AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q2 FY2021

Business Context and Reporting Period

American International Group, Inc. (AIG) filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2021. AIG is a global insurance organization operating in approximately 80 countries, with three reporting segments: General Insurance, Life and Retirement, and Other Operations.

The filing reflects continuing operations and should be read with AIG’s 2020 Form 10-K. Comparisons are primarily with the three and six months ended June 30, 2020.

Financial Results and Key Metrics

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Total revenues	$10.681 billion	$9.396 billion	$25.135 billion	$23.839 billion
Income from continuing operations before tax	$147 million	$(9.661) billion	$4.875 billion	$(7.103) billion
Net income attributable to AIG common shareholders	$91 million	$(7.936) billion	$3.960 billion	$(6.194) billion
Diluted EPS	$0.11	$(9.15)	$4.53	$(7.11)
Adjusted pre-tax income	$1.708 billion	$791 million	$2.964 billion	$971 million
Adjusted after-tax income attributable to common shareholders	$1.331 billion	$561 million	$2.254 billion	$666 million

Premiums increased 7% in the quarter to $7.914 billion but decreased 3% year to date to $14.421 billion.
Total net investment income increased 9% in the quarter to $3.675 billion and 25% year to date to $7.332 billion, helped by alternative investment returns and income from Fortitude Re funds-withheld assets.
Net realized losses were $1.926 billion in the quarter, driven principally by a $2.056 billion loss on the Fortitude Re funds-withheld embedded derivative. Year-to-date net realized gains were $1.324 billion.
General Insurance adjusted pre-tax income rose to $1.194 billion in the quarter and $2.039 billion year to date. The combined ratio improved to 92.5% and 95.5%, respectively.
Life and Retirement adjusted pre-tax income increased 26% in the quarter to $1.124 billion and 38% year to date to $2.065 billion. Life Insurance reported a $20 million adjusted pre-tax loss year to date, primarily due to COVID-19-related mortality.
Adjusted return on common equity was 10.5% for the quarter and 9.0% year to date, compared with 4.5% and 2.6% in the respective 2020 periods.

Balance Sheet, Capital and Liquidity

Total assets were $598.250 billion at June 30, 2021, compared with $586.481 billion at December 31, 2020.
AIG shareholders’ equity was $66.083 billion, compared with $66.362 billion at year-end 2020. Book value per common share was $76.73; adjusted book value per common share was $60.07, up from $57.01.
Total investments were $359.539 billion, including $273.070 billion of bonds available for sale. Net unrealized gains in the available-for-sale portfolio declined to approximately $21.4 billion from $27.4 billion at year-end, primarily because of higher interest rates during the first six months.
Long-term debt was $26.161 billion and debt of consolidated investment entities was $9.566 billion at June 30, 2021. Total debt, including consolidated investment entity debt, was $35.727 billion.
Operating cash flow was $2.810 billion for the first six months, compared with an operating cash use of $239 million in the prior-year period. Investing cash flow was a use of $1.645 billion, and financing cash flow was a use of $1.300 billion.
Cash and restricted cash ended the period at $3.061 billion. AIG Parent reported liquidity sources of $11.690 billion, including $4.500 billion of available capacity under its committed syndicated credit facility.
AIG repurchased approximately 13 million common shares for $592 million and paid $550 million of common dividends during the first six months. On August 3, 2021, the Board authorized a $6.0 billion share repurchase authorization.

Material Changes Versus the Prior Comparable Period

Reported profitability improved sharply because the prior-year period included an $8.4 billion loss from the sale and deconsolidation of Fortitude Holdings. The improvement also reflected better General Insurance underwriting and stronger investment returns.
General Insurance net premiums written increased 24% in the quarter and 16% year to date, driven by rate increases, higher retention, new business, portfolio changes and lower ceded premiums.
General Insurance catastrophe losses declined to $138 million in the quarter and $572 million year to date, compared with $694 million and $1.114 billion in the prior-year periods, which included significant COVID-19 and civil unrest losses.
General Insurance’s adjusted accident-year combined ratio improved to 91.1% in the quarter and 91.7% year to date, compared with 94.9% and 95.2%.
Life and Retirement results benefited from higher investment income, particularly private equity returns, and higher policy and advisory fee income. Fixed-account spreads narrowed as reinvestment yields declined.
AIG recorded a $109 million loss on debt extinguishment in the quarter, including the repurchase and cancellation of approximately $254 million of debt for approximately $359 million.
AIG recognized a $700 million increase in the valuation allowance for certain U.S. tax attribute carryforwards during the first six months, contributing to a $795 million income tax expense despite pre-tax income of $4.875 billion.
AIG corrected certain prior-period cash-flow classifications related to policyholder contract deposits. Management stated that the misclassifications were not material to prior financial statements.

Guidance, Outlook, Risks and Unusual Items

AIG did not provide specific numerical earnings guidance in the filing. Management expects results to remain sensitive to interest rates, equity and credit markets, foreign exchange, catastrophe losses, inflation, COVID-19 developments and regulatory actions.
AIG and Blackstone agreed after quarter-end that Blackstone would acquire a 9.9% equity interest in AIG’s Life and Retirement holding company for $2.2 billion, subject to adjustments and customary closing conditions. The transaction was expected to close in the third quarter of 2021. AIG also agreed to an asset-management relationship beginning with approximately $50 billion of Life and Retirement assets, potentially increasing to $92.5 billion.
AIG and Blackstone Real Estate Income Trust agreed to the sale of AIG’s U.S. affordable housing portfolio for approximately $5.1 billion, subject to adjustments and closing conditions; closing was expected in the fourth quarter of 2021.
The Life and Retirement separation and related transactions remain subject to regulatory approvals, Board approval, other conditions and execution risk. AIG stated that no assurance could be given regarding the form, timing or completion of the separation.
COVID-19 remains a material uncertainty, including potential effects on mortality, claims, business interruption and travel insurance, investment valuations, policyholder behavior, liquidity and capital.
Low interest rates pressure reinvestment yields, annuity and life-insurance spreads, product pricing and reserve assumptions. At June 30, 2021, 68% of fixed account values in Individual and Group Retirement annuities were crediting at contractual minimum guaranteed rates.
AIG’s reinsurance recoverables totaled approximately $77.4 billion. Approximately 92% were investment grade, while non-investment-grade exposures were concentrated primarily in General Insurance and were often collateralized.
Insurance reserve estimates, reinsurance collectability, fair value measurements, guaranteed benefits, deferred tax assets, credit losses, legal contingencies and catastrophe losses involve significant judgment and could materially affect future results.
AIG expects to make a remaining payment to the U.S. Treasury related to a settled foreign-tax-credit dispute, potentially as early as the third quarter of 2021. The total expected payment was approximately $0.4 billion, including prior prepayments.
Debt and derivative agreements contain ratings triggers. A downgrade could require additional collateral, termination payments or reduced access to financing.

Most Important Facts for Investors to Verify

Completion, timing, valuation and regulatory approvals for the Life and Retirement separation and Blackstone transactions.
Whether General Insurance underwriting improvements, rate adequacy and lower catastrophe activity persist after normalization of catastrophe and COVID-19 losses.
Life and Retirement exposure to low reinvestment yields, annuity surrenders, guaranteed benefits, mortality trends and investment-market volatility.
Future volatility from the Fortitude Re funds-withheld embedded derivative and the continuing collectability and performance of Fortitude Re reinsurance.
Realizability of deferred tax assets and the potential for additional valuation allowances or tax payments.
Liquidity available at AIG Parent and regulated subsidiaries after dividends, debt maturities, share repurchases, collateral requirements and transaction-related uses.
Developments in loss reserves, including adverse emergence in Blackboard and other runoff businesses, as well as exposure to inflation, litigation and regulatory changes.
Impact of the $6.0 billion share repurchase authorization on capital, liquidity, leverage and future book value per share.