860$1,869$1,873$1,874$1,875$1,876$-
20121,2381,9361,9962,0352,0652,0792,0852,0952,098-
20131,1091,6341,7051,7441,7591,7661,7721,774-
20149591,3801,4631,5071,5361,5551,568**(**1)
20159311,3201,4111,4391,4551,461**(**1)
20168571,3441,4221,4601,501-
20179411,6721,8961,789-
20181,2271,9391,973-
20198841,295-
2020667-
Total$16,002$**(**2)

280 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Reserving Process and Methodology

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.

We primarily segment our analysis by line of business and may separately review various sub-segments, such as specific accident and health products and property damage versus liability for personal lines products.

Frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves for short-tail product lines such as personal property.

Frequency/severity and loss development methods are utilized for domestic personal auto product lines.

For these classes of business, reliance is placed on frequency/severity methods as claim counts emerge quickly for personal auto. Frequency/severity methods allow for more immediate analysis of resulting loss trends and comparisons to industry and other diagnostic metrics.

In general, development for U.S. Personal Insurance classes has been very stable, with only modest changes in the initial selected loss ratios for this business.

Prior Year Development

During 2020, we recognized $94 million of unfavorable prior year development in U.S. Personal Insurance driven largely by large severity claims in Homeowners and Umbrella books of business.

During 2019, we recognized $96 million of favorable prior year development in U.S. Personal Insurance driven largely by subrogation recoverable on the 2017 California wildfires and favorable development from Hurricanes Harvey, Irma and Maria.

During 2018, we recognized $255 million of adverse prior year development in U.S. Personal Insurance driven largely by development on the California wildfires and Hurricane Irma in 2017.

UK/Europe Casualty and Financial Lines

**During 2020, we recognized $**258 million of unfavorable prior year development in Europe Casualty and Financial Lines driven by higher severity in losses reported.

**During 2019, we recognized $**161 million of unfavorable prior year development in Europe Casualty and Financial Lines driven by greater frequency of large losses than expected.

AIG | 2020 Form 10-K 281

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance*
Years Ended December 31, (in millions)December 31, 2020
Accident Year20112012201320142015201620172018201920202020 Prior Year DevelopmentTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported Claims
Unaudited
2011$1,332$1,284$1,365$1,415$1,509$1,515$1,560$1,539$1,539$1,528$**(**11)$45236,387
20121,1531,1281,0901,1761,2391,2141,2721,2581,2731557178,428
20131,1041,1491,1281,1061,1461,1801,2271,2502373150,978
20141,1041,0751,1001,1061,1001,1881,131**(**57)85149,799
20151,1651,3141,3511,2441,3151,300**(**15)136155,761
20161,4031,5431,5811,5871,68194243175,940
20171,4331,4051,3341,41884358184,069
20181,4631,5021,59088551191,493
20191,3801,41131680175,315
20201,3821,086101,348
Total$13,964$252
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below**(**7,925)-
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2011, net of reinsurance7876
Unallocated loss adjustment expense prior year development-
Liabilities for losses and loss adjustment expenses and prior year loss
development, net of reinsurance$6,826$258
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance*
Years Ended December 31, (in millions)
Accident Year2011201220132014201520162017201820192020
Unaudited
2011$132$365$551$798$948$1,075$1,189$1,257$1,314$1,338
20121113214696607978909971,0521,082
2013953575146627839049811,033
201476273434560667736803
201574253456599724905
2016126402620818980
2017103298476637
2018120380603
201994410
2020134
Total$7,925
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.

282 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Reserving Process and Methodology

UK/Europe is our largest non-U.S. region for Liability and Financial Lines. UK/Europe Casualty and Financial Lines is composed of third-party coverages including general liability, auto liability, D&O, professional liability and various other lines of business throughout both the UK and Continental Europe. These lines of business are all long-tail in nature and while somewhat diverse in terms of exposures, these lines are often subject to similar trends. These lines are impacted by the underwriting cycle and external judicial trends. The largest share of business is in the UK, but significant business is also written in other European countries such as Germany, France, and Italy.

We primarily segment our analysis by country and line of business. Additionally, we separately review various product lines, including excess versus primary casualty, commercial versus financial institutions management liability, and other specific programs and subsets of business. We maintain a database of detailed historical premium and loss transactions in original currency for business written outside of the U.S. which allows our actuaries to determine loss reserves without foreign exchange distorting development.

We generally use a combination of loss development methods and expected loss ratio methods. For countries and lines of business with sufficient loss volume, loss development methods may be given significant weight for all but the most recent accident years. For smaller countries and more volatile product lines, loss development methods are typically given limited weight for recent accident years. Further, we may rely on larger data subsets in determining the loss development factors and a priori loss ratio assumptions.

In general, the loss development for long-tail lines in UK/Europe has been more stable than the development in U.S. long-tail lines, although some underlying drivers have affected the results in a similar manner (e.g. the impact of the financial crisis in accident years 2008 and 2009).

Prior Year Development

During 2020, we recognized $258 million of unfavorable prior year development in UK and Europe Casualty and Financial Lines driven by Financial Lines in the UK and Europe and Excess Casualty in Europe as we continue to see increased severity of large losses in these classes.

During 2019, we recognized $161 million of unfavorable prior year development in UK and Europe Casualty and Financial Lines driven by increased large loss activity in recent accident years, particularly related to UK directors and officers class action suits against insureds with global exposure, and increased frequency and severity in European casualty for auto liability and employers liability. This was slightly offset by a benefit from an increase in the Ogden rates in the UK used to value long duration claims.

During 2018 we recognized $58 million of unfavorable prior year development in UK/Europe Casualty and Financial Lines driven by increased large loss activity in recent accident years, particularly related to directors and officers class action suits against insureds with global exposure; and increased severity in excess casualty.

UK/Europe Property and Special Risks

**During 2020, we recognized $**155 million of favorable prior year development in the UK/Europe Property and Special Risks segment, net of external reinsurance.

**During 2019, we recognized $**108 million of favorable prior year development in the UK/Europe Property and Special Risks segment, net of external reinsurance.

AIG | 2020 Form 10-K 283

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance*
Years Ended December 31, (in millions)December 31, 2020
Accident Year20112012201320142015201620172018201920202020 Prior Year DevelopmentTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported Claims
Unaudited
2011$1,461$1,388$1,263$1,226$1,194$1,183$1,181$1,170$1,166$1,152$**(**14)$**(**1)44,583
20121,3901,2561,1841,1671,1471,1521,1351,1151,12161240,133
20131,4751,4641,3491,3301,3121,3001,2811,273**(**8)-40,004
20141,5191,5461,5231,5141,5221,4961,458**(**38)**(**3)48,374
20151,6541,5981,5801,5411,5151,509**(**6)1653,754
20161,6191,7681,7601,7611,757**(**4)2456,625
20171,7351,6851,6771,676**(**1)4052,864
20181,7001,6431,614**(**29)10143,078
20191,2381,177**(**61)16030,713
20201,48966217,731
Total$14,226$**(**155)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below**(**11,590)-
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2011, net of reinsurance43-
Unallocated loss adjustment expense prior year development-
Liabilities for losses and loss adjustment expenses and prior year loss
development, net of reinsurance$2,679$**(**155)
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance*
Years Ended December 31, (in millions)
Accident Year2011201220132014201520162017201820192020
Unaudited
2011$349$800$998$1,074$1,098$1,117$1,125$1,132$1,136$1,138
20122887459401,0091,0551,0821,0921,0991,099
20133448431,0751,1531,2031,2251,2351,242
20143299591,2501,3211,3611,3881,399
20153609661,2561,3701,3931,418
20164791,1671,4271,5711,618
20173669991,2731,419
20183291,0211,219
2019293719
2020319
Total$11,590
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.

284 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Reserving Process and Methodology

UK/Europe Property products include commercial, industrial and energy-related property insurance products and services that cover exposures to manmade and natural disasters, including business interruption. UK/Europe Special Risk products include aerospace, environmental, political risk, trade credit, surety and marine insurance, and various small and medium sized enterprises insurance lines.

We primarily segment our analysis by line of business. Additionally, we separately review various subsets, including hull, cargo, and liability for marine business, aviation and satellite for aerospace business, and various other specific programs and product lines.

Frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves for short-tail classes such as UK/Europe Property.

IBNR factor methods are used when the nature of losses is low frequency/high severity. The IBNR factors, when applied to earned premium, generate the ultimate expected losses (or other exposure measure) yet to be reported. The factors are determined based on prior accident quarters’ loss costs adjusted to reflect current cost levels and the historical emergence of those loss costs. The factors are continually reevaluated to reflect emerging claim experience, rate changes or other factors that could affect the adequacy of the IBNR factor being employed.

We generally use a combination of loss development methods and expected loss ratio methods for aviation exposures. Aviation claims are not very long-tail in nature; however, they are driven by claim severity. Thus a combination of both development and expected loss ratio methods is used for all but the latest accident year to determine the loss reserves. Frequency/severity methods are not employed due to the high severity nature of the claims and different mix of claims from year to year.

We generally use loss development methods for fidelity exposures for all but the latest accident year. We also use claim department projections of the ultimate value of each reported claim to supplement and inform the standard actuarial approaches and some weight is given to this method in the more recent accident years. The claims staff also provides specific estimates to assist in the setting of reserves for natural catastrophe losses.

Expected loss ratio methods are used to determine the loss reserves for the latest accident year. We also use ground-up claim projections provided by our claims staff to assist in developing the appropriate reserve.

Prior Year Development

During 2020, we recognized $155 million of favorable prior year development in the Europe Property and Special Risks segment driven by lower Property attritional loss activity and favorable emergence across several Specialty classes.

During 2019, we recognized $108 million of favorable prior year development in the Europe Property and Special Risks segment driven by favorable development in Commercial Property and Specialty classes including aviation and marine.

During 2018, we recognized $22 million of favorable prior year development in the Europe Property and Special Risks segment driven by favorable development across most accident years with some adverse development in accident years 2014 and 2016.

UK/Europe and Japan Personal Insurance

**During 2020, we recognized $**39 million of favorable prior year development in UK/Europe and Japan Personal Insurance, net of external reinsurance.

**During 2019, we recognized $**119 million of favorable prior year development in UK/Europe and Japan Personal Insurance, net of external reinsurance.

AIG | 2020 Form 10-K 285

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Incurred Losses and Allocated Loss Adjustment Expenses, Undiscounted and Net of Reinsurance*
Years Ended December 31, (in millions)December 31, 2020
Accident Year20112012201320142015201620172018201920202020 Prior Year DevelopmentTotal of IBNR Liabilities Plus Expected Development on Reported LossesCumulative Number of Reported Claims
Unaudited
2011$3,503$3,567$3,531$3,533$3,522$3,525$3,516$3,515$3,514$3,515$1$31,758,202
20123,0863,0673,0463,0303,0403,0293,0263,0253,025-31,737,969
20132,9252,9252,8892,8892,8842,8792,8752,875-51,738,818
20142,8842,8932,8742,8722,8632,8632,863-61,789,156
20152,9582,9322,9332,9212,9192,9201121,773,689
20162,9042,8982,8822,8732,869**(**4)181,800,392
20172,8412,7522,7322,728**(**4)301,721,690
20183,3893,3063,30931011,898,738
20192,7272,688**(**39)1521,694,072
20202,4545421,264,520
Total$29,246$**(**42)
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of
Reinsurance from the table below**(**27,077)-
Liabilities for losses and loss adjustment expenses and prior year development
before accident year 2011, net of reinsurance503
Unallocated loss adjustment expense prior year development-
Liabilities for losses and loss adjustment expenses and prior year loss
development, net of reinsurance$2,219$**(**39)
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.
Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance*
Years Ended December 31, (in millions)
Accident Year2011201220132014201520162017201820192020
Unaudited
2011$2,132$2,991$3,243$3,363$3,430$3,462$3,479$3,489$3,494$3,497
20121,7262,5262,7692,8842,9442,9772,9943,0033,007
20131,6062,3982,6302,7442,8042,8372,8502,858
20141,5762,3722,6092,7282,7882,8142,829
20151,5972,4142,6532,7802,8262,859
20161,5982,3762,6082,7212,779
20171,5622,3272,5312,620
20181,9942,7953,018
20191,5612,277
20201,333
Total$27,077
* The losses reported in the table are not covered by the Adverse Development Reinsurance Agreement.

Reserving Process and Methodology

UK/Europe and Japan Personal Insurance lines consist 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 are generally short-tail in nature.

We primarily segment our analysis by line of business (and by country for UK/Europe and Japan business) and may separately review various sub-segments, such as specific accident and health products and property damage versus liability for other personal lines products.

Frequency/severity methods, loss development methods, and IBNR factor methods are used alone or in combination to set reserves for short-tail product lines such as personal property.

Frequency/severity and loss development methods are utilized for domestic personal auto product lines.

286 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

For these classes of business, reliance is placed on frequency/severity methods as claim counts emerge quickly for personal auto. Frequency/severity methods allow for more immediate analysis of resulting loss trends and comparisons to industry and other diagnostic metrics.

In general, development for UK/Europe and Japan Personal Insurance classes has been very stable, with only modest changes in the initial selected loss ratios for this business.

Prior Year Development

During 2020, we recognized $39 million of favorable prior year development in UK/Europe and Japan Personal Insurance due to favorable frequency and severity trends.

During 2019, we recognized $119 million of favorable prior year development in UK/Europe and Japan Personal Insurance due to favorable loss trends in personal auto and accident and health business.

During 2018, we recognized $116 million of favorable prior year development in UK/Europe and Japan Personal Insurance due to favorable emergence on catastrophes, accident and health business, and personal auto business.

The table below presents the reconciliation of change in net ultimates from tables above to prior year development for the year ended December 31, 2020:

Change in Loss andRe-AttributionAmortization of
Loss Adjustmentof ADCDeferred GainPrior Year
(in millions)Expenses Net Ultimate(a)Recovery(b)at InceptionDevelopment
U.S. Workers' Compensation$(322)$(9)$(65)$(396)
U.S. Excess Casualty206(60)(50)96
U.S. Other Casualty(155)(4)(48)(207)
U.S. Financial Lines31857(34)341
U.S. Property and Special Risks(61)25(12)(48)
U.S. Personal Insurance94(9)(2)83
UK/Europe Casualty and Financial lines258--258
UK/Europe Property and Special Risks(155)--(155)
UK/Europe and Japan Personal Insurance(39)--(39)
Other Operations Run-Off2--2
Other product lines(9)--(9)
Subtotal, adjusted pre-tax basis$137$-$**(**211)$**(**74)
Remove impact of Retroactive Reinsurance
Amortization of deferred gain at inception211
Prior year development ceded under the Asbestos LPT1
Prior year development ceded under the ADC(228)
Total, prior years, excluding discount and amortization of deferred gain$**(**90)

(a)Change in net ultimate loss and LAE excludes the portion of prior year development for which we have ceded to the Asbestos Loss Portfolio Transfer (LPT) and the ADC, both of which are provided by NICO and are considered retroactive reinsurance under U.S. GAAP.

(b)Reattribution of the ADC recovery takes place annually as we model the future payments on the subject reserves covered by the ADC to determine when the aggregate payments will exceed the attachment. ADC recoverables are then reallocated by line based on payments expected to be made after attachment point is exceeded.

AIG | 2020 Form 10-K 287

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Development on earlier Accident Years

The following table summarizes (favorable) unfavorable development, of incurred losses and loss adjustment expenses on accident years beyond the 10 years shown in the previous section’s development triangles by operating segment and major class of business:

Years Ended December 31,
(in millions)202020192018
U.S. Workers' compensation (before discount)$**(**87)$(210)$153
U.S. Excess casualty**(**237)54537
U.S. Other casualty**(**40)(170)129
U.S. Financial Lines2511(1)
U.S. Property and Special Risks**(**6)(3)39
U.S. Personal Insurance312
UK/Europe Casualty and Financial Lines691
UK/Europe Property and Special Risks-(28)3
UK/Europe and Japan Personal Insurance3-9
Other Operations Run-Off4(46)154
All Other including unallocated loss adjustment expenses**(**128)116137
Total prior year (favorable) unfavorable development$**(**457)$(266)$1,163

Claims Payout Patterns

The following table presents the historical average annual percentage claims payout on an accident year basis at the same level of disaggregation as presented in the claims development table.

Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance (Unaudited)
Year12345678910
U.S. Workers' compensation13.4%17.6%12.1%8.0%6.3%4.3%2.9%1.9%1.9%0.8%
U.S. Excess casualty0.77.410.916.913.011.09.06.80.24.2
U.S. Other casualty8.014.215.615.012.38.65.62.82.01.6
U.S. Financial Lines4.617.821.217.113.08.74.84.21.20.3
U.S. Property and Special Risks30.235.313.38.05.43.21.20.80.40.2
U.S. Personal Insurance59.029.94.91.01.50.60.40.20.1-
UK/Europe Casualty and Financial Lines7.617.013.212.69.89.17.04.33.01.6
UK/Europe Property and Special Risks24.539.816.96.92.81.90.80.60.20.2
UK/Europe and Japan Personal Insurance56.926.77.83.81.91.00.50.30.10.1

Discounting of Loss Reserves

At December 31, 2020 and 2019, the loss reserves reflect a net loss reserve discount of $725 million and $1.5 billion, respectively, including tabular and non-tabular calculations based upon the following assumptions:

The non-tabular workers’ compensation discount is calculated separately for companies domiciled in New York, Pennsylvania and Delaware, and follows the statutory regulations (prescribed or permitted) for each state.

For New York companies, the discount is based on a 5 percent interest rate and the companies’ own payout patterns. The Pennsylvania and Delaware regulators approved use of a consistent discount rate (U.S. Treasury rate plus a liquidity premium) to all of our workers’ compensation reserves in or Pennsylvania domiciled and Delaware domiciled companies, as well as our use of updated payout patterns specific to our primary and excess workers compensation portfolios. In 2020, the regulators also approved that the discount rate will be updated on an annual basis.

The tabular workers’ compensation discount is calculated based on the mortality rate used in the 2007 U.S. Life table and interest rates prescribed or permitted by each state (i.e. New York is based on 5 percent interest rate and Pennsylvania and Delaware are based on US treasury plus liquidity rate).

The discount for asbestos reserves has been fully accreted.

288 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

The discount consists of $285 million and $582 million of tabular discount, and $440 million and $967 million of non-tabular discount for workers’ compensation at December 31, 2020 and 2019, respectively. During the years ended December 31, 2020, 2019, and 2018 the benefit/(charge) from changes in discount of $(516) million, $(955) million and $371 million, respectively, were recorded as part of the policyholder benefits and losses incurred in the Consolidated Statement of Income.

The following table presents the components of the loss reserve discount discussed above:

December 31, 2020December 31, 2019
North AmericaOtherNorth AmericaOther
CommercialOperationsCommercialOperations
(in millions)InsuranceRun-Off(b)TotalInsuranceRun-OffTotal
U.S. workers' compensation$1,636$-$1,636$2,134$666$2,800
Retroactive reinsurance**(**911)-**(**911)(1,251)-(1,251)
Total reserve discount(a)$725$-$725$883$666$1,549

(a)Excludes $151 million and $172 million of discount related to certain long tail liabilities in the UK at December 31, 2020 and 2019, respectively.

(b)Excludes $493 million of discount which was 100 percent ceded to Fortitude Re at December 31, 2020. On June 2, 2020, we completed the Majority Interest Fortitude Sale. Refer to Note 1 for additional information.

The following table presents the net loss reserve discount benefit (charge):

Years Ended December 31,202020192018
NorthNorthNorth
AmericaOtherAmericaOtherAmericaOther
CommercialOperationsCommercialOperationsCommercialOperations
(in millions)InsuranceRun-Off(b)TotalInsuranceRun-OffTotalInsuranceRun-OffTotal
Current accident year$71$-$71$108$-$108$119$-$119
Accretion and other adjustments
to prior year discount**(**162)**(**18)**(**180)(229)(87)(316)(108)(58)(166)
Effect of interest rate changes**(**407)-**(**407)(527)(220)(747)305113418
Net reserve discount
benefit (charge)**(**498)**(**18)**(**516)(648)(307)(955)31655371
Change in discount on loss
reserves ceded under
retroactive reinsurance340-340469-469(180)-(180)
Net change in total
reserve discount(a)$**(**158)$**(**18)$**(**176)$(179)$(307)$(486)$136$55$191

(a) Excludes $(20) million, $9 million, and $(9) million of discount related to certain long tail liabilities in the UK at December 31, 2020, 2019, and 2018, respectively.

(b) On June 2, 2020, we completed the Majority Interest Fortitude Sale. Refer to Note 1 for additional information. Change in discount prior to the sale is included in the above at December 31, 2020. Following the sale, 100 percent of the discount is ceded to Fortitude Re.

During 2020, effective interest rates declined due to a decrease in the forward yield curve component of the discount rates reflecting a decline in U.S. Treasury rates along with changes in payout pattern assumptions. This resulted in a decrease in the loss reserve discount by $407 million in 2020.

During 2019, effective interest rates declined due to a decrease in the forward yield curve component of the discount rates reflecting a decline in U.S. Treasury rates along with changes in payout pattern assumptions. This resulted in a decrease in the loss reserve discount by $747 million in 2019.

During 2018, effective interest rates increased due to an increase in the forward yield curve component of the discount rates reflecting an incline in U.S. Treasury rates along with the changes in payout pattern assumptions. This resulted in an increase in the loss reserve discount by $418 million in 2018.

AIG | 2020 Form 10-K 289

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

Future Policy Benefits

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.

Future policy benefits also include certain guaranteed benefits of variable annuity products that are not considered embedded derivatives, primarily guaranteed minimum death benefits.

For additional information on guaranteed minimum death benefits see Note 14.

The liability for long-duration future policy benefits has been established including assumptions for interest rates which vary by year of issuance and product, and range from approximately 0.1 percent to 14.6 percent. Mortality and surrender rate assumptions are generally based on actual experience when the liability is established.

Policyholder Contract Deposits

The liability for Policyholder contract deposits is primarily recorded at accumulated value (deposits received and net transfers from separate accounts, plus accrued interest credited at rates ranging from 0 percent to 9.0 percent at December 31, 2020, less withdrawals and assessed fees). Deposits collected on investment-oriented products are not reflected as revenues, because they are recorded directly to Policyholder contract deposits upon receipt. Amounts assessed against the contract holders for mortality, administrative, and other services are included in revenues.

In addition to liabilities for universal life, fixed annuities, fixed options within variable annuities, annuities without life contingencies, funding agreements and GICs, policyholder contract deposits also include our liability for (i) certain guaranteed benefits and indexed features accounted for as embedded derivatives at fair value, (ii) annuities issued in a structured settlement arrangement with no life contingency and (iii) certain contracts we have elected to account for at fair value.

For additional information on guaranteed benefits accounted for as embedded derivatives see Note 14.

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 (a) the present value of total expected payments, in excess of the account value, over the life of the contract, divided by (b) the present value of total expected assessments over the life of the contract. For universal life policies without secondary guarantees, for which profits followed by losses are first expected after contract inception, we establish a liability, in addition to policyholder account balances, so that expected future losses are recognized in proportion to the emergence of profits in the earlier (profitable) years. Universal life account balances as well as these additional liabilities related to universal life products are reported within Policyholder contract deposits in the Consolidated Balance Sheet. These additional liabilities are also adjusted to reflect the effect of unrealized gains or losses on fixed maturity securities available for sale and prior to 2018, equity securities at fair value on accumulated assessments, with related changes recognized through Other comprehensive income. The policyholder behavior assumptions for these liabilities include mortality, lapses and premium persistency. The capital market assumptions used for the liability for universal life secondary guarantees include discount rates and net earned rates.

Under a funding agreement-backed notes issuance program, an unaffiliated, non-consolidated statutory trust issues medium-term notes to investors, which are secured by GICs issued to the trust by one of our Life and Retirement companies through our Institutional Markets business.

290 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 13. Insurance Liabilities

The following table presents universal life policies with secondary guarantees and similar features (excluding base policy liabilities and embedded derivatives):

Years Ended December 31,
(in millions)202020192018
Balance, beginning of year$2,685$2,640$2,351
Incurred guaranteed benefits*1,041514758
Paid guaranteed benefits**(**470)(469)(469)
Balance, end of year$3,256$2,685$2,640

*Incurred guaranteed benefits include the portion of assessments established as additions to reserves as well as changes in estimates (assumption unlockings) affecting these reserves.

The following table presents details concerning our Universal life policies with secondary guarantees and similar features, by benefit type:

At December 31,
(dollars in millions)20202019
Account value$3,078$2,850
Net amount at risk63,72159,924
Average attained age of contract holders5354

The following table presents Policyholder contract deposits by product line:

At December 31,
(in millions)20202019
Policyholder contract deposits:
Fixed annuities$49,206$50,446
Group Retirement43,89342,207
Life Insurance15,40714,403
Variable annuities10,96410,008
Index annuities25,22020,698
Institutional Markets11,3619,965
Fortitude Re4,2004,142
Total Policyholder contract deposits$160,251$151,869

Other Policyholder Funds

Other policyholder funds include unearned revenue reserves (URR). URR consist of front-end loads on investment-oriented contracts, representing those policy loads that are non-level and typically higher in initial policy years than in later policy years. URR for investment-oriented contracts are generally deferred and amortized, with interest, in relation to the incidence of estimated gross profits (EGPs) to be realized over the estimated lives of the contracts and are subject to the same adjustments due to changes in the assumptions underlying EGPs as DAC. Amortization of URR is recorded in Policy fees. Similar to shadow DAC, URR related to investment-oriented products is also adjusted to reflect the effect of unrealized gains or losses on fixed maturity securities available for sale and also, prior to 2018, equity securities at fair value on estimated gross profits, with related changes recognized through Other comprehensive income (shadow URR).

Other policyholder funds also include provisions for future dividends to participating policyholders, accrued in accordance with all applicable regulatory or contractual provisions. Participating life business represented approximately 1.4 percent of gross insurance in force at December 31, 2020 and 1.9 percent of gross domestic premiums and other considerations in 2020. The amount of annual dividends to be paid is approved locally by the boards of directors of the Life and Retirement companies. Provisions for future dividend payments are computed by jurisdiction, reflecting local regulations. The portions of current and prior net income and of current unrealized appreciation of investments that can inure to our benefit are restricted in some cases by the insurance contracts and by the local insurance regulations of the jurisdictions in which the policies are in force.

Certain products are subject to experience adjustments. These include group life and group medical products, credit life contracts, accident and health insurance contracts/riders attached to life policies and, to a limited extent, reinsurance agreements with other direct insurers. Ultimate premiums from these contracts are estimated and recognized as revenue with the unearned portions of the premiums recorded as liabilities in Other policyholder funds. Experience adjustments vary according to the type of contract and the territory in which the policy is in force and are subject to local regulatory guidance.

AIG | 2020 Form 10-K 291

ITEM 8 | Notes to Consolidated Financial Statements | 14. Variable Life and Annuity Contracts

  1. Variable Life and Annuity Contracts

We report variable contracts within the separate accounts when investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder and the separate account meets additional accounting criteria to qualify for separate account treatment. The assets supporting the variable portion of variable annuity and variable universal life contracts that qualify for separate account treatment are carried at fair value and reported as Separate account assets, with an equivalent summary total reported as Separate account liabilities.

Policy values for variable products and investment contracts are expressed in terms of investment units. Each unit is linked to an asset portfolio. The value of a unit increases or decreases based on the value of the linked asset portfolio. The current liability at any time is the sum of the current unit value of all investment units in the separate accounts, plus any liabilities for guaranteed minimum death benefits (GMDB) or guaranteed minimum withdrawal benefits (GMWB) included in Future policy benefits or Policyholder contract deposits, respectively.

Amounts assessed against the contract holders for mortality, administrative and other services are included in revenue. Net investment income, net investment gains and losses, changes in fair value of assets, and policyholder account deposits and withdrawals related to separate accounts are excluded from the Consolidated Statements of Income, Comprehensive Income (Loss) and Cash Flows.

Variable annuity contracts may include certain contractually guaranteed benefits to the contract holder. These guaranteed features include GMDB that are payable in the event of death, and living benefits that are payable in the event of annuitization, or, in other instances, at specified dates during the accumulation period. Living benefits primarily include GMWB. A variable 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 only receive payout from one guaranteed feature on a contract containing a death benefit and a living benefit, i.e. the features are 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 their lifetime). A policyholder cannot purchase more than one living benefit on one contract. The net amount at risk for each feature is calculated irrespective of the existence of other features; as a result, the net amount at risk for each feature is not additive to that of other features.

Account balances of variable annuity contracts with guarantees were invested in separate account investment options as follows:

At December 31,
(in millions)20202019
Equity funds$56,868$51,383
Bond funds8,5347,881
Balanced funds27,44126,659
Money market funds1,124765
Total$93,967$86,688

GMDB

Depending on the contract, the GMDB feature may provide a death benefit of either (a) total deposits made to the contract less any partial withdrawals plus a minimum return (and in rare instances, no minimum return) or (b) the highest contract value attained, typically on any anniversary date minus any subsequent withdrawals following the contract anniversary. GMDB is our most widely offered benefit.

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 over the accumulation period based on total expected assessments, through Policyholder benefits and losses incurred. The net amount at risk for GMDB represents the amount of benefits in excess of account value if death claims were filed on all contracts on the balance sheet date.

292 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 14. Variable Life and Annuity Contracts

The following table presents details concerning our GMDB exposures, by benefit type:

At December 31,20202019
Net DepositsNet Deposits
Plus a MinimumHighest ContractPlus a MinimumHighest Contract
(dollars in millions)ReturnValue AttainedReturnValue Attained
Account value$105,010$16,667$98,386$15,796
Net amount at risk490276689301
Average attained age of contract holders by product65726571
Range of guaranteed minimum return rates**0.00%-**4.50%0.00%-4.50%

The following summarizes GMDB liability related to variable annuity contracts, excluding assumed reinsurance:

Years Ended December 31,
(in millions)202020192018
Balance, beginning of year$407$397$352
Reserve increase (decrease)413593
Benefits paid**(**43)(40)(43)
Changes in reserves related to unrealized appreciation of investments1615(5)
Balance, end of year$421$407$397

Assumptions used to determine the GMDB liability include interest rates, which vary by year of issuance and products; mortality rates, which are based upon actual experience modified to allow for variations in policy form; lapse rates, which are based upon actual experience modified to allow for variations in policy form; investment returns, based on stochastically generated scenarios; and asset growth assumptions, which include a reversion to the mean methodology, similar to that applied for DAC. We regularly evaluate estimates used to determine the GMDB liability and adjust the additional liability balance, with a related charge or credit to Policyholder benefits and losses incurred, if actual experience or other evidence suggests that earlier assumptions should be revised.

GMWB

Certain of our variable annuity contracts contain optional GMWB benefits and, to a lesser extent, guaranteed minimum accumulation benefits, which are not currently offered. With a GMWB, the contract holder can monetize the excess of the guaranteed amount over the account value of the contract only through a series of withdrawals that do not exceed a specific percentage per year of the guaranteed amount. If, after the series of withdrawals, the account value is exhausted, the contract holder will receive a series of annuity payments equal to the remaining guaranteed amount, and, for lifetime GMWB products, the annuity payments continue as long as the covered person(s) is living.

The liabilities for 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 capital gains (losses). The fair value of these embedded derivatives was a net liability of $3.6 billion and $2.5 billion at December 31, 2020 and 2019, respectively.

For discussion of the fair value measurement of guaranteed benefits that are accounted for as embedded derivatives see Note 5.

We had account values subject to GMWB that totaled $48 billion and $45 billion at December 31, 2020 and 2019, respectively. The net amount at risk for GMWB represents the present value of minimum guaranteed withdrawal payments, in accordance with contract terms, in excess of account value, assuming no lapses. The net amount at risk related to the GMWB guarantees was $1.1 billion and $328 million at December 31, 2020 and 2019, respectively. We use derivative instruments and other financial instruments to mitigate a portion of our exposure that arises from GMWB benefits.

AIG | 2020 Form 10-K 293

ITEM 8 | Notes to Consolidated Financial Statements | 15. Debt

  1. Debt

Our long-term debt is denominated in various currencies, with both fixed and variable interest rates. Long-term debt is carried at the principal amount borrowed, including unamortized discounts, hedge accounting valuation adjustments and fair value adjustments, when applicable.

The following table lists our total debt outstanding at December 31, 2020 and 2019. The interest rates presented in the following table are the range of contractual rates in effect at December 31, 2020, including fixed and variable-rates:

Balance atBalance at
At December 31, 2020Range ofMaturityDecember 31,December 31,
(in millions)Interest Rate(s)Date(s)20202019
Debt issued or guaranteed by AIG:
AIG general borrowings:
Notes and bonds payable0% - 8.13%2021 - 2097$23,068$20,467
Junior subordinated debt4.88% - 8.63%2037 - 20581,5611,542
AIG Japan Holdings Kabushiki Kaisha0.28% - 0.35%2021 - 2025361344
AIGLH notes and bonds payable6.63% - 7.50%2025 - 2029282282
AIGLH junior subordinated debt7.57% - 8.50%2030 - 2046361361
Validus notes and bonds payable8.88%2040348353
Total AIG general borrowings25,98123,349
AIG borrowings supported by assets:(a)
Series AIGFP matched notes and bonds payable0.23% - 0.23%2046 - 20472121
GIAs, at fair value0.00% - 7.15%2021 - 20472,0332,003
Notes and bonds payable, at fair value0.50% - 10.37%2030 - 20496459
Total AIG borrowings supported by assets2,1182,083
Total debt issued or guaranteed by AIG28,09925,432
Other subsidiaries notes, bonds, loans and mortgages
payable - not guaranteed by AIG2.76%2022 - 2023447
Total long-term debt28,10325,479
Debt of consolidated investment entities - not guaranteed by AIG(b)0% - 9.31%2021 - 20629,4319,871
Total debt$37,534$35,350

(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 and $1.5 billion at December 31, 2020 and December 31, 2019, 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)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. At December 31, 2019, includes debt of consolidated investment entities related to real estate investments of $3.2 billion, affordable housing partnership investments of $2.1 billion and other securitization vehicles of $4.6 billion.

294 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 15. Debt

The following table presents maturities of long-term debt (including unamortized original issue discount, hedge accounting valuation adjustments and fair value adjustments, when applicable):

December 31, 2020Year Ending
(in millions)Total20212022202320242025Thereafter
Debt issued or guaranteed by AIG:
AIG general borrowings:
Notes and bonds payable$23,068$1,500$1,515$1,705$998$2,751$14,599
Junior subordinated debt1,561-----1,561
AIG Japan Holdings Kabushiki Kaisha361236---125-
AIGLH notes and bonds payable282----135147
AIGLH junior subordinated debt361-----361
Validus notes and bonds payable348-----348
Total AIG general borrowings25,9811,7361,5151,7059983,01117,016
AIG borrowings supported by assets:
Series AIGFP matched notes and
bonds payable21-----21
GIAs, at fair value2,03315853127149588958
Notes and bonds payable, at fair value64-----64
Total AIG borrowings supported by assets2,118158531271495881,043
Total debt issued or guaranteed by AIG28,0991,8941,5681,8321,1473,59918,059
Debt not guaranteed by AIG:
Other subsidiaries notes, bonds, loans
and mortgages payable4211---
Total debt not guaranteed by AIG4211---
Total*$28,103$1,896$1,569$1,833$1,147$3,599$18,059

*Does not reflect $9.4 billion of notes issued by 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.

Uncollateralized and collateralized notes, bonds, loans and mortgages payable consisted of the following:

UncollateralizedCollateralized
At December 31, 2020Notes/Bonds/LoansLoans and
(in millions)PayableMortgages PayableTotal
AIG general borrowings$361$-$361
Other subsidiaries notes, bonds, loans and mortgages payable*-44
Total$361$4$365

*AIG does not guarantee any of these borrowings.

AIGLH Junior Subordinated Debentures

In connection with our acquisition of AIG Life Holdings, Inc. (AIGLH) in 2001, we entered into arrangements with AIGLH with respect to outstanding AIGLH capital securities. In 1996, AIGLH issued capital securities through a trust to institutional investors and funded the trust with AIGLH junior subordinated debentures issued to the trust with the same terms as the capital securities.

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, 2020, 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.

AIG | 2020 Form 10-K 295

ITEM 8 | Notes to Consolidated Financial Statements | 15. Debt

Credit Facilities

We maintain a 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 June 2022.

At December 31, 2020AvailableEffective
(in millions)SizeAmountExpirationDate
Syndicated Credit Facility$4,500$4,500June 20226/27/2017

We also maintain revolving credit facilities that can exclusively be utilized by certain consolidated investment entities to acquire assets related to securitizations. Draws under those credit facilities cannot be utilized for general corporate purposes. Prior to the pricing of the related securitizations, these credit facilities have combined limits of up to $390 million. Subsequent to pricing of the related securitizations, the combined limits are expected to increase to up to approximately $610 million. As of December 31, 2020, we have drawn $84 million under the credit facilities. These credit facilities have maturity dates ranging from one to ten years.

  1. Contingencies, Commitments and Guarantees

In the normal course of business, various contingent liabilities and commitments are entered into by AIG and our subsidiaries. In addition, AIG Parent guarantees various obligations of certain subsidiaries.

Although AIG cannot currently quantify its ultimate liability for unresolved litigation and investigation matters, including those referred to below, it is possible that such liability could have a material adverse effect on AIG’s consolidated financial condition or its consolidated results of operations or consolidated cash flows for an individual reporting period.

Legal Contingencies

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 or examinations 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. On July 28, 2020, VALIC Financial Advisors, Inc. (VFA), an indirect subsidiary of AIG, agreed to settle two separate proceedings brought by the SEC without admitting or denying the findings. VFA agreed as part of these settlements to pay disgorgement, prejudgment interest, and civil monetary penalties, as well as to comply with certain undertakings.

296 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 16. Contingencies, Commitments and Guarantees

Tax Litigation

We were party to tax litigation before the Southern District of New York (Southern District), which was dismissed by the Southern District in October 2020 based upon the settlement reached between AIG and the government. For additional information see Note 22 to the Consolidated Financial Statements.

lease Commitments

We lease office space and equipment in various locations across jurisdictions in which the Company operates. The majority of the resulting obligation arising from these contracts is generated by our real estate portfolio, which only includes contracts classified as operating leases. As of December 31, 2020, the lease liability and corresponding right of use asset reflected in Other liabilities and Other assets were $1.0 billion and $906 million, respectively, and we made cash payments of $252 million in 2020 in connection with these leases. The liability includes non-lease components, such as property taxes and insurance for our gross leases. Some of these leases contain options to renew after a specified period of time at the prevailing market rate; however, renewal options that have not been exercised as of December 31, 2020 are excluded until management attains a reasonable level of certainty. Some leases also include termination options at specified times and term; however, termination options are not reflected in the lease asset and liability balances until they have been exercised.

The weighted average discount rate and lease term assumptions used in determining the liability are 2.50 percent and 8.8 years, respectively. The primary assumption used to determine the discount rate is the cost of funding for the Company, which is based on the secured borrowing rate for terms similar to the lease term, and for the major financial markets in which AIG operates.

Rent expense was $258 million, $232 million and $283 million for the years ended December 31, 2020, 2019 and 2018, respectively.

The following table presents the future undiscounted cash flows under operating leases at December 31, 2020:

(in millions)
2021$233
2022177
2023138
2024111
202581
Remaining years after 2025506
Total undiscounted lease payments$1,246
Less: Present value adjustment202
Net lease liabilities1,044

During 2019, we recognized a pretax net gain of $200 million from the sale and concurrent leaseback of our corporate headquarters. We also procured additional office space via operating lease contracts for which lease commencement will occur in 2021. Future undiscounted obligations stemming from those contracts total $389 million, which excludes the effect of renewal options.

Other Commitments

In the normal course of business, we enter into commitments to invest in limited partnerships, private equity funds and hedge funds and to purchase and develop real estate in the U.S. and abroad. These commitments totaled $7.3 billion at December 31, 2020.

AIG | 2020 Form 10-K 297

ITEM 8 | Notes to Consolidated Financial Statements | 16. Contingencies, Commitments and Guarantees

Guarantees

Subsidiaries

We have issued unconditional guarantees with respect to the prompt payment, when due, of all present and future payment obligations and liabilities of AIG Financial Products Corp. and related subsidiaries (collectively AIGFP) and of AIG Markets, Inc. (AIG Markets) arising from transactions entered into by AIG Markets.

In connection with AIGFP’s business activities, AIGFP has issued, in a limited number of transactions, standby letters of credit or similar facilities to equity investors of structured leasing transactions in an amount equal to the termination value owing to the equity investor by the lessee in the event of a lessee default (the equity termination value). The total amount outstanding at December 31, 2020 was $78 million. In those transactions, AIGFP has agreed to pay such amount if the lessee fails to pay. The amount payable by AIGFP is, in certain cases, partially offset by amounts payable under other instruments typically equal to the present value of scheduled payments to be made by AIGFP. In the event that AIGFP is required to make a payment to the equity investor, the lessee is unconditionally obligated to reimburse AIGFP. To the extent that the equity investor is paid the equity termination value from the standby letter of credit and/or other sources, including payments by the lessee, AIGFP takes an assignment of the equity investor’s rights under the lease of the underlying property. Because the obligations of the lessee under the lease transactions are generally economically defeased, lessee bankruptcy is the most likely circumstance in which AIGFP would be required to pay without reimbursement.

AIG Parent files a consolidated federal income tax return with certain subsidiaries and acts as an agent for the consolidated tax group when making payments to the Internal Revenue Service (IRS). AIG Parent and its subsidiaries have adopted, pursuant to a written agreement, a method of allocating consolidated federal income taxes. Under an Amended and Restated Tax Payment Allocation Agreement dated June 6, 2011 between AIG Parent and one of its Bermuda-domiciled insurance subsidiaries, AIG Life of Bermuda, Ltd. (AIGB), AIG Parent has agreed to indemnify AIGB for any tax liability (including interest and penalties) resulting from adjustments made by the IRS or other appropriate authorities to taxable income, special deductions or credits in connection with investments made by AIGB in certain affiliated entities.

Asset Dispositions

We are subject to financial guarantees and indemnity arrangements in connection with the completed sales of businesses. The various arrangements may be triggered by, among other things, declines in asset values, the occurrence of specified business contingencies, the realization of contingent liabilities, developments in litigation or breaches of representations, warranties or covenants provided by us. These arrangements are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or are not applicable. The Majority Interest Fortitude Sale is subject to a post-closing purchase price adjustment pursuant to which AIG will pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur on or prior to December 31, 2023, up to a maximum of $500 million.

We are unable to develop a reasonable estimate of the maximum potential payout under certain of these arrangements. Overall, we believe the likelihood that we will have to make any material payments related to completed sales under these arrangements is remote, and no material liabilities related to these arrangements have been recorded in the Consolidated Balance Sheets.

For additional discussion on the Fortitude Re transaction, see Note 1 to the Consolidated Financial Statements.

Other

For additional discussion on commitments and guarantees associated with VIEs see Note 10 to the Consolidated Financial Statements.

For additional disclosures about derivatives see Note 11 to the Consolidated Financial Statements.

298 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 17. Equity

  1. Equity

Shares Outstanding

Preferred Stock

On March 14, 2019, we issued 20,000 shares of Series A 5.85% Non-Cumulative Perpetual Preferred Stock (Series A Preferred Stock) (equivalent to 20,000,000 Depositary Shares, each representing a 1/1,000th interest in a share of Series A Preferred Stock), $5.00 par value and $25,000 liquidation preference per share (equivalent to $25 per Depositary Share). After underwriting discounts and expenses, we received net proceeds of approximately $485 million.

We may redeem the Series A Preferred Stock at our option, (a) in whole, but not in part, at any time prior to March 15, 2024, within 90 days after the occurrence of a “Rating Agency Event,” at a redemption price equal to $25,500 per share of the Series A Preferred Stock (equivalent to $25.50 per Depositary Share), plus an amount equal to any dividends per share that have been declared but not paid prior to the redemption date (but no amount due in respect of any dividends that have not been declared prior to such date), or (b) (i) in whole, but not in part, at any time prior to March 15, 2024, within 90 days after the occurrence of a “Regulatory Capital Event,” or (ii) in whole or in part, from time to time, on or after March 15, 2024, in each case, at a redemption price equal to $25,000 per share of the Series A Preferred Stock (equivalent to $25.00 per Depositary Share), plus an amount equal to any dividends per share that have been declared but not paid prior to the redemption date (but no amount due in respect of any dividends that have not been declared prior to such date).

A “Rating Agency Event” is generally defined to mean that any nationally recognized statistical rating organization within the meaning of Section 3(a)(62) of the Securities Exchange Act of 1934, as amended (the Exchange Act) that then publishes a rating for us amends, clarifies or changes the criteria it uses to assign equity credit to securities such as the Series A Preferred Stock, which amendment, clarification or change results in the shortening of the length of time the Series A Preferred Stock is assigned a particular level of equity credit by that rating agency as compared to the length of time it would have been assigned that level of equity credit by that rating agency or its predecessor on the initial issuance of the Series A Preferred Stock, or the lowering of the equity credit (including up to a lesser amount) assigned to the Series A Preferred Stock by that rating agency as compared to the equity credit assigned by that rating agency or its predecessor on the initial issuance of the Series A Preferred Stock. A “Regulatory Capital Event” is generally defined to mean our good faith determination that as a result of a change in law, rule or regulation, or a proposed change or an official judicial or administrative pronouncement, there is more than an insubstantial risk that the full liquidation preference of the Series A Preferred Stock would not qualify as capital (or a substantially similar concept) for purposes of any group capital standard to which we are or will be subject.

Holders of the Series A Preferred Stock will be entitled to receive dividend payments only when, as and if declared by our board of directors (or a duly authorized committee of the board). Dividends will be payable from the original date of issue at a rate of 5.85% per annum, payable quarterly, in arrears, on the fifteenth day of March, June, September and December of each year, beginning on June 15, 2019. Dividends on the Series A Preferred Stock will be non-cumulative.

In the event of any liquidation, dissolution or winding-up of the affairs of AIG, whether voluntary or involuntary, before any distribution or payment out of our assets may be made to or set aside for the holders of any junior stock, holders of the Series A Preferred Stock will be entitled to receive out of our assets legally available for distribution to our stockholders, an amount equal to $25,000 per share of Series A Preferred Stock (equivalent to $25.00 per Depositary Share), together with an amount equal to all declared and unpaid dividends (if any), but no amount in respect of any undeclared dividends prior to such payment date. Distributions will be made only to the extent of our assets that are available for distribution to stockholders (i.e., after satisfaction of all our liabilities to creditors, if any).

The Series A Preferred Stock does not have voting rights, except in limited circumstances, including in the case of certain dividend non-payments.

AIG | 2020 Form 10-K 299

ITEM 8 | Notes to Consolidated Financial Statements | 17. Equity

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, 2020 and 2019:

Dividends Paid
Declaration DateRecord DatePayment DatePer Preferred SharePer Depositary Share
November 5, 2020November 30, 2020December 15, 2020$365.625$0.365625
August 3, 2020August 31, 2020September 15, 2020365.6250.365625
May 4, 2020May 29, 2020June 15, 2020365.6250.365625
February 12, 2020February 28, 2020March 16, 2020365.6250.365625
October 31, 2019November 29, 2019December 16, 2019$365.625$0.365625
August 7, 2019August 30, 2019September 16, 2019365.6250.365625
May 21, 2019May 31, 2019June 17, 2019369.68750.3696875

Common Stock

The following table presents a rollforward of outstanding shares:

CommonTreasuryCommon Stock
Stock IssuedStockOutstanding
Year Ended December 31, 2018
Shares, beginning of year1,906,671,492(1,007,626,835)899,044,657
Shares issued-4,091,9224,091,922
Shares repurchased-(36,527,150)(36,527,150)
Shares, end of year1,906,671,492(1,040,062,063)866,609,429
Year Ended December 31, 2019
Shares, beginning of year1,906,671,492(1,040,062,063)866,609,429
Shares issued-3,389,6023,389,602
Shares repurchased---
Shares, end of year1,906,671,492(1,036,672,461)869,999,031
Year Ended December 31, 2020
Shares, beginning of year1,906,671,492**(**1,036,672,461)869,999,031
Shares issued-3,719,9703,719,970
Shares repurchased-**(**12,160,952)**(**12,160,952)
Shares, end of year1,906,671,492**(**1,045,113,443)861,558,049

Dividends

Dividends are payable on AIG Common Stock only when, as and if declared by our Board of Directors in its discretion, from funds legally available for this purpose. In considering whether to pay a dividend on or purchase shares of AIG Common Stock, our Board of Directors considers a number of factors, including, but not limited to: the capital resources available to support our insurance operations and business strategies, AIG’s funding capacity and capital resources in comparison to internal benchmarks, expectations for capital generation, rating agency expectations for capital, regulatory standards for capital and capital distributions, and such other factors as our Board of Directors may deem relevant. The payment of dividends is also subject to the terms of AIG’s outstanding Series A Preferred Stock, pursuant to which no dividends may be declared or paid on any AIG Common Stock unless the full dividends for the latest completed dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid or provided for.

300 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 17. Equity

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, 2020, 2019 and 2018**:**

Dividends Paid
Declaration DateRecord DatePayment DatePer Common Share
November 5, 2020December 14, 2020December 28, 2020$0.32
August 3, 2020September 17, 2020September 30, 20200.32
May 4, 2020June 15, 2020June 29, 20200.32
February 12, 2020March 16, 2020March 30, 20200.32
October 31, 2019December 12, 2019December 26, 2019$0.32
August 7, 2019September 17, 2019September 30, 20190.32
May 6, 2019June 14, 2019June 28, 20190.32
February 13, 2019March 15, 2019March 29, 20190.32
October 31, 2018December 12, 2018December 26, 2018$0.32
August 2, 2018September 17, 2018September 28, 20180.32
May 2, 2018June 14, 2018June 28, 20180.32
February 8, 2018March 15, 2018March 29, 20180.32

Repurchase of AIG Common Stock

The following table presents repurchases of AIG Common Stock and warrants to purchase shares of AIG Common Stock:

Years Ended December 31,
(in millions)202020192018
Aggregate repurchases of common stock$500$-$1,739
Total number of common shares repurchased12-37
Aggregate repurchases of warrants$-$-$11
Total number of warrants repurchased--1

Our Board of Directors has authorized the repurchase of shares of AIG Common Stock and warrants to purchase shares of AIG Common Stock through a series of actions. On February 13, 2019, our Board of Directors authorized an additional increase of approximately $1.5 billion to its previous share repurchase authorization. As of December 31, 2020, approximately $1.5 billion remained under our 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 (including through the purchase of warrants). Certain of our share repurchases have been and may from time to time be effected through Exchange Act Rule 10b5-1 repurchase plans.

In February 2020, we executed an accelerated stock repurchase (ASR) agreement with a third-party financial institution. The total number of shares of AIG Common Stock repurchased in the year ended December 31, 2020, and the aggregate purchase price of those shares, reflect our payment of $500 million in the aggregate under the ASR agreement and the receipt of approximately 12 million shares of AIG Common Stock in the aggregate.

The timing of any future repurchases will depend on market conditions, our business and strategic plans, financial condition, results of operations, liquidity and other factors. The repurchase of AIG Common Stock is also subject to the terms of AIG’s outstanding Series A Preferred Stock, pursuant to which AIG may not (other than in limited circumstances) purchase, redeem or otherwise acquire AIG Common Stock unless the full dividends for the latest completed dividend period on all outstanding shares of Series A Preferred Stock have been declared and paid or provided for.

AIG | 2020 Form 10-K 301

ITEM 8 | Notes to Consolidated Financial Statements | 17. Equity

Accumulated Other Comprehensive Income (Loss)

The following table presents a rollforward of Accumulated other comprehensive income (loss):

Unrealized AppreciationFair Value of
(Depreciation) of FixedUnrealizedLiabilities Under
Maturity Securities onAppreciationForeignRetirementFair Value Option
Which Other-Than-(Depreciation)CurrencyPlanAttributable to
Temporary Creditof All OtherTranslationLiabilitiesChanges in
(in millions)Impairments Were TakenInvestmentsAdjustmentsAdjustmentOwn Credit RiskTotal
Balance, January 1, 2018, net of tax$7937,693(2,090)(931)-$5,465
Cumulative effect of change in accounting principles169(285)(284)(183)7(576)
Change in unrealized depreciation
of investments(1,320)(8,688)---(10,008)
Change in deferred policy acquisition costs
adjustment and other(57)1,300---1,243
Change in future policy benefits-1,711---1,711
Change in foreign currency translation adjustments--(314)--(314)
Change in net actuarial loss---(23)-(23)
Change in prior service credit---(4)-(4)
Change in deferred tax asset (liability)377702(35)55-1,099
Change in fair value of liabilities under fair value
option attributable to changes in own credit risk----33
Total other comprehensive income (loss)(1,000)(4,975)(349)283(6,293)
Noncontrolling interests-72--9
Balance, December 31, 2018, net of tax$(38)$2,426$(2,725)$(1,086)$10$(1,413)
Cumulative effect of change in accounting principles-
Change in unrealized appreciation
of investments84213,333---14,175
Change in deferred policy acquisition costs
adjustment and other***15(1,871)---(1,856)
Change in future policy benefits-(4,462)---(4,462)
Change in foreign currency translation adjustments--135--135
Change in net actuarial loss---(58)-(58)
Change in prior service credit---(2)-(2)
Change in deferred tax asset (liability)(196)(1,311)(31)24-(1,514)
Change in fair value of liabilities under fair value
option attributable to changes in own credit risk----(3)(3)
Total other comprehensive income (loss)6615,689104(36)(3)6,415
Noncontrolling interests-164--20
Balance, December 31, 2019, net of tax$623$8,099$**(**2,625)$**(**1,122)$7$4,982
Unrealized AppreciationFair Value of
(Depreciation) of FixedUnrealizedLiabilities Under
Maturity Securities onAppreciationForeignRetirementFair Value Option
Which Allowance(Depreciation)CurrencyPlanAttributable to
for Credit Lossesof All OtherTranslationLiabilitiesChanges in
(in millions)Was TakenInvestmentsAdjustmentsAdjustmentOwn Credit RiskTotal
Balance, January 1, 2020, net of tax$-8,722**(**2,625)**(**1,122)7$4,982
Cumulative effect of change in accounting principles------
Change in unrealized appreciation (depreciation)
of investments**(**133)9,624---9,491
Change in deferred policy acquisition costs
adjustment and other11**(**1,327)---**(**1,316)
Change in future policy benefits-2,408---2,408
Change in foreign currency translation adjustments--303--303
Change in net actuarial loss---**(**67)-**(**67)
Change in prior service credit---**(**18)-**(**18)
Change in deferred tax asset (liability)27**(**2,351)56**(**21)-**(**2,289)
Change in fair value of liabilities under fair value
option attributable to changes in own credit risk----11
Total other comprehensive income (loss)**(**95)8,354359**(**106)18,513
Noncontrolling interests-**(**17)1--**(**16)
Balance, December 31, 2020, net of tax$**(**95)$17,093$**(**2,267)$**(**1,228)$8$13,511

*Includes net unrealized gains and losses attributable to businesses held for sale at December 31, 2019.

302 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 17. Equity

The following table presents the other comprehensive income (loss) reclassification adjustments for the years ended December 31, 2020, 2019 and 2018:

Unrealized AppreciationFair Value of
(Depreciation) of FixedUnrealizedLiabilities Under
Maturity Securities onAppreciationForeignRetirementFair Value Option
Which Other-Than-(Depreciation)CurrencyPlanAttributable to
Temporary Creditof All OtherTranslationLiabilitiesChanges in
(in millions)Impairments Were TakenInvestmentsAdjustmentsAdjustmentOwn Credit RiskTotal
December 31, 2018
Unrealized change arising during period$(1,372)(5,811)(314)(61)3$(7,555)
Less: Reclassification adjustments
included in net income5(134)-(34)-(163)
Total other comprehensive income (loss),
before income tax expense (benefit)(1,377)(5,677)(314)(27)3(7,392)
Less: Income tax expense (benefit)(377)(702)35(55)-(1,099)
Total other comprehensive income (loss),
net of income tax expense (benefit)$(1,000)$(4,975)$(349)$28$3$(6,293)
December 31, 2019
Unrealized change arising during period$8537,324135(97)(3)$8,212
Less: Reclassification adjustments
included in net income(4)324-(37)-283
Total other comprehensive income (loss),
before income tax expense (benefit)8577,000135(60)(3)7,929
Less: Income tax expense (benefit)1961,31131(24)-1,514
Total other comprehensive income (loss),
net of income tax expense (benefit)$661$5,689$104$(36)$(3)$6,415
Unrealized AppreciationFair Value of
(Depreciation) of FixedUnrealizedLiabilities Under
Maturity Securities onAppreciationForeignRetirementFair Value Option
Which Allowance(Depreciation)CurrencyPlanAttributable to
for Credit Lossesof All OtherTranslationLiabilitiesChanges in
(in millions)Was TakenInvestmentsAdjustmentsAdjustmentOwn Credit RiskTotal
December 31, 2020
Unrealized change arising during period$**(**161)$11,758$303$**(**130)$1$11,771
Less: Reclassification adjustments
included in net income**(**39)1,053-**(**45)-969
Total other comprehensive income (loss),
before income tax expense (benefit)**(**122)10,705303**(**85)110,802
Less: Income tax expense (benefit)**(**27)2,351**(**56)21-2,289
Total other comprehensive income (loss),
net of income tax expense (benefit)$**(**95)$8,354$359$**(**106)$1$8,513

AIG | 2020 Form 10-K 303

ITEM 8 | Notes to Consolidated Financial Statements | 17. Equity

The following table presents the effect of the reclassification of significant items out of Accumulated other comprehensive income on the respective line items in the Consolidated Statements of Income:

Amount Reclassified
from Accumulated Other
Years Ended December 31,Comprehensive IncomeAffected Line Item in the
(in millions)202020192018Consolidated Statements of Income
Unrealized appreciation (depreciation) of fixed maturity securities on which allowance for credit losses was taken
Investments$**(**39)$-$-Other realized capital gains
Total**(**39)--
Unrealized appreciation (depreciation) of fixed maturity securities on which other-than-temporary credit impairments were taken
Investments$-$(4)$5Other realized capital gains
Total-(4)5
Unrealized appreciation (depreciation) of all other investments
Investments1,053324(134)Other realized capital gains
Total1,053324(134)
Change in retirement plan liabilities adjustment
Prior-service credit**(**1)-1*
Actuarial losses**(**44)(37)(35)*
Total**(**45)(37)(34)
Total reclassifications for the year$969$283$(163)

*These Accumulated other comprehensive income components are included in the computation of net periodic pension cost. For additional information see Note 21.

304 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 18. Earnings Per Common Share

  1. Earnings Per Common Share (EPS)

The basic EPS computation is based on the weighted average number of common shares outstanding, adjusted to reflect all stock dividends and stock splits. The diluted EPS computation is based on those shares used in the basic EPS computation plus common shares that would have been outstanding assuming issuance of common shares for all dilutive potential common shares outstanding and adjusted to reflect all stock dividends and stock splits.

The following table presents the computation of basic and diluted EPS:

Years Ended December 31,
(dollars in millions, except per common share data)202020192018
Numerator for EPS:
Income (loss) from continuing operations$**(**5,833)$4,121$103
Less: Net income from continuing operations attributable to noncontrolling interests11582167
Less: Preferred stock dividends2922-
Income (loss) attributable to AIG common shareholders from continuing operations**(**5,977)3,27836
Income (loss) from discontinued operations, net of income tax expense448(42)
Net income (loss) attributable to AIG common shareholders$**(**5,973)$3,326$(6)
Denominator for EPS:
Weighted average common shares outstanding – basic869,309,458876,750,264898,405,537
Dilutive common shares-12,761,68211,735,705
Weighted average common shares outstanding – diluted(a)(b)869,309,458889,511,946910,141,242
Income (loss) per common share attributable to AIG common shareholders:
Basic:
Income (loss) from continuing operations$**(**6.88)$3.74$0.04
Income (loss) from discontinued operations$-$0.05$(0.05)
Income (loss) attributable to AIG common shareholders$**(**6.88)$3.79$(0.01)
Diluted:
Income (loss) from continuing operations$**(**6.88)$3.69$0.04
Income (loss) from discontinued operations$-$0.05$(0.05)
Income (loss) attributable to AIG common shareholders$**(**6.88)$3.74$(0.01)

(a)For the year ended December 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. The number of common shares excluded from the calculation was 5,401,597 shares.

(b)Dilutive common shares included our share-based employee compensation plans, and a weighted average portion of the 10-year warrants issued to AIG shareholders as part of AIG’s recapitalization in January 2011, which expired in January 2021. The number of common shares excluded from diluted shares outstanding was 68.7 million, 20.0 million and 19.6 million for the years ended December 31, 2020, 2019 and 2018, respectively, because the effect of including those common shares in the calculation would have been anti-dilutive.

For information about our repurchases of AIG Common Stock see Note 17 to the Consolidated Financial Statements.

AIG | 2020 Form 10-K 305

ITEM 8 | Notes to Consolidated Financial Statements | 19. Statutory Financial Data and Restrictions

  1. Statutory Financial Data and Restrictions

The following table presents statutory net income (loss) and capital and surplus for our General Insurance companies and our Life and Retirement companies in accordance with statutory accounting practices:

(in millions)202020192018
Years Ended December 31,
Statutory net income (loss)(a)(b):
General Insurance companies:
Domestic$915$1,481$(1,030)
Foreign9491,384558
Total General Insurance companies$1,864$2,865$(472)
Life and Retirement companies:
Domestic$680$325$671
Foreign143,336(553)
Total Life and Retirement companies$694$3,661$118
At December 31,
Statutory capital and surplus(a)(b):
General Insurance companies:
Domestic$17,926$17,418
Foreign15,59216,409
Total General Insurance companies$33,518$33,827
Life and Retirement companies:
Domestic$10,960$9,228
Foreign6715,231
Total Life and Retirement companies$11,631$14,459
Aggregate minimum required statutory capital and surplus:
General Insurance companies:
Domestic$3,817$4,177
Foreign7,3038,080
Total General Insurance companies$11,120$12,257
Life and Retirement companies:
Domestic$3,574$3,357
Foreign2071,137
Total Life and Retirement companies$3,781$4,494

(a) Excludes discontinued operations and other divested businesses. Statutory capital and surplus and net income (loss) with respect to foreign operations are as of November 30.

(b) The 2020 amounts reflect our best estimate of the statutory net income, capital and surplus as of the date of AIG’s Form 10-K filing. In aggregate, the 2019 General Insurance companies and Life and Retirement companies statutory net income decreased by $4 million and the 2019 General Insurance companies and Life and Retirement companies statutory capital and surplus increased by $132 million, compared to the amounts previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019, due to finalization of statutory filings and revision of prior period numbers.

Our insurance subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by domestic and foreign insurance regulatory authorities. The principal differences between statutory financial statements and financial statements prepared in accordance with U.S. GAAP for domestic companies are that statutory financial statements do not reflect DAC, some bond portfolios may be carried at amortized cost, investment impairments are determined in accordance with statutory accounting practices, assets and liabilities are presented net of reinsurance, policyholder liabilities are generally valued using more conservative assumptions and certain assets are non-admitted.

For domestic insurance subsidiaries, aggregate minimum required statutory capital and surplus is based on the greater of the RBC level that would trigger regulatory action or minimum requirements per state insurance regulation. Capital and surplus requirements of our foreign subsidiaries differ from those prescribed in the U.S., and can vary significantly by jurisdiction. At both December 31, 2020 and 2019, all domestic and foreign insurance subsidiaries individually exceeded the minimum required statutory capital and surplus requirements and all domestic insurance subsidiaries individually exceeded RBC minimum required levels.

306 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 19. Statutory Financial Data and Restrictions

At December 31, 2020 and 2019, our domestic insurance subsidiaries used the following permitted practices that resulted in reported statutory surplus or risk-based capital that is significantly different from the statutory surplus or risk based capital that would have been reported had NAIC statutory accounting practices or the prescribed regulatory accounting practices of their respective state regulator been followed in all respects:

 Effective December 31, 2019 and subsequent reporting periods through September 30, 2020, a domestic life insurance subsidiary domiciled in Texas adopted a permitted statutory accounting practice to recognize an admitted asset related to the notional value of coverage defined in an excess of loss reinsurance agreement, net of specified amounts. This reinsurance agreement has a 20-year term and provides coverage to the subsidiary for aggregate claims incurred during the agreement term associated with guaranteed minimum withdrawal benefits on certain fixed index annuities generally issued prior to April 2019 (Block 1) exceeding an attachment point defined in the treaty.

 Effective October 1, 2020 and subsequent reporting periods through September 30, 2023, this permitted practice was expanded to similarly recognize an additional admitted asset related to the notional value of coverage defined in a separate excess of loss reinsurance agreement, net of specified amounts. This additional reinsurance agreement has a 25-year term and provides coverage to the subsidiary for aggregate excess of loss claims associated with guaranteed minimum withdrawal benefits on a block of fixed index annuities generally issued in April 2019 or later, including new business issued after the effective date (Block 2). In addition, effective December 31, 2020, this expanded permitted practice also extended the term of the permitted practice for Block 1 from September 30, 2020 to September 30, 2023. The reinsurance agreement covering contracts in Block 1 was also amended to conform certain provisions to be consistent with the Block 2 reinsurance agreement. The permitted practice allows the subsidiary to manage its reserves in a manner more in line with anticipated principle-based reserving requirements once they have been developed. This permitted practice resulted in an increase in the statutory surplus of this subsidiary of approximately $614 million and $285 million at December 31, 2020 and 2019, respectively. The subsidiary may seek continuation of the permitted practice beyond September 30, 2023, subject to the approval of its domiciliary regulator.

 As described in Note 13, our domestic property and casualty insurance subsidiaries domiciled in New York, Pennsylvania and Delaware discount non-tabular workers’ compensation reserves based on applicable prescribed or approved regulations, or in the case of our Delaware subsidiary, based on a permitted practice. This practice did not have a material impact on our statutory surplus, statutory net income (loss) or risk-based capital.

Regulation XXX requires U.S. life insurers to establish additional statutory reserves for term life insurance policies with long-term premium guarantees and universal life policies with secondary guarantees (ULSGs). In addition, Guideline AXXX clarifies the application of Regulation XXX as to these guarantees, including certain ULSGs.

Our domestic life insurance subsidiaries manage the capital impact of statutory reserve requirements under Regulation XXX and Guideline AXXX through unaffiliated and affiliated reinsurance transactions. The affiliated life insurers providing reinsurance capacity for such transactions are fully licensed insurance companies and are not formed under captive insurance laws.

Under the other intercompany reinsurance arrangement, certain Regulation XXX and Guideline AXXX reserves related to a closed block of in-force business are ceded to an affiliated off-shore life insurer, which is licensed as a class E insurer under Bermuda law. This reinsurance arrangement does not meet the criteria for reinsurance accounting under U.S. GAAP; therefore, deposit accounting is applied by the assuming off-shore life insurer. Letters of credit are used to support the credit for reinsurance provided by the affiliated off-shore life insurer.

For additional information regarding these letters of credit see Note 8.

Subsidiary Dividend Restrictions

Payments of dividends to us by our insurance subsidiaries are subject to certain restrictions imposed by regulatory authorities. With respect to our domestic insurance subsidiaries, the payment of any dividend requires formal notice to the insurance department in which the particular insurance subsidiary is domiciled. For example, unless permitted by the Superintendent of Financial Services, property casualty companies domiciled in New York generally may not pay dividends to shareholders that, in any 12-month period, exceed the lesser of 10 percent of such company’s statutory policyholders’ surplus or 100 percent of its “adjusted net investment income,” for the previous year, as defined. Generally, less severe restrictions applicable to both property casualty and life insurance companies exist in most of the other states in which our insurance subsidiaries are domiciled. Under the laws of many states, an insurer may pay a dividend without prior approval of the insurance regulator when the amount of the dividend is below certain regulatory thresholds. Other foreign jurisdictions may restrict the ability of our foreign insurance subsidiaries to pay dividends. Various other regulatory restrictions also limit cash loans and advances to us by our subsidiaries.

Largely as a result of these restrictions, approximately $41.6 billion of the statutory capital and surplus of our consolidated insurance subsidiaries were restricted from transfer to AIG Parent without prior approval of state insurance regulators at December 31, 2020.

AIG | 2020 Form 10-K 307

ITEM 8 | Notes to Consolidated Financial Statements | 19. Statutory Financial Data and Restrictions

To our knowledge, no AIG insurance company is currently on any regulatory or similar “watch list” with regard to solvency.

Parent Company Dividend Restrictions

At December 31, 2020, our ability to pay dividends is not subject to any significant contractual restrictions, but remains subject to regulatory restrictions.

For additional information about our ability to pay dividends to our shareholders see Note 17.

  1. Share-Based Compensation Plans

The following table presents our total share-based compensation expense:

Years Ended December 31,
(in millions)202020192018
Share-based compensation expense - pre-tax(a)$274$314$337
Share-based compensation expense - after tax(b)216248266

(a)As a result of accelerated vesting events, such as retirement eligibility in the year of grant and involuntary terminations, we recognized $63 million, $82 million and $104 million in 2020, 2019 and 2018, respectively, prior to the end of the specified vesting periods. It is our policy to reverse compensation expense for forfeited awards when they occur.

(b)We also recognized $25 million of additional tax expense due to share settlements occurring in 2020.

Employee Plans

The Company sponsors several stock compensation programs under the AIG Long Term Incentive Plan (as amended) and its predecessor plan, the AIG 2013 Long Term Incentive Plan (each as applicable, the LTIP), which are governed by the AIG 2013 Omnibus Incentive Plan (Omnibus Plan). Our share-settled awards are settled with previously acquired shares held in AIG’s treasury.

AIG 2013 Omnibus Incentive Plan

The Omnibus Plan, which replaced the AIG 2010 Stock Incentive Plan (2010 Plan), was adopted at the 2013 Annual Meeting of Shareholders and provides for the grants of share-based awards to our employees and non-employee directors. The total number of shares that may be granted under the Omnibus Plan (the reserve) is the sum of 1) 45 million shares of AIG Common Stock, plus 2) the number of authorized shares that remained available for issuance under the 2010 Plan when the Omnibus Plan became effective, plus 3) the number of shares of AIG Common Stock relating to outstanding awards under the 2010 Plan at the time the Omnibus Plan became effective that subsequently are forfeited, expired, terminated or otherwise lapse or are settled in cash. Each share-based unit granted under the Omnibus Plan reduces the number of shares available for future grants by one share. However, shares with respect to awards that are forfeited, expired or settled for cash, and shares withheld for taxes on awards (other than options and stock appreciation rights awards) are returned to the reserve.

During 2020, performance share units (PSUs), restricted stock units (RSUs), stock options and deferred stock units (DSUs) (collectively, units) were granted under the Omnibus Plan and 21,892,781 shares are available for future grants as of December 31, 2020. Units are issued to employees as part of our long-term incentive program, generally in March of any given year, and are also issued for off-cycle grants, which are made from time to time during the year generally as sign-on awards to new hires or as a result of a change in employee status.

AIG Long Term Incentive Plan

Long-Term Incentive (LTI) Awards

The LTIP provides for an annual award to certain employees, including our senior executive officers and other highly compensated employees that may be comprised of a combination of one or more of the following units: PSUs, RSUs or stock options.

The number of PSUs issued on the grant date (the target) provides the opportunity for LTIP participants (usually senior management) to receive shares of AIG Common Stock based on AIG achieving specified performance goals at the end of a three-year performance period. These performance goals are pre-established by AIG’s Compensation and Management Resources Committee (CMRC) for each annual grant and may differ from year to year. The actual number of PSUs earned can vary from zero to 200 percent of the target for the 2020, 2019 and 2018 awards, depending on AIG’s performance relative to a specified peer group and/or the outcome of pre-established financial goals, as applicable.

308 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 20. Share-Based Compensation Plans

RSUs and stock options are earned based solely on continued service by the participant.

Vesting occurs on January 1 of the year immediately following the end of the three-year performance period. For awards granted prior to 2017, vesting occurs in three equal installments beginning on January 1 of the year immediately following the end of a performance period and January 1 of each of the next two years. Recipients must be employed at each vesting date to be entitled to share delivery, except upon the occurrence of an accelerated vesting event, such as an involuntary termination without cause, disability, retirement eligibility or death during the vesting period.

LTI awards accrue dividend equivalent units (DEUs) in the form of additional PSUs and/or RSUs whenever a cash dividend is declared on shares of AIG Common Stock; the DEUs are subject to the same vesting terms and conditions as the underlying unit.

Unit Valuation

The fair value of time-vesting RSUs as well as PSUs that are earned based on certain company-specific metrics was based on the closing price of AIG Common Stock on the grant date; while the fair value of PSUs that are earned based on AIG’s relative total shareholder return (TSR) was determined on the grant date using a Monte Carlo simulation.

The following table presents the assumptions used to estimate the fair value of PSUs that vest based on AIG’s TSR:

2020
Expected dividend yield(a)-%
Expected volatility(b)46.43%
Risk-free interest rate(c)0.18%

(a) The award agreement provides that TSR for AIG and each member of the Peer Group will be calculated assuming dividends distributed are reinvested on the ex-dividend date.

(b)We used the historical volatility over the most recent 2.50-year period for AIG and the members of the Peer Group, commensurate with the remaining Performance Period as of the Valuation Date.

(c)We converted the semi-annual zero-coupon U.S. Treasury rates as of the Valuation Date to continuously compounded rates. We then chose the continuously compounded risk-free rate that is commensurate with the length of the remaining performance period as of the valuation date and interpolated between the yields of the two-year and the three-year continuously compounded rates to determine the yield.

Modification of LTI awards

During the third quarter of 2019, we added a modifier to the 2019 performance share units awarded to certain senior executives to cap payout at 100 percent of target if our total shareholder return for the three-year performance period is below peer median. We did not recognize any incremental compensation expense as a result of this modification.

During the third quarter of 2020, we reduced the performance goals from three to two metrics for the 2018 LTI and 2019 LTI awards for certain PSU recipients, which resulted in a net credit of $4 million pre-tax to compensation expense. The modification did not apply to the Company’s senior executives.

The following table summarizes outstanding share-settled LTI awards(a):

Weighted Average
As of or for the YearNumber of UnitsGrant-Date Fair Value
Ended December 31, 2020(b)2020 LTI2019 LTI2018 LTI2016 LTI2020 LTI2019 LTI2018 LTI2016 LTI
Unvested, beginning of year-4,523,8982,656,994223,364$-$44.98$55.21$62.14
Granted7,281,247109,47979,294-31.3728.1628.16-
Vested(c)(1,788,974)(599,606)(2,338,209)(203,533)31.4645.1455.3562.14
Forfeited(d)(143,617)(536,352)(398,079)(19,831)32.0044.5554.9262.13
Unvested, end of year(e)5,348,6563,497,419--$31.33$44.79$-$-

(a) Excludes stock options, other RSUs and DSUs, which are discussed under Stock Options, Other RSU Grants and Non-Employee Plan, respectively. The 2017 LTI was fully vested in 2019 as a result of the three-year cliff vesting schedule.

(b) Except for the 2016 LTI awards, PSUs represent target amount granted, and does not reflect potential increases or decreases that could result from the final outcome of the performance goals for the respective awards, which is determined by the CMRC in the quarter after the applicable performance period ends.

(c) Also reflects units that vest as a result of an accelerated vesting event that occurred prior to the specified vesting date.

(d) Includes PSUs for which the performance metric was not met at the end of the performance period.

(e) At December 31, 2020, the total unrecognized compensation cost for outstanding RSUs and PSUs was $178 million and the weighted-average and expected period of years over which that cost is expected to be recognized are 0.94 year and 2 years.

AIG | 2020 Form 10-K 309

ITEM 8 | Notes to Consolidated Financial Statements | 20. Share-Based Compensation Plans

Stock Options

Stock options were issued as part of the 2020, 2019 and 2018 LTI awards, and to certain newly hired senior executives in 2017 and 2018. Option awards are generally granted with an exercise price equal to the market price of the company’s stock on the grant date. The fair value of the options was estimated on the grant date using the Black-Scholes model for the time-vesting options, and a Monte Carlo simulation for the hurdle-vesting options using the assumptions noted in the following table.

The following weighted-average assumptions were used for stock options granted:

202020192018
Expected annual dividend yield(a)3.97%2.86%2.32%
Expected volatility(b)42.03%23.17%23.29%
Risk-free interest rate(c)0.57%2.47%2.83%
Expected term(d)6.39years6.38years4.50 - 6.47years

(a)The dividend yield is the projected annualized AIG dividend yield estimated by Bloomberg Professional service as of the valuation date.

(b) The expected volatility is based on the implied volatility of 24 months stock option estimated by the Bloomberg Professional service as of the valuation date.

(c) The risk-free interest rate is the continuously compounded interest rate for the term between the valuation date and the expiration date that is assumed to be constant and equal to the interpolated value between the closet data points on the U.S. dollar LIBOR-swap curve as of the valuation date.

(d) The contractual terms are 7 and 10 years from the date of grant.

The following table provides a rollforward of stock option activity:

Weighted AverageAggregate
As of or for the YearWeighted AverageRemainingIntrinsic Values
Ended December 31, 2020UnitsExercise PriceContractual Life(in millions)
Outstanding, beginning of year8,365,891$53.667.65
Granted3,303,58732.25
Exercised**(**74,740)40.76
Forfeited or expired**(**165,247)45.42
Outstanding, end of year11,429,491$47.677.59$18
Exercisable, end of year3,988,609$54.466.86$1

The weighted average grant-date fair value of stock options granted during 2020, 2019 and 2018 was $9.61, $10.01 and $11.08, respectively. As of December 31, 2020, we recognized $28.1 million of expense, while $21 million was unrecognized and is expected to be amortized up to 2.00 years.

Other RSU Grants

The Company may issue time-vesting RSUs for various reasons including, as a sign-on bonus, retention grant or replacement award in an acquisition. Vesting for these awards generally ranges from 1 to 3 years and is contingent on continuous service.

The following table summarizes outstanding share-settled RSU grants.

Weighted Average
As of or for the YearNumber of UnitsGrant-Date Fair Value
Ended December 31,202020192018202020192018
Unvested, beginning of year1,231,1851,634,610595,250$54.17$56.11$62.93
Granted583,068399,7791,385,92935.5452.4054.07
Vested(535,220)(774,350)(342,481)50.8957.3259.68
Forfeited(127,653)(28,854)(4,088)54.9055.2360.31
Unvested, end of year1,151,3801,231,1851,634,610$46.18$54.17$56.11

We recognized $23.7 million of expense related to these RSU grants in 2020. Total unrecognized compensation cost related to these grants was $25 million and the weighted-average and expected period of years over which that cost is expected to be recognized are 1.36 years and 5.00 years at December 31, 2020.

310 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 20. Share-Based Compensation Plans

Non-Employee Plan

Our non-employee directors, who serve on our Board of Directors, receive share-based compensation in the form of fully vested DSUs with delivery deferred until retirement from the Board. DSUs granted in 2020, 2019 and 2018 accrue DEUs equal to the amount of any regular quarterly dividend that would have been paid by AIG if the shares of AIG Common Stock underlying the DSUs had been outstanding. In 2020, 2019 and 2018, we granted to non-employee directors 94,062, 49,706 and 39,092 DSUs, respectively, under the 2013 Plan, and recognized expense of $2.4 million, $2.6 million and $2.1 million, respectively.

  1. Employee Benefits

Pension Plans

We offer various defined benefit plans to eligible employees. Effective January 1, 2016, the U.S. defined benefit pension plans were frozen. Consequently, these plans are closed to new participants and current participants no longer earn benefits.

The U.S. AIG Retirement Plan (the qualified plan) is a noncontributory defined benefit plan subject to the provisions of ERISA. In 2012, the qualified plan was converted to a cash balance formula comprised of pay credits based on six percent of a plan participant’s annual compensation (subject to IRS limitations) and annual interest credits. Although benefits are frozen, these interest credits continue to accrue on the cash balance accounts of active participants, who also accrue years of service for purposes of early retirement eligibility and subsidies. Employees can take their vested benefits when they leave AIG as a lump sum or an annuity option.

Employees satisfying certain age and service requirements (i.e., grandfathered employees) remain covered under the average pay formula that was in effect prior to the conversion. The final average pay formula is based upon a percentage of final average compensation multiplied by years of credited service, up to 44 years. Grandfathered employees will receive the higher of the benefit under the cash balance formula or the final average pay formula at retirement.

In the U.S. we also sponsor non-qualified unfunded defined benefit plans, such as the AIG Non-Qualified Retirement Income Plan (AIG NQRIP) for certain employees, including key executives, designed to supplement pension benefits provided by the qualified plan. The AIG NQRIP provides a benefit equal to the reduction in benefits under the qualified plan as a result of federal tax limitations on compensation and benefits payable.

Non-U.S. defined benefit plans generally are either based on the employee’s years of credited service and compensation in the years preceding retirement or on points accumulated based on the employee’s job grade and other factors during each year of service.

Postretirement Plans

U.S. postretirement medical and life insurance benefits are based upon the employee attaining the age of 55 and having a minimum of ten years of service, which was reduced to 5 years in 2019 for medical coverage only. Eligible employees who have medical coverage can enroll in retiree medical upon termination of employment. Medical benefits are contributory, while the life insurance benefits, which are closed to new employees, are generally non-contributory. Retiree medical contributions vary from none for pre-1989 retirees to actual premium payments reduced by certain subsidies for post-1992 retirees. These retiree contributions are subject to annual adjustments. Other cost sharing features of the medical plan include deductibles, coinsurance, Medicare coordination, and an employer subsidy for grandfathered employees only.

Postretirement benefits are offered in certain non-U.S. countries and vary by geographic location.

AIG | 2020 Form 10-K 311

ITEM 8 | Notes to Consolidated Financial Statements | 21. Employee Benefits

The following table presents the funded status of the plans reconciled to the amount reported in the Consolidated Balance Sheets. The measurement date for most of the non-U.S. defined benefit pension and postretirement plans is November 30, consistent with the fiscal year end of the sponsoring companies. For all other plans, measurement occurs as of December 31.

As of or for the Years EndedPensionPostretirement
December 31,U.S. Plans(a)Non-U.S. Plans(a)U.S. PlansNon-U.S. Plans
(in millions)20202019202020192020201920202019
Change in projected benefit obligation:
Benefit obligation, beginning of year$4,972$4,553$1,174$1,138$181$172$61$50
Service cost5521211111
Interest cost13417610155622
Actuarial loss612536191171588
Benefits paid:
AIG assets**(**17)(18)**(**9)(8)**(**13)(13)**(**1)(1)
Plan assets**(**294)(279)**(**21)(33)----
Plan amendment--18-----
Curtailments---(2)----
Settlements--**(**24)(67)----
Foreign exchange effect--6018---1
Other**(**2)(1)11----
Projected benefit obligation, end of year$5,410$4,972$1,231$1,174$191$181$71$61
Change in plan assets:
Fair value of plan assets, beginning
of year$4,465$3,840$899$861$-$-$-$-
Actual return on plan assets, net of expenses7607443764----
AIG contributions171784963131311
Benefits paid:
AIG assets**(**17)(18)**(**9)(8)**(**13)(13)**(**1)(1)
Plan assets**(**294)(279)**(**21)(33)----
Settlements--**(**24)(67)----
Foreign exchange effect--4619----
Fair value of plan assets, end of year$4,931$4,465$977$899$-$-$-$-
Funded status, end of year$**(**479)$(507)$**(**254)$(275)$**(**191)$(181)$**(**71)$(61)
Amounts recognized in the balance
sheet:
Assets$-$-$73$65$-$-$-$-
Liabilities**(**479)(507)**(**327)(340)**(**191)(181)**(**71)(61)
Total amounts recognized$**(**479)$(507)$**(**254)$(275)$**(**191)$(181)$**(**71)$(61)
Pre-tax amounts recognized in Accumulated
other comprehensive income (loss):
Net gain (loss)$**(**1,493)$(1,436)$**(**178)$(195)$**(**7)$10$**(**14)$(6)
Prior service (cost) credit--**(**40)(22)---1
Total amounts recognized$**(**1,493)$(1,436)$**(**218)$(217)$**(**7)$10$**(**14)$(5)

(a)Includes non-qualified unfunded plans of which the aggregate projected benefit obligation was $282 million and $261 million for the U.S. at December 31, 2020 and 2019, respectively, and $243 million and $225 million for the non-U.S. at December 31, 2020 and 2019, respectively.

312 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 21. Employee Benefits

The following table presents the accumulated benefit obligations for U.S. and non-U.S. pension benefit plans:

At December 31,
(in millions)20202019
U.S. pension benefit plans$5,410$4,972
Non-U.S. pension benefit plans$1,213$1,159

Defined benefit plan obligations in which the projected benefit obligation (PBO) was in excess of the related plan assets and the accumulated benefit obligation (ABO) was in excess of the related plan assets were as follows:

At December 31,PBO Exceeds Fair Value of Plan AssetsABO Exceeds Fair Value of Plan Assets
U.S. PlansNon-U.S. PlansU.S. PlansNon-U.S. Plans
(in millions)20202019202020192020201920202019
Projected benefit obligation$5,410$4,972$1,019$1,005$-$-$-$-
Accumulated benefit obligation----5,4104,972931931
Fair value of plan assets4,9314,4656206054,9314,465620605

The following table presents the components of net periodic benefit cost with respect to pensions and other postretirement benefits:

Years Ended December 31,PensionPostretirement
U.S. PlansNon-U.S. PlansU.S. PlansNon-U.S. Plans
(in millions)202020192018202020192018202020192018202020192018
Components of net periodic benefit
cost:
Service cost*$5$5$5$21$21$22$1$1$1$1$1$1
Interest cost134176162101516566222
Expected return on assets**(**239)(229)(283)**(**21)(21)(25)------
Amortization of prior service cost (credit)---222--(1)**(**1)(2)(2)
Amortization of net (gain) loss333528857-(1)---1
Net periodic benefit cost (credit)**(**67)(13)(88)2022-22666212
Settlement (credit) charges---3(2)-------
Net benefit cost (credit)$**(**67)$(13)$(88)$23$20$22$6$6$6$2$1$2
Total recognized in Accumulated other
comprehensive income (loss)$**(**57)$14$(77)$**(**1)$(45)$20$**(**17)$(17)$9$**(**9)$(10)$12
Total recognized in net periodic benefit
cost and other comprehensive
income (loss)$10$27$11$**(**24)$(65)$(2)$**(**23)$(23)$3$**(**11)$(11)$10

*Reflects administrative fees for the U.S. pension plans.

Interest cost for pension and postretirement benefits for our U.S. plans and largest non-U.S. plans is measured using the spot rate approach, which applies specific spot rates along the yield curve to a plan’s corresponding discounted cash flows that comprise the obligation. This method provides a more precise measurement of interest cost by aligning the timing of the plans’ discounted cash flows to the corresponding spot rates on the yield curve. For certain non-U.S. plans, interest cost is measured utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligations.

A 100 basis point increase in the expected long-term rate of return would decrease the 2021 pension expense by approximately $57 million with all other items remaining the same. A 100 basis point increase in the discount rate would increase the 2021 pension expense by approximately $1 million. This is because the increase in the interest cost due to the higher discount rate is larger than the decrease in the amortization of the net loss, offset by the decrease in the projected settlement charge of the U.S. qualified plan. Conversely, a 100 basis point decrease in the discount rate would decrease the 2021 pension expense by approximately $4 million, while a 100 basis point decrease in the expected long-term rate of return would increase the 2021 pension expense by approximately $57 million, with all other items remaining the same.

AIG | 2020 Form 10-K 313

ITEM 8 | Notes to Consolidated Financial Statements | 21. Employee Benefits

Assumptions

The following table summarizes the weighted average assumptions used to determine the benefit obligations:

PensionPostretirement
U.S. PlansNon-U.S. Plans(a)U.S. PlansNon-U.S. Plans(a)
December 31, 2020
Discount rate2.28%1.00%2.25%2.33%
Interest crediting rate1.57%0.72%(b)N/AN/A
Rate of compensation increaseN/A(c)2.28%N/AN/A%
December 31, 2019
Discount rate3.16%1.09%3.14%3.18%
Interest crediting rate2.19%0.44%(b)N/AN/A
Rate of compensation increaseN/A(c)2.22%N/A3.00%

(a) The non-U.S. plans reflect those assumptions that were most appropriate for the local economic environments of each of the subsidiaries providing such benefits.

(b) Represents the weighted average interest crediting rate of non-U.S. cash balance plans primarily in Japan and Switzerland.

(c) Compensation increases are no longer applicable as the plan is frozen effective January 1, 2016.

The following table summarizes assumed health care cost trend rates for the U.S. plans:

At December 31,20202019
Following year:
Medical (before age 65)5.55%5.74%
Medical (age 65 and older)5.00%5.00%
Ultimate rate to which cost increase is assumed to decline4.50%4.50%
Year in which the ultimate trend rate is reached:
Medical (before age 65)20382038
Medical (age 65 and older)20382038

The following table presents the weighted average assumptions used to determine the net periodic benefit costs:

PensionPostretirement
U.S. PlansNon-U.S. Plans(a)U.S. PlansNon-U.S. Plans(a)
For the Year Ended December 31, 2020
Discount rate3.16%1.09%3.14%3.18%
Interest crediting rate2.19%0.44%(b)N/AN/A
Rate of compensation increaseN/A2.22%N/A3.00%
Expected return on assets5.55%2.32%N/AN/A
For the Year Ended December 31, 2019
Discount rate4.22%1.71%4.17%4.12%
Interest crediting rate3.34%0.74%(b)N/AN/A
Rate of compensation increaseN/A2.27%N/A3.00%
Expected return on assets6.20%2.51%N/AN/A
For the Year Ended December 31, 2018
Discount rate3.61%1.60%3.53%3.59%
Interest crediting rate2.88%0.70%(b)N/AN/A
Rate of compensation increaseN/A2.27%N/A3.00%
Expected return on assets6.75%2.78%N/AN/A

(a) The non-U.S. plans reflect those assumptions that were most appropriate for the local economic environments of each of the subsidiaries providing such benefits.

(b) Represents the weighted average interest crediting rate of non-U.S. cash balance plans primarily in Japan and Switzerland.

314 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 21. Employee Benefits

Discount Rate Methodology

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 (Mercer Yield Curve) at December 31, 2020 and 2019, which resulted in a single discount rate that would produce the same liability at the respective measurement dates. The discount rates were 2.28 percent at December 31, 2020 and 3.16 percent at December 31, 2019. The methodology was consistently applied for the respective years in determining the discount rates for the other U.S. pension plans.

In general, the discount rates for the non-U.S. plans were developed using a similar methodology to the U.S. AIG Retirement plan, by using country-specific Mercer Yield Curves.

The projected benefit obligation for AIG’s Japan pension plans represents approximately 51 percent and 53 percent of the total projected benefit obligations for our non-U.S. pension plans at December 31, 2020 and 2019, respectively. The weighted average discount rate of 0.56 percent and 0.42 percent at December 31, 2020 and 2019, respectively, was selected by reference to the Mercer Yield Curve for Japan.

Plan Assets

The investment strategy with respect to assets relating to our U.S. and non-U.S. pension plans is designed to achieve investment returns that will provide for the benefit obligations of the plans over the long term, limit the risk of short-term funding shortfalls and maintain liquidity sufficient to address cash needs. Accordingly, the asset allocation strategy is designed to maximize the investment rate of return while managing various risk factors, including, but not limited to, volatility relative to the benefit obligations, liquidity, diversification and concentration, and incorporates the risk/return profile applicable to each asset class.

There were no shares of AIG Common Stock included in the U.S. and non-U.S. pension plans assets at December 31, 2020 or 2019.

U.S. Pension Plan

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 qualified 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 following table presents the asset allocation percentage by major asset class for the U.S. qualified plan and the target allocation for 2021 based on the plan’s funded status at December 31, 2020:

TargetActualActual
At December 31,202120202019
Asset class:
Equity securities27%25%25%
Fixed maturity securities61%57%59%
Other investments12%18%16%
Total100%100%100%

The expected weighted average long-term rate of return for the plan was 5.55 percent and 6.20 percent for 2020 and 2019, 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.

Non-U.S. Pension Plans

The assets of the non-U.S. pension plans are held in various trusts in multiple countries and are invested primarily in equities and fixed maturity securities to maximize the long-term return on assets for a given level of risk.

AIG | 2020 Form 10-K 315

ITEM 8 | Notes to Consolidated Financial Statements | 21. Employee Benefits

The following table presents the asset allocation percentage by major asset class for non-U.S. pension plans and the target allocation:

TargetActualActual
At December 31,202120202019
Asset class:
Equity securities26%22%23%
Fixed maturity securities50%45%43%
Other investments21%24%24%
Cash and cash equivalents3%9%10%
Total100%100%100%

The assets of AIG’s Japan pension plans represent approximately 61 percent of total non-U.S. assets at December 31, 2020 and 2019. The expected long term rate of return was 1.84 percent and 1.82 percent, for 2020 and 2019, respectively, and is evaluated by the Japanese Pension Investment Committee on a quarterly and annual basis along with various investment managers, and is revised to achieve the optimal allocation to meet targeted funding levels if necessary. In addition, the funding policy is revised in accordance with local regulation every five years.

The expected weighted average long-term rate of return for all our non-U.S. pension plans was 2.32 percent and 2.51 percent for the years ended December 31, 2020 and 2019, respectively. It is an aggregation of expected returns within each asset class that was generally developed based on the building block approach that considers historical returns, current market conditions, asset volatility and the expectations for future market returns.

Assets Measured at Fair Value

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 5 herein.

U.S. PlansNon-U.S. Plans
(in millions)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
At December 31, 2020
Assets:
Cash and cash equivalents$247$-$-$247$83$-$-$83
Equity securities:
U.S.(a)459--459----
International(b)183--18315558-213
Fixed maturity securities:
U.S. investment grade(c)-2,217102,227----
International investment grade(c)-237-237-174-174
U.S. and international high yield(d)-282-282-269-269
Mortgage and other asset-backed
securities-49-49----
Other investment types(e)****:
Futures3**(**7)-**(**4)----
Direct private equity(f)--66----
Insurance contracts-13-13--179179
Mutual funds(g)-----59-59
Total$892$2,791$16$3,699$238$560$179$977
At December 31, 2019
Assets:
Cash and cash equivalents$133$-$-$133$90$-$-$90
Equity securities:
U.S.(a)278--278----
International(b)16125-18615649-205
Fixed maturity securities:
U.S. investment grade(c)-2,20092,209----
International investment grade(c)-203-203-158-158
U.S. and international high yield(d)-106-106-229-229
Mortgage and other asset-backed

316 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 21. Employee Benefits

securities-48-48----
Other investment types(e)****:
Futures(17)--(17)----
Direct private equity(f)--1111----
Insurance contracts-14-14--160160
Mutual funds(g)-----57-57
Total$555$2,596$20$3,171$246$493$160$899

(a) Includes passive and active U.S. equity strategies.

(b) Includes passive and active international equity strategies.

(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.

(d) Consists primarily of investments in securities or debt obligations that have a rating below investment grade.

(e) Excludes investments that are measured at fair value using the NAV per share (or its equivalent), which totaled $1,232 million and $1,294 million at December 31, 2020 and 2019, respectively.

(f) Comprised of private capital financing including private debt and private equity securities.

(g) Comprised of mutual fund investing in variety of equity, derivatives, and bonds.

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, 2020.

Changes in Level 3 Fair Value Measurements

The following table presents changes in our U.S. and non-U.S. Level 3 plan assets measured at fair value:

NetChanges inChanges in Unrealized
RealizedUnrealizedGains (Losses) Included
andGains (Losses)in Other Comprehensive
BalanceUnrealizedBalanceon InstrumentsIncome (Loss) for Recurring
At December 31, 2020BeginningGainsTransfersTransfersat EndHeld atLevel 3 Instruments
(in millions)of Year(Losses)PurchasesSalesIssuancesSettlementsInOutof YearEnd of YearHeld at End of Year
U.S. Plan Assets:
Fixed maturity securities
U.S. investment grade$9$1$-$-$-$-$-$-$10$-$-
Direct private equity11**(**3)-**(**2)----6**(**3)-
Total$20$**(**2)$-$**(**2)$-$-$-$-$16$**(**3)$-
Non-U.S. Plan Assets:
Insurance contracts$160$18$1$-$-$-$-$-$179$-$-
Total$160$18$1$-$-$-$-$-$179$-$-
Changes in
NetUnrealized Gains
BalanceRealized andBalance(Losses) on
At December 31, 2019BeginningUnrealizedTransfersTransfersat EndInstruments Held
(in millions)of yearGains (Losses)PurchasesSalesIssuancesSettlementsInOutof yearat End of year
U.S. Plan Assets:
Fixed maturity securities
U.S. investment grade$13$3$-$(3)$-$-$-$(4)$9$3
Direct private equity14(3)2(2)----112
Total$27$-$2$(5)$-$-$-$(4)$20$5
Non-U.S. Plan Assets:
Insurance contracts$145$16$(1)$-$-$-$-$-$160$-
Total$145$16$(1)$-$-$-$-$-$160$-

AIG | 2020 Form 10-K 317

ITEM 8 | Notes to Consolidated Financial Statements | 21. Employee Benefits

Expected Cash Flows

Funding for the qualified plan ranges from the minimum amount required by ERISA to the maximum amount that would be deductible for U.S. tax purposes. Contributed amounts in excess of the minimum amounts are deemed voluntary. Amounts in excess of the maximum amount would be subject to an excise tax and may not be deductible under the Internal Revenue Code. There are no minimum required cash contributions in 2020 for the U.S. AIG Retirement Plan. The non-qualified and postretirement plans’ benefit payments are deductible when paid to participants.

Our annual pension contribution in 2021 is expected to be approximately $68 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.

The expected future benefit payments, net of participants’ contributions, with respect to the defined benefit pension plans and other postretirement benefit plans, are as follows:

PensionPostretirement
U.S.Non-U.S.U.S.Non-U.S.
(in millions)PlansPlansPlansPlans
2021$338$44$13$1
202233445122
202333246122
202433453122
202531754112
2026-20301,4852984711

Defined Contribution Plans

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 eligible 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 $188 million, $195 million and $210 million in 2020, 2019 and 2018, respectively.

318 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 22. Income Taxes

  1. Income Taxes

U.S. TAX LAW CHANGES

On December 22, 2017, the U.S. enacted Public Law 115-97, known informally as the Tax Cuts and Jobs Act (the Tax Act). 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 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.

On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act to mitigate the economic impacts of the COVID-19 crisis. The tax provisions of the CARES Act have not had and are currently not expected to have a material impact on AIG’s U.S. federal tax liabilities.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued an accounting standard that allows the optional reclassification of stranded tax effects within 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 included 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.

EFFECTIVE TAX RATE

The following table presents income (loss) from continuing operations before income tax expense (benefit) by U.S. and foreign location in which such pre-tax income (loss) was earned or incurred:

Years Ended December 31,
(in millions)202020192018
U.S.$**(**8,396)$3,825$(12)
Foreign1,1031,462269
Total$**(**7,293)$5,287$257

The following table presents the income tax expense (benefit) attributable to pre-tax income (loss) from continuing operations:

Years Ended December 31,
(in millions)202020192018
Foreign and U.S. components of actual income tax expense (benefit):
U.S.:
Current$**(**57)$278$134
Deferred**(**1,676)633(175)
Foreign:
Current274267202
Deferred**(**1)(12)(7)
Total$**(**1,460)$1,166$154

AIG | 2020 Form 10-K 319

ITEM 8 | Notes to Consolidated Financial Statements | 22. Income Taxes

Our actual income tax expense (benefit) differs from the statutory U.S. federal amount computed by applying the federal income tax rate due to the following:

Years Ended December 31,202020192018
Pre-TaxTaxPercent ofPre-TaxTaxPercent ofTaxPercent of
IncomeExpense/Pre-TaxIncomeExpense/Pre-TaxPre-TaxExpense/Pre-Tax
(dollars in millions)(Loss)(Benefit)Income (Loss)(Loss)(Benefit)Income (Loss)Income(Benefit)Income
U.S. federal income tax at statutory
rate$**(**7,288)$**(**1,531)21.0%$5,336$1,12021.0%$255$5421.0%
Adjustments:
Tax exempt interest**(**19)0.3(25)(0.5)(37)(14.5)
Uncertain tax positions*165**(**2.3)2584.817669.0
Reclassifications from accumulated
other comprehensive income**(**101)1.4(113)(2.1)(72)(28.2)
Dispositions of subsidiaries180**(**2.5)210.4--
Non-controlling interest**(**12)0.2(5)(0.1)(1)(0.4)
Non-deductible transfer pricing
charges11**(**0.2)150.32911.4
Dividends received deduction**(**39)0.5(40)(0.7)(38)(14.8)
Effect of foreign operations76**(**1.0)821.56525.5
Share-based compensation
payments excess tax effect35**(**0.5)270.5(13)(5.1)
State income taxes15**(**0.2)130.2103.9
Impact of Tax Act----6224.3
Expiration of tax attribute
carryforwards221**(**3.0)----
Tax audit resolution**(**379)5.2----
Other***(**16)0.2(134)(2.5)(102)(40.0)
Effect of discontinued operations--(8)(0.1)4015.7
Valuation allowance:
Continuing operations**(**65)0.9(44)(0.8)218.2
Consolidated total amounts**(**7,288)**(**1,459)20.05,3361,16721.925519476.0
Amounts attributable to discontinued
operations5120.04912.0(2)40NM
Amounts attributable to continuing
operations$**(**7,293)$**(**1,460)20.0%$5,287$1,16622.1%$257$15459.9%

*2020 includes a net charge of $67 million related to the accrual of IRS interest, of which $139 million tax expense is reported in Uncertain tax positions and $72 million tax benefit is reported in Other. 2019 includes a net charge of $96 million related to the accrual of IRS interest, of which $207 million tax expense is reported in Uncertain tax positions and $(111) million tax benefit is reported in Other. 2018 includes a net charge of $83 million related to the accrual of IRS interest, of which $189 million tax expense is reported in Uncertain tax positions and $(106) million tax expense is reported in Other.

For the year ended December 31, 2020, the effective tax rate on loss from continuing operations was 20.0 percent. The effective tax rate on loss from continuing operations differs from the statutory tax rate of 21 percent primarily due to $186 million related to tax effects of the Majority Interest Fortitude Sale, tax charge of $150 million associated with the establishment of U.S. federal valuation allowance related to certain tax attribute carryforwards, a $165 million net charge associated with changes in uncertain tax positions primarily driven by the accrual of IRS interest, $76 million associated with the effect of foreign operations, and $35 million of excess tax charges related to share-based compensation payments recorded through the income statement. These tax charges were partially offset by tax benefits of $379 million associated with the remeasurement of tax liabilities, penalties and interest primarily related to the IRS audit settlement for tax years 1991-2006, $101 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, and $58 million associated with tax exempt income. We also recognized a $221 million tax charge associated with reduction of net operating loss deferred tax assets in certain foreign jurisdictions, with a corresponding decrease in the related deferred tax asset valuation allowance. 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 to U.S. taxation. As discussed further below, AIG and the IRS entered into a binding settlement agreement related to tax years 1991-2006. The impact of receiving the final settlement agreement resulted in a remeasurement of tax principal, penalties and interest based on agreed upon settlement amounts.

For the year ended December 31, 2019, the effective tax rate on income from continuing operations was 22.1 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to a $96 million net charge principally related to the accrual of IRS interest (including interest related to uncertain tax positions), $82 million associated with the effect of foreign operations, $37 million of tax charges and related interest associated with increases in uncertain tax positions primarily related to open tax issues and audits in state and local jurisdictions, $27 million of excess tax charges related to share-based compensation payments recorded through the income statement, and $15 million of non-deductible transfer pricing charges, partially

320 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 22. Income Taxes

offset by tax benefits of $113 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities, $65 million associated with tax exempt income, and $44 million of valuation allowance activity related to certain foreign subsidiaries and state jurisdictions. 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 to U.S. taxation.

For the year ended December 31, 2018, the effective tax rate on income from continuing operations was 59.9 percent. The effective tax rate on income from continuing operations differs from the statutory tax rate of 21 percent primarily due to a $83 million net charge primarily related to the accrual of IRS interest (including interest related to uncertain tax positions), $62 million measurement period adjustment related to the deemed repatriation tax, $65 million associated with the effect of foreign operations, $29 million of non-deductible transfer pricing charges, and $21 million of valuation allowance activity related to certain foreign subsidiaries and state jurisdictions, partially offset by tax benefits of $75 million associated with tax exempt income, and $72 million of reclassifications from accumulated other comprehensive income to income from continuing operations related to the disposal of available for sale securities. 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 to U.S. taxation.

For the year ended December 31, 2020, we consider earnings of 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 $100 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, 2020, 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. Given the uncertainties around the impact from the COVID-19 crisis, including the significant global economic slowdown and general market decline, we continue to monitor and review its impact on our reinvestment considerations, including regulatory oversight in the relevant jurisdictions.

The following table presents the components of the net deferred tax assets (liabilities):

December 31,
(in millions)20202019
Deferred tax assets:
Losses and tax credit carryforwards$9,257$10,541
Basis differences on investments4,9112,673
Life policy reserves2,3961,766
Accruals not currently deductible, and other632743
Investments in foreign subsidiaries146148
Loss reserve discount423471
Loan loss and other reserves56058
Unearned premium reserve reduction326382
Fixed assets and intangible assets1,077963
Other-319
Employee benefits567617
Total deferred tax assets20,29518,681
Deferred tax liabilities:
Deferred policy acquisition costs**(**2,026)(2,200)
Unrealized gains related to available for sale debt securities**(**4,328)(2,123)
Other**(**221)-
Total deferred tax liabilities**(**6,575)(4,323)
Net deferred tax assets before valuation allowance13,72014,358
Valuation allowance**(**1,330)(1,427)
Net deferred tax assets (liabilities)$12,390$12,931

AIG | 2020 Form 10-K 321

ITEM 8 | Notes to Consolidated Financial Statements | 22. Income Taxes

The following table presents our U.S. consolidated income tax group tax losses and credits carryforwards as of December 31, 2020.

Unlimited
Carryforward
Period and
December 31, 2020Carryforward
TaxCarryforward Period Ending Tax Year(b)Periods(b)
(in millions)GrossEffected2021202220232024202520262027 - After
Net operating loss carryforwards$31,648$6,646$-$-$-$-$-$-$6,646
Capital loss carryforwards$---------
Foreign tax credit carryforwards1,41924683711----
Other carryforwards--------
Total AIG U.S. consolidated income
tax group tax losses and credits
carryforwards on a U.S. GAAP basis(a)$8,065$24$683$711$-$-$-$6,646

(a)Financial reporting basis is net of unrecognized tax benefits of $442 million for those tax years in which tax attributes are available for use when settlement occurs.

(b)Carryforward periods are based on U.S. tax laws governing utilization of tax attributes. Expiration periods are based on the year the carryforward was generated.

Assessment of Deferred Tax Asset Valuation Allowance

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. The more negative evidence that exists, the more positive evidence is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed.

Our framework for assessing the recoverability of the deferred tax asset requires us to consider all available evidence, including:

 the nature, frequency, and amount of cumulative financial reporting income and losses in recent years;

 the sustainability of recent operating profitability of our subsidiaries;

 the predictability of future operating profitability of the character necessary to realize the net deferred tax asset, including forecasts of future income for each of our businesses and actual and planned business and operational changes;

 the carryforward periods for the net operating loss, capital loss and foreign tax credit carryforwards, including the effect of reversing taxable temporary differences; and

 prudent and feasible actions and tax planning strategies that would be implemented, if necessary, to protect against the loss of the deferred tax asset.

In performing our assessment of the recoverability of the deferred tax asset under this framework, we consider tax laws governing the utilization of the net operating loss, capital loss and foreign tax credit carryforwards in each applicable jurisdiction. Under U.S. tax law, a company generally must use its net operating loss carryforwards before it can use its foreign tax credit carryforwards, even though the carryforward period for the foreign tax credit is shorter than for the net operating loss. Our U.S. federal consolidated income tax group includes both life companies and non-life companies. While the U.S. taxable income of our non-life companies can be offset by our net operating loss carryforwards, only a portion (no more than 35 percent) of the U.S. taxable income of our life companies can be offset by those net operating loss carryforwards. The remaining tax liability of our life companies can be offset by the foreign tax credit carryforwards. Accordingly, we are able to utilize both the net operating loss and foreign tax credit carryforwards concurrently.

Recent events, including the COVID-19 crisis, multiple reductions in target interest rates by the Board of Governors of the Federal Reserve System, and significant market volatility, continue to impact actual and projected results of our business operations as well as our views on potential effectiveness of certain prudent and feasible tax planning strategies. In order to demonstrate the predictability and sufficiency of future taxable income necessary to support the realizability of the net operating losses and foreign tax credit carryforwards, we have considered forecasts of future income for each of our businesses, including assumptions about future macro-economic and AIG-specific conditions and events, and any impact these conditions and events may have on our prudent and feasible tax planning strategies. We also subjected the forecasts to a variety of stresses of key assumptions and evaluated the effect on tax attribute utilization.

The carryforward periods of our foreign tax credit carryforwards range from tax years 2021 through 2023. Carryforward periods for our net operating losses extend from 2028 forward. However, utilization of a portion of our net operating losses is limited under separate return limitation year rules. Based on 2020 events and our analysis of their potential impact on utilization of our tax attributes, we

322 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 22. Income Taxes

concluded that a valuation allowance of $150 million should be established on a portion of our foreign tax credit carryforwards that are no longer more-likely-than-not to be realized.

Estimates of future taxable income, including income generated from prudent and feasible actions and tax planning strategies, impact of settlements with taxing authorities, and any changes to interpretations and assumptions related to the impact of the Tax Act could change in the near term, perhaps materially, which may require us to consider any potential impact to our assessment of the recoverability of the deferred tax asset. Additionally, estimates of future taxable income, including prudent and feasible tax planning strategies, may be further impacted by market developments arising from the COVID-19 crisis and uncertainty regarding its outcome. Such potential impact could be material to our consolidated financial condition or results of operations for an individual reporting period.

For the year ended December 31, 2020, recent changes in market conditions, including the COVID-19 crisis and 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, 2020, based on all available evidence, we concluded that no valuation allowance is necessary in the U.S. Life Insurance companies’ available for sale securities portfolio.

For the year ended December 31, 2020, recent changes in market conditions, including interest rate fluctuations, impacted the unrealized tax gains and losses in the U.S. non-life companies’ available for sale securities portfolio, resulting in a deferred tax liability related to net unrealized tax capital gains. As of December 31, 2020, based on all available evidence, we concluded that no valuation allowance is necessary in the U.S. non-life companies’ available for sale securities portfolio.

For the year ended December 31, 2020, we recognized a net $215 million decrease in deferred tax asset valuation allowance associated with certain foreign jurisdictions, primarily attributable to a corresponding reduction in foreign net operating loss deferred tax assets as a result of restructuring of our European business and the expiration of a portion of net operating losses prior to utilization in Japan.

The following table presents the net deferred tax assets (liabilities) at December 31, 2020 and 2019 on a U.S. GAAP basis:

December 31,
(in millions)20202019
Net U.S. consolidated return group deferred tax assets$16,502$14,622
Net deferred tax assets (liabilities) in accumulated other comprehensive income**(**4,259)(2,055)
Valuation allowance**(**237)(90)
Subtotal12,00612,477
Net foreign, state and local deferred tax assets1,7112,006
Valuation allowance**(**1,093)(1,337)
Subtotal618669
Subtotal - Net U.S., foreign, state and local deferred tax assets12,62413,146
Net foreign, state and local deferred tax liabilities**(**234)(215)
Total AIG net deferred tax assets (liabilities)$12,390$12,931

Deferred Tax Asset Valuation Allowance of U.S. Consolidated FEDERAL Income Tax Group

At December 31, 2020 and 2019, our U.S. consolidated income tax group had net deferred tax assets after valuation allowance of $12.0 billion and 12.5 billion, respectively. At December 31, 2020 and 2019, our U.S. consolidated income tax group had valuation allowances of $237 million and $90 million, respectively.

Deferred Tax ASSET – Foreign, State and Local

At December 31, 2020 and 2019, we had net deferred tax assets (liabilities) of $384 million and $454 million, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns.

At December 31, 2020 and 2019, we had deferred tax asset valuation allowances of $1.1 billion and $1.3 billion, respectively, related to foreign subsidiaries, state and local tax jurisdictions, and certain domestic subsidiaries that file separate tax returns. We maintained these valuation allowances following our conclusion that we could not demonstrate that it was more likely than not that the related deferred tax assets will be realized. This was primarily due to factors such as cumulative losses in recent years and the inability to demonstrate profits within the specific jurisdictions over the relevant carryforward periods.

AIG | 2020 Form 10-K 323

ITEM 8 | Notes to Consolidated Financial Statements | 22. Income Taxes

Tax Examinations and Litigation

We file a consolidated U.S. federal income tax return with our eligible U.S. subsidiaries. Income earned by subsidiaries operating outside the U.S. is taxed, and income tax expense is recorded, based on applicable U.S. and foreign law.

We are currently under examination for the tax years 2007 through 2013.

On August 1, 2012, we filed a motion for partial summary judgment related to the disallowance of foreign tax credits associated with cross border financing transactions in the Southern District of New York (SDNY). The SDNY denied our summary judgment motion and upon AIG’s appeal, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) affirmed the denial. AIG’s petition for certiorari to the U.S. Supreme Court from the decision of the Second Circuit was denied on March 7, 2016. As a result, the case was remanded back to the SDNY for a jury trial.

In January 2018, the parties reached non-binding agreements in principle on issues presented in the dispute. In 2019, we agreed with the IRS to execute an agreement for the tax years at issue in which AIG would waive restrictions on the assessment of additional tax related to the settlement of the underlying issues in those tax years. The litigation was stayed pending the outcome of the review process.

During the fourth quarter of 2020, the parties concluded the review process and executed a binding settlement agreement on the underlying issues in those tax years. On October 22, 2020, the Southern District dismissed the case based upon the settlement reached between AIG and the government. The parties continue to review the related interest calculations based on the settlement agreement, which will become due upon the IRS’ issuance of a Notice and Demand for Payment.

In September 2020, we received the IRS Revenue Agent Report containing agreed and disagreed issues for the audit of tax years 2007-2010. In October 2020, we filed a protest of the disagreed issues with IRS Appeals.

Accounting For Uncertainty in Income Taxes

The following table presents a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits:

Years Ended December 31,
(in millions)202020192018
Gross unrecognized tax benefits, beginning of year$4,762$4,709$4,707
Increases in tax positions for prior years455114
Decreases in tax positions for prior years**(**131)(1)(6)
Increases in tax positions for current year134-
Settlements**(**2,346)(1)(6)
Gross unrecognized tax benefits, end of year$2,343$4,762$4,709

At December 31, 2020, 2019 and 2018, our unrecognized tax benefits, excluding interest and penalties, were $2.3 billion, $4.8 billion and $4.7 billion, respectively. The activity for the year ended December 31, 2020 includes the impact of the binding settlement agreement with the IRS for tax years 1991-2006 with respect to cross border financing transactions. After remeasurement based on the settlement terms, the remaining balances of the unrecognized tax benefits, penalties and interest related to the 1991-2006 tax years are no longer presented as uncertain tax positions and were reclassified as prior year current tax payable. The activity for the year ended December 31, 2019 includes increases primarily related to open tax issues and audits in state and local jurisdictions. The activity for the year ended 2018 is not material.

At December 31, 2020, 2019 and 2018, 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 $44 million, $43 million and $38 million, respectively. Accordingly, at December 31, 2020, 2019 and 2018, the amounts of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate were $2.3 billion, $4.7 billion and $4.7 billion, respectively.

Interest and penalties related to unrecognized tax benefits are recognized in income tax expense. At December 31, 2020, 2019, and 2018, we had accrued liabilities of $286 million, $2.4 billion, and $2.2 billion, respectively, for the payment of interest (net of the federal benefit) and penalties. For the years ended December 31, 2020, 2019, and 2018, we accrued expense of $128 million, $236 million and $190 million, respectively, for the payment of interest and penalties. The activity in the fourth quarter of 2020 also includes a net decrease of $2.2 billion, which is attributable to decreases and settlements of interest and penalties associated with the completion of the IRS examination for tax years 1991-2006. During the fourth quarter of 2020, interest accrued was re-computed factoring in principal tax and penalty adjustments based on the final IRS settlement agreement, including estimated impact of interest netting which we have already formally requested.

324 AIG | 2020 Form 10-K

ITEM 8 | Notes to Consolidated Financial Statements | 22. Income Taxes

We believe it is reasonably possible that our unrecognized tax benefits could decrease within the next 12 months by as much as $1.2 billion, principally as a result of potential resolutions or settlements of prior years’ tax items. The prior years’ tax items include unrecognized tax benefits related to the deductibility of certain expenses.

Listed below are the tax years that remain subject to examination by major tax jurisdictions:

At December 31, 2020Open Tax Years
Major Tax Jurisdiction
United States2007-2019
Australia2016-2019
Canada2013-2019
France2018-2019
Japan2014-2019
Korea2015-2019
Singapore2016-2019
United Kingdom2019-2019
  1. Subsequent Events

DIVIDENDS DECLARED

On February 16, 2021, our Board of Directors declared a cash dividend on AIG Common Stock of $0.32 per share, payable on March 30, 2021 to shareholders of record on March 16, 2021. On February 16, 2021, our Board of Directors declared a cash dividend on AIG’s Series A Preferred Stock of $365.625 per share, payable on March 15, 2021 to holders of record on February 26, 2021.

DEBT REDEMPTION

On February 1, 2021, we redeemed all of our outstanding 3.300% Notes Due 2021 (the Notes), for a redemption price of 100 percent of the principal amount plus accrued and unpaid interest. As of December 31, 2020, $1.5 billion aggregate principal amount of the Notes were outstanding.

REPURCHASE OF COMMON STOCK

Pursuant to an Exchange Act Rule 10b5-1 repurchase plan, in January 2021, we repurchased approximately $92 million of additional shares of AIG Common Stock, 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. As of February 18, 2021, approximately $1.4 billion remained under our share repurchase authorization.

SALE OF CERTAIN AIG LIFE AND RETIREMENT RETAIL MUTUAL FUNDS BUSINESS

On February 8, 2021, we announced we entered into a definitive agreement with Touchstone Investments, an indirect wholly-owned subsidiary of Western & Southern Financial Group, to sell certain assets of AIG Life and Retirement’s Retail Mutual Funds business. AIG’s Life and Retirement Retail Mutual Funds business manages $7.8 billion in assets across eighteen funds as of December 31, 2020, of which twelve funds with $7.5 billion in assets would be proposed to be merged into Touchstone funds in the transaction. The closing is subject to customary approvals and is targeted for mid-2021.

AIG | 2020 Form 10-K 325

TABLE OF CONTENTS

Part II

Previous: Item 7A. Quantitative and Qualitative Disclosures about Market Risk · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure