AIG 3Q 2015 Form 10-Q Summary
Business context and reporting period
American International Group, Inc. is a global insurance organization operating primarily through Commercial Insurance, Consumer Insurance, and Corporate and Other. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods, and presents results under U.S. GAAP.
Key financial metrics
| Metric | 3Q 2015 | 3Q 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenues | $12.822 billion | $16.697 billion | $44.496 billion | $48.996 billion |
| Income from continuing operations | $(180) million | $2.199 billion | $4.071 billion | $6.864 billion |
| Net income attributable to AIG | $(231) million | $2.192 billion | $4.037 billion | $6.874 billion |
| Diluted EPS | $(0.18) | $1.52 | $2.97 | $4.71 |
| After-tax operating income attributable to AIG | $691 million | $1.722 billion | $4.275 billion | $5.259 billion |
| Net investment income | $3.206 billion | $4.028 billion | $10.870 billion | $12.108 billion |
| Net realized capital gains (losses) | $(342) million | $536 million | $1.125 billion | $546 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $2.234 billion | $4.357 billion |
Approximate net margins were negative in the third quarter because of the net loss and approximately 9.1% for the first nine months of 2015, compared with approximately 14.0% for the first nine months of 2014. After-tax operating income declined 60% in the quarter and 19% year to date.
- Total assets were $501.985 billion at September 30, 2015, compared with $515.581 billion at December 31, 2014.
- AIG shareholders’ equity was $98.999 billion, down from $106.898 billion at year-end 2014. Accumulated other comprehensive income declined to $6.557 billion from $10.617 billion, primarily reflecting investment and foreign-currency losses.
- Long-term debt was $30.719 billion, down from $31.217 billion. Total debt, including debt of consolidated investments, was $30.719 billion at September 30, 2015.
- AIG Parent reported liquidity sources of $15.703 billion, including $11.203 billion of cash, short-term investments and unencumbered securities, $4.0 billion of available syndicated credit capacity and $500 million of contingent liquidity capacity.
- Cash declined by $189 million during the first nine months, ending at $1.569 billion.
- The company repurchased approximately 129 million shares for approximately $7.5 billion and paid $687 million of common dividends during the first nine months.
Material changes versus the prior comparable period
- Revenue declined 23% in the third quarter and 9% year to date. The primary drivers were lower net investment income, lower premiums, the absence of aircraft leasing revenue following the ILFC sale, and lower other income.
- Net investment income fell 20% in the quarter and 10% year to date, reflecting weaker hedge fund and other alternative investment performance, lower fair-value-option income and lower reinvestment yields in the low-interest-rate environment.
- Third-quarter net realized capital losses of $342 million compared with gains of $536 million in 2014. Year-to-date gains increased to $1.125 billion, including gains on equity disposals and fair-value changes, partly offset by higher impairments and the loss on AerCap share sales.
- Commercial Insurance pre-tax operating income declined 34% in the quarter and 12% year to date, principally because of lower investment income and weaker Property Casualty underwriting results. Property Casualty’s combined ratio increased to 102.7% from 102.1%.
- Consumer Insurance pre-tax operating income declined 48% in the quarter and 26% year to date. Retirement and Life were affected by lower investment income and less favorable actuarial assumption updates; Personal Insurance was affected by lower investment income and weaker underwriting results.
- Mortgage Guaranty was a relative strength: pre-tax operating income increased 20% in the quarter and 10% year to date, while the first-lien combined ratio improved to 46.0% from 55.7% in the quarter and 49.2% from 52.5% year to date.
- Corporate and Other generated a pre-tax operating loss of $613 million in the quarter versus income of $149 million in 2014, reflecting weaker fair values for ABS CDOs and PICC investments, the absence of AerCap equity-method income and higher run-off insurance losses.
- Other-than-temporary impairment charges increased to $273 million in the quarter and $565 million year to date, compared with $50 million and $164 million, respectively, in 2014.
- Other comprehensive loss attributable to AIG was $1.294 billion in the quarter and $23 million year to date, compared with income of $2.012 billion and $11.845 billion in the prior-year periods.
Guidance, outlook, risks and unusual items
- Management did not provide a conventional quantitative earnings outlook in the filing. It expects low interest rates, currency volatility, weak or uneven global growth, equity-market volatility and property-casualty industry overcapacity to continue challenging investment income and profitability.
- AIG finalized restructuring initiatives expected to produce approximately $400 million to $500 million of annualized pre-tax savings when fully implemented. Expected pre-tax restructuring and other costs are approximately $500 million, including approximately $300 million of employee severance; $274 million was recognized in the third quarter, with remaining costs expected through 2017.
- Management expects to continue portfolio optimization, underwriting discipline, technology modernization, legal-entity simplification and capital-efficiency initiatives. Further staff reductions are anticipated in 2016.
- Commercial Property Casualty experienced adverse prior-year development of $191 million in the quarter and $532 million year to date, driven by Healthcare, Environmental and commercial automobile severity. The filing identifies deterioration in commercial automobile liability, particularly accident years 2011 through 2014.
- Life Insurance recorded a $157 million negative actuarial-assumption adjustment, including lower surrender and investment-spread assumptions and $39 million of loss-recognition expense for certain discontinued long-term-care products. Retirement recorded positive assumption adjustments totaling $140 million.
- At September 30, 2015, AIG’s available-for-sale investment portfolio had approximately $13.0 billion of net unrealized gains, down from approximately $19.0 billion at year-end 2014. Fixed maturity securities below investment grade or not rated totaled $35.4 billion.
- Potential liquidity pressures include catastrophe losses, reserve strengthening, higher policy surrenders, collateral calls, investment losses, credit-rating downgrades and restrictions on transfers from regulated subsidiaries. A one-notch downgrade scenario disclosed in the filing could require approximately $12 million to $118 million of additional collateral postings and termination payments, depending on the severity of the downgrade.
- Material legal and regulatory matters include continuing securities litigation, the Starr International appeal relating to the 2008 government assistance, Caremark-related litigation seeking $3.2 billion plus punitive damages, regulatory examinations and tax litigation. The filing states that some potential losses cannot be reasonably estimated.
- The board declared a $0.28 per-share dividend on November 2, 2015, payable December 21, 2015.
Most important facts for investors to verify
- Whether the decline in after-tax operating income is temporary investment-market volatility or reflects sustained deterioration in underwriting, spreads and fee-generating businesses.
- Future adverse development in commercial automobile, Healthcare, Environmental, asbestos and other run-off reserves.
- The actual timing, cash cost and savings realization from the restructuring program.
- Capital and liquidity effects of share repurchases, dividends, debt refinancing, collateral requirements and regulatory restrictions on subsidiary dividends.
- Credit-spread, equity-market, interest-rate and foreign-exchange sensitivity of the investment portfolio and variable-annuity guarantees.
- Progress and ultimate exposure from significant litigation, tax examinations, regulatory matters and indemnification obligations.
- Whether Mortgage Guaranty’s favorable delinquency and claims trends persist and whether the new private mortgage insurer capital requirements change required capital or dividend capacity.