American International Group, Inc. — Q1 2020 Form 10-Q
Business context and reporting period
AIG is a global insurance organization operating through General Insurance, Life and Retirement, Other Operations and a Legacy Portfolio. The unaudited report covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019, and includes the initial effects of the COVID-19 crisis and related market disruption.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / prior period |
|---|---|---|
| Total revenues | $14.443 billion | $12.456 billion |
| Income from continuing operations | $1.654 billion | $937 million |
| Net income attributable to AIG common shareholders | $1.742 billion | $654 million |
| Diluted EPS | $1.98 | $0.75 |
| Net cash used in operating activities | $14 million | $976 million |
| Total assets at period end | $510.477 billion | $525.064 billion at December 31, 2019 |
| AIG shareholders’ equity | $60.173 billion | $65.675 billion at December 31, 2019 |
| Long-term debt and debt of consolidated investment entities | $35.410 billion | $35.350 billion at December 31, 2019 |
Reported net income benefited substantially from $3.519 billion of net realized capital gains, compared with a $446 million loss in the prior-year quarter. Net investment income declined 35% to $2.508 billion. The effective tax rate on continuing operations was 35.3%, versus 18.8% in Q1 2019. Reported net margin was approximately 11.5% based on net income and total revenues.
General Insurance adjusted pre-tax income declined to $501 million from $1.268 billion. The combined ratio deteriorated to 101.5% from 97.4%, although the accident-year combined ratio, as adjusted, improved to 95.5% from 96.1%. General Insurance recorded $419 million of catastrophe losses, including an estimated $272 million related to COVID-19.
Life and Retirement adjusted pre-tax income declined to $574 million from $924 million, primarily reflecting weaker equity markets, higher variable-annuity DAC and reserve impacts, lower investment returns and lower spreads. Other Operations generated an adjusted pre-tax loss of $451 million, compared with a $387 million loss. The Legacy Portfolio generated an adjusted pre-tax loss of $368 million, compared with $112 million of adjusted pre-tax income.
Material changes versus comparable periods
- AIG adopted the current expected credit loss standard on January 1, 2020, reducing opening retained earnings by $487 million after tax. Total credit-loss allowances reached $1.642 billion at March 31, 2020.
- Net unrealized investment gains declined by $10.455 billion during the quarter, and accumulated other comprehensive income fell from $4.982 billion to a loss of $994 million.
- Available-for-sale bond fair value declined to $241.776 billion from $251.086 billion at year-end 2019, while gross unrealized losses increased to $7.500 billion from $815 million.
- AIG placed Blackboard U.S. Holdings into run-off at the end of March and recognized a $210 million pre-tax loss, primarily from asset impairment charges.
- AIG repurchased approximately 12 million common shares for $500 million under an accelerated stock repurchase agreement and paid $276 million of common dividends.
- AIG borrowed $1.3 billion under its $4.5 billion revolving syndicated credit facility; $3.2 billion remained available at March 31, 2020.
- Book value per common share declined to $69.30 from $74.93 at year-end, while book value excluding AOCI increased to $70.45 from $69.20 and adjusted book value increased to $60.55 from $58.89.
Cash flow, debt and liquidity
Cash and restricted cash increased modestly to $3.319 billion from $3.179 billion at March 31, 2019. Investing activities used $633 million, while financing activities provided $660 million, primarily reflecting the $1.3 billion credit-facility borrowing, partly offset by debt repayments, share repurchases and dividends.
AIG Parent reported $10.688 billion of liquidity sources, comprising $5.112 billion of cash and short-term investments, $2.376 billion of unencumbered fixed-maturity securities and $3.200 billion of available credit-facility capacity. Total consolidated debt at March 31, 2020 was $36.710 billion, including the revolving-facility borrowing and debt of consolidated investment entities.
Outlook, commentary, risks and unusual items
The filing does not provide formal quantitative earnings guidance. Management stated that the ultimate COVID-19 impact cannot be estimated because the duration and severity of the crisis, economic contraction, market volatility, claims activity and governmental responses remain uncertain.
- COVID-19 may increase claims in business interruption, travel, trade credit, event cancellation, workers’ compensation, accident and health, life and other lines. Legislative or regulatory actions could expand coverage retroactively or require premium relief, refunds or payment moratoria.
- Management expects continued pressure from historically low interest rates, lower reinvestment yields, credit losses, equity-market volatility, policyholder surrenders and potential declines in premium volumes.
- AIG agreed to sell controlling interests in Fortitude Holdings, subject to regulatory approvals and other closing conditions. Upon closing, AIG expects to retain a 3.5% interest and contribute approximately $1.45 billion of proceeds temporarily to insurance subsidiaries.
- At March 31, 2020, the unamortized prepaid insurance assets and related DAC associated with Fortitude were approximately $2.2 billion and $0.4 billion after tax. AIG disclosed that a combined loss of approximately $2.6 billion could be incremental to any gain or loss on the Fortitude transaction when control is lost.
- AIG expects a potential payment of approximately $1.7 billion related to proposed settlements of cross-border financing tax litigation, although the settlements remain non-binding and the timing and amount are uncertain.
- Management identified risks from investment concentrations, commercial real estate, energy and utilities, financial institutions, reinsurance collectability, ratings downgrades, collateral calls, regulatory restrictions, litigation, cybersecurity and remote-work disruption.
- AIG declared subsequent common and preferred dividends on May 4, 2020. The company also announced the launch of Lloyd’s Syndicate 2019, exclusively reinsuring risks from AIG’s Private Client Group.
Important facts for investors to verify
- Subsequent COVID-19 claims development, including business-interruption and other coverage disputes, regulatory actions and the adequacy of catastrophe and loss reserves.
- Actual closing terms, regulatory approvals and final accounting consequences of the Fortitude Holdings sale, including the potential $2.6 billion incremental loss.
- Changes in the fair value and credit performance of AIG’s fixed-maturity, structured-credit, commercial mortgage and alternative-investment portfolios.
- Availability and cost of parent-company liquidity, future credit-facility usage, debt maturities and any ratings-triggered collateral or termination requirements.
- Future policyholder surrender and withdrawal behavior, annuity spreads, variable-annuity guarantee liabilities and DAC amortization.
- Resolution and payment requirements associated with tax litigation and the recoverability of deferred tax assets.
- Whether future dividends and share repurchases remain consistent with regulatory requirements, capital needs and management’s stated liquidity priorities.