Reinsurance

3 Months Ended

Mar. 31, 2024

8. 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 OCI). 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.

As of March 31, 2024, approximately $26.9 billion of reserves from our Life and Retirement Run-Off Lines and approximately $2.9 billion of reserves from our 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.

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:


	March 31, 2024				December 31, 2023
(in millions)	Carrying Value			Fair Value	Carrying Value			Fair Value	Corresponding Accounting Policy
Fixed maturity securities - available for sale(a)	$	16,726	$	16,726	$	17,384	$	17,384	Fair value through other comprehensive income (loss)
Fixed maturity securities - fair value option		5,035		5,035		4,867		4,867	Fair value through net investment income
Commercial mortgage loans		3,882		3,614		3,921		3,685	Amortized cost
Real estate investments		175		302		184		329	Amortized cost
Private equity funds / hedge funds		1,920		1,920		1,910		1,910	Fair value through net investment income
Policy loans		325		325		330		330	Amortized cost
Short-term investments		178		178		176		176	Fair value through net investment income
Funds withheld investment assets		28,241		28,100		28,772		28,681
Derivative assets, net(b)		14		14		45		45	Fair value through net realized gains (losses)
Other(c)		675		675		758		758	Amortized cost
Total	$	28,930	$	28,789	$	29,575	$	29,484

(a)The change in the net unrealized gains (losses) on available for sale securities related to the Fortitude Re funds withheld assets was $(163) million ($(128) million after-tax) and $704 million ($556 million after-tax), respectively for the three months ended March 31, 2024 and 2023.

(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 $17 million and $27 million, respectively, as of March 31, 2024. The derivative assets and liabilities supporting the Fortitude Re funds withheld arrangements had a fair market value of $63 million and $34 million, respectively, as of December 31, 2023. 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 March 31,
(in millions)		2024		2023

Net investment income - Fortitude Re funds withheld assets	$	369	$	446
Net realized gains (losses) on Fortitude Re funds withheld assets:
Net realized losses - Fortitude Re funds withheld assets		(179)		(31)
Net realized gains (losses) - Fortitude Re funds withheld embedded derivative		13		(1,165)
Net realized losses on Fortitude Re funds withheld assets		(166)		(1,196)
Income (loss) from continuing operations before income tax expense (benefit)		203		(750)
Income tax expense (benefit)(a)		43		(158)
Net income (loss)		160		(592)
Change in unrealized appreciation (depreciation) of all other investments(a)		(128)		556
Comprehensive income (loss)	$	32	$	(36)

(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 arrangement and the appreciation (depreciation) of the asset 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. 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 uncollectible 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 classified 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 recoverable's 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 March 31, 2024 were $71.1 billion. As of that date, utilizing AIG’s ORRs, (i) approximately 90 percent of the reinsurance recoverables were investment grade, of which 49 percent related to General Insurance and 41 percent related to Life and Retirement; (ii) approximately 9 percent of the reinsurance recoverables were non-investment grade, the majority of which related to General Insurance and (iii) approximately one percent of the reinsurance recoverables related to entities that were not rated by AIG.

The total reinsurance recoverables as of December 31, 2023 were $69.8 billion. As of that date, utilizing AIG’s ORRs, (i) approximately 90 percent of the reinsurance recoverables were investment grade, of which 51 percent related to General Insurance and 39 percent related to Life and Retirement; (ii) approximately 9 percent of the reinsurance recoverables were non-investment grade, the majority of which related to General Insurance; (iii) approximately one percent of the reinsurance recoverables related to entities that were not rated by AIG.

As of March 31, 2024 and December 31, 2023, approximately 82 percent and 83 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 March 31,		2024						2023
(in millions)	General Insurance		Life and Retirement			Total	General Insurance		Life and Retirement			Total
Balance, beginning of year	$	255	$	30	$	285	$	260	$	84	$	344
Addition to (release of) allowance for expected credit losses and disputes, net		1		(10)		(9)		(3)		(10)		(13)
Write-offs charged against the allowance for credit losses and disputes		(1)		(2)		(3)		(1)		—		(1)

Other changes		—		—		—		(3)		—		(3)
Balance, end of period	$	255	$	18	$	273	$	253	$	74	$	327

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.