Business Context and Reporting Period
American International Group, Inc. (AIG) is a global insurer operating in more than 80 countries through General Insurance, Life and Retirement, Other Operations and a Legacy Portfolio. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods, and reflects the continuing effects of COVID-19, market volatility and historically low interest rates.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues | $9.396 billion | $12.561 billion | $23.839 billion | $25.017 billion |
| Income (loss) from continuing operations | $(7.765) billion | $1.391 billion | $(6.111) billion | $2.328 billion |
| Net income (loss) attributable to AIG common shareholders | $(7.936) billion | $1.102 billion | $(6.194) billion | $1.756 billion |
| Basic loss per common share | $(9.15) | $1.26 income | $(7.11) | $2.00 income |
| Adjusted pre-tax income | $803 million | $1.677 billion | $975 million | $3.524 billion |
| Adjusted after-tax income attributable to common shareholders | $571 million | $1.272 billion | $670 million | $2.660 billion |
| Adjusted return on common equity | 4.6% | 10.4% | 2.7% | 11.0% |
Premiums were $7.407 billion in the quarter, essentially flat year over year, and $14.850 billion for the six months, down 4%. Net investment income declined 10% in the quarter and 23% year to date. Q2 net realized capital losses were $2.332 billion, compared with $404 million of gains in the prior-year quarter; six-month net realized capital gains were $1.187 billion versus a $42 million loss in 2019.
General Insurance produced adjusted pre-tax income of $175 million in Q2 and $676 million year to date, down from $980 million and $2.248 billion, respectively. The consolidated combined ratio was 106.0% in Q2 and 103.7% year to date, compared with 97.8% and 97.5% in the comparable 2019 periods. The adjusted accident-year combined ratio was 94.9% in Q2 and 95.2% year to date.
Life and Retirement adjusted pre-tax income was $881 million in Q2 and $1.455 billion year to date, down 16% and 26%, respectively. Its base net investment spread declined to 1.55% in Individual Retirement and 1.63% in Group Retirement during Q2. At June 30, 2020, 67% of aggregate Individual and Group Retirement fixed account values were crediting at contractual minimum guaranteed rates.
Balance Sheet, Cash Flow, Debt and Liquidity
- Total assets were $569.388 billion at June 30, 2020, up from $525.064 billion at December 31, 2019.
- Total AIG shareholders’ equity was $62.234 billion, down from $65.675 billion; book value per common share was $71.68 versus $74.93 at year-end. Adjusted book value per common share was $55.90 versus $58.89.
- Investments totaled $350.151 billion, including $258.505 billion of available-for-sale bonds. Net unrealized gains on the available-for-sale portfolio increased to approximately $21.4 billion from $17.9 billion at year-end.
- Cash flow from operating activities was $1.325 billion for the six months, compared with $(1.272) billion in 2019. Investing cash flow was $(2.903) billion and financing cash flow was $2.140 billion. Cash and restricted cash ended at $3.852 billion.
- Long-term debt was $29.248 billion and total debt, including debt of consolidated investment entities, was $39.280 billion, compared with $35.350 billion at year-end.
- AIG Parent reported $15.156 billion of liquidity sources at June 30, including $7.654 billion of cash and short-term investments, $3.002 billion of unencumbered fixed-maturity securities and $4.5 billion of available revolving credit capacity. A $1.3 billion March borrowing under the facility was repaid in June.
- AIG issued $4.1 billion of notes in May 2020 and repaid or repurchased approximately $1.6 billion of debt during the first six months.
Material Changes Versus the Prior Comparable Period
- Fortitude transaction: On June 2, 2020, AIG sold controlling interests in Fortitude Holdings to Carlyle and T&D, retaining a 3.5% interest. AIG received approximately $2.2 billion of proceeds but recorded an $8.412 billion pre-tax loss from the divestiture and a $4.3 billion after-tax reduction to AIG shareholders’ equity related to the sale and deconsolidation.
- Fortitude Re became an unaffiliated reinsurer of approximately $34.6 billion of ceded Legacy reserves. AIG continues to hold the supporting investments under funds-withheld arrangements and recorded a $42.033 billion funds-withheld payable and a $34.556 billion Fortitude Re reinsurance asset at June 30.
- COVID-19: General Insurance recorded $674 million of Q2 catastrophe losses and $1.1 billion year to date, including estimated COVID-19 losses of $458 million and $730 million, respectively. Life and Retirement experienced adverse mortality, lower sales and deposits, and market-driven changes in reserves and deferred acquisition costs.
- General Insurance net premiums written declined 16% in Q2 and 9% year to date, while its loss ratio increased to 72.6% in Q2 and 69.6% year to date.
- AIG adopted the current expected credit loss standard on January 1, 2020, reducing opening retained earnings by $487 million after tax. The allowance for credit losses on loans increased to $794 million from $438 million at year-end.
- Blackboard was placed into run-off in March 2020, resulting in a $210 million pre-tax loss, primarily from asset impairments, during the first quarter.
- AIG repurchased approximately 12 million common shares for $500 million during the first quarter; no common shares were repurchased in Q2.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal quantitative earnings guidance. Management expects COVID-19, economic contraction, market volatility and low interest rates to continue affecting claims, sales, investment returns, liquidity and capital. The filing states that the ultimate impact of COVID-19 cannot be estimated because the duration, severity, potential resurgence and governmental, regulatory and legal responses remain uncertain.
- Management expects continued pressure on investment income and spread earnings from low rates and lower reinvestment yields, while credit spread changes and equity volatility may produce substantial period-to-period earnings variability.
- General Insurance is pursuing rate increases, tighter risk selection, portfolio management and greater use of reinsurance. Management identifies travel, business interruption, trade credit, workers’ compensation, event cancellation and civil unrest as significant areas of COVID-19 exposure.
- Life and Retirement faces pressure from low rates, competitive pricing, adverse mortality, lower premiums and deposits, policyholder behavior and potential surrender or withdrawal activity.
- AIG recorded a $286 million valuation allowance through continuing operations against certain tax attributes. A pending tax matter could require approximately $1.2 billion of additional payment under proposed settlement terms, although settlement approval, timing and amount remain uncertain.
- The Fortitude sale includes a potential post-closing payment of up to $500 million for specified adverse property-casualty reserve development through December 31, 2023. AIG also issued $600 million of letters of credit supporting certain General Insurance subsidiaries.
- Other key risks include investment and credit losses, reserve inadequacy, reinsurance counterparty risk, ratings downgrades and collateral calls, regulatory changes affecting insurance coverage or dividends, litigation and cybersecurity or operational disruptions.
Investor Verification Priorities
- Verify the final economic effect of the Fortitude sale, including the funds-withheld arrangements, the potential $500 million purchase-price adjustment and any future reserve development.
- Track COVID-19 claims emergence, premium refunds, coverage litigation, regulatory mandates and changes in catastrophe reserves.
- Reconcile GAAP losses with adjusted pre-tax income and assess the sustainability of the underlying underwriting and investment results.
- Monitor credit-loss allowances, commercial real estate and structured-security exposures, and the level and composition of unrealized investment gains.
- Evaluate parent-company liquidity, debt maturities, ratings-trigger collateral requirements and restrictions on dividends from insurance subsidiaries.
- Assess the recoverability of deferred tax assets and the outcome and timing of the pending tax litigation or settlement.