AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q3 FY2022

American International Group, Inc. — Third-Quarter 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022; comparison periods are the corresponding periods of 2021. AIG is a global insurer operating in approximately 70 countries, with General Insurance, Life and Retirement, and Other Operations segments. The financial statements are unaudited and should be read with the 2021 Form 10-K.

Business context and major strategic event

On September 19, 2022, AIG completed the initial public offering of Corebridge Financial, the holding company for its Life and Retirement business. AIG sold 80 million shares for approximately $1.7 billion of gross proceeds and recorded a $608 million increase in shareholders’ equity after transaction costs.
AIG retained 77.7% of Corebridge and continues to consolidate its financial results; the remaining ownership is reported as noncontrolling interest.
Corebridge issued $6.5 billion of senior unsecured notes, $1.0 billion of junior subordinated debt, and borrowed $1.5 billion under a delayed-draw term loan. These proceeds were used substantially to repay the $8.3 billion intercompany note owed to AIG Parent.
AIG expected to transfer management of up to $150 billion of investments, including up to $90 billion of Corebridge assets, to BlackRock, with most transfers anticipated by year-end 2022.

Financial performance and key metrics

Metric	Three months ended September 30	Nine months ended September 30
Total revenues	$14.6 billion, up 14%	$44.9 billion, up 18%
Income before tax	$3.8 billion, up 77%	$14.0 billion, up 99%
Net income attributable to AIG common shareholders	$2.7 billion, up 63%	$10.0 billion, up 78%
Diluted EPS	$3.50, versus $1.92	$12.49, versus $6.45
Operating adjusted pre-tax income	$725 million, versus $1.126 billion	$3.598 billion, versus $4.090 billion
Adjusted after-tax income attributable to common shareholders	$509 million, versus $837 million	$2.562 billion, versus $3.091 billion
Adjusted return on common equity	3.7%, versus 6.5%	6.1%, versus 8.1%

Premiums increased 4% in the quarter and 2% year to date. Net investment income declined 28% in the quarter and 23% year to date, primarily because of lower alternative investment returns, lower yield-enhancement income, and fair-value losses on certain fixed maturity securities.
Reported earnings benefited materially from market-sensitive realized gains, including $1.757 billion in third-quarter gains and $7.851 billion year-to-date gains on the Fortitude Re funds-withheld embedded derivative. These gains were driven primarily by interest-rate movements and are excluded from adjusted operating results.
General Insurance adjusted pre-tax income was $750 million in the quarter and $3.218 billion year to date. The General Insurance combined ratio improved to 97.3% in the quarter and 92.6% year to date, compared with 99.7% and 97.0%, respectively.
North America reported a third-quarter underwriting loss of $439 million, mainly due to unfavorable prior-year development and catastrophe losses, but generated $223 million of underwriting income year to date. International underwriting income was $607 million in the quarter and $1.190 billion year to date.
Life and Retirement adjusted pre-tax income declined 33% in the quarter to $589 million and 36% year to date to $1.876 billion. Results were pressured by lower investment income and lower fee income from equity-market declines, partly offset by favorable actuarial assumption updates and expense reductions.
Catastrophe losses were $655 million in the quarter and $1.064 billion year to date, compared with $618 million and $1.190 billion in the prior-year periods. Russia/Ukraine-related losses totaled $85 million year to date.

Cash flow, liquidity, debt and capital

Operating cash flow was $4.018 billion for the first nine months, compared with $5.764 billion in 2021. Investing activities used $2.265 billion and financing activities used $1.571 billion. Cash and restricted cash ended at $2.496 billion.
AIG Parent and applicable intermediate holding companies had approximately $11.0 billion of liquidity sources at September 30, 2022, comprising $6.548 billion of cash, short-term investments and unencumbered fixed-maturity securities, plus $4.5 billion of available committed credit capacity.
Total short- and long-term debt was $24.508 billion, compared with $23.741 billion at December 31, 2021. Debt of consolidated investment entities was $5.924 billion.
AIG repurchased approximately 77 million common shares for $4.4 billion during the first nine months and paid $746 million of common dividends. Approximately $4.4 billion remained under the repurchase authorization at October 27, 2022.
AIG shareholders’ equity declined to $39.023 billion from $65.956 billion at year-end 2021, primarily because accumulated other comprehensive loss increased to $23.793 billion, reflecting the sharp decline in fixed-maturity security values.
Book value per common share was $51.58, versus $79.97 at year-end; adjusted book value per common share increased to $73.28 from $68.83.

Material changes versus the prior comparable period

GAAP earnings increased substantially because of Fortitude Re embedded-derivative gains and other derivative and hedging gains, despite lower investment income and lower adjusted operating earnings.
Available-for-sale fixed-maturity securities recorded approximately $50.2 billion of unrealized losses during the first nine months. The portfolio’s net unrealized position moved from a $18.1 billion gain at December 31, 2021 to a $32.1 billion loss at September 30, 2022.
General Insurance underwriting improved year to date, supported by rate increases, portfolio actions, favorable business mix, and lower catastrophe losses. However, third-quarter North America results deteriorated because of unfavorable prior-year development and catastrophe activity.
Life and Retirement results weakened because of lower alternative investment returns, reduced fee income, and lower equity-market values. Fixed annuity sales benefited from higher interest rates, while variable annuity flows and fee income were pressured by market declines.
AIG repurchased substantially more stock than in the prior-year period, while debt reductions lowered interest expense. The company repurchased or redeemed $7.6 billion of debt during the first nine months, recording a $299 million extinguishment loss.

Outlook, risks and unusual items

Management did not provide a clear consolidated earnings or revenue guidance figure in the filing text. The company expects continued sensitivity to interest rates, credit spreads, equity markets, foreign exchange, inflation, catastrophe losses, and economic and geopolitical conditions.
Rising interest rates improve reinvestment yields and may support fixed-annuity sales and Life and Retirement spreads, but can increase surrender activity, pressure asset values and fee income, and require higher crediting rates.
Inflation, social inflation, supply-chain disruption, labor shortages, commodity prices and climate-related catastrophe trends may increase insurance claim severity and challenge pricing adequacy.
Key risks include investment valuation losses, reinsurance counterparty performance, Fortitude Re exposure, rating downgrades and collateral calls, liquidity constraints, regulatory restrictions on subsidiary dividends, cybersecurity incidents, sanctions and the Russia/Ukraine conflict.
The company expects to adopt the long-duration targeted improvements accounting standard on January 1, 2023. AIG currently estimates a transition-date equity reduction of approximately $1.0 billion to $3.0 billion in Life and Retirement, with increased future earnings volatility from fair-value measurement of market-risk benefits.
AIG maintained an $850 million deferred-tax-asset valuation allowance and recorded additional valuation allowances of approximately $2.6 billion related to unrealized tax capital losses in U.S. insurance portfolios during the first nine months.
Legal contingencies include the Moriarty putative class action concerning California life-insurance lapse-notice requirements. AIG has accrued its current estimate of probable loss, but the ultimate exposure remains uncertain.
The Inflation Reduction Act may increase future cash taxes through the 15% corporate alternative minimum tax and adds a 1% excise tax on stock repurchases beginning after 2022. AIG stated that it did not expect a material impact on reported financial results, but cash-tax effects remain a risk.

Most important facts for investors to verify

Whether reported earnings growth is sustainable after excluding the $7.851 billion year-to-date Fortitude Re embedded-derivative gain and other realized gains.
The effect of continued interest-rate and credit-spread movements on AIG’s large fixed-income portfolio, accumulated other comprehensive income, statutory capital and adjusted book value.
Corebridge’s post-IPO capital structure, debt service, dividend capacity, tax deconsolidation effects and the economic value of AIG’s 77.7% retained ownership.
Future General Insurance reserve development, particularly U.S. Financial Lines, casualty exposures, catastrophe losses and social-inflation trends.
Life and Retirement surrender rates, variable-annuity hedging performance, spread compression, fee income and the impact of the 2023 long-duration-contract accounting adoption.
Liquidity available at AIG Parent versus subsidiary-level restrictions, potential collateral requirements, rating triggers and upcoming debt maturities.
Progress and economics of the BlackRock investment-management transition and any related concentration or execution risks.