AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q1 FY2015

Business Context and Reporting Period

American International Group, Inc. (AIG) filed an unaudited Form 10-Q for the three months ended March 31, 2015. AIG is a global insurance group operating primarily through Commercial Insurance, Consumer Insurance, and Corporate and Other. The prior-year comparison is affected by the May 2014 sale of International Lease Finance Corporation (ILFC); aircraft leasing revenue and expenses were included through the sale date in 2014 but were zero in the 2015 quarter.

Financial Performance and Key Metrics

Metric	Q1 2015	Q1 2014	Change
Total revenues	$15,975 million	$16,163 million	(1%)
Income from continuing operations	$2,476 million	$1,659 million	49%
Net income attributable to AIG	$2,468 million	$1,609 million	53%
Diluted EPS	$1.78	$1.09	Up $0.69
After-tax operating income attributable to AIG	$1,691 million	$1,741 million	(3%)
Net cash provided by operating activities	$388 million	$763 million	Down $375 million

Net realized capital gains were $1,341 million versus a $152 million loss in Q1 2014, materially increasing GAAP earnings. The 2015 gains included investment-sale gains and favorable fair-value changes on variable-annuity-related embedded derivatives, net of hedges.
Net investment income decreased 9% to $3,838 million, primarily because of lower reinvestment yields and lower alternative-investment income.
Income from continuing operations represented approximately 15.5% of revenues; net income attributable to AIG represented approximately 15.4% of revenues.
Commercial Insurance pre-tax operating income increased 3% to $1,462 million. Property Casualty's combined ratio improved to 97.1 from 98.9, and Mortgage Guaranty's combined ratio improved to 51.7 from 80.8.
Consumer Insurance pre-tax operating income declined 19% to $945 million. Retirement income declined 13% to $800 million, Life income declined 27% to $171 million, and Personal Insurance reported a $26 million operating loss versus $18 million of income.
At March 31, 2015, total assets were $520,701 million, total AIG shareholders' equity was $107,979 million, and book value per common share was $80.16.
Long-term debt was $31,999 million, up from $31,217 million at December 31, 2014. Total debt, including debt of consolidated investments and other subsidiaries, was $31,999 million on the consolidated balance sheet and $31,999 million in the debt rollforward.
Cash was $1,823 million at quarter-end, up from $1,758 million at December 31, 2014. AIG Parent reported liquidity sources of $15,757 million, comprising $11,257 million of cash, short-term investments and unencumbered securities, a $4,000 million syndicated credit facility, and a $500 million contingent liquidity facility.

Material Changes Versus the Prior Comparable Period

GAAP earnings improved substantially because of the swing to significant net realized capital gains, lower debt-extinguishment losses, and the absence of ILFC operating costs and revenue.
Underlying after-tax operating income declined modestly, reflecting weaker insurance operating income despite improved Commercial Insurance results.
Commercial Insurance benefited from improved Property Casualty underwriting, lower catastrophe losses of $71 million versus $184 million, and lower adverse prior-year development. Personal Insurance underwriting remained unprofitable.
Consumer Insurance was pressured by lower alternative-investment returns, lower base yields, higher expenses in certain businesses, and less favorable Life mortality experience.
Operating cash flow declined to $388 million from $763 million, while financing cash use improved to $604 million from $4,289 million, primarily because 2014 included substantially higher debt repayments.
AIG repurchased approximately 28.9 million shares for approximately $1.4 billion and paid a $0.125 per-share dividend. The April 30, 2015 share-repurchase authorization increase left approximately $3.8 billion available.
AIG acquired a controlling stake in NSM Insurance Group for approximately $239 million and acquired Laya Healthcare in Ireland on March 31, 2015. The filing does not provide a separate quantified quarterly earnings contribution for these acquisitions.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide formal numerical earnings or revenue guidance. Management's stated priorities are to improve customer focus, simplify operations, modernize technology, reduce costs, improve underwriting and concentrate capital on sustainable profitability.

Management expects historically low interest rates, currency volatility, overcapacity in property-casualty markets, and uncertainty in global economic conditions to continue pressuring investment income, pricing, and reported U.S.-dollar premium growth.
Life and annuity businesses face spread compression from low yields. Approximately 70% of fixed-annuity account values were at their minimum crediting rates at March 31, 2015, increasing sensitivity to interest rates and surrender behavior.
Insurance reserves remain judgment-sensitive. Net unpaid losses and loss-adjustment expenses were $60,143 million, and management cautioned that adverse reserve development could materially affect an individual reporting period.
Investment risks include $279,835 million of fixed maturity securities, $43,764 million of below-investment-grade fixed maturity securities, and $35,838 million of available-for-sale securities in an unrealized-loss position. Other-than-temporary impairments increased to $128 million from $59 million.
Derivative and rating-trigger risks remain material. A one-notch downgrade to specified rating levels was estimated to require approximately $19 million, $42 million, or $84 million of additional collateral postings and termination payments, depending on the downgrade scenario.
Material legal and regulatory contingencies include securities litigation, legacy crisis matters, the Starr International litigation and potential indemnification claims, Caremark-related litigation, regulatory examinations, and insurance-operations matters. The filing states that some potential losses cannot be reasonably estimated.
The SICO Treasury Action involved asserted damages of approximately $40 billion plus interest against the United States; AIG was no longer a party, but the United States asserted potential indemnification defenses that could adversely affect AIG if ultimately enforced.
AIG remains subject to Federal Reserve supervision as a nonbank systemically important financial institution and to global systemically important insurer requirements. The applicable regulatory and capital framework remained incomplete.
Subsequent events included April 2015 debt repurchases of approximately $976 million principal amount for approximately $1.32 billion and approximately $0.8 billion of additional share repurchases through April 30, 2015.

Most Important Facts to Verify

Reconcile the large GAAP earnings increase with the decline in after-tax operating income and identify the sustainability of the $1,341 million net realized capital gain.
Monitor Commercial Insurance reserve development, catastrophe experience, combined ratios, and the continued underwriting loss in Personal Insurance.
Assess the effect of prolonged low interest rates on net investment income, annuity spreads, guaranteed benefits, policyholder surrenders, and fair-value liabilities.
Review AIG's debt maturities, rating-trigger collateral requirements, derivative exposures, and the availability and covenant conditions of its credit facilities.
Evaluate the quality, concentration, liquidity, and valuation sensitivity of the fixed maturity, RMBS, CMBS, CDO/ABS, alternative-investment, and Level 3 portfolios.
Track the outcome and potential financial exposure from the SICO litigation, securities litigation, Caremark matter, regulatory examinations, tax disputes, and other unresolved contingencies.
Confirm the regulatory approvals, integration costs, capital requirements, and earnings contribution of the NSM Insurance Group and Laya Healthcare acquisitions.