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INVESTMENTS

6 Months Ended

Jun. 30, 2020

5. 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.

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.

Securities Available for Sale

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

		Amortized		Allowance		Gross		Gross
		Cost or		for Credit		Unrealized		Unrealized		Fair
(in millions)		Cost		Losses^(a)		Gains		Losses		Value
June 30, 2020
Bonds available for sale:
U.S. government and government sponsored entities	$	3,940	$	-	$	878	$	(16)	$	4,802
Obligations of states, municipalities and political subdivisions		13,934		-		2,082		(20)		15,996
Non-U.S. governments		13,757		(17)		971		(103)		14,608
Corporate debt		142,616		(145)		15,872		(1,578)		156,765
Mortgage-backed, asset-backed and collateralized:
RMBS		30,453		(36)		2,846		(151)		33,112
CMBS		14,294		-		841		(136)		14,999
CDO/ABS		18,351		-		296		(424)		18,223
Total mortgage-backed, asset-backed and collateralized		63,098		(36)		3,983		(711)		66,334
Total bonds available for sale^(c)	$	237,345	$	(198)	$	23,786	$	(2,428)	$	258,505

										Other-Than-
		Amortized		Gross		Gross				Temporary
		Cost or		Unrealized		Unrealized		Fair		Impairments
(in millions)		Cost		Gains		Losses		Value		in AOCI^(b)
December 31, 2019
Bonds available for sale:
U.S. government and government sponsored entities	$	5,108	$	316	$	(44)	$	5,380	$	-
Obligations of states, municipalities and political subdivisions		13,960		1,390		(32)		15,318		-
Non-U.S. governments		14,042		884		(57)		14,869		(18)
Corporate debt		138,046		12,090		(500)		149,636		7
Mortgage-backed, asset-backed and collateralized:
RMBS		29,802		3,067		(64)		32,805		1,149
CMBS		13,879		576		(25)		14,430		34
CDO/ABS		18,393		348		(93)		18,648		14
Total mortgage-backed, asset-backed and collateralized		62,074		3,991		(182)		65,883		1,197
Total bonds available for sale^(c)	$	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 the statements of income and are not recognized in other comprehensive income.

(b)Represents the amount of other-than-temporary impairments recognized in Accumulated other comprehensive income (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.

(c)At June 30, 2020 and December 31, 2019, bonds available for sale held by us that were below investment grade or not rated totaled $27.0 billion and $27.8 billion, respectively.

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 Months				12 Months or More				Total
				Gross				Gross				Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in millions)		Value		Losses		Value		Losses		Value		Losses
June 30, 2020
Bonds available for sale:
U.S. government and government sponsored entities	$	129	$	16	$	-	$	-	$	129	$	16
Obligations of states, municipalities and political
subdivisions		337		14		112		6		449		20
Non-U.S. governments		1,649		52		207		47		1,856		99
Corporate debt		22,363		1,109		1,083		222		23,446		1,331
RMBS		3,927		77		256		26		4,183		103
CMBS		2,588		128		98		8		2,686		136
CDO/ABS		8,171		288		3,086		136		11,257		424
Total bonds available for sale	$	39,164	$	1,684	$	4,842	$	445	$	44,006	$	2,129

Securities Available for Sale in a Loss Position

	Less than 12 Months				12 Months or More				Total
				Gross				Gross				Gross
		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in millions)		Value		Losses		Value		Losses		Value		Losses
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
subdivisions		672		21		246		11		918		32
Non-U.S. governments		1,105		12		343		45		1,448		57
Corporate debt		11,868		319		2,405		181		14,273		500
RMBS		3,428		28		1,367		36		4,795		64
CMBS		1,877		16		367		9		2,244		25
CDO/ABS		3,920		53		2,571		40		6,491		93
Total bonds available for sale	$	24,331	$	493	$	7,362	$	322	$	31,693	$	815

At June 30, 2020, we held 8,189 individual fixed maturity securities that were in an unrealized loss position and for which no allowance for credit losses has been recorded (including 967 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 June 30, 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.

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 Allowance		Fair Value
June 30, 2020
Due in one year or less	$	10,776	$	10,903
Due after one year through five years		41,602		42,617
Due after five years through ten years		40,483		43,482
Due after ten years		81,224		95,169
Mortgage-backed, asset-backed and collateralized		63,062		66,334
Total	$	237,147	$	258,505

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:

	Three Months Ended June 30,								Six Months Ended June 30,
		2020				2019			2020					2019
		Gross		Gross		Gross		Gross		Gross		Gross		Gross		Gross
	Realized		Realized		Realized		Realized		Realized		Realized		Realized		Realized
(in millions)		Gains		Losses		Gains		Losses		Gains		Losses		Gains		Losses
Fixed maturity securities	$	541	$	392	$	173	$	86	$	921	$	558	$	266	$	210

For the three- and six-month periods ended June 30, 2020, the aggregate fair value of available for sale securities sold was $6.7 billion and $13.9 billion, respectively, which resulted in net realized capital gains (losses) of $149 million and $363 million, respectively. Included within the net realized capital gains (losses) are $122 million of realized capital gains for the three- and six-month periods ended June 30, 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 three- and six-month periods ended June 30, 2019, the aggregate fair value of available for sale securities sold was $6.4 billion and $12.8 billion, respectively, which resulted in net realized capital gains of $87 million and $56 million, respectively.

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 and equity securities measured at fair value:

		June 30, 2020				December 31, 2019
		Fair	Percent			Fair	Percent
(in millions)		Value	of Total			Value	of Total
Fixed maturity securities:
U.S. government and government sponsored entities	$	1,912	31	%	$	2,121	28	%
Corporate debt		11	-			18	-
Mortgage-backed, asset-backed and collateralized:
RMBS		510	9			489	7
CMBS		303	5			322	4
CDO/ABS and other collateralized		2,701	44			3,732	50
Total mortgage-backed, asset-backed and collateralized		3,514	58			4,543	61
Total fixed maturity securities		5,437	89			6,682	89
Equity securities		679	11			841	11
Total	$	6,116	100	%	$	7,523	100	%

Other Invested Assets

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

		June 30,		December 31,
(in millions)		2020		2019
Alternative investments^{(a) (b)}	$	7,987	$	8,845
Investment real estate^(c)		8,164		8,491
All other investments^(d)		1,541		1,456
Total	$	17,692	$	18,792

(a)At June 30, 2020, included hedge funds of $2.2 billion, private equity funds of $5.5 billion and affordable housing partnerships of $279 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 June 30, 2020, approximately 77 percent of our hedge fund portfolio is available for redemption in 2020. The remaining 23 percent will be available for redemption between 2021 and 2027.

(c)Net of accumulated depreciation of $749 million and $703 million at June 30, 2020 and December 31, 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 June 30, 2020.

Net Investment Income

The following table presents the components of Net investment income:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2020		2019		2020		2019
Available for sale fixed maturity securities, including short-term investments	$	2,588	$	2,701	$	5,197	$	5,354
Other fixed maturity securities^(a)		374		281		314		608
Equity securities		56		(22)		(135)		57
Interest on mortgage and other loans		498		518		1,011		1,016
Alternative investments^(b)		(73)		345		(132)		764
Real estate		61		62		120		131
Other investments^(c)		1		(8)		(214)		(60)
Total investment income		3,505		3,877		6,161		7,870
Investment expenses		139		132		287		246
Net investment income^(d)	$	3,366	$	3,745	$	5,874	$	7,624

(a)Included in the three- and six-month periods ended June 30, 2020 were income of $29 million and $198 million, respectively, related to fixed maturity securities measured at fair value that economically hedge liabilities described in (c) below. Included in the three- and six-month periods ended June 30, 2019 were income of $21 million and $49 million, respectively, for fixed maturity securities measured at fair value through income that economically hedge liabilities as 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 three- and six-month periods ended June 30, 2020 were losses of $13 million and $215 million, respectively, related to liabilities measured at fair value that are economically hedged with fixed maturity securities as described in (a) above. Included in the three- and six-month periods ended June 30, 2019 were losses of $31 million and $46 million, respectively, related to liabilities measured at fair value that are economically hedged with fixed maturity securities as described in (a) above.

(d)Included in both the three- and six-month periods ended June 30, 2020 was $116 million of Net investment income from Fortitude Re funds withheld assets. For additional information on the Fortitude Re transaction, see Note 7 to the Condensed Consolidated Financial Statements

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 or full redemptions 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 derivatives 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.

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2020		2019		2020		2019
Sales of fixed maturity securities	$	27	$	87	$	241	$	56
Other-than-temporary impairments		-		(30)		-		(113)
Change in intent^(a)		(3)		-		(3)		-
Change in allowance for credit losses on fixed maturity securities^(b)		(24)		-		(222)		-
Change in allowance for credit losses on loans^(b)		(22)		14		(60)		(10)
Foreign exchange transactions		44		(2)		(210)		(39)
Variable annuity embedded derivatives, net of related hedges		(1,010)		(40)		1,182		(301)
All other derivatives and hedge accounting		(568)		207		991		135
Fortitude Re funds withheld assets^(b)		(741)		-		(741)		-
Other		(35)		168		9		230
Net realized capital gains (losses)	$	(2,332)	$	404	$	1,187	$	(42)

(a)For the three- and six-month periods ended June 30, 2019, the change in intent was included in Other-than-temporary impairments.

(b)The change in allowance for credit losses on fixed maturity securities excludes increases in the allowance of $5 million for the three- and six-month periods ended June 30, 2020, and the change in allowance for credit losses on loans excludes decreases in the allowance of $3 million for the three- and six-month periods ended June 30, 2020, which are reported in the Fortitude Re funds withheld assets line as these changes in the allowance relate to Fortitude Re funds withheld assets. For additional information on the Fortitude Re transaction, see Note 7 to the Condensed Consolidated Financial Statements.

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:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)		2020		2019		2020		2019
Increase (decrease) in unrealized appreciation (depreciation) of investments:
Fixed maturity securities	$	13,957	$	5,906	$	3,502	$	11,888
Other investments		-		1		-		(68)
Total increase (decrease) in unrealized appreciation (depreciation) of investments	$	13,957	$	5,907	$	3,502	$	11,820

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:

Three Months Ended June 30,	2020						2019
				Other						Other
			Invested						Invested
(in millions)		Equities		Assets		Total		Equities		Assets		Total
Net gains and losses recognized during the period on equity securities	$	56	$	(71)	$	(15)	$	(22)	$	271	$	249
Less: Net gains and losses recognized during the period on equity
securities sold during the period		5		13		18		(7)		146		139
Unrealized gains and losses recognized during the reporting
period on equity securities still held at the reporting date	$	51	$	(84)	$	(33)	$	(15)	$	125	$	110

Six Months Ended June 30,	2020						2019
				Other						Other
			Invested						Invested
(in millions)		Equities		Assets		Total		Equities		Assets		Total
Net gains and losses recognized during the period on equity securities	$	(135)	$	(200)	$	(335)	$	57	$	510	$	567
Less: Net gains and losses recognized during the period on equity
securities sold during the period		17		15		32		12		156		168
Unrealized gains and losses recognized during the reporting
period on equity securities still held at the reporting date	$	(152)	$	(215)	$	(367)	$	45	$	354	$	399

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 were 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 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).

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:

	Three Months Ended June 30, 2020						Six Months Ended June 30, 2020
				Non-						Non-
(in millions)	Structured		Structured			Total	Structured		Structured			Total
Balance, beginning of period*	$	37	$	174	$	211	$	7	$	-	$	7
Additions:
Securities for which allowance for credit losses were not
previously recorded		11		82		93		35		256		291
Purchases of available for sale debt securities accounted for
as purchased credit deteriorated assets		20		-		20		26		-		26
Accretion of available for sale debt securities accounted for
as purchased credit deteriorated assets		1		-		1		1		-		1
Reductions:
Securities sold during the period		(1)		(5)		(6)		(1)		(5)		(6)
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		(31)		(33)		(64)		(31)		(33)		(64)
Write-offs charged against the allowance		-		(57)		(57)		-		(57)		(57)
Recoveries of amounts previously written off		-		-		-		-		-		-
Other		-		-		-		-		-		-
Balance, end of period	$	37	$	161	$	198	$	37	$	161	$	198

* 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:

	Three Months Ended		Six Months Ended
(in millions)	June 30, 2019		June 30, 2019
Balance, beginning of period	$	53	$	-
Increases due to:
Credit impairments on new securities subject to impairment losses		27		95
Additional credit impairments on previously impaired securities		-		6
Reductions due to:
Credit impaired securities fully disposed for which there was no
prior intent or requirement to sell		(38)		(59)
Accretion on securities previously impaired due to credit^*		(8)		(8)
Balance, end of period	$	34	$	34

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.

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; andExpected 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 three- and six-month periods ended June 30, 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 June 30, 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 six-month period ended June 30, 2020:

(in millions)	June 30, 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.

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 securities		19,382

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

(in millions)	December 31, 2019
Outstanding principal balance	$	10,476
Amortized cost		6,970
Fair value		8,664

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

	Three Months Ended		Six Months Ended
(in millions)	June 30, 2019		June 30, 2019
Balance, beginning of period	$	6,801		$	7,210
Newly purchased PCI securities		1			13
Accretion		(151)			(323)
Effect of changes in interest rate indices		(266)			(400)
Net reclassification from (to) non-accretable difference,
including effects of prepayments		17			(98)
Balance, end of period	$	6,402		$	6,402

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)		June 30, 2020		December 31, 2019
Fixed maturity securities available for sale	$	3,019	$	3,030

At June 30, 2020 and December 31, 2019, amounts borrowed under repurchase and securities lending agreements totaled $3.0 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
(in millions)	Overnight and Continuous			up to 30 days		31 - 90 days		91 - 364 days		365 days or greater		Total
June 30, 2020
Bonds available for sale:
Non-U.S. governments	$	9	$	16	$	-	$	-	$	-	$	25
Corporate debt		57		110		-		-		-		167
Total	$	66	$	126	$	-	$	-	$	-	$	192

December 31, 2019
Bonds available for sale:
Non-U.S. governments	$	2	$	71	$	-	$	-	$	-	$	73
Corporate debt		22		55		82		-		-		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
(in millions)		Overnight and Continuous		up to 30 days		31 - 90 days		91 - 364 days		365 days or greater		Total
June 30, 2020
Bonds available for sale:
Obligations of states, municipalities and political
subdivisions	$	-	$	102	$	-	$	-	$	-	$	102
Corporate debt		-		814		1,102		436		-		2,352
RMBS		-		277		-		96		-		373
Total	$	-	$	1,193	$	1,102	$	532	$	-	$	2,827

December 31, 2019
Bonds available for sale:
Obligations of states, municipalities and political
subdivisions	$	-	$	-	$	386	$	-	$	-	$	386
Corporate debt		-		1,071		947		-		-		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)		June 30, 2020		December 31, 2019
Securities collateral pledged to us	$	5,560	$	2,567
Amount sold or repledged by us		-		121

At June 30, 2020 and December 31, 2019, amounts loaned under reverse repurchase agreements totaled $5.5 billion and $2.6 billion, respectively.

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 $10.8 billion and $8.7 billion at June 30, 2020 and December 31, 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 $198 million and $194 million of stock in FHLBs at June 30, 2020 and December 31, 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 $5.9 billion and $1.9 billion, respectively, at June 30, 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 June 30, 2020 and December 31, 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 $460 million and $330 million, comprised of bonds available for sale and short term investments at June 30, 2020 and December 31, 2019, respectively.

Reinsurance transactions between AIG and Fortitude Re were structured as modified coinsurance (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 7 to the Condensed Consolidated Financial Statements.