American International Group, Inc. — First-Quarter 2022 Form 10-Q
Business context and reporting period
AIG is a global insurance organization operating in approximately 70 countries and jurisdictions through General Insurance, Life and Retirement, and Other Operations. The filing covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021; balance-sheet comparisons are against December 31, 2021. The financial statements are unaudited and prepared under U.S. GAAP.
AIG continued preparing to separate Life and Retirement, held through Corebridge Financial. Blackstone owned 9.9% of Corebridge at quarter-end. AIG stated that an initial public offering was the expected next step, but no assurance was given regarding timing, terms, regulatory approvals, or completion.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 / Dec. 31, 2021 | Change |
|---|---|---|---|
| Total revenues | $15.808 billion | $14.454 billion | +9% |
| Income before tax | $5.835 billion | $4.728 billion | +23% |
| Net income attributable to AIG common shareholders | $4.253 billion | $3.869 billion | +10% |
| Diluted EPS | $5.15 | $4.41 | +17% |
| Adjusted pre-tax income | $1.514 billion | $1.256 billion | +21% |
| Adjusted after-tax income per diluted share | $1.30 | $1.05 | +24% |
| Operating cash flow | $57 million | $640 million | Down $583 million |
| Total assets | $573.513 billion | $596.112 billion | Down $22.599 billion |
| AIG shareholders’ equity | $55.944 billion | $65.956 billion | Down $10.012 billion |
| Long-term debt | $23.572 billion | $23.741 billion | Down $169 million |
| Adjusted book value per common share | $70.72 | $68.83 | +3% |
Reported net margin was approximately 26.9%, compared with approximately 26.8% in the prior-year quarter. Reported pre-tax margin was approximately 36.9%, compared with approximately 32.7%. The improvement was substantially influenced by market-sensitive realized gains, particularly on the Fortitude Re funds-withheld embedded derivative.
Business performance and material changes
- General Insurance: Adjusted pre-tax income increased to $1.211 billion from $845 million. Underwriting income rose to $446 million from $73 million, and the combined ratio improved to 92.9% from 98.8%. North America underwriting income improved to $256 million from a $202 million loss, largely because catastrophe losses declined. International underwriting income fell to $190 million from $275 million, primarily because catastrophe losses increased.
- Life and Retirement: Adjusted pre-tax income declined to $724 million from $941 million. Lower investment income, weaker equity markets, lower separate-account values, and higher DAC amortization and policyholder benefits pressured results. Individual Retirement income declined to $384 million from $532 million, and Group Retirement income declined to $225 million from $307 million.
- Other Operations: Adjusted pre-tax loss improved to $421 million from $530 million, mainly due to lower corporate interest expense and lower run-off underwriting losses.
- Investment results: Net investment income declined 11% to $3.237 billion. Net realized gains increased 36% to $4.419 billion, including a $3.318 billion gain on the Fortitude Re funds-withheld embedded derivative versus $2.382 billion in the prior year.
- Accumulated other comprehensive income: AIG recorded a $13.648 billion after-tax other comprehensive loss, primarily from a $13.607 billion decline in unrealized investment appreciation. Available-for-sale fixed maturity securities experienced a $20.2 billion decline in unrealized value, driven by higher interest rates and wider credit spreads.
- Capital deployment: AIG repurchased approximately 23 million shares for $1.403 billion and paid $258 million of common dividends. Shares outstanding declined to approximately 800.2 million from 818.7 million at year-end 2021.
Debt, liquidity and cash flow
AIG Parent reported approximately $13.582 billion of liquidity sources at March 31, 2022, consisting of $9.082 billion of cash, short-term investments and unencumbered fixed maturity securities, plus $4.5 billion of available capacity under its committed revolving credit facility, which expires in November 2026. Management stated that liquidity and capital resources were sufficient for reasonably foreseeable requirements, while noting potential pressure from collateral calls, reserve strengthening, catastrophe losses, rating downgrades, higher policy surrenders and market disruption.
Operating cash flow was only $57 million, compared with $640 million in the prior-year quarter. Investing activities provided $853 million, while financing activities used $595 million. Total long-term debt was $23.572 billion, and debt of consolidated investment entities was $6.366 billion.
Guidance, outlook, risks and unusual items
- No formal full-year earnings guidance is provided in the filing. AIG stated that first-quarter results are not necessarily indicative of the full year.
- Management highlighted rising interest rates, inflation, foreign-exchange volatility, equity-market weakness, widening credit spreads, COVID-19 effects, supply-chain disruption and the Russia-Ukraine conflict as key operating and investment factors.
- The Russia-Ukraine conflict contributed $85 million to first-quarter General Insurance catastrophe-related charges in International. The ultimate claims, sanctions, operational and investment effects remain uncertain.
- AIG’s insurance and investment results remain sensitive to interest rates, equity markets, credit spreads, policyholder behavior, catastrophe losses, reinsurance recoverability and valuation assumptions.
- AIG estimated that adoption of the long-duration contract accounting standard on January 1, 2023 could reduce equity by approximately $1.0 billion to $3.0 billion in the Life and Retirement business and could increase earnings volatility.
- AIG carried a $850 million valuation allowance related to certain tax attribute carryforwards and established $940 million of additional valuation allowance during the quarter for unrealized tax losses in U.S. life and non-life insurance portfolios, with the latter allocated to other comprehensive income.
- AIG disclosed ongoing litigation, regulatory and tax matters, including the Moriarty California life-insurance litigation. The company has accrued its current estimate of probable loss, but the potential ultimate liability is not clearly quantified.
- After quarter-end, Corebridge issued $6.5 billion of senior unsecured notes and used the proceeds to repay part of its $8.3 billion promissory note to AIG. AIG also repurchased approximately $6.8 billion of debt in April 2022 and announced redemption of €750 million of 2023 notes.
- After quarter-end, AIG announced a $6.5 billion common-stock repurchase authorization, including expected remaining authorization under the prior plan. AIG also entered investment-management agreements with BlackRock covering up to $150 billion of assets over approximately 12 months.
Most important facts for investors to verify
- Whether the Corebridge separation and IPO occur on the anticipated timetable and under what valuation, ownership and regulatory terms.
- How much of reported earnings is attributable to recurring underwriting and operating performance versus Fortitude Re embedded-derivative gains, hedging results and other market-sensitive items.
- The effect of higher rates and credit spreads on unrealized investment losses, capital, statutory surplus, liquidity and future investment income.
- Whether General Insurance’s improved combined ratio is sustained after adjusting for catastrophe losses, prior-year reserve development and reserve discounting.
- The implementation impact of the long-duration contract accounting standard in 2023, including the transition equity adjustment and ongoing market-driven volatility.
- The adequacy and collectability of approximately $77.7 billion of reinsurance recoverables, including Fortitude Re exposures and non-investment-grade counterparties.
- Potential cash requirements from debt tender offers, collateral calls, rating triggers, litigation, tax matters, share repurchases and dividends.