AIG 2014 Form 10-K Summary
Business context and reporting period
American International Group, Inc. is a global insurer serving commercial, institutional and individual customers in more than 100 countries. The filing covers the fiscal year ended December 31, 2014. AIG reorganized its reporting structure in the fourth quarter, replacing AIG Property Casualty and AIG Life and Retirement with Commercial Insurance, Consumer Insurance, and Corporate and Other. Prior periods were revised to conform.
- Commercial Insurance includes Property Casualty, Mortgage Guaranty and Institutional Markets.
- Consumer Insurance includes Retirement, Life and Personal Insurance.
- Peter D. Hancock became President and Chief Executive Officer on September 1, 2014.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenues | $64.406 billion | $68.874 billion | Down 6% |
| Income before taxes from continuing operations | $10.501 billion | $9.368 billion | Up 12% |
| Income from continuing operations | $7.574 billion | $9.008 billion | Down 16% |
| Net income attributable to AIG | $7.529 billion | $9.085 billion | Down 17% |
| Diluted EPS | $5.20 | $6.13 | Down 15% |
| After-tax operating income attributable to AIG | $6.630 billion | $6.650 billion | Essentially flat |
| Net cash provided by operating activities | $5.007 billion | $5.865 billion | Down 15% |
| Total assets | $515.581 billion | $541.329 billion | Down 5% |
| Long-term debt | $31.217 billion | $41.693 billion | Down 25% |
| AIG shareholders’ equity | $106.898 billion | $100.470 billion | Up 6% |
| Book value per common share | $77.69 | $68.62 | Up 13% |
| Book value per share excluding AOCI | $69.98 | $64.28 | Up 9% |
Reported pre-tax income margin was approximately 16.3%, compared with approximately 13.6% in 2013. Net income attributable to AIG margin was approximately 11.7%, compared with approximately 13.2% in 2013. These margin calculations are derived from reported revenues and earnings.
- Net investment income increased 2% to $16.079 billion, although alternative investment income declined and reinvestment yields remained under pressure.
- Net realized capital gains declined 62% to $739 million.
- Other-than-temporary impairments totaled $247 million, compared with $232 million in 2013.
- Commercial Insurance pre-tax operating income rose 11% to $5.510 billion; Consumer Insurance declined 2% to $4.474 billion; Corporate and Other posted a $388 million operating loss.
- Property Casualty net premiums written increased 1% to $21.020 billion. Its combined ratio improved to 100.2 from 101.6, while the adjusted accident-year combined ratio improved to 94.2 from 95.1.
- Mortgage Guaranty pre-tax operating income increased to $592 million from $205 million, and its combined ratio improved to 49.8 from 90.9. Domestic first-lien new insurance written declined 15% to $42.038 billion.
- Retirement premiums and deposits increased 1% to $24.023 billion, while Retirement pre-tax operating income was broadly flat at $3.495 billion.
- Life pre-tax operating income decreased 28% to $580 million, including a $104 million increase in estimated IBNR death claims and an $87 million long-term-care loss-recognition charge.
- Personal Insurance pre-tax operating income increased 49% to $399 million, with the combined ratio improving to 99.9 from 101.5.
Cash flow, debt and liquidity
- Operating cash flow was $5.007 billion; investing activities provided $14.284 billion; financing activities used $19.788 billion. Cash declined by $571 million to $1.758 billion.
- AIG reduced total debt by approximately $10.5 billion, including $7.5 billion of Direct Investment Book debt reductions. Total debt ended at $31.217 billion.
- AIG Parent reported $14.312 billion of liquidity sources, consisting of $9.812 billion of cash, short-term investments and unencumbered securities, $4.0 billion of syndicated credit capacity and $500 million of contingent liquidity capacity.
- AIG Parent received $2.6 billion of dividends from Non-Life Insurance Companies and $6.8 billion of dividends and loan repayments from Life Insurance Companies.
- AIG repurchased approximately 88 million shares for $4.9 billion and paid quarterly dividends of $0.125 per share, or $0.50 for the year.
- At December 31, 2014, AIG had $80.337 billion of gross loss reserves before discount and reinsurance, $15.648 billion of reinsurance recoverables and a $61.612 billion net liability for unpaid losses and loss adjustment expenses.
Material changes versus the prior comparable period
- Reported revenue and GAAP net income declined primarily because 2013 benefited from larger realized capital gains and significant deferred tax valuation allowance releases. 2014 also included higher income tax expense and a $2.282 billion loss on extinguishment of debt.
- Pre-tax operating income improved modestly, driven mainly by stronger Commercial Insurance underwriting and Mortgage Guaranty results, while Consumer Insurance was pressured by lower investment income and additional life claims reserves.
- AIG completed the sale of ILFC to AerCap on May 14, 2014 for approximately $7.6 billion of total consideration, including $2.4 billion of net cash proceeds and 97.6 million AerCap shares. AIG retained approximately 46% of AerCap and recognized a pre-tax gain of approximately $2.2 billion.
- Net adverse prior-year loss reserve development, including premium adjustments, increased to $598 million from $468 million. Significant adverse development arose in primary casualty, environmental, international financial lines and healthcare.
- Unrealized gains in the available-for-sale investment portfolio increased to approximately $19.0 billion from $11.7 billion, largely because of lower interest rates and wider spreads.
- The filing includes presentation reclassifications affecting policy fees, realized capital gains and other income, but these changes did not affect net income or shareholders’ equity.
Guidance, outlook, commentary and risks
Management did not provide quantified earnings guidance in the filing. For 2015, AIG identified priorities of improving customer focus, simplifying its cost structure, modernizing technology and concentrating capital on sustainable profitability and intrinsic value.
- Management expects low interest rates, currency volatility, economic uncertainty and excess property-casualty capacity to continue pressuring investment income, pricing and margins.
- Commercial Insurance plans to emphasize higher-value businesses, underwriting discipline, claims effectiveness, data analytics, technology modernization, capital efficiency and optimized reinsurance.
- Mortgage Guaranty expects favorable operating results from higher persistency, declining delinquencies and improved cure rates, although mortgage originations and competition remain headwinds.
- Consumer Insurance expects continued demand for retirement products with guaranteed income features, but low rates constrain fixed annuity profitability and could increase surrender activity if rates rise rapidly.
- Key risks include adverse reserve development, asbestos and environmental claims, catastrophes, inadequate or unavailable reinsurance, investment losses, credit-spread and interest-rate volatility, policyholder lapses, guaranteed annuity benefits, litigation, cyber and operational failures, and foreign-exchange exposure.
- AIG remained subject to Federal Reserve supervision as a nonbank systemically important financial institution and was redesignated as a global systemically important insurer. Future capital, liquidity, stress-testing and resolution-planning requirements could restrict dividends, repurchases, acquisitions or other activities.
- Significant contingencies include the $960 million Consolidated 2008 Securities Litigation settlement pending final court approval, the Starr International litigation involving potential claims of approximately $40 billion plus interest against the United States and possible indemnification exposure for AIG, and ongoing regulatory and insurance-related proceedings.
- AIG’s modeled 1-in-100 U.S. hurricane loss, net of 2015 reinsurance and after tax, was $1.821 billion; modeled 1-in-250 U.S. earthquake loss was $2.289 billion. These estimates are model-dependent and not forecasts.
Investor verification priorities
- Reconcile GAAP net income with after-tax operating income and isolate the effects of the ILFC gain, debt extinguishment charges, legal settlements, realized gains and tax valuation allowance changes.
- Review reserve development by business line, particularly U.S. primary casualty, environmental and asbestos, excess workers’ compensation, international financial lines and healthcare.
- Assess sensitivity to sustained low rates, rapid rate increases, equity-market declines, policyholder surrenders and variable-annuity guarantee liabilities.
- Verify the liquidity available at AIG Parent versus liquidity held in regulated subsidiaries and the restrictions on upstream dividends.
- Monitor debt reduction, upcoming maturities, rating-trigger collateral requirements and the remaining Direct Investment Book and Global Capital Markets exposures.
- Evaluate the carrying value, accounting and market exposure of AIG’s approximately 46% AerCap investment.
- Review unresolved litigation, regulatory examinations, tax examinations and the potential consequences of AIG’s SIFI and G-SII status.