Business Context and Reporting Period
American International Group, Inc. filed its Form 10-K for the fiscal year ended December 31, 2020. AIG is a global insurer operating in approximately 80 countries and jurisdictions across General Insurance, Life and Retirement, and Other Operations. The filing presents full-year results rather than a standalone fourth-quarter report.
In the fourth quarter, AIG revised its operating structure and eliminated the Legacy segment. Prior periods were recast into General Insurance, Life and Retirement, and Other Operations. AIG also announced its intention to separate the Life and Retirement business from AIG, although the structure, timing, approvals, and completion remained uncertain at filing.
Key Financial Metrics
| Metric | 2020 | 2019 | Change or comment |
|---|---|---|---|
| Total revenues | $43.7 billion | $49.7 billion | Down 12% |
| Net income attributable to AIG common shareholders | $(6.0) billion | $3.3 billion | Shifted to a substantial loss |
| Adjusted after-tax income attributable to common shareholders | $2.2 billion | $4.1 billion | Down approximately 46% |
| Adjusted return on common equity | 4.4% | 8.3% | Lower profitability |
| General Insurance combined ratio | 104.3% | 99.6% | Underwriting loss; 100% indicates breakeven |
| General Insurance accident-year combined ratio, as adjusted | 94.1% | 96.0% | Improved underlying underwriting performance |
| Life and Retirement adjusted pre-tax income | $3.5 billion | $3.6 billion | Broadly stable |
| Operating cash flow | $1.0 billion | $(1.8) billion | Improved year over year |
| Total assets | $586.5 billion | $525.1 billion | Higher, principally reflecting balance-sheet and market changes |
| Total AIG shareholders’ equity | $66.4 billion | $65.7 billion | Slightly higher |
| Long-term debt and debt of consolidated investment entities | $37.5 billion | $35.4 billion | Higher |
| AIG Parent liquidity sources | $15.0 billion | $12.1 billion | Included $4.5 billion undrawn revolving facility |
Revenue and Profit Drivers
- Premiums declined to $28.5 billion from $30.6 billion, while net investment income declined to $13.6 billion from $14.6 billion.
- Net realized capital losses were $2.2 billion, compared with gains of $632 million in 2019. The 2020 result included a $2.6 billion loss on the embedded derivative associated with Fortitude Re funds withheld assets.
- The net loss also reflected an $8.5 billion net loss on the sale or disposal of divested businesses, primarily the Fortitude transaction, higher catastrophe losses, COVID-19 mortality impacts, and Blackboard impairment charges.
- General operating and other expenses declined 2% to $8.4 billion. Restructuring and other costs increased to approximately $435 million from $218 million.
- The effective tax rate on the loss from continuing operations was 20.0%. The tax benefit included effects from the IRS settlement, valuation allowances, and other tax adjustments.
Segment Performance
| Segment | 2020 adjusted pre-tax income | 2019 | Primary drivers |
|---|---|---|---|
| General Insurance | $1.9 billion | $3.5 billion | Higher catastrophe losses and lower investment income, partly offset by improved underlying accident-year results and expense discipline |
| Life and Retirement | $3.5 billion | $3.6 billion | Stable overall; lower spreads and COVID-19 mortality offset by favorable results in Group Retirement and Institutional Markets |
| Other Operations and eliminations | $(2.4) billion | $(1.6) billion | Lower investment income after Fortitude deconsolidation and higher interest expense |
Cash Flow, Liquidity, Capital, and Debt
- Net cash provided by operating activities was $1.0 billion. Investing activities used $6.2 billion, and financing activities provided $5.1 billion. Cash and restricted cash ended at $3.2 billion, compared with $3.3 billion at year-end 2019.
- AIG Parent reported $15.0 billion of liquidity sources, consisting of $6.8 billion of cash and short-term investments, $3.7 billion of unencumbered fixed maturity securities, and $4.5 billion of available revolving credit capacity.
- AIG issued $4.1 billion of long-term debt during 2020 and repaid $2.0 billion of long-term debt. General borrowings outstanding were $26.0 billion; consolidated investment entity debt was $9.4 billion and generally nonrecourse to AIG.
- AIG paid $1.1 billion of common dividends, $29 million of preferred dividends, and repurchased approximately $500 million of common stock. Approximately $1.5 billion remained under the repurchase authorization at December 31, 2020.
- Approximately $41.6 billion of insurance subsidiary statutory capital and surplus was restricted from transfer to AIG Parent without prior regulatory approval.
- All domestic and foreign insurance subsidiaries exceeded minimum statutory capital and surplus requirements, and all domestic insurance subsidiaries exceeded RBC minimum levels.
Material Changes Versus the Prior Comparable Period
- GAAP results deteriorated from $3.3 billion of common-shareholder net income in 2019 to a $6.0 billion net loss in 2020, primarily because of the Fortitude sale loss, catastrophe and COVID-19 impacts, weaker investment results, and impairment charges.
- General Insurance net premiums written declined 9% to $23.0 billion. The General Insurance combined ratio worsened to 104.3%, but the adjusted accident-year combined ratio improved to 94.1%, reflecting rate increases, underwriting discipline, reinsurance, limit management, and expense reductions.
- General Insurance recorded approximately $2.4 billion of pre-tax catastrophe losses, including approximately $1.1 billion related to COVID-19, versus approximately $1.3 billion in 2019.
- General Insurance recognized $74 million of favorable prior-year reserve development, compared with $294 million of favorable development in 2019. Favorable Workers’ Compensation development was partly offset by adverse Financial Lines development.
- Life and Retirement adjusted pre-tax income decreased modestly to $3.5 billion. Individual Retirement income declined 2%, Life Insurance income declined 57%, while Group Retirement and Institutional Markets improved.
- Life and Retirement premiums and deposits declined in several annuity and retirement channels because of COVID-19 distribution disruptions and low interest rates. Approximately 67% of relevant fixed account values were crediting at contractual minimum guaranteed rates at year-end.
- Net unrealized gains in the available-for-sale portfolio increased to approximately $27.4 billion from $17.9 billion, primarily because of lower interest rates, partly offset by wider credit spreads.
- AIG adopted the current expected credit loss standard in 2020, reducing opening retained earnings by $487 million after tax.
- The filing revised prior-period cash-flow classifications related to policyholder contract deposits and withdrawals. Management concluded the misclassifications were not material to previously issued financial statements.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that COVID-19 continued to create uncertainty around claims, mortality, premium volumes, investment values, liquidity, policyholder behavior, regulation, and litigation. The filing does not provide quantitative earnings guidance.
- AIG’s 2021 priorities included separating Life and Retirement, improving General Insurance profitability, maintaining underwriting and pricing discipline, executing AIG 200 operational initiatives, optimizing risk and reinsurance, and managing capital.
- The proposed Life and Retirement separation could involve an initial disposition of up to 19.9%, but no definitive structure or timing had been established. Completion depended on board, insurance, regulatory, SEC, and other approvals.
- AIG completed the sale of a majority interest in Fortitude Holdings on June 2, 2020 for approximately $2.2 billion. AIG retained a 3.5% interest. Approximately $34.6 billion of reserves remained ceded to Fortitude Re at year-end, supported by a related reinsurance asset and funds-withheld arrangements.
- Fortitude Re was AIG’s largest reinsurance counterparty, representing approximately 47% of total reinsurance assets. AIG retained primary obligations to policyholders and could face material effects if Fortitude Re failed to perform or if ceded business were recaptured.
- AIG could owe Fortitude Re up to $500 million for specified adverse property-casualty reserve development through December 31, 2023.
- Other key risks included prolonged low interest rates, market and credit volatility, catastrophe and climate-related losses, reserve inadequacy, reinsurance collectability, policyholder lapses and surrenders, rating downgrades, cybersecurity, regulatory changes, litigation, LIBOR transition, and tax-attribute utilization.
- AIG reported $31.6 billion of U.S. federal net operating loss carryforwards and $1.4 billion of foreign tax credits. An ownership change could materially limit their utilization.
- AIG expected to pay approximately $0.7 billion to the U.S. Treasury under the IRS settlement relating to prior tax years, with payment timing and final amount subject to remaining calculations.
- Subsequent to year-end, AIG redeemed $1.5 billion of 3.300% Notes Due 2021, repurchased approximately $92 million of common stock using warrant exercise proceeds, and agreed to sell certain Retail Mutual Funds assets involving approximately $7.5 billion of assets targeted for merger into Touchstone funds.
Investor Verification Checklist
- Reconcile the $6.0 billion GAAP common-shareholder loss to the $2.2 billion adjusted after-tax income figure and assess which adjustments are recurring.
- Review the Fortitude sale accounting, $43.1 billion funds-withheld payable, $34.6 billion reinsurance asset, collateral levels, and potential $500 million adverse-development payment.
- Assess COVID-19 claim estimates, including the approximately $1.1 billion General Insurance catastrophe estimate and Life Insurance mortality impacts, against subsequent loss emergence.
- Monitor General Insurance rate increases, premium retention, Financial Lines reserve development, and whether the 94.1% adjusted accident-year combined ratio is sustainable.
- Evaluate Life and Retirement spread compression, minimum guaranteed crediting-rate exposure, annuity flows, lapse behavior, and the proposed separation’s capitalization and ratings implications.
- Review AIG Parent liquidity after debt maturities, dividends, repurchases, tax payments, and any restrictions on subsidiary dividends.
- Stress-test the investment portfolio, particularly commercial real estate, energy, structured securities, below-investment-grade assets, and Level 3 valuations.
- Examine the recoverability of deferred tax assets and the expiration or limitation of foreign tax credits and net operating losses.
- Review the audit’s critical audit matters covering Level 3 securities, loss reserves, embedded derivatives, DAC, and deferred tax assets, as these areas involve substantial estimation uncertainty.