Business Context and Reporting Period
American International Group, Inc. (AIG) is a global insurer operating primarily through AIG Property Casualty and AIG Life and Retirement, with Mortgage Guaranty, Global Capital Markets, the Direct Investment Book, Corporate & Other, and post-sale AerCap-related activities included in Other Operations. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, with comparisons to the same periods in 2013 and balance-sheet comparisons to December 31, 2013.
On May 14, 2014, AIG completed the sale of International Lease Finance Corporation (ILFC) to AerCap for approximately $7.6 billion of total consideration, including cash and 97.6 million AerCap shares. AIG retained approximately 46% of AerCap and accounts for the investment under the equity method.
Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenues | $16.654 billion, up 4% | $48.871 billion, down 5% |
| Income from continuing operations | $2.199 billion, up 2% | $6.864 billion, down 3% |
| Net income attributable to AIG | $2.192 billion, up 1% | $6.874 billion, down 3% |
| Diluted EPS attributable to AIG | $1.52, versus $1.46 | $4.71, versus $4.80 |
| After-tax operating income attributable to AIG | $1.745 billion, up 23% | $5.359 billion, up 6% |
| Net cash provided by operating activities | Not separately provided for the quarter | $4.357 billion, versus $3.948 billion |
| Net investment income | $4.028 billion, up 13% | $12.108 billion, up 5% |
| Net realized capital gains | $470 million, versus $252 million | $358 million, versus $2.143 billion |
Reported pre-tax income from continuing operations was $3.019 billion for the quarter and $9.772 billion for the nine-month period. The effective tax rate was 27.2% for the quarter and 29.8% year to date, compared with (82.3)% and 2.4%, respectively, in the prior-year periods.
- AIG Property Casualty pre-tax operating income was $1.096 billion for the quarter and $3.610 billion year to date. The combined ratio was 102.0% for the quarter and 100.6% year to date; the adjusted accident-year combined ratio was 95.6% and 96.6%, respectively.
- AIG Life and Retirement pre-tax operating income was $1.348 billion for the quarter and $3.945 billion year to date. Premiums and deposits were $9.662 billion for the quarter and $24.151 billion year to date. Assets under management were $333.978 billion at September 30, 2014.
- Mortgage Guaranty pre-tax operating income was $135 million for the quarter and $421 million year to date. The domestic first-lien combined ratio was 55.7% for the quarter and 52.5% year to date.
Balance Sheet, Debt and Liquidity
| Metric | September 30, 2014 | December 31, 2013 |
|---|---|---|
| Total assets | $527.190 billion | $541.329 billion |
| Total liabilities | $418.207 billion | $440.218 billion |
| AIG shareholders’ equity | $108.581 billion | $100.470 billion |
| Total investments | $366.434 billion | $356.428 billion |
| Cash | $1.933 billion | $2.241 billion |
| Long-term debt | $36.223 billion | $41.693 billion |
| Book value per common share | $77.35 | $68.62 |
| Book value per common share excluding AOCI | $69.28 | $64.28 |
AIG Parent reported approximately $17.1 billion of liquidity sources, comprising $12.6 billion of cash, short-term investments and unencumbered securities, $4.0 billion of available syndicated credit capacity, and $500 million of contingent liquidity capacity. The consolidated Five-Year Facility had $4.0 billion available at September 30, 2014.
During the first nine months, AIG issued $5.827 billion and repaid $11.561 billion of long-term debt. It repurchased approximately 60 million common shares for $3.4 billion and paid $539 million of dividends. The quarterly dividend was $0.125 per share.
Material Changes Versus Prior Comparable Period
- Quarterly earnings improved despite higher legal reserves, debt-extinguishment losses and catastrophe-related costs. The improvement was supported by higher investment income, stronger AIG Life and Retirement results, and gains on foreign currency-denominated debt.
- Year-to-date reported revenue and net income declined primarily because ILFC revenue and expenses were included only through the May 14 sale date and because 2013 included substantially higher investment-sale gains.
- After-tax operating income increased in both comparison periods, reflecting stronger underlying insurance performance and lower extraordinary volatility than the reported GAAP figures suggest.
- AIG Property Casualty experienced higher adverse prior-year reserve development and catastrophe losses. Nine-month adverse prior-year development, net of premium adjustments, was $375 million versus $172 million in 2013, while catastrophe losses were $685 million versus $579 million.
- AIG Life and Retirement benefited from higher fee income, asset growth and alternative investment returns. Its quarterly net flows were negative $157 million, compared with positive $2.494 billion in 2013, primarily because of higher surrenders and withdrawals.
- AIG recognized a $1.8 billion reduction in deferred tax asset valuation allowances during the first nine months, with $161 million recorded in continuing-operations income and approximately $1.7 billion in other comprehensive income.
- Accumulated other comprehensive income increased to $11.331 billion from $6.360 billion, primarily due to higher unrealized investment appreciation.
Outlook, Commentary, Risks and Unusual Items
Management emphasized growth and profitability in core insurance businesses, improved investment yields while maintaining credit quality, more efficient capital deployment, expense reduction and continued simplification of the organization. No formal quantitative earnings or revenue guidance was provided in the filing.
- Low interest rates, reinvestment at lower yields, market volatility, credit-spread movements and equity-market performance remain important risks to investment income, insurance margins and annuity economics.
- Property Casualty faces pricing pressure, overcapacity, catastrophe exposure, severe losses and adverse development in long-tail casualty reserves. Terrorism Risk Insurance Program authorization was scheduled to expire December 31, 2014, creating legislative and coverage uncertainty.
- Life and Retirement remains exposed to low rates, surrender behavior, guaranteed minimum withdrawal benefits, longevity and mortality assumptions, and potential loss-recognition charges. Approximately 70% of universal-life and fixed-annuity account values were at their minimum crediting rates.
- AIG’s derivative and capital-markets activities expose it to collateral calls and early termination rights following credit-rating downgrades. Estimated additional collateral postings and termination payments were approximately $48 million after specified rating declines and approximately $190 million after further declines, although actual amounts could differ materially.
- At September 30, 2014, AIG had $2.5 billion of investment commitments, $6.36 billion of consolidated off-balance-sheet commercial commitments, and $4.5 billion of unrecognized tax benefits whose timing and ultimate resolution remain uncertain.
- AIG accrued a $960 million settlement obligation for the Consolidated 2008 Securities Litigation. The settlement remained subject to court approval, and the payment made in October 2014 was held in escrow.
- Other unresolved matters include ERISA and securities litigation, the Starr International litigation involving potential indemnification claims, Caremark-related litigation seeking $3.2 billion plus punitive damages, regulatory inquiries, and insurance reserve uncertainty.
- Subsequent to quarter-end, AIG paid approximately $5.1 billion for debt redemptions and repurchases, issued an additional $750 million of 4.5% notes due 2044, increased its share-repurchase authorization, and declared another $0.125 per-share dividend.
Important Facts for Investors to Verify
- Reconcile GAAP net income with after-tax operating income and isolate the effects of the ILFC sale, tax valuation allowance releases, legal items, realized gains and debt-extinguishment losses.
- Assess the sustainability of AIG Property Casualty’s adjusted accident-year improvement against adverse reserve development, catastrophe losses and a reported combined ratio above 100%.
- Review AIG Life and Retirement’s net flows, surrender trends, minimum crediting-rate exposure, embedded-derivative valuation and sensitivity to interest rates and equity markets.
- Evaluate liquidity after the post-quarter-end $5.1 billion debt transactions, the $960 million escrow payment and ongoing capital distributions.
- Review investment concentrations, including below-investment-grade bonds, RMBS, CMBS, CDO/ABS, commercial mortgage loans and Level 3 assets, together with unrealized losses and impairment assumptions.
- Track the resolution, accrual adequacy and potential range of losses for the major litigation, regulatory and tax matters disclosed in Note 10 and Note 15.
- Confirm the impact of regulatory capital requirements, termination of most AIG Life and Retirement capital maintenance agreements, and AIG’s continuing Federal Reserve and global systemically important insurer oversight.