AIG(AIG) - 2022 Q4 - Annual Report

Part I Business AIG is a global insurance organization providing property casualty, life, and retirement solutions across 70 countries, operating through General Insurance, Life and Retirement, and Other Operations segments - AIG is a leading global insurance organization providing property casualty insurance, life insurance, retirement solutions, and other financial services to customers in approximately 70 countries and jurisdictions[5] 2022 Performance Highlights | Category | Detail | | :--- | :--- | | Strategic Initiatives | Completed the IPO of Corebridge Financial, Inc., the largest U.S. IPO in 2022. Achieved the $1 billion exit run-rate savings goal from the AIG 200 program six months ahead of schedule | | Capital Management | Reduced general borrowings by $9.4 billion, repurchased $5.1 billion of AIG Common Stock, and paid $1.0 billion in dividends | | General Insurance Performance | Achieved $2.0 billion in underwriting income, a 94% year-over-year increase. The 2022 combined ratio was 91.9, an improvement from 95.8 in 2021 | - AIG reports its business through three segments: General Insurance, Life and Retirement, and Other Operations[10] - As of December 31, 2022, AIG had approximately 26,200 employees, with 34% in North America, 43% in the Asia Pacific region, and 23% in EMEA and Latin America[15] Regulation AIG's insurance subsidiaries are extensively regulated across jurisdictions, primarily for policyholder protection, covering financial condition, market conduct, and corporate governance - AIG's (re)insurance subsidiaries are subject to extensive regulation and supervision, which primarily relates to financial condition, corporate conduct, and market conduct activities for the protection of policyholders[19][20] - In the U.S., the New York State Department of Financial Services (NYDFS) is AIG's lead state regulator and leads the Supervisory College meetings of AIG's key global regulatory bodies[23] - AIG is subject to various data privacy and cybersecurity laws, including the NAIC Insurance Data Security Model Law, NYDFS cybersecurity regulations, California's CCPA/CPRA, and the EU's GDPR, which impose significant obligations for protecting personal information and reporting data breaches[31][32] - Regulators are increasing scrutiny on climate change and other ESG issues, with proposed SEC rule changes requiring extensive climate-related disclosures in periodic reports[34] Risk Factors AIG faces diverse material risks, including economic deterioration, geopolitical tensions, interest rate fluctuations, insurance reserve adequacy, catastrophic events, investment portfolio concentrations, liquidity constraints, operational challenges, and regulatory changes Market Conditions AIG's business is highly sensitive to global economic and market conditions, where deterioration, geopolitical tensions, or interest rate fluctuations can significantly impact profitability and asset valuations - Deterioration of economic conditions, geopolitical tensions, and market volatility may materially affect AIG's business by causing a poor operating environment, reduced business volumes, and declines in asset valuations[47][57] - Changes in interest rates have materially and adversely affected profitability, with rising rates decreasing fixed-income portfolio fair value and increasing policy surrenders, while sustained low rates negatively affect investment performance and compress spreads[47][58] Reserves and Exposures AIG faces significant uncertainty in estimating insurance claims, potential reinsurance unavailability or credit risk, and substantial exposure to catastrophic events, including those exacerbated by climate change - Estimating insurance and reinsurance liability claims is difficult, and claims may exceed established reserves, especially for long-tail liability lines of business[48][61] - Reinsurance may be unavailable or too expensive, and AIG is exposed to credit risk if reinsurers fail to make timely payments, with limited availability of terrorism reinsurance[48][62] - Climate change may adversely affect AIG's business by increasing the frequency and severity of natural disasters, impacting underwriting models, and affecting the value of its investment portfolio[48][65] - AIG has significant exposure to Fortitude Re, which reinsured approximately $29.0 billion of Life and Retirement reserves and $3.2 billion of General Insurance reserves, where failure to perform could materially impact AIG's results[48][67] Business and Operations AIG's operational risks include the successful separation of Corebridge, challenges in product pricing and guarantee management, foreign operation exposures, cybersecurity threats, and reliance on third-party providers - The separation of the Life and Retirement business (Corebridge) involves risks, with no assurance of completion or expected benefits, and AIG will have continuing equity market exposure until its stake is fully divested[52][78] - AIG is exposed to significant risks from its reliance on critical technology systems and the need to safeguard data, where a system failure, cyberattack, or data breach could compromise business conduct and lead to regulatory sanctions and financial loss[52][81] - The company relies on third-party providers for a broad range of services, including investment management, policy administration, and IT functions, where failure to perform could adversely affect business and operations[52][85] - The COVID-19 pandemic has adversely affected AIG's business through capital market volatility, increased mortality claims, and an inflationary environment, with its ultimate impact remaining uncertain[52][88] Regulation AIG's heavily regulated businesses face risks from changing laws, increased capital requirements, and new tax laws, potentially limiting the utilization of significant tax loss carryforwards - AIG's operations are subject to extensive and potentially conflicting laws and regulations in the jurisdictions where it operates, which can affect operations, increase capital requirements, and reduce profitability[54][92] - An "ownership change" as defined in Section 382 of the Internal Revenue Code could significantly limit AIG's ability to utilize its approximately $24.8 billion in U.S. federal net operating loss carryforwards and $22 million in foreign tax credits[54][93] - The recently enacted Inflation Reduction Act (IRA) establishes a new 15% corporate alternative minimum tax (CAMT) and a 1% excise tax on stock repurchases, which may impact AIG's after-tax earnings and cash flow starting in 2023[54][94] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities AIG's common stock is listed on the NYSE, with $780 million in repurchases during Q4 2022, and its five-year cumulative total shareholder return was 21.89%, outperforming the S&P 500 Life & Health Insurance Index but underperforming broader indices Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Shares Repurchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | Oct 1-31 | 4,698,357 | 51.97 | | Nov 1-30 | 3,793,917 | 60.21 | | Dec 1-31 | 4,896,176 | 62.59 | | Total | 13,388,450 | 58.19 | - As of December 31, 2022, approximately $3.8 billion remained under the Board of Directors' authorization for the repurchase of AIG Common Stock[105] Five-Year Cumulative Total Shareholder Return (Value of $100 Invested on Dec 31, 2017) | Index | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | AIG | $100.00 | $67.91 | $90.72 | $69.62 | $107.16 | $121.89 | | S&P 500 | $100.00 | $95.62 | $125.72 | $148.85 | $191.58 | $156.88 | | S&P 500 P&C Insurance | $100.00 | $95.31 | $119.97 | $128.31 | $153.05 | $181.93 | | S&P 500 Life & Health Insurance | $100.00 | $79.23 | $97.60 | $88.35 | $120.76 | $133.25 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on AIG's financial condition and results of operations for 2022, highlighting strategic moves, economic impacts, consolidated and segment performance, investment portfolio, insurance reserves, liquidity, capital resources, and enterprise risk management Executive Summary AIG's 2022 was marked by strategic actions, including the Corebridge IPO and deepened asset management partnerships with Blackstone and BlackRock, all within a challenging market environment of rising interest rates, inflation, and geopolitical tensions - On September 19, 2022, AIG closed the IPO of 12.4% of Corebridge Financial, Inc., raising approximately $1.7 billion in gross proceeds and recording a $608 million increase to shareholder's equity[170] - AIG entered into long-term asset management relationships with Blackstone to manage up to $92.5 billion for Corebridge and with BlackRock to manage over $150 billion of investments for AIG and Corebridge[171][172] - The Russia/Ukraine conflict, which began in February 2022, has the potential to adversely affect AIG's business from an investment, underwriting, and operational perspective, with the company actively monitoring the evolving situation[176] - As of December 31, 2022, 64% of the aggregate fixed account values of Individual and Group Retirement annuity products were crediting at the contractual minimum guaranteed interest rate[181] Consolidated Results of Operations For 2022, AIG reported net income attributable to common shareholders of $10.2 billion, an increase driven by a gain on the Fortitude Re embedded derivative and higher General Insurance underwriting income, partially offset by lower net investment income and the absence of a prior year gain Consolidated Results of Operations (in millions) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total Revenues | $56,437 | $52,057 | | Total Benefits, Losses and Expenses | $42,155 | $39,958 | | Income from Continuing Operations | $11,276 | $9,923 | | Net Income Attributable to AIG Common Shareholders | $10,247 | $9,359 | - The increase in net income was primarily driven by an $8.1 billion increase in Net realized gains on the Fortitude Re funds withheld embedded derivative and a $1.1 billion increase in underwriting income in General Insurance[193] - The effective tax rate on income from continuing operations was 21.0% in 2022, compared to 18.0% in 2021, with the increase primarily attributable to higher income from continuing operations[194] Book Value Per Common Share | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Book value per common share | $53.83 | $79.97 | | Adjusted book value per common share (Non-GAAP) | $73.87 | $68.83 | Business Segment Operations In 2022, General Insurance adjusted pre-tax income slightly increased to $4.4 billion due to strong underwriting, while Life and Retirement adjusted pre-tax income decreased to $2.7 billion due to lower alternative investment returns, and Other Operations improved its pre-tax loss to $1.9 billion Adjusted Pre-tax Income (Loss) by Segment (in millions) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | General Insurance | $4,430 | $4,359 | | Life and Retirement | $2,657 | $3,911 | | Other Operations | $(1,947) | $(2,350) | | Total Adjusted Pre-tax Income | $5,140 | $5,920 | Investments AIG's investment strategy focuses on income generation and capital preservation, but 2022 saw significant net unrealized losses of $47.7 billion in fixed maturity securities due to rising interest rates and lower net investment income from alternative investments - A significant rise in interest rates and widening credit spreads resulted in net unrealized losses in the available for sale fixed security portfolio of $47.7 billion during 2022, decreasing from a net unrealized gain of $18.1 billion at year-end 2021 to a net unrealized loss of $29.7 billion at year-end 2022[284] Fixed Maturity Security Portfolio by NAIC Designation (Fair Value, in millions) | NAIC Designation | Fair Value (Dec 31, 2022) | | :--- | :--- | | 1 (Highest Quality) | $139,048 | | 2 (High Quality) | $74,377 | | Total Investment Grade | $213,425 | | 3 - 6 (Below Investment Grade) | $17,195 | | Total | $230,620 | - Net realized gains were $9.0 billion in 2022, a significant increase from $2.2 billion in 2021, driven by a $7.5 billion gain on the Fortitude Re funds withheld embedded derivative, partially offset by a $1.2 billion net loss on sales of fixed maturity securities[322] Insurance Reserves As of December 31, 2022, AIG's net liability for unpaid losses and loss adjustment expenses was $43.1 billion, with favorable prior year loss reserve development of $523 million in 2022, while Life and Retirement experienced a net unfavorable impact from actuarial assumption updates due to higher interest rates Net Loss Reserves by Segment (in millions) | Segment | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | General Insurance | $42,434 | $43,146 | | Other Operations Run-Off | $631 | $667 | | Total | $43,065 | $43,813 | - In 2022, AIG recognized favorable prior year loss reserve development of $523 million, compared to favorable development of $115 million in 2021[329] - The annual update of actuarial assumptions for Life and Retirement products resulted in a net unfavorable impact to adjusted pre-tax income of $57 million in 2022, primarily in fixed annuities driven by the impact of higher interest rates on expected lapses[348] Liquidity and Capital Resources AIG maintains liquidity through subsidiary dividends, cash from operations, and credit facilities, with $8.2 billion in liquidity sources as of December 31, 2022, and major capital uses in 2022 included $9.4 billion for debt repayment and $5.1 billion for common stock repurchases - As of December 31, 2022, AIG Parent had approximately $8.2 billion in liquidity sources, including cash, short-term investments, and a $4.5 billion committed revolving credit facility[389] Key Uses of Capital in 2022 | Use of Capital | Amount (billions) | | :--- | :--- | | Debt Repayment/Redemption | $9.4 | | Common Stock Repurchases | $5.1 | | Common Stock Dividends | $1.0 | - During 2022, AIG Parent received dividends of $1.9 billion from its General Insurance companies and $753 million from its Life and Retirement companies[379] Summary of Contractual Obligations (in millions) | Obligation | Total Payments Due | | :--- | :--- | | Loss reserves (gross, undiscounted) | $77,699 | | Insurance and investment contract liabilities | $294,416 | | Short-term and Long-term debt | $21,299 | | Interest payments on debt | $13,703 | | Total | $407,117 | Enterprise Risk Management AIG employs an integrated three-lines-of-defense model for risk management, overseen by the Board's Risk and Capital Committee, utilizing a risk appetite framework with tiered limits and proprietary capital models to assess aggregate risk, including a modeled 1-in-250 year worldwide all-peril probable maximum loss of $3.2 billion - AIG employs a Three Lines of Defense model for risk management, where business leaders have primary accountability, the Enterprise Risk Management (ERM) department provides oversight, and the Internal Audit Group offers independent assurance[421] - The company's Risk Appetite Framework uses risk tolerances and a three-tiered limits hierarchy (Board-level, AIG management level, and business unit level) to manage its risk profile and financial resources[423][425] Modeled Annual Aggregate Catastrophe Losses (Net of Reinsurance, After Tax) | Exposure | Probability | Estimated Loss (billions) | | :--- | :--- | :--- | | World-wide all peril | 1-in-250 year (0.4%) | $3.2 | | U.S. Hurricane | 1-in-100 year (1.0%) | $1.1 | | U.S. Earthquake | 1-in-250 year (0.4%) | $1.3 | - AIG manages market risk from its variable annuity guaranteed living benefits through product design features and an economic hedging program that utilizes derivatives to offset changes in the economic value of these liabilities[454] Financial Statements and Supplementary Data This section presents AIG's audited consolidated financial statements for the three years ended December 31, 2022, with accompanying notes detailing accounting policies, segment information, fair value measurements, and other financial matters, along with an unqualified opinion from PricewaterhouseCoopers LLP Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on AIG's consolidated financial statements for the three years ended December 31, 2022, and on the effectiveness of its internal control over financial reporting, while identifying critical audit matters including the valuation of Level 3 fixed maturity securities and insurance loss reserves - PricewaterhouseCoopers LLP issued an unqualified opinion, stating that AIG's consolidated financial statements present fairly, in all material respects, the financial position and results of operations in conformity with U.S. GAAP[470] - The firm also issued an unqualified opinion that AIG maintained effective internal control over financial reporting as of December 31, 2022[470] - Critical Audit Matters: - Valuation of certain Level 3 fixed maturity securities[473] - Valuation of insurance liabilities - unpaid losses and loss adjustment expenses (loss reserves), net of reinsurance[475] - Valuation of embedded derivatives for variable annuity and fixed index annuity products and certain guaranteed benefit features for universal life products[476] - Valuation of Deferred Policy Acquisition Costs (DAC) for universal life and individual retirement variable annuity products[478] - Recoverability of the U.S. federal deferred tax asset[478] Consolidated Financial Statements AIG's consolidated balance sheet as of December 31, 2022, shows total assets of $526.6 billion and total AIG shareholders' equity of $40.0 billion, a decrease largely due to unrealized losses on fixed maturity securities, while net income attributable to AIG for 2022 was $10.3 billion with $4.2 billion in net cash from operating activities Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Investments | $309,150 | $359,292 | | Total Assets | $526,634 | $596,112 | | Total Liabilities | $484,399 | $527,200 | | Total AIG Shareholders' Equity | $40,002 | $65,956 | Consolidated Income Statement Highlights (in millions) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Total Revenues | $56,437 | $52,057 | | Net Income (Loss) | $11,275 | $9,923 | | Net Income (Loss) Attributable to AIG | $10,276 | $9,388 | Consolidated Cash Flow Highlights (in millions) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $4,207 | $6,279 | | Net Cash Used in Investing Activities | $(3,626) | $(3,280) | | Net Cash Provided by (Used in) Financing Activities | $(676) | $(3,735) | Notes to Consolidated Financial Statements The notes provide detailed explanations of AIG's accounting policies and financial results, including the Corebridge IPO, asset management agreements, segment data, fair value measurements, and the expected impact of new accounting standards for long-duration insurance contracts - AIG closed the IPO of 12.4% of Corebridge Financial, Inc. on September 19, 2022, raising approximately $1.7 billion in gross proceeds, while retaining a 77.7% ownership stake and continuing to consolidate Corebridge[496][497] - On June 2, 2020, AIG completed the sale of a majority interest in Fortitude Group Holdings, LLC, receiving $2.2 billion in proceeds and recording a $4.3 billion after-tax reduction to shareholders' equity[500] - AIG will adopt new accounting standards for long-duration insurance contracts on January 1, 2023, with the adoption expected to decrease after-tax equity as of the transition date (Jan 1, 2021) by approximately $1.0 billion to $1.5 billion[513] - As of December 31, 2022, AIG had $24.9 billion in Level 3 bonds available for sale and $7.1 billion in Level 3 policyholder contract deposit liabilities, indicating significant use of unobservable inputs in fair value measurements[556]