REINSURANCE

9 Months Ended

Sep. 30, 2021

REINSURANCE

REINSURANCE

7. 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 September 30, 2021, approximately $29.9 billion of reserves from AIG’s Life and Retirement Run-Off Lines and approximately $3.8 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. Additionally, the Majority Interest Fortitude Sale was subject to a post-closing purchase price adjustment pursuant to which AIG would pay Fortitude Re for certain adverse development in property casualty related reserves, based on an agreed methodology, that may occur through December 31, 2023, up to a maximum payment of $500 million. Effective in the second quarter of 2021, AIG, Fortitude Holdings, Carlyle FRL, T&D and Carlyle amended the purchase agreement to finalize the post-closing purchase price adjustment for adverse reserve development. As a result of this amendment, during the nine months ended September 30, 2021, AIG recorded a $21 million benefit through Policyholder benefits and losses incurred and eliminated further net exposure to adverse development on the reserves ceded to Fortitude Re.

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 (loss)). 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 Net realized 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:

	September 30, 2021				December 31, 2020
	Carrying			Fair	Carrying			Fair
(in millions)		Value		Value		Value		Value	Corresponding Accounting Policy
Fixed maturity securities - available for sale(a)	$	33,457	$	33,457	$	36,047	$	36,047	Fair value through other comprehensive income (loss)
Fixed maturity securities - fair value option		158		158		200		200	Fair value through net investment income
Commercial mortgage loans		3,732		3,968		3,679		4,010	Amortized cost
Real estate investments		245		508		358		585	Amortized cost
Private equity funds / hedge funds		1,465		1,465		1,168		1,168	Fair value through net investment income
Policy loans		384		384		413		413	Amortized cost
Short-term investments		55		55		34		34	Fair value through net investment income
Funds withheld investment assets		39,496		39,995		41,899		42,457
Derivative assets, net(b)		47		47		(1)		(1)	Fair value through net realized gains (losses)
Other(c)		846		846		604		604	Amortized cost
Total	$	40,389	$	40,888	$	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 $(2.1) billion ($(1.6) billion after-tax) for the nine months ended September 30, 2021 and $1.0 billion ($812 million after-tax) during the post deconsolidation period (June 2, 2020 - December 31, 2020).

(b) The derivative assets and liabilities have been presented net of cash collateral. The derivative assets and liabilities supporting the Fortitude Re funds withheld arrangements had a fair market value of $304 million and $12 million, respectively, as of September 30, 2021. 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 and liabilities are fully collateralized either by cash or securities.

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

The impact of the funds withheld arrangements with Fortitude Re was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)	2021		2020		2021		2020
Net underwriting income(a)	$	-	$	-	$	-	$	-
Net investment income - Fortitude Re funds withheld assets		495		458		1,488		574
Net realized gains (losses) on Fortitude Re funds withheld assets:
Net realized gains - Fortitude Re funds withheld assets		190		32		536		128
Net realized gains (losses) - Fortitude Re embedded derivatives		(209)		(656)		117		(1,493)
Net realized gains (losses) on Fortitude Re funds withheld assets		(19)		(624)		653		(1,365)
Income (loss) from continuing operations before income tax expense (benefit)		476		(166)		2,141		(791)
Income tax expense (benefit)(b)		99		(35)		449		(166)
Net income (loss)		377		(131)		1,692		(625)
Change in unrealized appreciation (depreciation) of all other investments(b)		(360)		132		(1,645)		570
Comprehensive income (loss)	$	17	$	1	$	47	$	(55)

(a) Effective in the second quarter of 2021, an amendment was made to the purchase agreement to finalize the post-closing purchase price adjustment for adverse reserve development and as a result, during the nine months ended September 30, 2021, AIG recognized a $21 million benefit through Policyholder benefits and losses incurred.

(b) The income tax expense (benefit) and the tax impact in AOCI 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 arrangements and the appreciation of these assets is the primary driver of the comprehensive income (loss) reflected above.

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, reinsurance recoverables). 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.

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 September 30, 2021 were $76.8 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 6 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 September 30, 2021, approximately 74 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:

Three Months Ended September 30,	2021						2020
		General		Life and				General		Life and
(in millions)	Insurance		Retirement			Total	Insurance		Retirement			Total
Balance, beginning of period	$	287	$	87	$	374	$	305	$	59	$	364
Addition to (release of) allowance for expected credit losses and disputes, net		5		15		20		(2)		2		-
Write-offs charged against the allowance for credit losses and disputes		(8)		-		(8)		-		-		-
Other changes		2		-		2		5		1		6
Balance, end of period	$	286	$	102	$	388	$	308	$	62	$	370

Nine Months Ended September 30,	2021						2020
		General		Life and				General		Life and
(in millions)	Insurance		Retirement			Total	Insurance		Retirement			Total
Balance, beginning of year	$	292	$	83	$	375	$	111	$	40	$	151
Initial allowance upon CECL adoption		-		-		-		202		22		224
Addition to (release of) allowance for expected credit losses and disputes, net		5		19		24		-		5		5
Write-offs charged against the allowance for credit losses and disputes		(15)		-		(15)		(5)		(5)		(10)
Other changes		4		-		4		-		-		-
Balance, end of period	$	286	$	102	$	388	$	308	$	62	$	370

There were no material recoveries of credit losses previously written off for either of the three- or nine-month periods ended September 30, 2021. There were no recoveries of credit losses previously written off for either of the three- or nine-month periods ended September 30, 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.