American International Group, Inc. — 2013 Q3 Form 10-Q Summary
Business context and reporting period
AIG is a global insurance organization operating in more than 130 countries. Its principal reportable segments are AIG Property Casualty and AIG Life and Retirement; Other Operations include Mortgage Guaranty, Global Capital Markets, the Direct Investment Book and corporate activities.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, with comparisons to the corresponding 2012 periods and balance-sheet comparisons to December 31, 2012.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenues | $14.826 billion | $16.722 billion | $48.029 billion | $50.440 billion |
| Income from continuing operations | $2.172 billion | $1.824 billion | $7.035 billion | $7.369 billion |
| Net income attributable to AIG | $2.170 billion | $1.856 billion | $7.107 billion | $7.396 billion |
| Diluted EPS attributable to AIG | $1.46 | $1.13 | $4.80 | $4.21 |
| After-tax operating income | $1.421 billion | $1.621 billion | $5.058 billion | $6.345 billion |
| Pre-tax margin | 8.0% | 15.3% | 14.9% | 17.2% |
| Net income margin | 14.6% | 11.1% | 14.8% | 14.6% |
Revenue declines primarily reflected lower net investment income and the absence of large 2012 fair-value gains related to AIA, Maiden Lane II and Maiden Lane III. Q3 income benefited from a $1.2 billion deferred tax valuation allowance release, producing an effective tax benefit rate of 84.2% on continuing operations; the nine-month effective tax rate was 1.7%.
Balance sheet, cash flow, debt and liquidity
- Total assets were $540.744 billion at September 30, 2013, compared with $548.633 billion at December 31, 2012.
- Total AIG shareholders’ equity increased to $98.793 billion from $98.002 billion. Book value per common share increased to $67.10 from $66.38; book value excluding AOCI increased to $62.68 from $57.87.
- Total investments were $358.302 billion, including $259.901 billion of available-for-sale bonds. Net unrealized gains in the available-for-sale portfolio declined to approximately $13 billion from approximately $25 billion, primarily because of higher interest rates and realized investment gains.
- Long-term debt declined to $42.231 billion from $48.500 billion. Nine-month debt issuances were $1.742 billion, while maturities and repayments were $7.633 billion. AIG reported $2.928 billion of debt maturities through the third quarter of 2014, excluding borrowings of consolidated investments.
- Nine-month net cash provided by operating activities was $3.948 billion, including $1.924 billion from continuing operations and $2.024 billion from discontinued operations, compared with $2.839 billion in 2012.
- Net cash provided by investing activities was $6.518 billion, while financing activities used $9.472 billion. Cash increased to $2.058 billion from $1.151 billion at year-end 2012.
- AIG Parent reported $16.863 billion of liquidity sources at September 30, 2013, consisting of $12.736 billion of cash, short-term investments and unencumbered securities, $3.627 billion of available syndicated facility capacity and $500 million of contingent liquidity capacity.
Material changes versus the prior comparable period
- AIG Property Casualty pre-tax income increased 8% in Q3 and 35% for the nine months. The adjusted accident-year combined ratio improved to 98.0% and 97.2%, respectively, from 100.1% and 99.6%.
- Commercial Insurance pre-tax income improved to $610 million in Q3 and $2.186 billion for the nine months, while Consumer Insurance declined to $93 million and $337 million, respectively. Consumer results reflected higher warranty losses, business-expansion costs and lower allocated investment income.
- AIG Life and Retirement pre-tax income increased 40% in Q3 and 79% for the nine months, to $1.241 billion and $4.530 billion. Results benefited from higher fee income, asset-management growth, spread management and a $118 million favorable update to estimated gross-profit assumptions, including a $198 million benefit in Retail partly offset by an $80 million Institutional charge.
- Life and Retirement premiums and deposits increased 76% in Q3 and 32% for the nine months, to $8.422 billion and $20.767 billion. Assets under management increased to $304.399 billion from $275.479 billion.
- Other Operations generated pre-tax losses of $1.125 billion in Q3 and $1.269 billion for the nine months, compared with income of $891 million and $3.511 billion in the prior-year periods. The comparison was affected by the absence of 2012 AIA and ML III gains, 2013 legal reserves and a $459 million nine-month loss on extinguishment of debt.
- Net investment income declined 23% in Q3 and 29% for the nine months, to $3.573 billion and $11.581 billion. Net realized capital gains were $252 million in Q3 and $2.143 billion for the nine months, versus $646 million and $794 million in 2012.
- Accumulated other comprehensive income declined to $6.509 billion from $12.574 billion, principally because of investment and foreign-currency losses.
Guidance, outlook, risks and unusual items
- The filing does not provide formal consolidated earnings guidance. Management’s priorities are to improve core underwriting, monetize ILFC, enhance investment yields while maintaining credit quality, improve capital efficiency, reduce expenses and operate under heightened Federal Reserve and global-insurer supervision.
- ILFC remained classified as held for sale and discontinued operations. The proposed sale of up to 90% had not closed as of October 31, 2013. ILFC generated a $1.636 billion pre-tax loss on sale during the first nine months, and held-for-sale assets and liabilities were $30.120 billion and $25.448 billion.
- ILFC had approximately $21.8 billion of remaining aircraft purchase commitments, with payments extending through 2022. These commitments relate to discontinued operations and require lessees and financing arrangements for aircraft acquisitions.
- Low interest rates continue to pressure investment yields, fixed-annuity sales, policy spreads, loss-recognition reserves and the recoverability of deferred acquisition costs. Approximately 75% of certain annuity and universal-life account values were at contractual minimum crediting rates at September 30, 2013.
- Management recorded $1.5 billion of loss recognition on certain payout annuity contracts during the first nine months, with additional recognition possible if investment sales or assumptions change.
- Insurance reserves remain subject to adverse development, particularly long-tail casualty, environmental, asbestos and workers’ compensation exposures. Net unpaid claims and claims adjustment expense were $64.778 billion.
- Legal, regulatory and tax matters remain material. AIG disclosed significant securities, ERISA, government-assistance, Caremark, employment and regulatory proceedings. Some matters have accrued probable losses; others cannot yet be reasonably estimated. The Caremark plaintiffs seek $3.2 billion of compensatory damages plus punitive damages.
- AIG’s net notional super-senior credit-default-swap portfolio was $15.237 billion. The filing states that current performance, subordination and risk mitigants make contractual payments unlikely, but the net notional amount represents maximum exposure to loss.
- AIG was designated a U.S. systemically important financial institution and a global systemically important insurer. Future capital, supervision, resolution-planning and loss-absorption requirements remain uncertain.
- On October 2, 2013, AIG issued $1.0 billion of 4.125% senior notes due 2024. On October 31, the Board declared a $0.10 per-share dividend payable in December 2013.
Important facts for investors to verify
- Whether the ILFC transaction closes, is terminated or is replaced by another sale or initial public offering, and the resulting cash proceeds and loss exposure.
- The sustainability of earnings excluding the $1.2 billion quarterly tax valuation allowance release, realized gains, legal items, debt-extinguishment losses and other fair-value effects.
- Future investment yields, unrealized losses, structured-securities performance and the effect of interest-rate changes on AOCI, capital and policyholder behavior.
- Development of long-tail insurance reserves, including Storm Sandy, environmental, asbestos, casualty and mortgage-guaranty claims.
- Liquidity requirements from policy surrenders, derivative collateral, credit-rating downgrades and DIB/GCM obligations.
- Progress on debt reduction, capital returns, regulatory capital requirements and restrictions on dividends from insurance subsidiaries.
- Outcomes and potential exposures from disclosed litigation, tax examinations, regulatory matters and indemnities related to prior asset dispositions.