Business Context and Reporting Period
American International Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. AIG is a global insurer operating in more than 130 countries, with principal businesses in Property Casualty, Life and Retirement, Mortgage Guaranty, and other legacy or non-core operations. The filing includes quarterly information, but this summary focuses on full-year 2013 results and year-end financial condition.
Key Financial Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenues | $68.7 billion | $71.0 billion | Down 3% |
| Income from continuing operations | $9.0 billion | $3.7 billion | Up 144% |
| Net income attributable to AIG | $9.1 billion | $3.4 billion | Up 164% |
| Diluted EPS attributable to AIG | $6.13 | $2.04 | Up materially |
| After-tax operating income attributable to AIG | $6.8 billion | $6.6 billion | Up 2% |
| Net cash from operating activities | $5.9 billion | $3.7 billion | Improved |
| Long-term debt | $41.7 billion | $48.5 billion | Down $6.8 billion |
| Total AIG shareholders’ equity | $100.5 billion | $98.0 billion | Up 3% |
| Book value per share | $68.62 | $66.38 | Up 3% |
| Book value per share excluding AOCI | $64.28 | $57.87 | Up 11% |
The 2013 effective tax rate on continuing operations was 3.8%, substantially below the 35% statutory rate, primarily due to valuation allowance releases and tax-exempt interest. The filing reports no consolidated operating margin percentage; income from continuing operations before tax represented approximately 13.6% of revenue.
Segment Performance
- AIG Property Casualty: Revenue was $39.7 billion and pre-tax income was $5.1 billion, compared with $2.0 billion in 2012. Pre-tax operating income increased to $4.8 billion from $1.8 billion. The combined ratio improved to 101.3% from 108.5%, while the adjusted accident-year combined ratio improved to 98.4% from 99.8%.
- AIG Life and Retirement: Revenue was $20.6 billion and pre-tax income was $6.5 billion, compared with $3.8 billion in 2012. Pre-tax operating income increased to $5.1 billion from $4.2 billion. Premiums and deposits increased 37% to $28.8 billion, and assets under management increased to $318.0 billion from $290.4 billion.
- Mortgage Guaranty: Pre-tax income increased to $213 million from $15 million. New insurance written increased 33% to $49.9 billion, while the 60-plus-day delinquency ratio on primary loans declined to 5.9% from 8.8%.
- Other Operations: Pre-tax operating loss was $511 million, compared with operating income of $4.1 billion in 2012, primarily because 2012 included substantial gains on retained AIA and Maiden Lane III interests. Corporate and other operations also included $265 million of severance expense.
Material Changes Versus the Prior Comparable Period
- Reported earnings improved substantially, although 2012 benefited from approximately $5.0 billion of fair-value gains related to AIA and Maiden Lane III that did not recur in 2013.
- Property Casualty underwriting improved, with catastrophe losses declining to $787 million from $2.7 billion. However, 2013 included $557 million of unfavorable prior-year reserve development, including adverse development in Storm Sandy, construction-related general liability, and environmental lines.
- Net investment income declined 22% to $15.8 billion because of the absence of 2012 retained-interest gains. Excluding those gains, insurance investment performance improved, aided by alternative investments and equity-market performance.
- Net unrealized gains in the available-for-sale portfolio declined to approximately $12 billion from $25 billion, primarily because of rising interest rates and approximately $2.5 billion of realized gains from security sales.
- AIG reduced total debt by approximately $9.7 billion through maturities, repayments, redemptions and repurchases, partly offset by $2.0 billion of new senior-note issuance. Total debt declined to $41.7 billion.
- AIG Parent received $8.7 billion of dividends and loan repayments from insurance subsidiaries and maintained approximately $17.6 billion of liquidity sources at year-end, including cash, short-term investments, unencumbered securities and committed facilities.
- AIG repurchased approximately 12 million common shares for $597 million and paid $0.20 per share in 2013 dividends.
Guidance, Outlook, Risks and Unusual Items
- Management’s 2014 priorities were growth and profitability in core insurance businesses, improved investment yield while preserving credit quality, more efficient capital deployment, expense reduction, continued regulatory coordination, and completion of the ILFC sale.
- Management expected low interest rates, currency volatility, economic uncertainty and excess Property Casualty capacity to continue pressuring investment income and pricing. Rising rates could support fixed-annuity sales but could also reduce the fair value of fixed-income investments and increase surrender activity.
- AIG agreed to sell 100% of ILFC to AerCap for $3.0 billion of cash and approximately 97.6 million AerCap shares, valued at approximately $5.4 billion at announcement. Closing remained subject to regulatory and other conditions. AIG expected to own approximately 46% of AerCap after closing, creating equity-method and share-price exposure.
- ILFC remained classified as held for sale at year-end, with $29.5 billion of assets and $24.5 billion of liabilities classified as held for sale. Its operating results were presented in continuing operations because the contemplated AerCap ownership interest meant ILFC no longer qualified for discontinued-operations treatment.
- AIG was subject to Federal Reserve supervision as a savings and loan holding company and systemically important financial institution, and was designated a global systemically important insurer. Potential future capital, liquidity, resolution-planning and derivatives requirements could affect profitability, capital distributions and financing costs.
- TRIPRA, which materially mitigated U.S. terrorism exposure, was scheduled to expire on December 31, 2014. AIG disclosed limited private terrorism reinsurance and estimated a modeled five-ton New York City bomb loss of $3.3 billion net of TRIPRA and reinsurance.
- Major contingencies included long-tail casualty, asbestos and environmental reserves, legal proceedings, tax examinations, reinsurance collectability, variable-annuity guarantees, deferred tax assets and the pending ILFC transaction. Management stated that adverse reserve development could materially affect an individual reporting period.
Most Important Facts for an Investor to Verify
- Reconcile reported net income of $9.1 billion with after-tax operating income of $6.8 billion and identify the impact of tax valuation allowance releases, realized gains, settlements and other excluded items.
- Assess whether the 2013 Property Casualty improvement is sustainable after separating catastrophe losses, reserve development, discounting changes and investment gains.
- Review Life and Retirement exposure to low rates, minimum crediting guarantees, surrender behavior, loss-recognition reserves and variable-annuity guarantee hedging.
- Confirm the final closing terms, accounting treatment and economic value of the AerCap transaction, including AIG’s retained ownership and associated credit facility.
- Evaluate reserve sensitivity, particularly excess casualty, excess workers’ compensation, environmental and asbestos exposures; the filing discloses potential reserve sensitivity of up to approximately $1.3 billion for excess workers’ compensation under certain assumptions.
- Monitor Parent liquidity, subsidiary dividend restrictions, capital-support agreements, debt maturities and the effect of any credit-rating downgrade on collateral requirements.
- Review unresolved litigation and regulatory matters, including SICO-related claims, securities litigation, insurance-practice inquiries, Caremark litigation and UGC mortgage-insurance matters.