AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q2 FY2017

Business Context and Reporting Period

American International Group, Inc. is a global insurance organization serving commercial and individual customers in more than 80 countries and jurisdictions. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017, with comparisons to the corresponding 2016 periods and to December 31, 2016 for balance-sheet items.

Reported businesses comprised Commercial Insurance, Consumer Insurance, Other Operations and the Legacy Portfolio. AIG continued to optimize its portfolio, reduce expenses, monetize legacy assets and return capital to shareholders.

Key Financial Metrics

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
Total revenues	$12.5 billion	$14.7 billion	$25.1 billion	$26.5 billion
Income before tax	$1.7 billion	$2.9 billion	$3.4 billion	$2.6 billion
Net income attributable to AIG	$1.13 billion	$1.91 billion	$2.32 billion	$1.73 billion
Diluted EPS attributable to AIG	$1.19	$1.68	$2.37	$1.49
Net investment income	$3.61 billion	$3.68 billion	$7.30 billion	$6.70 billion
Net realized capital gains/(losses)	$(69) million	$1.04 billion	$(184) million	$(64) million
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$(9.29) billion	$571 million

Approximate Q2 pretax margin was 13.3%, compared with 19.4% in the prior-year quarter; approximate net income attributable to AIG margin was 9.0%, compared with 13.0%. For the six months, approximate pretax margin was 13.5%, compared with 10.0%, and net income attributable to AIG margin was 9.2%, compared with 6.5%.

Balance Sheet, Debt and Capital

Total assets were $499.8 billion at June 30, 2017, compared with $498.3 billion at December 31, 2016.
Total investments were $320.7 billion, down from $328.2 billion, primarily reflecting funding of the NICO adverse development reinsurance agreement and portfolio reductions.
Cash was $2.5 billion, compared with $1.9 billion at year-end 2016.
Total AIG shareholders’ equity was $73.7 billion, down from $76.3 billion, despite a $1.7 billion increase in accumulated other comprehensive income to $5.0 billion.
Long-term debt was $31.8 billion, compared with $30.9 billion. Total debt, including debt of consolidated investments, was $31.8 billion.
Book value per common share was $81.62; book value excluding AOCI was $76.12; adjusted book value excluding AOCI and deferred tax assets was $60.31.
AIG repurchased approximately 95 million shares for $6.0 billion during the first six months. Approximately $2.5 billion remained under the repurchase authorization at June 30, 2017.
AIG declared quarterly dividends of $0.32 per share and paid $597 million in dividends during the first six months.

Liquidity and Cash Flow

AIG Parent reported total liquidity sources of approximately $12.3 billion, including $7.8 billion of cash, short-term investments and unencumbered fixed maturity securities, plus $4.5 billion of available capacity under a syndicated credit facility.
The credit facility was amended and extended to June 2022; the full $4.5 billion remained available at June 30, 2017.
Operating cash outflow of $9.3 billion primarily reflected the $10.2 billion payment, including interest, for the NICO retroactive reinsurance transaction.
Investing activities provided $14.9 billion, principally from sales and maturities of investments used to fund the NICO transaction. Financing activities used $5.0 billion after share repurchases, dividends and debt repayments, partly offset by $2.2 billion of debt issuance.
Management stated that AIG had sufficient liquidity and capital resources for reasonably foreseeable requirements, while noting potential pressure from catastrophes, collateral calls, reserve strengthening, higher policy surrenders, credit downgrades and market disruption.

Material Changes Versus the Prior Comparable Period

Second-quarter net income attributable to AIG fell 41% to $1.13 billion, primarily because the 2016 period included $1.04 billion of net realized capital gains, while 2017 included a $69 million loss, along with lower net investment income and a loss on the sale of divested businesses.
Six-month net income attributable to AIG increased 34% to $2.32 billion. The improvement reflected lower operating expenses, higher alternative-investment income, higher fair-value gains and improved Legacy Portfolio results, partly offset by realized capital losses and the loss on divested businesses.
Six-month premiums decreased 12% to $15.4 billion. Commercial Insurance premiums declined 21%, reflecting portfolio optimization, disciplined underwriting and market pressure; Consumer Insurance premiums declined 1%.
Commercial Insurance six-month pretax operating income declined slightly to $1.57 billion. Its combined ratio increased to 102.4% from 97.9%, with higher current accident-year loss ratios and lower earned premiums.
Consumer Insurance six-month pretax operating income increased 40% to $2.31 billion, supported by lower expenses, improved Personal Insurance underwriting, higher policy fees and improved alternative-investment results.
Legacy Portfolio pretax operating income increased to $773 million from $5 million for the six months, driven by higher fair-value gains and improved run-off insurance results.
General operating and other expenses declined 17% to $4.63 billion for the six months. Restructuring and other costs were $228 million, compared with $278 million in the prior-year period.
Net realized capital results were adversely affected by derivative and hedge-accounting losses, including losses associated with variable-annuity guaranteed living benefits and tightening credit spreads. The company recognized $278 million of total investment impairments in the first six months, down from $592 million.

Guidance, Outlook, Risks and Unusual Items

Management Outlook

AIG expects continued low interest rates, competitive pricing, foreign-exchange volatility, Brexit-related uncertainty, changing regulation and volatile energy markets to affect results.
Management targets approximately $1.4 billion to $1.5 billion of annualized pretax savings when its efficiency program is fully implemented by 2018. Aggregate pretax restructuring costs are expected to be approximately $1.5 billion; approximately $1.4 billion had been recognized since the third quarter of 2015.
Management expects Commercial Insurance to maintain pricing discipline and reduce exposure to inadequately priced or non-core business, while expanding selected targeted property lines.
The filing does not provide a consolidated earnings or revenue forecast.

Significant Transactions and Contingencies

Under the January 2017 NICO agreement, AIG ceded 80% of reserve risk on substantially all U.S. Commercial long-tail exposures for accident years 2015 and prior. NICO’s liability limit was $20 billion, with $13.1 billion of covered losses ceded and $6.9 billion of remaining limit at June 30, 2017. The deferred gain was $1.28 billion.
A catastrophic Grenfell Tower fire occurred in June 2017. AIG stated that its net exposure was not estimable because investigations and identification of potentially insured parties were incomplete.
AIG recognized $56 million of unfavorable prior-year loss reserve development in the second quarter and $66 million for the six months. Drivers included U.S. casualty construction-defect and wrap business, excess casualty and several international property and specialty claims.
Insurance operations classified $555 million of assets and $827 million of liabilities as held for sale. Fuji Life was sold April 30, 2017; additional international operations were sold or remained subject to regulatory approvals.
At June 30, 2017, AIG reported $4.6 billion of unrecognized tax benefits and $1.3 billion of accrued interest and penalties. The company continued to defend certain tax positions and stated that the ultimate effect of unresolved matters could be material to an individual reporting period.
Derivative contracts with credit-risk-related contingent features could require up to approximately $83 million of additional collateral postings and termination payments under specified rating downgrades, based on conditions at June 30, 2017.
Key market sensitivities included an estimated $16.1 billion adverse balance-sheet effect from a 100-basis-point parallel yield-curve increase and a $4.4 billion adverse effect from a 20% decline in equity and alternative-investment values; these are illustrative scenarios, not forecasts.

Important Facts for Investors to Verify

Whether Commercial Insurance loss trends, unfavorable reserve development and combined ratios improve after the 2016 loss-estimate increases.
The cash-flow, capital and reserve implications of the NICO agreement, including future covered losses, recoveries and deferred-gain amortization.
The sustainability of expense reductions and the remaining restructuring costs required to achieve the stated $1.4 billion to $1.5 billion savings target.
Exposure to low interest rates, annuity surrenders, credit-spread movements and variable-annuity guaranteed living-benefit hedging volatility.
The quality, liquidity and valuation sensitivity of AIG’s fixed maturity, structured-security, alternative-investment and commercial-mortgage portfolios.
Potential effects of credit-rating downgrades, collateral requirements, regulatory capital restrictions and catastrophe losses on liquidity and shareholder distributions.
Status and proceeds of remaining held-for-sale businesses, related regulatory approvals and indemnification or litigation obligations.
Resolution of unresolved tax matters, legal proceedings and the currently unquantifiable Grenfell Tower exposure.