American International Group, Inc. — 2010 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2010, compared primarily with the three months ended March 31, 2009. AIG operates through General Insurance, Domestic Life Insurance & Retirement Services, Foreign Life Insurance & Retirement Services, Financial Services, and Other operations. AIA, ALICO, and Nan Shan were classified as discontinued operations and held for sale.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 | Change/comment |
|---|---|---|---|
| Total revenues | $16.330 billion | $13.315 billion | Up 23% |
| Income (loss) from continuing operations before tax | $835 million | $(6.516) billion | Returned to profit |
| Income from continuing operations | $926 million | $(5.213) billion | Improved materially |
| Net income (loss) | $2.099 billion | $(5.133) billion | Includes discontinued operations |
| Net income attributable to AIG | $1.451 billion | $(4.353) billion | Improved materially |
| Net income attributable to common shareholders | $294 million | $(5.365) billion | Basic and diluted EPS of $0.41 from continuing operations |
| Net investment income | $4.836 billion | $915 million | Up 429%, principally from Maiden Lane gains and partnership results |
| Net realized capital losses | $(548) million | $(2.774) billion | Lower impairment and investment losses |
| Operating cash flow | $3.195 billion | $3.770 billion | Continuing operations provided $345 million |
| Cash and cash equivalents | $2.133 billion | $4.400 billion at Dec. 31, 2009 | Quarter-end cash declined |
| Total assets | $863.697 billion | $847.585 billion at Dec. 31, 2009 | Increase largely related to held-for-sale businesses |
| Total equity | $101.719 billion | $98.076 billion at Dec. 31, 2009 | Improved |
Continuing-operations pre-tax margin was approximately 5.1 percent, and continuing-operations net margin was approximately 5.7 percent, based on reported total revenues. These are derived measures and should not be confused with AIG’s segment or statutory margins.
Segment performance
| Segment | Q1 2010 pre-tax income (loss) | Q1 2009 | Key drivers |
|---|---|---|---|
| General Insurance | $1.016 billion | $102 million | Higher investment results and lower impairments offset underwriting losses and $481 million of catastrophe losses; combined ratio rose to 102.5% from 96.7% |
| Domestic Life & Retirement | $327 million | $(1.827) billion | Improved investment results, lower impairments, and no comparable DAC unlocking |
| Foreign Life & Retirement | $85 million | $(128) million | Lower impairments and improved investment results, partly offset by lower premiums and higher expenses |
| Financial Services | $(439) million | $(1.130) billion | Lower AIGFP losses and improved consumer finance results, offset by ILFC aircraft impairments |
| Other | $(294) million | $(3.444) billion | Lower FRBNY facility interest expense, a $751 million ML III fair-value gain, and mortgage-guaranty improvement |
Material changes versus the prior comparable period
- Revenue increased despite a 22 percent decline in premiums and other considerations, primarily because of higher investment income and improved market valuations.
- Maiden Lane II and III gains totaled approximately $911 million, compared with approximately $2.2 billion of losses in Q1 2009.
- Other-than-temporary impairment charges recognized in earnings declined to approximately $1.074 billion from $3.649 billion.
- AIGFP recorded a $119 million unrealized gain on its super senior credit default swap portfolio, compared with a $452 million loss in Q1 2009.
- Interest expense declined to $1.734 billion from $2.587 billion; FRBNY Credit Facility interest expense was $650 million versus $1.3 billion.
- Operating cash flow declined, while investing cash flow changed to a use of $4.516 billion from a source of $1.432 billion, largely reflecting discontinued operations and investment activity.
- General Insurance underwriting deteriorated, with the combined ratio increasing to 102.5% from 96.7%, despite $244 million of favorable prior-year reserve development.
- AIG adopted new consolidation guidance for variable interest entities, increasing assets by approximately $8.2 billion, liabilities by $7.1 billion, and noncontrolling interests by $1.1 billion.
Debt, liquidity, outlook, and management commentary
- Total debt was approximately $139.4 billion at March 31, 2010, including $27.4 billion outstanding under the FRBNY Credit Facility and $2.285 billion under the FRBNY Commercial Paper Funding Facility.
- Remaining availability was $12.507 billion under the FRBNY Credit Facility and $22.292 billion under the Department of the Treasury Commitment. AIG Parent had approximately $35.171 billion of stated liquidity sources at March 31, 2010.
- Management believes AIG has adequate liquidity to operate and meet obligations for at least the next twelve months. However, this conclusion depends materially on continued U.S. government support, asset dispositions, subsidiary payments, financing access, and market conditions.
- AIA was agreed to be sold to Prudential for approximately $35.5 billion, including $25 billion in cash. ALICO was agreed to be sold to MetLife for approximately $15.5 billion, including $6.8 billion in cash. Proceeds were expected to repay FRBNY obligations and redeem or reduce FRBNY preferred interests.
- ILFC and AGF materially improved liquidity after quarter-end. ILFC raised approximately $4.0 billion of debt and agreed to sell 53 aircraft expected to generate approximately $2.0 billion of gross proceeds. AGF completed a $1.0 billion securitization and drew a $3.0 billion secured term loan.
- Management prioritized stabilizing operating businesses, completing AIA, ALICO, and Nan Shan dispositions, reducing FRBNY obligations, addressing the leveraged capital structure, winding down AIGFP, and supporting ILFC and AGF liquidity.
Risks, contingencies, and unusual items
- Management recorded a $158 million reduction to net income attributable to AIG for out-of-period adjustments, primarily related to investment impairments and income taxes. AIG concluded that no restatement was required.
- Without additional government support if planned transactions or financing fail, management stated that substantial doubt could exist regarding AIG’s ability to continue as a going concern.
- AIGFP’s super senior CDS portfolio had $136.4 billion of net notional exposure and a $4.617 billion fair-value derivative liability before netting and collateral. Future collateral requirements could not be reasonably estimated.
- A one-notch downgrade was estimated to create up to approximately $1.6 billion of additional collateral postings and termination payments; further downgrades could create additional requirements.
- AIG had $16.023 billion of debt maturities over the four quarters following March 31, 2010. Contractual obligations totaled approximately $975.3 billion, including insurance liabilities, loss reserves, borrowings, interest, and aircraft purchase commitments.
- ILFC had commitments to purchase 120 aircraft for approximately $13.7 billion through 2019. Aircraft impairments and operating lease charges totaled $431 million in Q1 2010 for aircraft expected to be sold.
- Potential impairment of up to $3.3 billion existed for goodwill allocated to ALICO because its estimated fair value exceeded book value by only approximately 1 percent.
- Legal and regulatory matters included SEC, DOJ, U.K. and other investigations, securities and derivative litigation, workers’ compensation premium disputes, and other significant claims. AIG stated that ultimate liabilities could materially affect a period’s results, although amounts were not currently quantifiable for several matters.
- The April 20, 2010 Deepwater Horizon incident occurred after quarter-end. AIG estimated approximately $20 million of property-loss exposure had been paid but could not quantify potential casualty liabilities.
- Fair-value estimates for Level 3 assets, Maiden Lane interests, structured securities, and derivatives rely substantially on management assumptions and limited market information.
Most important facts for an investor to verify
- Whether the AIA and ALICO transactions closed on the agreed terms, the actual cash and securities proceeds, and the resulting reduction in FRBNY obligations.
- Actual post-quarter-end liquidity, debt maturities, collateral calls, credit-rating actions, and reliance on U.S. government support.
- Performance and valuation changes in AIGFP’s CDS portfolio, including termination activity, collateral requirements, and sensitivity to credit spreads and underlying asset values.
- General Insurance reserve development, catastrophe losses, pricing trends, and the sustainability of the 2010 favorable prior-year development.
- Recoverability of deferred tax assets and the potential ALICO goodwill impairment of up to $3.3 billion.
- Progress and final purchase-price allocation for the Fuji acquisition, including whether a substantial bargain-purchase gain is recognized.
- Developments in significant litigation, regulatory investigations, workers’ compensation claims, and Deepwater Horizon-related liabilities.
- Whether ILFC, AGF, and other subsidiaries can meet obligations without additional parent-company or government funding.