HELD-FOR-SALE CLASSIFICATION

3 Months Ended

Mar. 31, 2020

HELD-FOR-SALE CLASSIFICATION

HELD-FOR-SALE CLASSIFICATION

4. Held-For-Sale Classification

Held-For-Sale Classification

We report and classify a business as held-for-sale (Held-For-Sale Business) when management has approved the sale or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the next 12 months and certain other specified criteria are met. A Held-For-Sale Business is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized.

Assets and liabilities related to Held-For-Sale Business are reported in Other assets and Other liabilities, respectively, in our Consolidated Balance Sheets beginning in the period in which the business is classified as held-for-sale.

At March 31, 2020, the following business was reported and classified as held-for-sale:

Fortitude Holdings

Fortitude Re was established during the first quarter of 2018 in connection with a series of affiliated reinsurance transactions related to our Legacy Portfolio. Those reinsurance transactions were designed to consolidate most of our Legacy Insurance Run-Off Lines into a single legal entity. As of March 31, 2020, the affiliated transactions included the cession of approximately $30.1 billion of reserves from our Legacy Life and Retirement Run-Off Lines and approximately $3.8 billion of reserves from our Legacy General Insurance Run-Off Lines related to business written by multiple wholly-owned AIG subsidiaries. Fortitude Re has approximately $2.7 billion of total assets after elimination of intercompany balances, primarily managed by AIG, and is AIG’s main run-off reinsurer with its own dedicated management team. In the second quarter of 2018, the Company formed Fortitude Holdings as the holding company for Fortitude Re.

On November 13, 2018, AIG completed the sale of a 19.9 percent ownership interest in Fortitude Holdings to TCG, an affiliate of Carlyle. Upon completion of the 2018 Fortitude Sale, Fortitude Holdings owned 100 percent of the outstanding common shares of Fortitude Re and AIG had an 80.1 percent ownership interest in Fortitude Holdings. We received $381 million in cash and will receive up to $95 million of deferred compensation following December 31, 2023, which is subject to a purchase price adjustment wherein AIG will reimburse TCG for adverse development in property casualty related reserves, based on an agreed methodology, that occurs on or prior to December 31, 2023, up to the value of TCG’s investment in Fortitude. Any amount due to TCG in respect of this purchase price adjustment will be offset by the amount of the $95 million otherwise due from TCG to AIG. To the extent we do not receive all or a portion of the planned distributions by May 13, 2020, TCG will pay us up to an additional $100 million, which amount shall adjust in proportion with the amount of the dividend received by AIG. In connection with the 2018 Fortitude Sale, we agreed to certain investment commitment targets into various Carlyle strategies and to certain minimum investment management fee payments within thirty-six months following the closing. We also will be required to pay a proportionate amount of an agreed make-whole fee to the extent we fail to satisfy such investment commitment targets.

On November 25, 2019, AIG entered into a membership interest purchase agreement with Fortitude Holdings, Carlyle, Carlyle FRL, T&D and T&D Holdings, Inc., pursuant to which, subject to the satisfaction or waiver of certain conditions set forth therein, Carlyle FRL will purchase from AIG a 51.6 percent ownership interest in Fortitude Holdings and T&D will purchase from AIG a 25 percent ownership interest in Fortitude Holdings. Upon closing of the Majority Interest Fortitude Sale, AIG will have a 3.5 percent ownership interest in Fortitude Holdings. The purchase price under 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 payment of $500 million. In connection with the Majority Interest Fortitude Sale agreement, AIG, Fortitude Holdings and TCG have agreed that, effective as of the closing of the Majority Interest Fortitude Sale, (i) AIG’s aforementioned investment commitment targets will be assumed by Fortitude Holdings and AIG will be released therefrom, (ii) the purchase price adjustment that AIG had agreed to provide TCG in the 2018 Fortitude Sale will be terminated, and (iii) Carlyle will remain obligated to pay AIG $95 million of deferred compensation at December 31, 2023 and up to an additional $100 million to the extent AIG does not receive all or a portion of the planned distributions by May 13, 2020, which amount shall adjust in proportion with the amount of the dividend received by AIG. We expect to contribute approximately $1.45 billion of the proceeds of the Majority Interest Fortitude Sale to certain of our insurance company subsidiaries for a period of time following the closing of the transaction. There can be no guarantee that we will receive the required regulatory approvals or that closing conditions will be satisfied in order to consummate the Majority Interest Fortitude Sale.

We recorded a loss of $98 million in 2019 in respect of our interest in Fortitude Holdings, which was recorded as a contra-asset within assets held for sale line below.

The transaction is expected to close in mid-2020, subject to required regulatory approvals and other customary closing conditions.

The following table summarizes the components of assets and liabilities held-for-sale on the Consolidated Balance Sheets after elimination of intercompany balances:

		March 31,		December 31,
(in millions)		2020		2019
Assets:
Bonds available for sale	$	2,308	$	2,187
Other bond securities		13		13
Other invested assets		58		45
Short-term investments		63		107
Cash		54		63
Accrued investment income		20		19
Deferred income taxes		(11)		(22)
Other assets		152		106
Assets of business held for sale		2,657		2,518
Less: Loss accrual		(98)		(98)
Total assets held for sale	$	2,559	$	2,420
Liabilities:
Other liabilities	$	14	$	15
Total liabilities held for sale	$	14	$	15

The affiliated reinsurance transactions executed in the first quarter of 2018 with Fortitude Re resulted in prepaid insurance assets on the ceding subsidiaries’ balance sheets of approximately $2.5 billion (after-tax) and related deferred acquisition costs of $0.5 billion (after-tax) at inception of the contract. The prepaid insurance assets have been eliminated in AIG’s consolidated financial statements since the counterparties were wholly owned.

Upon closing of the Majority Interest Fortitude Sale, AIG will recognize a loss for the portion of the unamortized balance of these assets that are not recoverable, if any, when AIG is no longer a controlling shareholder in Fortitude Holdings. As of March 31, 2020, the unamortized balances of the aforementioned prepaid insurance assets and related deferred acquisition costs were $2.2 billion (after-tax) and $0.4 billion (after-tax), respectively. As of December 31, 2019, the unamortized balances of the aforementioned prepaid insurance assets and related deferred acquisition costs were $2.3 billion (after-tax) and $0.4 billion (after-tax), respectively. The combined loss of $2.6 billion for the three-month period ended March 31, 2020 would be incremental to any gain or loss recognized on the Majority Interest Fortitude Sale. The incremental gain or loss we will recognize on the Majority Interest Fortitude Sale would be impacted, perhaps significantly, by market conditions existing at the time the Majority Interest Fortitude Sale closes.