Business context and reporting period
American International Group, Inc. (AIG) is a global insurance organization serving commercial, institutional and individual customers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods, and presents Commercial Insurance, Consumer Insurance, and Corporate and Other. Segment presentation was revised in the third quarter to classify United Guaranty and Institutional Markets within Corporate and Other.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenues | $12.854 billion | $12.822 billion | $39.357 billion | $44.496 billion |
| Income from continuing operations | $433 million | $(180) million | $2.211 billion | $4.071 billion |
| Net income attributable to AIG | $462 million | $(231) million | $2.192 billion | $4.037 billion |
| Diluted EPS | $0.42 | $(0.18) | $1.92 | $2.97 |
| After-tax operating income attributable to AIG | $1.097 billion | $691 million | $2.983 billion | $4.275 billion |
| Pre-tax operating income | $1.612 billion | $848 million | $4.186 billion | $6.243 billion |
- Q3 net income improved from a prior-year loss, primarily because of stronger insurance operations, higher net investment income, lower debt-extinguishment costs and gains on divested businesses. These benefits were partly offset by higher realized capital losses and a $622 million loss-recognition charge in Institutional Markets.
- Nine-month net income and operating income declined materially, reflecting lower investment income, realized capital losses versus prior-year gains, the Institutional Markets charge, lower Corporate and Other results, and higher restructuring costs.
- Net investment income was $3.783 billion in Q3, up 18 percent, but $10.479 billion for nine months, down 4 percent. Alternative-investment performance improved in Q3 but was weaker year to date.
- Net realized capital losses were $765 million in Q3 and $829 million for nine months, compared with losses of $342 million and gains of $1.125 billion, respectively, in the prior-year periods. Foreign-exchange losses, including effects following the Brexit vote, were significant.
- Commercial Insurance pre-tax operating income was $729 million in Q3, up 23 percent, but $2.306 billion for nine months, down 23 percent. The Q3 combined ratio was 105.3, compared with 102.3; the nine-month ratio was 100.9, compared with 99.3. The adjusted accident-year combined ratio improved to 92.4 in Q3 and 91.2 for nine months.
- Consumer Insurance pre-tax operating income increased to $1.384 billion in Q3 and $3.276 billion for nine months, increases of 111 percent and 25 percent, respectively. Personal Insurance’s combined ratio improved to 96.3 in Q3 and 95.2 for nine months.
- Balance-sheet totals at September 30, 2016 were $514.568 billion of assets, $425.403 billion of liabilities, $32.277 billion of long-term debt and $88.663 billion of AIG shareholders’ equity. Book value per common share was $85.02, versus $75.10 at December 31, 2015; excluding AOCI, it was $76.33.
- Reported ROE was 2.1 percent for Q3 and 3.3 percent for nine months. ROE based on after-tax operating income excluding AOCI was 5.4 percent and 4.8 percent, respectively.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was $1.753 billion, down from $2.234 billion. Investing cash flow was $325 million, down from $6.680 billion, largely because the 2015 period benefited from AerCap-related proceeds. Financing cash flow was $(1.297) billion, compared with $(9.064) billion.
- Cash increased to $2.498 billion from $1.629 billion at year-end 2015. AIG issued $11.430 billion of long-term debt and repaid $7.683 billion during the nine months; total debt increased to $32.277 billion.
- AIG Parent reported $13.071 billion of liquidity sources at September 30, including $2.349 billion of cash and short-term investments, $6.222 billion of unencumbered fixed-maturity securities and $4.5 billion of available syndicated credit capacity.
- AIG repurchased approximately 153 million common shares for $8.5 billion and 15 million warrants for $263 million during the nine months. It paid quarterly dividends of $0.32 per share. The November 2, 2016 authorization increase left approximately $4.4 billion available for repurchases.
Material changes, outlook and unusual items
- AIG agreed to sell United Guaranty to Arch Capital for expected consideration of $3.4 billion, subject to regulatory and customary closing conditions. United Guaranty assets of $6.661 billion and liabilities of $3.909 billion were classified as held for sale.
- AIG agreed to sell its interest in Ascot for total consideration of approximately $1.1 billion and expected net cash proceeds of approximately $240 million, subject to approvals. In October 2016, AIG also agreed to sell certain international insurance operations to Fairfax for approximately $240 million.
- AIG sold its controlling interest in NSM Insurance Group for $201 million and recognized a pre-tax gain of approximately $105 million. It also completed the Advisor Group sale earlier in 2016, recognizing a $238 million pre-tax gain.
- Management expects restructuring and other costs of approximately $1.2 billion in total, of which approximately $1.0 billion had been recognized by September 30, 2016. The initiatives are expected to generate annualized pre-tax savings of approximately $1.2 billion to $1.3 billion when fully implemented.
- Management’s stated priorities are improving ROE, simplifying the organization, reducing expenses, improving Commercial Insurance underwriting, returning excess capital and increasing book value per share. No conventional consolidated earnings guidance was provided.
- Key operating risks include prolonged low interest rates, reinvestment at lower yields, catastrophe losses, adverse reserve development, market and foreign-exchange volatility, variable-annuity guarantee exposures, credit deterioration, rating downgrades, regulatory changes, Brexit-related operating impacts and the execution of planned divestitures.
- The filing identifies significant judgment in loss reserves, life policy benefits, deferred acquisition costs, tax assets, fair values, impairments and legal contingencies. AIG reported $4.5 billion of unrecognized tax benefits and $1.2 billion of accrued interest and penalties at September 30, 2016.
- Legal and regulatory matters remain potentially material, including the SICO litigation appeal, insurance-related proceedings, tax litigation, regulatory examinations and the Caremark matter, which was settled and paid during the quarter. The filing states that ultimate exposure for certain matters cannot currently be quantified.
Investor verification checklist
- Verify whether the United Guaranty and Ascot transactions closed on the expected terms and how proceeds, taxes and capital releases were ultimately recorded.
- Assess the sustainability of Q3 operating performance apart from alternative-investment gains, actuarial assumption updates, divestiture gains and other non-recurring items.
- Review Commercial Insurance reserve development, catastrophe losses, pricing trends and whether the adjusted accident-year improvement offsets the reported combined ratio above 100.
- Monitor Institutional Markets’ $622 million loss-recognition charge and sensitivity to mortality, longevity, interest rates and future investment yields.
- Reconcile reported book value growth with the $6.520 billion increase in AOCI and substantial share repurchases.
- Evaluate liquidity under stress scenarios, including collateral calls, rating downgrades, higher surrenders, catastrophe losses and restrictions on dividends from regulated subsidiaries.
- Review the full legal, tax and regulatory disclosures for potential cash payments or adverse outcomes not reflected in the summarized financial statements.