Business context and reporting period
American International Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2009, including fourth-quarter results. AIG operated through General Insurance, Domestic Life Insurance and Retirement Services, Foreign Life Insurance and Retirement Services, and Financial Services. The company was controlled by the AIG Credit Facility Trust for the benefit of the U.S. Treasury and remained dependent on substantial U.S. government support.
Key financial metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total revenues | $96.0 billion | $6.9 billion |
| Income (loss) from continuing operations before tax | $(13.6) billion | $(106.5) billion |
| Net income (loss) attributable to AIG | $(10.9) billion | $(99.3) billion |
| Net loss attributable to AIG in Q4 | $(8.9) billion | Not clearly provided in the filing text |
| Net investment income | $25.2 billion | $11.4 billion |
| Net realized capital losses | $(6.9) billion | $(52.7) billion |
| Operating cash flow | $18.6 billion provided | $122 million used |
| Total assets | $847.6 billion | $860.4 billion |
| Total investments | $601.2 billion | $636.9 billion |
| Total debt | $141.5 billion | $193.2 billion |
| Total equity | $98.1 billion | $60.8 billion |
| Cash | $4.4 billion | $8.6 billion |
2009 revenue and earnings benefited materially from a $1.4 billion unrealized valuation gain on AIGFP's super-senior credit default swap portfolio, compared with a $28.6 billion loss in 2008. The filing also reported $7.8 billion of other-than-temporary impairment charges, $15.4 billion of interest expense, and a $2.9 billion increase in the deferred-tax valuation allowance.
General Insurance produced a $169 million pretax profit, but underwriting remained unprofitable: net premiums written were $30.7 billion, underwriting loss was $2.6 billion, and the combined ratio deteriorated to 108.0% from 101.9%. Foreign Life Insurance and Retirement Services produced $3.2 billion of pretax income, while Domestic Life Insurance and Retirement Services recorded a $1.2 billion pretax loss.
Material changes versus prior comparable period
- Net loss attributable to AIG improved substantially from $99.3 billion in 2008 to $10.9 billion in 2009, primarily because markets recovered, impairment charges declined, and AIGFP valuation losses reversed.
- Premiums and other considerations fell 18% to $64.7 billion, reflecting divestitures, lower commercial insurance volumes, weaker life and annuity sales, foreign exchange effects, and customer and distributor concerns following AIG's financial crisis.
- Fourth-quarter loss was driven by $6.2 billion of FRBNY interest and amortization expense, including $5.2 billion of accelerated prepaid-commitment-asset amortization; a $2.8 billion pretax loss on the pending Nan Shan sale; a $2.3 billion General Insurance reserve strengthening charge; and a $2.7 billion tax valuation allowance adjustment.
- On December 1, 2009, AIG transferred preferred interests in SPVs holding AIA and ALICO to the FRBNY, reducing the FRBNY Credit Facility by $25 billion. The transaction also created preferred interests with a $25 billion initial liquidation preference and a 5% preferred return through September 2013, increasing to 9% thereafter.
- AIGFP reduced its derivative portfolio notional amount by 41%, from $1.6 trillion to $940.7 billion, and reduced outstanding trade positions from approximately 35,000 to 16,100.
- AIG completed or agreed to dispositions involving Transatlantic, 21st Century, HSB, portions of AIG Credit, consumer finance operations, institutional asset management, and other businesses. Nan Shan was classified as discontinued operations and held for sale.
- General Insurance prior-year loss development was adverse by $2.8 billion, compared with adverse development of $118 million in 2008. Net loss reserves ended at $67.9 billion, down from $72.5 billion primarily because of divestitures.
Liquidity, debt, outlook, and risks
At December 31, 2009, AIG had $17.1 billion of remaining borrowing capacity under the FRBNY Credit Facility, $24.5 billion of remaining availability under the Department of the Treasury Commitment, and $528 million of parent cash and short-term investments. Management concluded that AIG had adequate liquidity for at least the next twelve months, but stated that failure of its plans or loss of government support could create substantial doubt about its ability to continue as a going concern.
AIG's 2010 priorities were to stabilize its businesses, execute further asset dispositions, monetize AIA and ALICO, wind down AIGFP, and address the funding needs of ILFC and AGF. Management expected modest gross and net premium growth in General Insurance, gradual recovery in domestic life and retirement sales, continued weakness in foreign investment-oriented product sales, and continued AIGFP portfolio runoff.
- Near-term debt maturities totaled approximately $19.4 billion for 2010, including $6.8 billion for ILFC, $6.6 billion for AGF, $2.2 billion for the Matched Investment Program, $1.9 billion for AIGFP, and $1.4 billion for AIG parent.
- ILFC and AGF lacked normal access to unsecured debt markets and depended on secured financing, asset sales, securitizations, receivable collections, and potential AIG support.
- AIG's parent depended on dividends and other payments from subsidiaries, but regulators restricted distributions from many regulated subsidiaries.
- A further ratings downgrade could trigger up to approximately $1.8 billion of additional collateral postings and termination payments for a one-notch downgrade, with additional amounts for further downgrades; actual amounts could differ materially.
- AIGFP retained $150.0 billion of net notional regulatory-capital CDS and $30.0 billion of arbitrage CDS within its super-senior portfolio. The filing states that future losses remain possible, particularly if counterparties do not terminate transactions as expected or credit markets deteriorate.
- Long-tail casualty reserves remain highly judgmental. Sensitivity disclosures indicate that reasonably likely changes in reserving assumptions could increase excess-casualty reserves by approximately $2.2 billion, excess workers' compensation reserves by up to $1.3 billion, and primary workers' compensation reserves by up to $2.5 billion.
- The filing identifies unresolved securities, derivative, regulatory, antitrust, tax, and other litigation and investigations for which ultimate exposure cannot currently be quantified.
Most important facts an investor should verify
- Whether AIG completed the planned AIA, ALICO, Nan Shan, asset-management, ILFC, and AGF transactions and the actual proceeds and impact on government obligations.
- Current FRBNY Credit Facility borrowings, Treasury Commitment availability, accrued interest and fees, and compliance with applicable covenants.
- Actual development of General Insurance casualty reserves after the $2.3 billion fourth-quarter strengthening charge.
- Changes in AIGFP's super-senior CDS notional exposure, collateral requirements, terminations, and fair-value assumptions.
- Liquidity and refinancing progress at ILFC, AGF, the Matched Investment Program, and AIGFP.
- Regulatory restrictions on subsidiary dividends and any additional capital support required for insurance subsidiaries.
- Recoverability of the $5.9 billion net deferred tax asset and the potential for additional valuation allowances.
- Material developments in litigation, regulatory investigations, tax examinations, and the Brookfield swap dispute.
- The effect of preferred stock rights, Treasury ownership, potential dilution, and the absence of common-stock dividends.