AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q3 FY2010

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

Reporting period: Quarter and nine months ended September 30, 2010. The unaudited filing covers AIG’s insurance, retirement services, aircraft leasing, capital markets and other operations. Results reflect discontinued-operations classification for ALICO, AGF, AIG Star, AIG Edison and Nan Shan, while AIA remained in continuing operations at September 30, 2010.

Key Financial Metrics

Metric	Q3 2010	Q3 2009	9M 2010	9M 2009
Total revenues	$19.1 billion	$19.6 billion	$55.6 billion	$56.8 billion
Income from continuing operations before tax	$422 million	$(517) million	$3.8 billion	$(5.8) billion
Income from continuing operations	$(47) million	$(109) million	$2.8 billion	$(4.3) billion
Net income attributable to AIG	$(2.4) billion	$455 million	$(3.3) billion	$(2.1) billion
Net loss attributable to common shareholders	$(2.4) billion	$92 million	$(661) million	$(3.4) billion
Operating cash flow	Not separately provided for the quarter	$15.1 billion	$12.0 billion

Q3 2010 net loss included a $1.844 billion after-tax loss from discontinued operations. This included an estimated $1.9 billion pretax loss on the planned AGF sale and a $1.3 billion goodwill impairment charge related to AIG Star and AIG Edison. The nine-month discontinued-operations loss was $4.329 billion.

At September 30, 2010, total assets were $872.0 billion, total liabilities were $761.2 billion, total equity was $108.7 billion and AIG shareholders’ equity was $80.8 billion. Cash was $1.7 billion, compared with $4.4 billion at December 31, 2009. Assets held for sale increased to $234.8 billion from $56.4 billion.

Total investments were $477.3 billion, down from $601.2 billion at year-end 2009, primarily reflecting businesses classified as held for sale. Available-for-sale securities had $5.9 billion of gross unrealized losses and $28.2 billion of gross unrealized gains at September 30, 2010.

Debt included $20.5 billion outstanding under the Federal Reserve Bank of New York credit facility and $93.4 billion of other long-term debt. Total debt, including debt not guaranteed by AIG, was $113.9 billion at September 30, 2010. The FRBNY facility had $14.9 billion of remaining availability, subject to potential reclassification of prior repayments, and the Department of the Treasury Commitment had approximately $22.3 billion remaining availability.

Segment Performance and Margins

General Insurance: Q3 revenue was $9.4 billion and pretax income was $865 million, compared with $682 million in Q3 2009. The combined ratio improved to 99.3% from 105.2%; the nine-month combined ratio was 101.2% versus 100.0%.
Domestic Life Insurance and Retirement Services: Q3 revenue was $3.9 billion and pretax income was $998 million, compared with a $222 million pretax loss in Q3 2009. Nine-month pretax income was $1.4 billion versus a $1.8 billion loss.
Foreign Life Insurance and Retirement Services: Q3 revenue was $4.0 billion and pretax income was $691 million, up from $531 million. Nine-month pretax income was $2.1 billion, up from $1.3 billion.
Financial Services: Q3 revenue was $1.2 billion and pretax loss was $89 million, compared with $1.2 billion of pretax income in Q3 2009. The nine-month pretax loss was $267 million versus $1.5 billion of pretax income.
Other operations: Q3 pretax loss was $2.5 billion, compared with $3.1 billion. The nine-month pretax loss improved to $3.4 billion from $9.0 billion.

Cash Flow, Liquidity and Debt

For the first nine months, operating cash flow increased to $15.1 billion from $12.0 billion. Investing activities used $7.5 billion versus providing $9.1 billion in 2009, reflecting net purchases of fixed-maturity investments. Financing activities used $8.8 billion versus $25.0 billion in 2009.
AIG Parent reported $545 million of cash and short-term investments, $14.9 billion of available FRBNY borrowing and $22.3 billion of Treasury Commitment capacity at September 30, 2010, or total stated liquidity of $37.7 billion.
ILFC issued approximately $8.8 billion of debt during the first nine months and extended $2.16 billion of a $2.5 billion revolving facility to October 2012. ILFC also agreed to sell 64 aircraft and expected approximately $2.3 billion of gross proceeds during 2010.
Near-term maturities through Q3 2011 totaled approximately $12.1 billion, including $7.3 billion for ILFC and $4.8 billion of AIG borrowings and other obligations.

Material Changes Versus the Prior Comparable Period

Continuing-operations pretax results improved substantially, from a $517 million loss in Q3 2009 to $422 million of income in Q3 2010, driven by stronger insurance results, lower realized capital losses, lower restructuring costs and the absence of the prior-year divestiture losses.
Financial Services deteriorated because Capital Markets’ super-senior credit-default-swap valuation gain fell to $152 million from $959 million and ILFC recorded aircraft impairment charges of $465 million in Q3.
Net investment income declined 18% in Q3 to $5.2 billion, primarily because of lower Maiden Lane valuation gains and lower partnership income. Nine-month net investment income increased 10% to $15.5 billion.
Net realized capital losses narrowed to $661 million in Q3 and $1.5 billion for the nine months, compared with $1.9 billion and $5.0 billion, respectively, in the prior periods.
The Capital Markets derivatives portfolio declined 46% during 2010 to $505.8 billion of notional amount at September 30, including $87.8 billion of super-senior credit-default-swap exposure.
Other comprehensive income was $12.8 billion for the nine months, increasing accumulated other comprehensive income to $18.0 billion from $5.7 billion at year-end 2009.

Guidance, Outlook, Risks and Unusual Items

AIG entered into an agreement in principle on September 30, 2010 for a recapitalization targeted for completion before the end of the first quarter of 2011. The proposed transaction contemplated repayment and termination of the FRBNY facility, exchange of Series C, E and F preferred stock for approximately 1.655 billion common shares, issuance of Series G preferred stock and issuance of 10-year warrants to existing common shareholders. Completion depended on definitive documentation, adequate proceeds, acceptable ratings, financing commitments, de-risking targets and regulatory, shareholder and other approvals.

After the reporting date, AIG completed the AIA IPO on October 29, 2010, receiving approximately $20.5 billion of gross proceeds and retaining approximately 33% of AIA. AIG also completed the ALICO sale on November 1, 2010 for consideration valued at approximately $16.2 billion, including $7.2 billion of cash and MetLife securities. AIG expected to recognize material gains from both transactions in Q4 2010. The filing does not provide the final amounts of those gains.

Management concluded that AIG had adequate liquidity to operate and meet obligations for at least the next twelve months, but stated that failure of the recapitalization, insufficient third-party financing or loss of U.S. government support could create substantial doubt about the company’s ability to continue as a going concern.

Key risks included execution of the recapitalization and asset-disposition plan, regulatory approvals, rating downgrades, collateral calls, insurance reserve deterioration, policy surrenders, market declines, restricted subsidiary dividends and AIG’s highly leveraged capital structure.
A one-notch downgrade was estimated to create up to approximately $1.2 billion of additional collateral postings and termination payments; further downgrades could create additional requirements.
Capital Markets collateral posted against the super-senior CDS portfolio was $3.9 billion at September 30, 2010. AIG stated that future collateral requirements could not be reasonably estimated.
Legal and regulatory exposures remained material. AIG stated that unresolved litigation and investigations could materially affect consolidated results, cash flow or financial condition for an individual reporting period.
ILFC had commitments to purchase 115 aircraft for approximately $13.5 billion through 2019 and would need lessees and financing for a substantial portion of those aircraft.
AIG recorded $824 million of other-than-temporary impairment charges in Q3 and $2.3 billion for the nine months, compared with $1.5 billion and $5.7 billion in the prior comparable periods.
Out-of-period adjustments reduced Q3 net loss attributable to AIG by $166 million and increased the nine-month net loss by $210 million. Management concluded that no restatement was required.

Investor Verification Checklist

Verify completion, final terms and accounting consequences of the recapitalization, including the final ownership percentage of the U.S. Department of the Treasury.
Verify the final Q4 gains, cash proceeds and retained-interest valuation from the AIA IPO and ALICO sale.
Monitor repayment and termination of the FRBNY facility, remaining Treasury support, parent liquidity and restrictions on subsidiary dividends.
Assess Capital Markets CDS runoff, collateral requirements, downgrade triggers and the sensitivity of Level 3 valuations.
Review AGF, AIG Star, AIG Edison and Nan Shan closing conditions, proceeds and remaining indemnification exposure.
Evaluate insurance reserve development, asbestos and environmental claims, catastrophe losses and Deepwater Horizon claims.
Review ILFC aircraft impairments, aircraft-sale proceeds, debt maturities and the $13.5 billion aircraft purchase commitment.
Reconcile discontinued operations, goodwill impairments, deferred-tax valuation allowances and the effect of out-of-period adjustments when comparing future periods.