American International Group, Inc. — First Quarter 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period three months ended March 31, 2020. AIG is a global insurance organization operating primarily through General Insurance, Life and Retirement, and Other Operations. The filing is unaudited and should be read with the 2020 Form 10-K.
Business Context and Reporting Period
- AIG serves commercial and individual customers in approximately 80 countries and jurisdictions.
- AIG announced its intention to separate Life and Retirement from AIG; the structure, timing and completion remain subject to approvals and other conditions.
- AIG entered into an agreement to sell certain Life and Retirement retail mutual fund assets to Touchstone. The transaction covered twelve funds with approximately $7.4 billion of assets; six additional funds with approximately $0.2 billion of assets were expected to be liquidated.
- Fortitude Holdings was deconsolidated in June 2020. As of March 31, 2021, approximately $34.3 billion of AIG reserves had been ceded to Fortitude Re, with related funds-withheld assets and liabilities remaining on AIG’s balance sheet.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|
| Total revenues | $14.454 billion | $14.443 billion | Flat |
| Income before tax | $4.728 billion | $2.558 billion | Up 85% |
| Net income | $3.930 billion | $1.654 billion | Up 138% |
| Net income attributable to AIG | $3.876 billion | $1.749 billion | Up 122% |
| Net income attributable to common shareholders | $3.869 billion | $1.742 billion | Up 122% |
| Diluted EPS | $4.41 | $1.98 | Up 123% |
| Adjusted pre-tax income | $1.256 billion | $0.180 billion | Up $1.076 billion |
| Adjusted after-tax income attributable to common shareholders | $0.923 billion | $0.105 billion | Up $0.818 billion |
| Adjusted diluted EPS | $1.05 | $0.12 | Up $0.93 |
| Adjusted return on common equity | 7.4% | 0.8% | Up 6.6 points |
- Premiums declined 13% to $6.507 billion, while policy fees increased 4% to $784 million.
- Total net investment income increased 46% to $3.657 billion, including $486 million from Fortitude Re funds-withheld assets.
- Net realized capital gains declined 8% to $3.250 billion. The 2021 amount included a $2.382 billion gain on the Fortitude Re funds-withheld embedded derivative.
- Policyholder benefits and losses declined 19% to $5.139 billion; deferred policy acquisition cost amortization declined 30% to $1.304 billion.
- The effective tax rate on continuing operations was 16.9%, compared with 35.3% in the prior-year quarter. AIG recorded a $700 million increase in valuation allowance against certain tax attribute carryforwards.
Balance Sheet, Cash Flow, Debt and Liquidity
| Metric | March 31, 2021 | December 31, 2020 |
|---|
| Total assets | $584.390 billion | $586.481 billion |
| Total liabilities | $520.830 billion | $519.282 billion |
| AIG shareholders’ equity | $62.679 billion | $66.362 billion |
| Book value per common share | $72.37 | $76.46 |
| Adjusted book value per common share | $58.69 | $57.01 |
| Long-term debt | $26.432 billion | $28.103 billion |
| Debt of consolidated investment entities | $9.216 billion | $9.431 billion |
| Cash and restricted cash | $3.244 billion | $3.230 billion at year-end |
- Operating cash flow was $640 million, compared with an operating cash outflow of $586 million in Q1 2020.
- Investing activities provided $1.505 billion, while financing activities used $2.114 billion. Cash and restricted cash increased $14 million during the quarter.
- AIG Parent reported approximately $12.422 billion of liquidity sources, including $4.401 billion of cash and short-term investments, $3.521 billion of unencumbered fixed maturity securities and $4.500 billion of available committed revolving credit capacity.
- AIG redeemed $1.5 billion of notes during the quarter. Total debt, including debt of consolidated investment entities, declined to $35.648 billion.
- AIG repurchased approximately 8 million common shares for $362 million and paid $276 million of common dividends and $7 million of preferred dividends.
Material Changes Versus the Prior Comparable Period
- Profitability improved materially, driven by stronger alternative investment and equity-market returns, improved General Insurance underwriting, lower variable-annuity DAC and reserve impacts, and lower expenses.
- General Insurance adjusted pre-tax income rose to $845 million from $501 million. Net premiums written increased 9% to $6.479 billion, and the combined ratio improved to 98.8% from 101.5%.
- General Insurance North America produced a $202 million underwriting loss versus a $103 million loss, primarily because of higher catastrophe losses, including winter storms. Its adjusted accident-year combined ratio improved to 95.6% from 97.7%.
- General Insurance International underwriting income increased to $275 million from $16 million, and its combined ratio improved to 92.2% from 99.5%.
- Life and Retirement adjusted pre-tax income increased 57% to $941 million. Individual Retirement income rose to $532 million, Group Retirement to $307 million, and Institutional Markets to $142 million; Life Insurance recorded a $40 million loss versus $78 million of income, primarily because of COVID-19-related mortality.
- Other Operations’ adjusted pre-tax loss improved to $530 million from $922 million, mainly because of higher investment income and the prior-year comparison affected by Fortitude-related results.
- Accumulated other comprehensive income declined to $6.466 billion from $13.511 billion, primarily because of a $7.199 billion after-tax decline in unrealized investment appreciation. AIG attributed the decline mainly to rising interest rates.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide specific consolidated earnings or revenue guidance for 2021. Management states that quarterly results are not necessarily indicative of full-year results.
- COVID-19 remains a significant uncertainty, potentially affecting claims, mortality, premiums, sales, investment valuations, liquidity, capital, regulation and litigation.
- Low interest rates continue to pressure reinvestment yields, product spreads, annuity sales and the profitability of existing Life and Retirement business. Rising rates may reduce unrealized investment gains and increase surrender activity.
- AIG faces exposure to catastrophe losses, long-tail reserve uncertainty, credit losses, reinsurance recoverability, market volatility, counterparty defaults, rating downgrades, cybersecurity events and regulatory changes.
- A downgrade of AIG’s long-term senior debt ratings could trigger collateral calls or termination rights. The filing estimates up to approximately $40 million of additional collateral calls and termination payments under specified downgrade scenarios for outstanding derivatives.
- AIG expects to pay approximately $0.7 billion under the settlement of historical tax matters, including interest subject to further review; additional payments could occur as early as Q2 2021.
- The Fortitude Re transaction includes a potential post-closing payment by AIG of up to $500 million for specified adverse property-casualty reserve development through December 31, 2023.
- Reinsurance recoverables totaled approximately $78.2 billion at March 31, 2021; approximately 6% were classified as non-investment grade, with most of that exposure related to General Insurance.
- Unrealized losses on available-for-sale fixed maturity securities increased significantly during the quarter, although management concluded the losses were primarily non-credit related and did not intend to sell or expect to be required to sell the affected securities before recovery.
- The filing identifies a material future accounting change: implementation of the long-duration contract standard is expected to significantly affect reported financial condition, results, cash flows, disclosures, systems, processes and controls when adopted, currently targeted for January 1, 2023.
Most Important Facts for Investors to Verify
- Whether and when AIG completes the proposed Life and Retirement separation, including transaction structure, regulatory approvals, capitalization and effects on ratings and liquidity.
- The sustainability of Q1 earnings given the substantial contribution from investment returns, realized gains and the Fortitude Re embedded derivative.
- COVID-19 mortality, catastrophe claims, reserve development and the performance of North America General Insurance.
- Interest-rate sensitivity of the fixed maturity portfolio, unrealized gains, Life and Retirement spreads, annuity guarantees and surrender behavior.
- The collectability and collateralization of reinsurance recoverables, particularly Fortitude Re and non-investment-grade counterparties.
- The timing and final amount of the historical tax settlement and the recoverability of deferred tax assets following the $700 million valuation allowance increase.
- Future debt maturities, rating-agency actions, collateral requirements and the continued availability of AIG’s $4.5 billion revolving credit facility.
- The effect of the long-duration insurance accounting standard on equity, earnings volatility, reserves, DAC and regulatory capital.
