Reinsurance

6 Months Ended

Jun. 30, 2022

7. Reinsurance

FORTITUDE RE

Fortitude Re is the reinsurer of the majority of AIG’s run-off operations. The reinsurance transactions are 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.

For additional information on Fortitude Re see Note 7 to the Consolidated Financial Statements in the 2021 Annual Report.

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:


	June 30, 2022				December 31, 2021
(in millions)	Carrying Value			Fair Value	Carrying Value			Fair Value	Corresponding Accounting Policy
Fixed maturity securities - available for sale(a)	$	21,982	$	21,982	$	31,815	$	31,815	Fair value through other comprehensive income (loss)
Fixed maturity securities - fair value option		3,309		3,309		1,983		1,983	Fair value through net investment income
Commercial mortgage loans		4,126		4,010		3,637		3,859	Amortized cost
Real estate investments		168		422		201		395	Amortized cost
Private equity funds / hedge funds		1,794		1,794		1,606		1,606	Fair value through net investment income
Policy loans		364		364		380		380	Amortized cost
Short-term investments		135		135		50		50	Fair value through net investment income
Funds withheld investment assets		31,878		32,016		39,672		40,088
Derivative assets, net(b)		94		94		81		81	Fair value through net realized gains (losses)
Other(c)		860		860		602		602	Amortized cost
Total	$	32,832	$	32,970	$	40,355	$	40,771

(a)The change in the net unrealized gains (losses) on available for sale securities related to the Fortitude Re funds withheld assets was $(6.1) billion ($(4.8) billion after-tax) and $(1.6) billion ($(1.3) billion after-tax), respectively for the six months ended June 30, 2022 and 2021.

(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 $369 million and $20 million, respectively, as of June 30, 2022. The derivative assets and liabilities supporting the Fortitude Re funds withheld arrangements had a fair market value of $389 million and $10 million, respectively, as of December 31, 2021. 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 June 30,				Six Months Ended June 30,
(in millions)		2022		2021		2022		2021
Net underwriting income	$	—	$	—	$	—	$	—
Net investment income - Fortitude Re funds withheld assets		188		507		479		993
Net realized gains (losses) on Fortitude Re funds withheld assets:
Net realized gains (losses) - Fortitude Re funds withheld assets		(86)		173		(226)		346
Net realized gains (losses) - Fortitude Re embedded derivatives		2,776		(2,056)		6,094		326
Net realized gains (losses) on Fortitude Re funds withheld assets		2,690		(1,883)		5,868		672
Income (loss) from continuing operations before income tax expense (benefit)		2,878		(1,376)		6,347		1,665
Income tax expense (benefit)		605		(289)		1,333		350
Income tax expense (benefit)(a)		2,273		(1,087)		5,014		1,315
Change in unrealized appreciation (depreciation) of all other investments(a)		(2,156)		1,055		(4,794)		(1,285)
Comprehensive income (loss)	$	117	$	(32)	$	220	$	30

(a)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 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; reinsurers 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 recoverables lifetime expected credit losses is established utilizing a probability of default and loss given default method, which reflects the reinsurer’s ORR. 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 June 30, 2022 were $76.6 billion. As of that date, utilizing AIG’s ORRs, (i) approximately 92 percent of the reinsurance recoverables were investment grade, of which 53 percent related to General Insurance and 39 percent related to Life and Retirement; (ii) approximately 7 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.

The total reinsurance recoverables as of December 31, 2021 were $76.3 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 7 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 June 30, 2022 and December 31, 2021, approximately 72 percent and 71 percent, respectively, 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 June 30,		2022						2021
(in millions)	General Insurance		Life and Retirement			Total	General Insurance		Life and Retirement			Total
Balance, beginning of period	$	286	$	105	$	391	$	291	$	87	$	378
Addition to (release of) allowance for expected credit losses and disputes, net		(4)		2		(2)		(1)		—		(1)
Write-offs charged against the allowance for credit losses and disputes		—		—		—		(3)		—		(3)
Recoveries of amounts previously written off		2		—		2		—		—		—
Other changes		—		—		—		—		—		—
Balance, end of period	$	284	$	107	$	391	$	287	$	87	$	374
Six Months Ended June 30,		2022						2021
(in millions)	General Insurance		Life and Retirement			Total	General Insurance		Life and Retirement			Total
Balance, beginning of year	$	281	$	101	$	382	$	292	$	83	$	375

Addition to (release of) allowance for expected credit losses and disputes, net		1		6		7		—		4		4
Write-offs charged against the allowance for credit losses and disputes		(2)		—		(2)		(7)		—		(7)
Recoveries of amounts previously written off		2		—		2		—		—		—
Other changes		2		—		2		2		—		2
Balance, end of period	$	284	$	107	$	391	$	287	$	87	$	374

There were no material recoveries of credit losses previously written off for the three- and six-month periods ended June 30, 2021.

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.