Business Context and Reporting Period
American International Group, Inc. (AIG) filed its Form 10-K for the fiscal year ended December 31, 2017. Although the request metadata references 2017 Q4, this filing reports the full fiscal year, with quarterly information included in Note 24. AIG is a global insurance organization operating in more than 80 countries and jurisdictions across General Insurance, Life and Retirement, Other Operations, and a Legacy Portfolio.
In the fourth quarter of 2017, AIG completed an organizational restructuring. General Insurance now comprises North America and International, while Life and Retirement comprises Individual Retirement, Group Retirement, Life Insurance, and Institutional Markets. Prior periods were revised to conform to the new segment presentation.
Financial Performance and Key Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenues | $49.5 billion | $52.4 billion | Down 5% |
| Income before income taxes from continuing operations | $1.5 billion | $(74) million | Improved |
| Net income attributable to AIG | $(6.1) billion | $(849) million | Lower |
| Adjusted after-tax income attributable to AIG | $2.2 billion | $406 million | Improved |
| GAAP ROE | (8.4)% | (1.0)% | Lower |
| Adjusted ROE | 4.1% | 0.6% | Improved |
| Book value per common share | $72.49 | $76.66 | Down 5% |
| Adjusted book value per common share | $54.74 | $58.57 | Down 7% |
The reported net loss was driven primarily by a $6.7 billion provisional tax charge associated with the Tax Cuts and Jobs Act. Excluding that charge, management stated that net income increased by approximately $1.5 billion, reflecting improved General Insurance results, lower expenses, higher Life and Retirement actuarial results, higher investment income, lower realized capital losses, and improved Legacy Portfolio earnings.
- Premiums declined 9% to $31.4 billion, while policy fees increased 7% to $2.9 billion.
- Net investment income increased 1% to $14.2 billion.
- Net realized capital losses improved to $1.4 billion from $1.9 billion.
- General operating and other expenses declined 17% to $9.1 billion; adjusted general operating expenses declined 11% to $8.9 billion.
- Restructuring and other costs were $413 million, primarily employee severance and organizational efficiency costs.
Segment Results
| Adjusted pre-tax income/(loss) | 2017 | 2016 |
|---|---|---|
| General Insurance | $(813) million | $(2.1) billion |
| Life and Retirement | $3.8 billion | $3.4 billion |
| Other Operations | $(1.3) billion | $(969) million |
| Legacy Portfolio | $1.5 billion | $1.0 billion |
| Total adjusted pre-tax income | $3.2 billion | $1.4 billion |
General Insurance net premiums written declined 10% to $25.4 billion as AIG reduced production in underperforming lines, maintained pricing discipline, and completed dispositions. The consolidated combined ratio improved to 117.3% from 118.9%, but remained materially above the 100% underwriting-profit threshold. The adjusted accident-year combined ratio increased to 97.1% from 96.0%, excluding catastrophe losses, prior-year development, and reserve discounting.
Life and Retirement adjusted pre-tax income increased 12% to $3.8 billion. The segment benefited from a $284 million net positive actuarial assumption update, compared with $230 million in 2016, and higher investment income. Individual Retirement deposits declined to $11.9 billion from $16.1 billion, partly reflecting low interest rates and uncertainty surrounding the Department of Labor fiduciary rule.
Balance Sheet, Cash Flow, Debt and Liquidity
- Total assets were $498.3 billion, broadly unchanged from 2016.
- Total investments declined to $322.3 billion from $328.2 billion, primarily because AIG funded the NICO adverse-development reinsurance transaction.
- Total liabilities increased to $432.6 billion from $421.4 billion.
- Total AIG shareholders’ equity declined to $65.2 billion from $76.3 billion.
- Long-term debt increased to $31.6 billion from $30.9 billion; total debt, including debt of consolidated investments, was $31.6 billion.
- Cash at year-end was $2.4 billion, compared with $1.9 billion in 2016.
- AIG Parent liquidity sources totaled $11.8 billion, consisting of $2.1 billion of cash and short-term investments, $5.2 billion of unencumbered fixed-maturity securities, and $4.5 billion of available credit-facility capacity.
- The committed syndicated credit facility provides up to $4.5 billion and expires in June 2022.
Operating cash flow was negative $8.6 billion, compared with positive operating cash flow of $2.4 billion in 2016. The principal driver was the $10.2 billion payment to fund the adverse-development reinsurance agreement with National Indemnity Company (NICO). Investing activities provided $14.7 billion, primarily from asset sales used to fund the NICO transaction. Financing activities used $5.7 billion, including $6.3 billion for repurchases of approximately 100 million common shares and $1.2 billion of dividends.
Material Changes, Outlook and Unusual Items
- AIG entered into the NICO adverse-development agreement, transferring 80% of reserve risk on substantially all U.S. Commercial long-tail exposures for accident years 2015 and prior. The agreement covers losses above $25 billion of net paid losses, up to a $25 billion aggregate limit, with NICO’s liability capped at $20 billion.
- General Insurance recorded approximately $1.0 billion of unfavorable prior-year reserve development on an adjusted basis, versus $5.4 billion in 2016. The filing also reports $4.2 billion of catastrophe-related losses, versus $1.3 billion in 2016, including Hurricanes Harvey, Irma and Maria, the Mexico earthquake, and California wildfires.
- Life and Retirement recorded a $270 million net positive adjusted pre-tax impact from actuarial assumption updates, while variable-annuity guaranteed living benefit and related hedging activity reduced consolidated pre-tax income by approximately $1.2 billion.
- AIG’s available-for-sale investment portfolio had approximately $13.9 billion of net unrealized gains at year-end, up from approximately $9.7 billion in 2016. Other-than-temporary impairment charges declined to $260 million from $559 million.
- The Financial Stability Oversight Council rescinded AIG’s nonbank SIFI designation in September 2017. AIG is no longer subject to Federal Reserve consolidated supervision and enhanced prudential standards applicable to nonbank SIFIs, although substantial insurance regulation remains.
- Management’s 2018 priorities include underwriting excellence, product and geographic diversification, technology and innovation, expense discipline, reinsurance optimization, capital efficiency, and targeted profitable growth.
- In January 2018, AIG agreed to acquire Validus Holdings for approximately $5.6 billion in cash, subject to regulatory and shareholder approvals. In February 2018, AIG completed affiliated reinsurance transactions transferring approximately $37 billion of Legacy Portfolio reserves to DSA Re, an AIG-owned Bermuda reinsurer.
- The filing provides no formal earnings or revenue guidance. Management expects a future effective tax rate of approximately 21% to 22%, excluding items that cannot be forecast.
Principal Risks and Contingencies
- Loss reserves remain highly judgmental, particularly for long-tail casualty, workers’ compensation, financial lines, asbestos, environmental, and other legacy exposures. A 5% increase in U.S. Excess Casualty loss-cost trends was estimated to increase reserves by approximately $1.1 billion.
- Catastrophes, climate-related events, terrorism, pandemics, cyber incidents, and other man-made events could materially affect earnings, liquidity, and capital.
- Low interest rates pressure investment income, insurance spreads, annuity profitability, and reserve assumptions; rapidly rising rates could increase surrenders and create investment losses.
- AIG remains exposed to reinsurance collectability and counterparty risk. Reinsurance recoverable assets totaled approximately $33.0 billion, supported by approximately $20.5 billion of collateral.
- Regulatory restrictions limit transfers from subsidiaries to AIG Parent; approximately $44.8 billion of subsidiary statutory capital and surplus was restricted from transfer without prior approval.
- Tax contingencies include approximately $4.7 billion of unrecognized tax benefits and a potential payment of approximately $1.3 billion under non-binding settlement terms related to cross-border financing tax matters. The final amount and timing remain uncertain.
- Legal proceedings, ratings downgrades, derivative collateral requirements, cybersecurity failures, Brexit-related restructuring, and changes in insurance capital standards could materially affect results or liquidity.
Investor Verification Checklist
- Reconcile the $6.7 billion Tax Act charge and assess its impact on deferred tax assets, future tax rates, and cash taxes.
- Review General Insurance reserve development, especially accident year 2016 and U.S. Excess Casualty, Other Casualty, Financial Lines, and European long-tail business.
- Assess whether the 117.3% combined ratio and 97.1% adjusted accident-year combined ratio support management’s underwriting-improvement objectives.
- Evaluate the economic and accounting effects of the NICO agreement, including the $10.2 billion funding, deferred gain, collateral, and future investment-income impact.
- Monitor AIG Parent liquidity after the Validus acquisition, DSA Re capitalization, dividends, debt maturities, and continued share repurchases.
- Review sensitivity to interest rates, equity markets, policyholder lapses, mortality, volatility, and guaranteed variable-annuity benefits.
- Confirm regulatory approvals and closing conditions for the Validus acquisition and the ongoing effect of the DSA Re transactions.
- Read the audited financial statements, Note 13 insurance-liability disclosures, Note 23 tax disclosures, Note 16 contingencies, and the reconciliation of non-GAAP measures before relying on adjusted earnings.