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, 2020. AIG is a global insurance organization operating through General Insurance, Life and Retirement, Other Operations and a Legacy Portfolio. Results were materially affected by COVID-19, market volatility, the June 2, 2020 deconsolidation and sale of a majority interest in Fortitude Holdings, and the planned separation of Life and Retirement announced after quarter-end.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenues | $10.2 billion | $12.9 billion | $34.1 billion | $37.9 billion |
| Income from continuing operations | $294 million | $973 million | $(5.8) billion | $3.3 billion |
| Net income attributable to AIG common shareholders | $281 million | $648 million | $(5.9) billion | $2.4 billion |
| Diluted EPS | $0.32 | $0.72 | $(6.80) | $2.71 |
| Adjusted pre-tax income | $918 million | $746 million | $1.9 billion | $4.3 billion |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $2.2 billion | $(789) million |
Q3 2020 adjusted pre-tax income increased despite lower reported GAAP earnings. Life and Retirement adjusted pre-tax income rose 51% to $975 million, while General Insurance declined 18% to $416 million. Other Operations reported a $562 million adjusted pre-tax loss, and Legacy Portfolio adjusted pre-tax income was $89 million.
General Insurance net premiums written declined 11% in the quarter and 10% year to date. The consolidated General Insurance combined ratio was 107.2% in Q3 and 104.9% year to date, compared with 103.7% and 99.6%, respectively, in the prior-year periods. The accident-year combined ratio, as adjusted, improved to 93.3% in Q3 and 94.6% year to date, reflecting underwriting actions, rate increases and reinsurance, but catastrophe losses increased.
Q3 catastrophe losses were $790 million, including $185 million attributed to COVID-19. Nine-month catastrophe losses were $1.9 billion, including $915 million attributed to COVID-19. Reported catastrophe losses also included hurricanes, wildfires, civil unrest and other weather events.
Total assets were $577.2 billion at September 30, 2020, compared with $525.1 billion at December 31, 2019. Total AIG shareholders’ equity was $64.1 billion, compared with $65.7 billion. Book value per common share was $73.86, compared with $74.93; adjusted book value per common share was $56.78, compared with $58.89.
Total debt, including debt of consolidated investment entities, was $38.2 billion at September 30, 2020, compared with $35.4 billion at year-end 2019. AIG Parent reported $15.2 billion of liquidity sources, including $6.8 billion of cash and short-term investments, $3.9 billion of unencumbered fixed maturity securities and $4.5 billion of available revolving credit capacity.
Cash and restricted cash increased to $3.6 billion at September 30, 2020 from $3.3 billion at year-end 2019. Investing activities used $5.2 billion, while financing activities provided $3.3 billion. AIG paid $827 million of common dividends, $22 million of preferred dividends and repurchased approximately 12 million common shares for $500 million during the first nine months.
Material Changes Versus the Prior Comparable Period
- Nine-month results shifted from $2.4 billion of net income attributable to common shareholders in 2019 to a $5.9 billion net loss in 2020, primarily because of the Fortitude Holdings transaction, lower investment returns, COVID-19 impacts and higher catastrophe losses.
- The Fortitude transaction generated $2.2 billion of proceeds but caused an after-tax reduction of approximately $4.3 billion to AIG shareholders’ equity, including a $6.7 billion after-tax loss partially offset by a $2.4 billion increase in AOCI.
- Fortitude Re became an unaffiliated reinsurer following the sale. AIG continued to hold the supporting assets and recorded a $42.5 billion fair value pool and a $42.5 billion Fortitude Re funds-withheld payable at September 30, 2020.
- AIG adopted the current expected credit loss standard on January 1, 2020, reducing opening retained earnings by $487 million after tax. The allowance for credit losses totaled $1.7 billion at September 30, 2020.
- Blackboard was placed into run-off in March 2020, producing a $210 million pre-tax loss primarily from asset impairment charges.
- Net unrealized gains in the available-for-sale investment portfolio increased to approximately $23.7 billion from $17.9 billion at year-end 2019, primarily because of lower interest rates, partly offset by wider credit spreads.
Guidance, Outlook, Risks and Unusual Items
AIG did not provide a clear quantitative full-year earnings outlook in the filing. Management stated that nine-month results are not necessarily indicative of full-year results, particularly because the duration and severity of COVID-19 remain uncertain.
Management expects continued pressure from historically low interest rates, which reduce reinvestment yields, compress Life and Retirement spreads and may affect annuity sales and policyholder behavior. At September 30, 2020, 67% of aggregate fixed account values for Individual and Group Retirement annuities were crediting at contractual minimum guaranteed rates.
On October 26, 2020, AIG announced its intention to separate Life and Retirement. The structure, terms and timing were not determined, and completion remains subject to board, regulatory and other approvals. Following the announcement, Fitch placed AIG on Rating Watch Negative, Moody’s placed AIG debt on review for downgrade, and S&P placed AIG debt on CreditWatch with negative implications.
The Fortitude transaction includes a post-closing purchase price adjustment under which AIG may pay Fortitude Re up to $500 million for specified adverse property-casualty reserve development through December 31, 2023. AIG also issued $600 million of letters of credit supporting certain General Insurance subsidiaries that reinsure business with Fortitude Re.
AIG disclosed approximately $77.5 billion of reinsurance recoverables, of which approximately 93% were investment grade. It also disclosed $7.2 billion of investment commitments and $12.2 billion of consolidated off-balance-sheet guarantees and commercial commitments. AIG estimated that a specified downgrade could trigger up to approximately $46 million of additional collateral calls and termination payments on certain derivatives.
Other material risks include catastrophe claims, mortality, reserve adequacy, credit losses, commercial real estate exposure, investment valuation, policyholder surrenders, legal and regulatory actions, cybersecurity, tax matters and potential coverage disputes related to COVID-19. AIG disclosed that VFA agreed to pay approximately $40 million in penalties, disgorgement and interest in two SEC settlements concerning referral payments, mutual fund share-class practices and related disclosures.
Most Important Facts for Investors to Verify
- Reconcile reported GAAP losses with adjusted pre-tax income and assess the extent to which results depend on investment marks, derivative valuations and non-GAAP adjustments.
- Evaluate the economic and accounting effects of the Fortitude Re funds-withheld arrangements, including the $42.5 billion payable, embedded derivative volatility and potential $500 million reserve-development payment.
- Monitor COVID-19 claims, catastrophe losses, mortality, premium refunds, business interruption litigation and the adequacy of reinsurance coverage.
- Assess the effect of sustained low interest rates on Life and Retirement spreads, guaranteed benefits, DAC amortization, policyholder surrenders and asset-liability matching.
- Track the proposed Life and Retirement separation, required approvals, transaction costs, capital allocation, tax effects and rating-agency actions.
- Review liquidity at AIG Parent, debt maturities, rating-trigger collateral requirements and regulatory limits on dividends from insurance subsidiaries.
- Examine the recoverability of deferred tax assets, including the $286 million valuation allowance recorded in 2020, and the unresolved tax matters with approximately $4.8 billion of unrecognized tax benefits.