American International Group, Inc. — Second 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. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
AIG continued preparations to separate its Life and Retirement business through Corebridge Financial. Blackstone held a 9.9% Corebridge interest, and Corebridge issued $6.5 billion of senior unsecured notes in April 2022 to repay part of its $8.3 billion promissory note to AIG.
Financial performance and key metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Total revenues | $14.441 billion | $10.681 billion | $30.249 billion | $25.135 billion |
| Income before tax | $4.321 billion | $147 million | $10.156 billion | $4.875 billion |
| Net income attributable to AIG common shareholders | $3.028 billion | $91 million | $7.281 billion | $3.960 billion |
| Diluted EPS | $3.78 | $0.11 | $8.95 | $4.53 |
| Adjusted pre-tax income | $1.359 billion | $1.708 billion | $2.873 billion | $2.964 billion |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $631 million | $2.810 billion |
Reported pre-tax margin was approximately 29.9% for the quarter and 33.6% year to date; reported net income attributable to common shareholders represented approximately 21.0% and 24.1% of revenues, respectively. These reported margins were materially affected by market-driven realized gains, particularly the Fortitude Re funds withheld embedded derivative.
- General Insurance: Adjusted pre-tax income was $1.257 billion for the quarter and $2.468 billion year to date, compared with $1.194 billion and $2.039 billion, respectively. Underwriting income was $799 million in the quarter and $1.245 billion year to date. The combined ratio improved to 87.4% for the quarter and 90.2% year to date, from 92.5% and 95.5% in the comparable periods.
- Life and Retirement: Adjusted pre-tax income was $563 million for the quarter and $1.287 billion year to date, down from $1.124 billion and $2.065 billion. Lower investment income, equity-market-related fee pressure, and higher DAC amortization and policyholder benefits weighed on results.
- Other Operations: Adjusted pre-tax loss improved to $461 million for the quarter and $882 million year to date, compared with losses of $610 million and $1.140 billion.
- Investment income: Net investment income declined 29% year over year in the quarter to $2.604 billion and 20% year to date to $5.841 billion, reflecting lower alternative investment returns, lower fair-value investment results and reduced income from Fortitude Re funds withheld assets.
- Reserve development: AIG recorded favorable prior-year loss reserve development of $203 million in the quarter and $296 million year to date, compared with unfavorable development of $14 million and favorable development of $23 million in the prior-year periods.
Financial position, cash flow, debt and liquidity
- Total assets were $538.938 billion at June 30, 2022, down from $596.112 billion at December 31, 2021, primarily reflecting lower market values of fixed maturity and separate-account assets.
- Total AIG shareholders’ equity was $45.344 billion, down from $65.956 billion. Accumulated other comprehensive loss was $17.656 billion, compared with accumulated other comprehensive income of $6.687 billion at year-end, primarily due to fixed-income market losses.
- Book value per common share declined to $58.16 from $79.97, while adjusted book value per common share increased to $72.23 from $68.83. Adjusted return on common equity was 7.0% for the quarter and 7.3% year to date, compared with 10.5% and 9.0%.
- Operating cash flow was $631 million year to date, compared with $2.810 billion in 2021. Investing activities provided $2.534 billion, while financing activities used $2.793 billion. Cash and restricted cash ended at $2.728 billion.
- Long-term debt was $22.186 billion, down from $23.741 billion. AIG repurchased or redeemed $7.6 billion of debt in the first half, recording a $299 million loss on extinguishment of debt. Debt of consolidated investment entities was $6.252 billion and is generally limited to the assets of those entities.
- AIG Parent reported $10.063 billion of liquidity sources at June 30, 2022, including $5.563 billion of cash, short-term investments and unencumbered fixed maturity securities and $4.5 billion of available committed credit capacity.
- AIG repurchased approximately 53 million common shares for $3.1 billion during the first half and had $6.5 billion of authorized repurchase capacity as of May 3, 2022. Approximately $5.3 billion remained as of August 3, 2022 after subsequent repurchases.
Material changes versus the prior comparable period
- Reported earnings increased substantially, but the improvement was driven mainly by a $2.776 billion quarterly and $6.094 billion year-to-date gain on the Fortitude Re funds withheld embedded derivative, compared with losses in the 2021 quarter and substantially smaller gains year to date.
- Adjusted pre-tax income declined 20% in the quarter and 3% year to date, showing weaker underlying earnings despite higher reported GAAP income.
- General Insurance underwriting improved materially, including stronger North America results, lower catastrophe losses, favorable reserve development and improved pricing and risk selection.
- Life and Retirement earnings declined because of lower investment income, weaker equity markets, lower fee-based asset values and increased DAC amortization and policyholder benefits.
- Net unrealized losses on fixed maturity securities were $17.9 billion in the second quarter and $38.1 billion year to date, compared with a net unrealized gain in the second quarter of 2021. The available-for-sale portfolio moved from a $18.1 billion net unrealized gain at December 31, 2021 to a $20.0 billion net unrealized loss at June 30, 2022.
- The number of common shares repurchased increased materially, while weighted-average diluted shares declined to 800.7 million in the quarter and 813.3 million year to date.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal quantitative earnings guidance. Management expects results to remain sensitive to interest rates, equity markets, credit spreads, foreign exchange, inflation, catastrophe activity, competition, regulation and geopolitical conditions.
- Rising interest rates may improve reinvestment yields and fixed-annuity sales, but can reduce asset values, fee income and reported equity and may increase crediting rates and surrender pressure.
- Management cited continued inflation, supply-chain disruption, labor shortages, elevated loss-cost trends, climate-related catastrophe exposure and the Russia/Ukraine conflict as important risks to underwriting and investment results.
- The Life and Retirement separation and Corebridge IPO remain subject to board, regulatory and SEC approvals, and the filing provides no assurance regarding timing, structure or completion.
- AIG entered into investment management arrangements with BlackRock, with an expectation of transferring management of up to $150 billion of assets over 12 months; the filing states that not all contemplated agreements may be completed.
- AIG expects to adopt the long-duration targeted improvements accounting standard on January 1, 2023. Management estimated a possible transition-date reduction in AIG equity of approximately $1.0 billion to $3.0 billion in the Life and Retirement business, with increased future earnings volatility possible from fair-value measurement of market risk benefits.
- At June 30, 2022, AIG had $23.3 billion of gross unrealized losses on available-for-sale bonds for which no credit-loss allowance was recorded. Management concluded the losses were primarily non-credit-related and did not intend, nor expect, to be required, to sell the securities before recovery.
- Legal and regulatory matters include the Moriarty litigation concerning California life insurance lapse-notice requirements. AIG has accrued its current estimate of probable loss, but the ultimate liability remains uncertain.
- Additional risks include reinsurance counterparty performance, reserve adequacy, collateral calls following ratings changes, cybersecurity, tax examinations, deferred-tax-asset realizability and restrictions on dividends from regulated subsidiaries.
Most important facts for an investor to verify
- How much of reported earnings is attributable to recurring underwriting and operating performance versus Fortitude Re, derivatives, fair-value movements and other non-operating items.
- Whether General Insurance’s improved combined ratios and favorable reserve development persist after catastrophe losses, inflation and social-inflation effects.
- The sustainability of Life and Retirement earnings amid equity-market volatility, lower fee-based assets, annuity surrender behavior and rising crediting costs.
- The effect of further interest-rate and credit-spread changes on AIG’s $232.7 billion available-for-sale bond portfolio, AOCI, statutory capital and liquidity.
- The timing, valuation, regulatory approvals and capital consequences of the Corebridge separation or IPO.
- The implementation impact of the long-duration accounting standard, including the estimated $1.0 billion to $3.0 billion equity reduction.
- AIG Parent’s liquidity after debt repayments, share repurchases and dividends, including the ability to receive future distributions from regulated subsidiaries.