Business Context and Reporting Period
American International Group, Inc. (AIG) filed its Form 10-K for the fiscal year ended December 31, 2015. AIG is a global insurance organization operating in more than 100 countries through Commercial Insurance, Consumer Insurance, and Corporate and Other. Commercial Insurance includes Property Casualty, Mortgage Guaranty, and Institutional Markets; Consumer Insurance includes Retirement, Life, and Personal Insurance.
The filing was audited by PricewaterhouseCoopers LLP, which expressed an unqualified opinion on the consolidated financial statements and internal control over financial reporting. AIG had approximately 66,400 employees at December 31, 2015.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenues | $58.3 billion | $64.4 billion | Down 9% |
| Income from continuing operations | $2.2 billion | $7.6 billion | Down 71% |
| Net income attributable to AIG | $2.2 billion | $7.5 billion | Down 71% |
| Diluted EPS | $1.65 | $5.20 | Down 68% |
| After-tax operating income | $2.9 billion | $6.6 billion | Down 56% |
| Net cash from operating activities | $2.9 billion | $5.0 billion | Down 43% |
| Total assets | $496.9 billion | $515.6 billion | Down 4% |
| Long-term debt | $29.4 billion | $31.2 billion | Down $1.9 billion |
| AIG shareholders’ equity | $89.7 billion | $106.9 billion | Down 16% |
| Book value per common share | $75.10 | $77.69 | Down 3% |
| Book value per share excluding AOCI | $72.97 | $69.98 | Up 4% |
| GAAP ROE | 2.2% | 7.1% | Down 4.9 points |
Total revenues declined primarily because aircraft leasing revenue was no longer reported following the 2014 sale of ILFC, and because net investment income and other income decreased. The approximate net margin based on income from continuing operations was 3.8% in 2015 versus 11.8% in 2014.
- Net investment income declined to $14.1 billion from $16.1 billion, reflecting weaker hedge fund and alternative investment performance, lower fair-value gains, and lower reinvestment yields.
- Commercial Insurance pre-tax operating income fell to $1.7 billion from $5.5 billion. Property Casualty reported a $3.0 billion underwriting loss and a 115.0% combined ratio, compared with a 100.2% combined ratio in 2014.
- Consumer Insurance pre-tax operating income declined to $3.4 billion from $4.5 billion. Retirement income fell to $2.8 billion, Life income to $465 million, and Personal Insurance income to $74 million.
- Cash flow was pressured by lower operating cash generation, while investing activities provided $8.5 billion. Financing activities used $11.4 billion, including $10.7 billion for share repurchases, $9.8 billion for debt repayments, and $1.0 billion for dividends.
- AIG Parent reported approximately $13.7 billion of liquidity sources at year-end, including $9.2 billion of cash, short-term investments, and unencumbered securities, plus $4.5 billion of available revolving credit capacity.
Material Changes Versus the Prior Comparable Period
- The most significant adverse development was a $3.6 billion fourth-quarter reserve strengthening charge in Non-Life Insurance Companies, primarily affecting U.S. and Canada casualty, financial lines, and run-off businesses. Total prior-year unfavorable development was $4.1 billion in 2015 versus $703 million in 2014.
- Commercial Property Casualty prior-year adverse development increased to $3.5 billion from $655 million. Excess Casualty alone experienced approximately $1.5 billion of adverse development, reflecting worse-than-expected high-severity claims and updated loss assumptions.
- Property Casualty net premiums written decreased 3% to $20.4 billion, although premiums increased 2% in original currencies. Casualty writings declined as AIG tightened risk selection and faced rate pressure.
- Mortgage Guaranty improved: pre-tax operating income increased to $644 million from $592 million, the combined ratio improved to 44.6% from 49.8%, and the primary-loan delinquency ratio declined to 3.4% from 4.4%.
- Retirement premiums and deposits increased 5% to $25.2 billion, and net flows improved to $3.7 billion from $455 million. Life premiums and deposits rose 3% to $5.0 billion, while Life profitability declined because of weaker investment income, mortality experience, and actuarial assumption changes.
- Net unrealized gains in the available-for-sale portfolio declined to approximately $8.8 billion from $19.0 billion, primarily because of higher interest rates, wider credit spreads, and equity securities sales.
- AIG repurchased approximately 182 million shares for $10.7 billion, compared with approximately 88 million shares for $4.9 billion in 2014. Shares outstanding declined to approximately 1.19 billion at year-end.
- The 2015 results included approximately $500 million of pre-tax restructuring and other costs. AIG expects total restructuring costs of approximately $700 million and annualized savings of approximately $700 million to $800 million when fully implemented.
Guidance, Outlook, Risks, and Unusual Items
Management’s 2016 priorities were to improve return on equity, reduce general operating expenses, improve the Commercial Property Casualty accident-year loss ratio, return excess capital, grow book value per share, and reorganize the company into more self-contained “modular” business units. A new Legacy Portfolio was planned to manage run-off and non-strategic assets and release capital.
- AIG expected low interest rates, currency volatility, excess insurance capacity, and uncertain global economic conditions to continue pressuring pricing, investment income, and profitability.
- Management expected U.S. Casualty net premiums written to decline through 2016 as underwriting discipline continued. Mortgage Guaranty expected favorable results if delinquency and cure-rate trends remained near 2015 levels; it also met PMIERs requirements at year-end.
- AIG announced plans to pursue an initial public offering of up to 19.9% of Mortgage Guaranty, subject to regulatory and GSE approvals, and agreed to sell AIG Advisor Group, subject to regulatory approval.
- AIG remains subject to Federal Reserve supervision as a nonbank SIFI and was re-designated as a global systemically important insurer. Potentially higher capital, liquidity, stress-testing, resolution-planning, and regulatory compliance requirements could restrict capital actions or increase costs.
- Key risks include further adverse loss-reserve development, catastrophe losses, low interest rates, market and credit spread volatility, investment impairments, reinsurer credit risk, rating downgrades, liquidity constraints, policyholder surrenders, derivative collateral requirements, cyber and operational failures, regulatory changes, and litigation.
- Cash flows and earnings also remain sensitive to actuarial assumptions for mortality, lapses, investment spreads, guaranteed annuity benefits, deferred acquisition costs, and long-tail casualty reserves.
- The filing disclosed out-of-period adjustments that reduced 2015 net income by $156 million, pre-tax income by $376 million, and pre-tax operating income by $235 million. The adjustments primarily related to other invested asset impairments, unpaid-loss liabilities, and income tax liabilities.
Most Important Facts for Investors to Verify
- Whether the $4.1 billion of 2015 prior-year adverse reserve development represents a peak or signals further deterioration in long-tail casualty, financial lines, asbestos, environmental, and run-off reserves.
- Progress toward restoring Property Casualty underwriting profitability and reducing the 115.0% combined ratio.
- The sustainability of AIG’s investment income in a low-yield environment and the effect of alternative investment performance, credit spreads, and unrealized losses.
- The sufficiency and transferability of Parent liquidity, given that approximately $41.6 billion of subsidiary statutory capital and surplus was restricted from transfer without regulatory approval.
- The impact of the January 2016 capital contribution of approximately $2.9 billion to Non-Life Insurance Companies and the effect of future capital requirements on dividends and repurchases.
- Exposure to rating downgrades, including potential collateral and termination payments under derivatives and other contracts.
- Reserve, reinsurance, litigation, tax, and restructuring contingencies, including the SICO litigation, Caremark-related claims, unrecognized tax benefits, and indemnities associated with divested businesses.