AmazonScience/document-haystack

1REGULATORY, INDUSTRY AND ECONOMIC FACTORS2Russia/Ukraine Conflict3The Russia/Ukraine conflict began in February 2022. The conflict has and may continue to have a significant impact on the global 4macroeconomic and geopolitical environments, including increased volatility in capital and commodity markets, rapid changes to 5regulatory conditions around the globe including the use of sanctions, operational challenges for multinational corporations, 6inflationary pressures and an increased risk of cybersecurity incidents.7The conflict is evolving and has the potential to adversely affect our business and results of operations from an investment, 8underwriting and operational perspective. While we believe we have taken appropriate actions to minimize related risk, we continue to 9monitor potential exposure and operational impacts, as well as any actual and potential claims activity. The ultimate impact will 10depend on future developments that are uncertain and cannot be predicted, including scope, severity and duration, the governmental, 11legislative and regulatory actions taken (including the application of sanctions), and court decisions, if any, rendered in response to 12those actions.13Impact of Changes in the Interest Rate Environment and Equity Markets14Certain key U.S. benchmark rates continued to rise during 2023 as markets reacted to heightened inflation measures, geopolitical 15risk, and the Board of Governors of the Federal Reserve System implementing multiple increases to short term interest rates. The 16yield pick of new investments over sales, maturities and paydowns and redemptions, excluding Fortitude Re, averaged 195 basis 17points during 2023. This combined with resetting of coupon rates on floating rate securities and loans has steadily improved the 18overall portfolio yields. However, the key benchmark rates remain highly volatile. We actively manage our exposure to the interest rate 19environment through portfolio construction and asset-liability management, including spread management strategies for our 20investment-oriented products and economic hedging of interest rate risk from guarantee features in our variable and fixed index 21annuities, but we may not be able to fully mitigate our interest rate risk by matching exposure of our assets relative to our liabilities.22Equity Markets23Our financial results are impacted by the performance of equity markets, which impacts the performance of our alternative investment 24portfolio, fee income and net amount at risk. For instance, in our variable annuity separate accounts, mutual fund assets and 25brokerage and advisory assets, we generally earn fee income based on the account value, which fluctuates with the equity markets 26as a significant amount of these assets are invested in equity funds. The impact of equity market returns, both increases and 27decreases, is reflected in our results due to the impact on the account value and the fair values of equity-exposed securities. 28In Life and Retirement, hedging costs could also be significantly impacted by changes in the level of equity markets as rebalancing 29and option costs are tied to the equity market volatility. These hedging costs are partially offset by our rider fees that are tied to the 30level of the Chicago Board Options Exchange Volatility Index. As rebalancing and option costs increase or decrease, the rider fees will 31increase or decrease partially offsetting the hedging costs incurred. 32Market and other economic factors may result in increased credit impairments, downgrades and losses across single or numerous 33asset classes due to lower collateral values or deteriorating cash flow and profitability by borrowers could lead to higher defaults on 34our investment portfolio, especially in geographic, industry or investment sectors where we have higher concentrations of exposure, 35such as real estate related borrowings. These factors can also cause widening of credit spreads which could reduce investment asset 36valuations, decrease fee income and increase statutory capital requirements, as well as reduce the availability of investments that are 37attractive from a risk-adjusted perspective.38Alternative investments include private equity funds which are generally reported on a one-quarter lag. Accordingly, changes in 39valuations driven by equity market conditions during the fourth quarter of 2023 may impact the private equity investments in the 40alternative investments portfolio in the first quarter of 2024.41Annuity Sales and Surrenders42The rising rate environment and our partnership with Blackstone Inc. and its investment advisory affiliates (Blackstone) have provided 43a strong tailwind for fixed and fixed index annuity sales, however, higher interest rates have also resulted in an increase in surrenders. 44Rising interest rates could continue to create the potential for increased sales, but could also drive higher surrenders relative to what 45we have already experienced. Fixed annuities have surrender charge periods, generally in the three-to-seven year range. Fixed index 46annuities have surrender charge periods, generally in the five-to-ten year range, and within our Group Retirement segment, certain of 47our fixed investment options are subject to other withdrawal restrictions, which may help mitigate increased early surrenders in a 48rising rate environment. In addition, older contracts that have higher minimum interest rates and continue to be attractive to contract 49holders have driven better than expected persistency in fixed annuities, although the reserves for such contracts have continued to 50decrease over time in amount and as a percentage of the total annuity portfolio. We closely monitor surrenders of fixed annuities as 51contracts with lower minimum interest rates come out of the surrender charge period. 52ITEM 7 | Executive Summary5358 AIG | 2023 Form 10-K