AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q3 FY2017

AIG Third Quarter 2017 Form 10-Q Summary

Business context and reporting period

American International Group, Inc. is a global insurer operating in more than 80 countries and jurisdictions. Its principal businesses were Commercial Insurance, Consumer Insurance, Other Operations and the Legacy Portfolio. The unaudited filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.

AIG announced a prospective organizational restructuring effective in the fourth quarter of 2017: Commercial Insurance and Consumer Insurance were expected to become General Insurance and Life and Retirement, respectively. Prior-period segment information was expected to be recast after implementation.

Financial performance and key metrics

Metric	Q3 2017	Q3 2016	9M 2017	9M 2016
Total revenues	$11.8 billion	$12.9 billion	$36.9 billion	$39.4 billion
Net income attributable to AIG	$(1.7) billion	$462 million	$576 million	$2.2 billion
Diluted EPS attributable to AIG	$(1.91)	$0.42	$0.60	$1.92
Pre-tax operating income	$(1.9) billion	$1.6 billion	$2.3 billion	$4.5 billion
Net cash from operating activities	Not separately provided for the quarter	$(9.2) billion	$1.8 billion
Total assets at period-end	$503.1 billion	$498.3 billion at December 31, 2016
Long-term debt at period-end	$31.0 billion	$30.9 billion at December 31, 2016
AIG shareholders’ equity at period-end	$72.5 billion	$76.3 billion at December 31, 2016

Q3 total revenues declined 9%, while nine-month revenues declined 6%. Premiums decreased 6% in Q3 and 10% year to date; net investment income decreased 10% in Q3 but increased 2% year to date.
Net realized capital losses were $922 million in Q3 and $1.1 billion for the first nine months, compared with losses of $765 million and $829 million, respectively, in 2016.
Policyholder benefits and losses incurred increased 38% in Q3 and 9% year to date, primarily reflecting catastrophe losses and unfavorable prior-year reserve development.
General operating and other expenses declined 15% in Q3 and 17% year to date. Restructuring and other costs were $31 million in Q3 and $259 million year to date, versus $210 million and $488 million, respectively, in 2016.
Commercial Insurance pre-tax operating loss was $2.9 billion in Q3 and $1.3 billion year to date. Its combined ratio was 195.4% in Q3 and 133.9% year to date, compared with 105.8% and 100.3% in 2016.
Consumer Insurance pre-tax operating income was $1.0 billion in Q3 and $3.3 billion year to date. Life Insurance improved to $112 million in Q3 and $272 million year to date, while Individual Retirement declined in Q3 but improved year to date.
Legacy Portfolio pre-tax operating income was $286 million in Q3 and $1.1 billion year to date, compared with a Q3 loss of $99 million and a nine-month loss of $94 million in 2016.
Book value per common share increased to $80.62 from $76.66 at December 31, 2016. Adjusted book value per common share, excluding AOCI and deferred tax assets, declined to $57.44 from $58.57.

Liquidity, capital and debt

Cash at September 30, 2017 was $2.4 billion, compared with $1.9 billion at December 31, 2016. Investing activities provided $14.8 billion, while financing activities used $5.1 billion.
The nine-month operating cash outflow was principally attributable to the $10.2 billion payment, including interest, for the adverse development reinsurance agreement with National Indemnity Company, or NICO.
AIG Parent reported $11.2 billion of liquidity sources, consisting of $2.2 billion of cash and short-term investments, $4.6 billion of unencumbered fixed maturity securities and $4.5 billion of available capacity under a syndicated credit facility. This compared with $12.9 billion at year-end 2016.
AIG issued $2.4 billion of long-term debt and repaid $2.8 billion during the first nine months. Consolidated debt was $31.0 billion, including $5.0 billion of debt of consolidated investments.
AIG repurchased approximately 100 million common shares for $6.3 billion and paid $884 million of dividends during the first nine months. The quarterly dividend remained $0.32 per share, and approximately $2.2 billion remained under the repurchase authorization as of November 2, 2017.

Material changes and unusual items

Pre-tax catastrophe losses were approximately $3.0 billion in Q3 and $3.4 billion year to date, including Hurricanes Harvey, Irma and Maria and the Mexico earthquake, versus $282 million and $947 million in the comparable 2016 periods.
AIG recorded $836 million of unfavorable prior-year loss reserve development in Q3 and $902 million year to date, concentrated in Commercial Insurance liability, casualty and financial lines. The filing cited higher-than-expected loss emergence, especially in accident year 2016.
The NICO agreement transferred 80% of reserve risk on substantially all U.S. Commercial long-tail exposures for accident years 2015 and prior, subject to an aggregate $25 billion limit and an $20 billion NICO share. Covered losses ceded to NICO were $13.1 billion at September 30, 2017, leaving $6.9 billion of unexpired limit.
AIG recorded a $273 million Q3 impairment on life-settlement investments after agreeing to sell the remaining life-settlement contracts. The sale closed November 1, 2017.
Actuarial assumption updates produced a $270 million favorable pre-tax operating adjustment in Q3 and year to date, compared with a $384 million unfavorable adjustment in 2016.
In October 2017, Northern California wildfires occurred after the reporting date. As of November 2, AIG estimated approximately $500 million of pre-tax fourth-quarter losses, net of reinsurance; the ultimate amount could differ materially.
Effective September 29, 2017, the Financial Stability Oversight Council rescinded AIG’s designation as a U.S. nonbank SIFI. AIG remained subject to extensive insurance, securities, derivatives and international regulatory requirements.

Outlook and principal risks

Management continued to pursue portfolio optimization, underwriting discipline, expense reduction, organizational simplification and business rationalization. The company expected approximately $1.4 billion to $1.5 billion of annualized pre-tax savings when its initiatives were fully implemented by 2018, with approximately $1.5 billion of aggregate restructuring and other costs expected in total.
Low interest rates continued to pressure reinvestment yields, annuity and life insurance spreads, pricing and future profitability. Approximately 73% of fixed account values in Individual and Group Retirement annuity products were credited at contractual minimum guaranteed rates.
Commercial Insurance faced excess capacity, pricing pressure, long-tail casualty exposures, higher loss-cost trends and catastrophe volatility. Consumer Insurance faced low rates, competitive annuity pricing and uncertainty surrounding the Department of Labor Fiduciary Rule.
Key risks include reserve inadequacy, catastrophe losses, reinsurance recoverability, investment and credit losses, equity and interest-rate volatility, foreign exchange movements, policyholder surrenders, rating downgrades, collateral calls, regulatory changes, litigation and tax uncertainties.
A downgrade to specified AIG debt ratings could trigger collateral calls or early termination rights. AIG estimated that a downgrade to BBB or BBB- by S&P and/or Baa2 or Baa3 by Moody’s could result in up to approximately $95 million of additional collateral postings and termination payments based on conditions at September 30, 2017.
Unrecognized tax benefits were $4.6 billion at September 30, 2017, with $1.3 billion accrued for related interest and penalties. The filing states that ultimate legal, tax and regulatory outcomes may materially affect individual reporting periods.

Important facts for investors to verify

Whether Commercial Insurance reserve strengthening and catastrophe losses moderate, and whether accident-year combined ratios improve.
The remaining economic exposure, recoveries and deferred-gain amortization under the NICO reinsurance agreement.
The final amount and timing of fourth-quarter wildfire losses and any additional catastrophe claims.
Whether expense savings and restructuring targets are achieved without impairing underwriting quality, customer relationships or growth.
The effect of low interest rates, credit spreads, equity markets and policyholder behavior on annuity guarantees, DAC, investment income and capital.
Parent-company liquidity after share repurchases, dividends, debt maturities and potential collateral calls, including continued access to the $4.5 billion credit facility.
Future developments in the DOL Fiduciary Rule, Brexit-related restructuring, insurance capital standards and other regulatory requirements.