AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q2 FY2013

American International Group, Inc. — Form 10-Q Summary

Business context and reporting period

AIG is an international insurance organization operating in more than 130 countries. Its primary reportable segments are AIG Property Casualty and AIG Life and Retirement; Other Operations includes Mortgage Guaranty, Global Capital Markets, the Direct Investment book and Corporate & Other.

This unaudited filing covers the three and six months ended June 30, 2013, with comparisons to the corresponding 2012 periods. ILFC was classified as held for sale and discontinued operations. AIG continued pursuing a sale or initial public offering of ILFC; the proposed purchaser elected to acquire 90% of ILFC, but the transaction had not closed as of August 5, 2013.

Key financial metrics

Metric	Three months ended June 30, 2013	Three months ended June 30, 2012	Six months ended June 30, 2013	Six months ended June 30, 2012
Total revenues	$17.315 billion	$16.221 billion	$33.203 billion	$33.718 billion
Income from continuing operations	$2.725 billion	$2.160 billion	$4.863 billion	$5.545 billion
Net income attributable to AIG	$2.731 billion	$2.332 billion	$4.937 billion	$5.540 billion
Diluted EPS attributable to AIG	$1.84	$1.33	$3.33	$3.05
After-tax operating income attributable to AIG	$1.655 billion	$1.678 billion	$3.637 billion	$4.724 billion
Net cash provided by operating activities	Not separately provided	Not separately provided	$1.674 billion	$1.632 billion

Total revenues increased 7% in the second quarter but declined 2% for the first six months. Second-quarter earnings benefited from higher realized capital gains, improved insurance operations and lower legal reserves compared with 2012. Year-to-date earnings declined primarily because 2012 included significant gains on former interests in AIA, ML II and ML III.

Balance sheet, debt and liquidity

Total assets were $537.438 billion at June 30, 2013, down from $548.633 billion at December 31, 2012.
Total AIG shareholders’ equity was $97.463 billion, compared with $98.002 billion at year-end 2012. Book value per common share was $66.02; book value excluding AOCI was $61.25, up from $57.87.
Accumulated other comprehensive income declined to $7.039 billion from $12.574 billion, primarily because of unrealized investment losses.
Long-term debt declined to $42.614 billion from $48.500 billion. Total debt, including specified supported and subsidiary borrowings, declined to $42.614 billion from $48.500 billion after $5.558 billion of maturities and repayments, partly offset by $486 million of issuances.
AIG Parent reported total liquidity sources of $14.670 billion, including $8.123 billion of cash and short-term investments, $2.920 billion of unencumbered fixed-maturity securities, $3.127 billion of available syndicated credit capacity and $500 million under a contingent liquidity facility.
Cash increased to $1.762 billion from $1.151 billion. Six-month operating, investing and financing cash flows were respectively $1.674 billion, $6.071 billion and negative $7.055 billion.

Segment performance and material changes

AIG Property Casualty: Six-month pre-tax income increased to $2.772 billion from $1.871 billion. Operating income increased 35% to $2.674 billion. The adjusted accident-year combined ratio improved to 97.0 from 99.3, although the reported second-quarter combined ratio was 102.6. Storm Sandy contributed approximately $164 million of adverse Commercial Insurance development in the second quarter and $164 million for the first half.
AIG Life and Retirement: Six-month pre-tax income increased to $3.289 billion from $1.639 billion, and operating income increased 13% to $2.545 billion. Premiums and deposits increased 12% to $12.345 billion, driven by retirement income solutions and retail mutual funds. Results included $467 million of legal settlement income and $1.586 billion of net realized capital gains.
Other Operations: Six-month pre-tax results were a loss of $144 million versus income of $2.620 billion in 2012. The comparison was affected by the absence of prior-year AIA and ML III gains and a $378 million loss on extinguishment of debt. Second-quarter pre-tax income was $270 million versus a $116 million loss in 2012, reflecting improved Global Capital Markets and Direct Investment book results and lower legal reserves.
Mortgage Guaranty: New insurance written increased 63% to $24.637 billion for the first six months. Six-month operating income increased to $114 million from $51 million.

Investments, margins and unusual items

Net investment income declined 31% to $8.008 billion for the first six months, primarily because 2012 included fair-value gains on ML II, ML III and AIA. Excluding those prior-year items, insurance investment performance improved through alternative investment returns and yield-enhancement initiatives.
Net realized capital gains increased to $1.891 billion from $148 million for the first six months, largely from selling appreciated securities to utilize capital-loss carryforwards.
Net unrealized gains in the available-for-sale portfolio declined to approximately $14 billion from approximately $25 billion at year-end, primarily because of rising interest rates and realized gains.
Other-than-temporary impairment charges declined to $160 million from $834 million for the first six months.
Second-quarter and year-to-date comprehensive income attributable to AIG were losses of $2.069 billion and $598 million, respectively, versus income of $3.250 billion and $8.178 billion in the comparable 2012 periods, mainly due to investment-market losses recorded in other comprehensive income.
The six-month effective tax rate on continuing operations was 18.7%. AIG released $1.4 billion of the life-insurance-business capital-loss carryforward valuation allowance, including $1.3 billion through continuing operations. Future market conditions could require reestablishment of part of the allowance.

Guidance, outlook, risks and contingencies

Management’s 2013 priorities were to improve core operating performance, complete the ILFC disposition, enhance investment yields while maintaining credit quality, reduce expenses and interest costs, manage capital efficiently, and work with the Federal Reserve.
Management expected low interest rates, property-casualty industry overcapacity and uncertain global economic conditions to continue pressuring investment income and growth. Rising rates could improve reinvestment yields and fixed-annuity sales but could also reduce investment values and increase surrenders.
Approximately 74% of certain annuity and universal-life account values were at contractual minimum crediting rates at June 30, 2013. A rapid rise in rates could increase surrender activity, while prolonged low rates could compress spreads and reduce profitability.
AIG was designated for Federal Reserve supervision as a systemically important financial institution and was identified as a Global Systemically Important Insurer. Resulting capital, liquidity, stress-testing, resolution-planning and other regulatory requirements were not fully finalized and could increase costs or constrain capital actions.
Liquidity and capital could be pressured by additional collateral calls, investment losses, reserve strengthening, catastrophic losses, higher policy surrenders, credit-rating downgrades and restrictions on transfers from subsidiaries.
At June 30, 2013, AIG had approximately $3.0 billion of net derivative liabilities and estimated that specified additional rating downgrades could require approximately $78 million or $121 million of additional collateral postings and termination payments, although actual amounts could differ materially.
Material or potentially material legal matters included securities litigation, ERISA actions, the Starr International litigation, the Brookfield swap dispute with an estimated maximum contractual loss of $1.5 billion, Caremark litigation seeking $3.2 billion plus punitive damages, and other regulatory and insurance-related matters. For several matters, AIG could not reasonably estimate a loss range.
ILFC had aircraft purchase commitments totaling approximately $22.3 billion for 346 new and three used aircraft. AIG also reported $2.3 billion of commitments to invest in limited partnerships, private-equity and hedge funds and real estate.

Subsequent events

On August 1, 2013, AIG declared a $0.10 per-share common-stock dividend payable September 26, 2013.
On August 1, 2013, AIG authorized up to $1.0 billion of common-stock repurchases.
As of August 5, 2013, the ILFC sale had not closed.

Most important facts for investors to verify

Whether the ILFC sale or an alternative transaction closed, and the ultimate proceeds, ownership retained and loss or gain recognized.
The sustainability of earnings excluding realized capital gains, tax valuation allowance releases, legal settlements and other unusual items.
Property-casualty reserve development, particularly Storm Sandy, long-tail casualty, asbestos and environmental exposures.
The sensitivity of book value and capital to interest-rate movements, credit-spread widening, equity-market declines and foreign-currency changes.
The effect of Federal Reserve SIFI/SLHC supervision, G-SII requirements and other regulatory changes on capital, liquidity, dividends and repurchases.
Derivative collateral requirements and potential losses following credit-rating downgrades.
The status and potential exposure from disclosed litigation, tax examinations, guarantees, aircraft purchase commitments and other contingencies.
Whether management’s stated liquidity resources remain available after regulatory, collateral, policyholder-surrender and subsidiary-dividend constraints.