BUSINESS COMBINATION

9 Months Ended

Sep. 30, 2018

4. 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. This transaction was made with the intent to strengthen our global General Insurance business by expanding our current product portfolio through additional distribution channels and advancing the tools available to enhance underwriting. The impact of the acquisition on Total revenues, Net income (loss), and Net income (loss) attributable to AIG was $756 million, $(105) million, and $(105) million, respectively, for both the three- and nine-month periods ended September 30, 2018. Integration and transaction costs associated with the acquisition of Validus were $91 million for both the three- and nine-month periods ending September 30, 2018 and are included in General operating and other expenses in our Consolidated Statement of Income.

As part of the purchase, we guaranteed 6,000 issued and outstanding 5.875% Non-Cumulative Preference Shares, Series A (the Series A Preference Shares) and 10,000 issued and outstanding 5.800% Non-Cumulative Preference Shares, Series B (together with the Series A Preference Shares, the Preference Shares). On September 27, 2018, we provided notice to the preference shareholders that on October 30, 2018 (the Redemption Date), we will redeem all of the Preference Shares at a redemption price of $26,000 per Preference Share, plus all declared and unpaid dividends, if any, up to, but excluding, the Redemption Date. Accordingly, as of September 30, 2018, the Preference Shares are included within Other liabilities on our Condensed Consolidated Balance Sheet.

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 Manager). AlphaCat Manager is an asset manager primarily for third party investors and in connection with the issuance of ILS invests in AlphaCat funds which are considered variable interest entities (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 approximated $128 million at September 30, 2018, in Other Invested Assets in the Condensed Consolidated Balance Sheet.

The following table summarizes the estimated provisional fair values of major classes of identifiable assets acquired and liabilities assumed as of July 18, 2018:

(in millions)		July 18, 2018
Identifiable net assets:
Investments	$	6,613
Cash		330
Premiums and other receivables		2,130
Reinsurance assets		1,692
Value of business acquired*		298
Deferred income taxes		63
Other assets, including restricted cash of $93		1,008
Liability for unpaid claims and claims adjustment expense		(4,138)
Unearned premiums		(2,083)
Long-term debt		(1,106)
Other liabilities		(913)
Preference shares		(416)
Total identifiable net assets acquired		3,478
Cash consideration paid		5,475
Goodwill recognized from acquisition	$	1,997

* Reported in Deferred policy acquisition costs in the Condensed Consolidated Balance Sheet.

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.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)		2018		2017*		2018*		2017*
Total revenues	$	11,486	$	12,418	$	36,028	$	38,752
Net income (loss)		(1,259)		(1,958)		576		571
Net income (loss) attributable to AIG		(1,259)		(1,984)		571		531

Income (loss) per common share attributable to AIG:
Basic:
Net income (loss) attributable to AIG		(1.41)		(2.18)		0.63		0.57
Diluted:
Net income (loss) attributable to AIG		(1.41)		(2.18)		0.62		0.55

* 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.

The following table presents details of the identified intangible assets acquired:

			Estimated Weighted
(in millions, except years)		Fair Value	Average Useful Life
Definite lived intangibles
Value of distribution network acquired^(a)(b)	$	444	15 years
Value of business acquired^(c)		298	2 years
Indefinite lived intangibles^(a)
Syndicate capacity		193
Other		75
Total	$	1,010

(a) Reported in Other assets in the Condensed Consolidated Balance Sheet.

(b) Amortization is reported in General operating and other expenses in the Condensed Consolidated Statement of Income (Loss).

(c) Reported in Deferred policy acquisition costs in the Condensed Consolidated Balance Sheet and Amortization of deferred policy acquisition costs in the Condensed Consolidated Statement of Income (Loss).