American International Group, Inc. — First Quarter 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited and presented under U.S. GAAP. AIG is a global insurance organization serving commercial, individual, life insurance and retirement customers in more than 80 countries.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $11.712 billion | $12.632 billion | (7%) |
| Income from continuing operations | $950 million | $1.211 billion | (22%) |
| Net income attributable to AIG | $938 million | $1.185 billion | (21%) |
| Diluted EPS | $1.01 | $1.18 | (14%) |
| Adjusted pre-tax income | $1.216 billion | $2.041 billion | (40%) |
| Adjusted after-tax income | $963 million | $1.367 billion | (30%) |
| Net cash used in operating activities | $938 million | $10.336 billion | Improved by $9.398 billion |
| Total assets at period end | $499.143 billion | $498.301 billion at Dec. 31, 2017 | Nearly flat |
| Long-term debt at period end | $33.619 billion | $31.640 billion at Dec. 31, 2017 | +$1.979 billion |
| AIG shareholders’ equity | $62.792 billion | $65.171 billion at Dec. 31, 2017 | ($2.379 billion) |
Income from continuing operations represented approximately 8.1% of revenue, versus approximately 9.6% in the prior-year quarter. Adjusted return on equity was 7.7%, compared with 9.6% in Q1 2017. Book value per common share was $69.95; excluding accumulated other comprehensive income, it was $67.48, and adjusted book value per share was $56.10.
- Net investment income declined 12% to $3.261 billion, primarily because of weaker alternative-investment and hedge-fund results, lower invested assets following the NICO reinsurance transaction, and the 2017 sale of the life settlements portfolio.
- Policyholder benefits and losses incurred declined 6% to $5.667 billion, while deferred policy acquisition cost amortization increased 23% to $1.358 billion.
- Net realized capital losses improved to $19 million from $115 million, primarily because variable-annuity hedging results were more favorable.
- Other comprehensive loss was $2.669 billion, primarily reflecting a $4.994 billion decrease in unrealized investment appreciation as interest rates rose and credit spreads widened.
- AIG declared and paid a $0.32-per-share quarterly dividend and repurchased approximately 5 million common shares for $298 million. Approximately $2.0 billion remained under the repurchase authorization as of early May 2018.
Segment results and material changes
| Segment adjusted pre-tax income | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| General Insurance | $510 million | $1.061 billion | (52%) |
| Life and Retirement | $892 million | $898 million | (1%) |
| Other Operations | $(342) million | $(308) million | Lower |
| Legacy Portfolio | $145 million | $342 million | (58%) |
| Consolidated adjusted pre-tax income | $1.216 billion | $2.041 billion | (40%) |
- General Insurance net premiums written decreased 2% to $6.171 billion. The combined ratio increased to 103.8 from 99.8, driven by higher catastrophe losses, higher current accident-year losses and increased reinsurance costs. Catastrophe losses were $376 million versus $228 million.
- General Insurance recognized $110 million of favorable prior-year reserve development, compared with $10 million of unfavorable development in Q1 2017. Loss reserves totaled $78.098 billion at March 31, 2018, including $27.211 billion of reinsurance recoverables.
- Life and Retirement adjusted pre-tax income was broadly stable. Lower Individual Retirement results reflected weaker equity-market performance and lower fixed-annuity spreads; Group Retirement improved 16% to $282 million.
- Retirement and life businesses remained exposed to low interest rates, annuity surrender behavior and regulatory uncertainty. Seventy-two percent of fixed account values in Individual and Group Retirement annuity products were crediting at contractual minimum guaranteed rates.
- In February 2018, AIG transferred approximately $31 billion of Legacy Life and Retirement reserves and approximately $5 billion of Legacy General Insurance reserves to newly formed DSA Reinsurance Company, Ltd., consolidating more than 80% of Legacy Portfolio insurance reserves.
Cash flow, liquidity and debt
- Operating cash outflow was $938 million, compared with $10.336 billion in Q1 2017; the prior-year outflow primarily reflected the $10.2 billion consideration paid for the NICO adverse development reinsurance agreement.
- Investing cash flow was an outflow of $1.972 billion, versus a $14.499 billion inflow in Q1 2017. Financing cash flow was an inflow of $2.486 billion, including $3.039 billion of debt issuance and $1.327 billion of debt repayments.
- Cash and restricted cash ended the quarter at $2.371 billion. AIG Parent reported approximately $12.957 billion of liquidity sources, including $4.5 billion of available capacity under its syndicated credit facility.
- In March 2018, AIG issued $2.5 billion of debt securities, including notes due 2028 and 2048 and junior subordinated debentures, partly to fund the planned Validus acquisition.
- Consolidated contractual obligations totaled $367.045 billion, including $80.019 billion of loss reserves and $242.309 billion of insurance and investment contract liabilities. These amounts depend on significant assumptions and may differ materially from actual payment timing.
Outlook, risks and unusual items
- AIG agreed to acquire Validus Holdings for approximately $5.6 billion in cash, with closing expected in mid-2018 subject to regulatory approvals and other conditions. The filing provides no quantitative earnings guidance.
- Management cited difficult market conditions, including historically low interest rates, catastrophe activity, competitive insurance pricing, currency volatility, Brexit-related uncertainty, slowing growth in China and the euro area, and evolving standards of care for investment-product sales.
- The Tax Cuts and Jobs Act produced a provisional 2017 tax charge of approximately $6.7 billion. AIG had not completed its accounting for the Tax Act as of March 31, 2018, and further adjustments remained possible. The Q1 effective tax rate was 22.6%.
- AIG remained involved in tax litigation concerning foreign tax credits. Non-binding settlement agreements in principle could require a payment of approximately $1.3 billion, potentially not before 2019; the settlement was not final.
- Credit-rating downgrades could trigger collateral calls or early termination rights. Based on the disclosed derivative portfolio, a downgrade to specified BBB/Baa rating levels could require up to approximately $81 million of additional collateral or termination payments.
- The company identified material sensitivity to interest rates, equity markets, credit spreads, foreign exchange, catastrophe losses, reserve estimates, reinsurance recoverables, legal contingencies, deferred tax asset realizability, cybersecurity and regulatory developments.
- The SICO Treasury Action, a long-running shareholder litigation matter concerning the government’s 2008 assistance to AIG, concluded when the U.S. Supreme Court denied SICO’s petition on March 26, 2018.
Investor verification items
- Verify the status, funding and regulatory approvals of the Validus acquisition and any related debt redemption or financing requirements.
- Assess whether General Insurance’s elevated combined ratio and catastrophe losses are temporary or indicate continuing underwriting pressure.
- Monitor investment portfolio unrealized losses, credit quality, alternative-investment performance and the effect of further rate or spread movements on equity and earnings.
- Review reserve adequacy, the NICO retroactive reinsurance agreement, DSA Re capitalization and the collectability of reinsurance recoverables.
- Track annuity sales, surrender rates, minimum guaranteed crediting rates and the impact of changing fiduciary or investment-product regulations.
- Confirm final Tax Act accounting, the outcome and timing of the foreign-tax-credit litigation, and any resulting cash tax payments.
- Reconcile adjusted pre-tax income, adjusted after-tax income, adjusted book value and adjusted return on equity to GAAP results; these are non-GAAP measures and may not be comparable with similarly named measures used by other insurers.