AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q3 FY2021

Business Context and Reporting Period

American International Group, Inc. (AIG) filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. AIG is a global insurance organization operating through General Insurance, Life and Retirement, and Other Operations, serving customers in approximately 80 countries and jurisdictions.

The filing reflects AIG’s planned separation of Life and Retirement. Blackstone agreed to acquire a 9.9% interest in SAFG Retirement Services for $2.2 billion; the transaction closed on November 2, 2021, after the reporting date. AIG also agreed to sell its U.S. affordable housing portfolio to a Blackstone affiliate for approximately $5.1 billion, subject to customary closing conditions.

Financial Performance and Key Metrics

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Total revenues	$12.835 billion	$10.221 billion	$37.970 billion	$34.060 billion
Income before tax from continuing operations	$2.176 billion	$368 million	$7.051 billion	$(6.735) billion
Net income attributable to AIG common shareholders	$1.660 billion	$281 million	$5.620 billion	$(5.913) billion
Diluted earnings per share	$1.92	$0.32	$6.45	$(6.80)
Net cash provided by operating activities	Not separately provided for the quarter	Not separately provided for the quarter	$5.764 billion	$609 million

Q3 2021 pre-tax margin was approximately 17.0%; nine-month pre-tax margin was approximately 18.6%.
Q3 2021 net margin attributable to common shareholders was approximately 12.9%; nine-month net margin was approximately 14.8%.
Adjusted pre-tax income, a non-GAAP measure, was $1.126 billion in Q3 2021 versus $916 million in Q3 2020, and $4.090 billion for the first nine months versus $1.887 billion in the prior-year period.
Adjusted after-tax income attributable to common shareholders was $837 million in Q3 2021 versus $708 million in Q3 2020, and $3.091 billion for the first nine months versus $1.374 billion.
General Insurance adjusted pre-tax income increased to $811 million in Q3 and $2.850 billion for the first nine months. The consolidated combined ratio improved to 99.7% in Q3 and 97.0% year to date, compared with 107.2% and 104.9%, respectively.
Life and Retirement adjusted pre-tax income was $877 million in Q3 and $2.942 billion year to date. Q3 results declined 13% because of higher deferred policy acquisition cost amortization and actuarial assumption impacts; year-to-date results increased 17%.
Total assets were $594.8 billion at September 30, 2021, compared with $586.5 billion at December 31, 2020. AIG shareholders’ equity was $64.9 billion, compared with $66.4 billion.
Book value per common share was $77.03, compared with $76.46 at year-end 2020. Adjusted book value per common share was $61.80, compared with $57.01.
Long-term debt was $24.6 billion, down from $28.1 billion, and debt of consolidated investment entities was $7.0 billion, down from $9.4 billion.
Cash and restricted cash were $2.834 billion at September 30, 2021, compared with $3.607 billion at September 30, 2020.
AIG Parent reported $9.816 billion of liquidity sources, including $5.316 billion of cash, short-term investments and unencumbered fixed maturity securities, plus $4.5 billion of available revolving credit capacity.

Material Changes Versus the Prior Comparable Period

Q3 and year-to-date earnings improved substantially, primarily because 2020 included the $8.4 billion loss associated with the sale and deconsolidation of Fortitude Holdings.
General Insurance underwriting improved materially. Net premiums written increased 11% in Q3 and 15% year to date, supported by rate increases, higher renewal retentions and new business growth. Catastrophe-related charges declined to $618 million in Q3 and $1.190 billion year to date, versus $788 million and $1.902 billion.
General Insurance recognized favorable prior-year development of $50 million in Q3 and $73 million year to date, compared with unfavorable development of $13 million in Q3 2020 and favorable development of $123 million year to date in 2020.
Net investment income increased 14% year to date to $11.047 billion, driven primarily by alternative investment returns and Fortitude Re funds withheld assets.
Net realized gains were $660 million in Q3 and $1.984 billion year to date, compared with a $1.122 billion loss and $65 million gain, respectively, in the prior-year periods. Results were significantly affected by derivative valuations, real estate sales and Fortitude Re-related items.
Q3 deferred policy acquisition cost amortization increased 78% to $1.260 billion, primarily reflecting the annual actuarial assumption review. The review reduced year-to-date Life and Retirement adjusted pre-tax income by $166 million, primarily due to lower projected investment earnings on fixed annuities.
Unrealized losses on fixed maturity securities were $2.1 billion in Q3 and $7.9 billion year to date, primarily due to higher interest rates. Accumulated other comprehensive income declined to $8.6 billion from $13.5 billion.
AIG repurchased approximately 32 million common shares for $1.651 billion during the first nine months and paid $819 million of common dividends. Approximately $4.6 billion remained under the repurchase authorization as of November 4, 2021.
AIG corrected prior-period presentation errors: certain cash-flow classifications for the nine months ended September 30, 2020 and a $5.8 billion balance-sheet reclassification between policyholder contract deposits and future policy benefits. Management determined the errors were not material to prior periods.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide a specific earnings or revenue forecast. Management expects results to remain sensitive to interest rates, equity and credit markets, foreign currency movements, inflation, catastrophe losses, COVID-19 developments, competition, regulation and reinsurance availability.
Management reported improved demand and pricing in General Insurance Commercial Lines but cited social and economic inflation, claims severity, catastrophe exposure, capacity returning to certain markets and volatility in Financial Lines.
Life and Retirement remains exposed to low interest rates, reinvestment spread compression, increased surrenders if rates rise, mortality trends, policyholder behavior and valuation changes in guaranteed living benefits. Approximately 68% of applicable fixed account values were crediting at contractual minimum guaranteed rates at September 30, 2021.
The separation of Life and Retirement remains subject to future approvals and execution risk. The filing states that an initial public offering was expected to be the next step, but provides no assurance regarding its form, terms, timing or completion.
The affordable housing sale involved approximately $4.3 billion of assets and $2.7 billion of liabilities classified as held for sale at September 30, 2021.
AIG recorded a $111 million loss on debt extinguishment associated with cash tender offers during the first nine months. Approximately $262 million of principal was repurchased for approximately $369 million.
AIG recorded a $700 million valuation allowance against certain U.S. tax attribute carryforwards during the first quarter. The balance-sheet valuation allowance related to certain tax attribute carryforwards was $850 million at September 30, 2021.
AIG expects to make an additional payment to the U.S. Treasury related to a settled foreign-tax-credit matter as early as the fourth quarter of 2021; the expected remaining amount was approximately $0.3 billion, including amounts previously paid and interest subject to final calculation.
Legal, regulatory and tax matters remain potentially material. AIG accrued its current estimate of probable loss related to California life-insurance litigation, but stated that ultimate exposure for unresolved proceedings cannot currently be quantified.
The long-duration insurance accounting standard is scheduled for adoption on January 1, 2023 and is expected to have a significant impact on reported financial condition, results, cash flows, disclosures, systems and controls.

Investor Verification Checklist

Verify completion terms, proceeds, regulatory approvals and capitalization effects of the Blackstone transaction and the planned Life and Retirement separation.
Verify closing status and final proceeds from the affordable housing portfolio sale.
Assess the sustainability of General Insurance’s improved combined ratio, including catastrophe losses, Financial Lines reserve development and inflationary claims trends.
Separate recurring operating performance from realized gains, derivative valuation movements, Fortitude Re-related items, divestitures, tax benefits and actuarial assumption changes.
Review exposure to higher interest rates, unrealized investment losses, spread compression, annuity surrenders and guaranteed living-benefit liabilities.
Verify the remaining U.S. Treasury tax payment, valuation allowance assumptions and recoverability of deferred tax assets.
Review liquidity available at AIG Parent versus regulatory restrictions on dividends and transfers from insurance subsidiaries, as well as debt maturities and ratings-trigger collateral requirements.
Monitor COVID-19, catastrophe, climate, cybersecurity, regulatory, litigation, reinsurance-counterparty and capital-market risks identified in the filing.