Business Context and Reporting Period
American International Group, Inc. (AIG) filed an unaudited Form 10-Q for the three months ended March 31, 2013. AIG is a global insurance organization operating in more than 130 countries, with reportable segments consisting of AIG Property Casualty and AIG Life and Retirement. International Lease Finance Corporation (ILFC) was classified as held for sale and discontinued operations.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 or prior period |
|---|---|---|
| Total revenues | $15.888 billion | $17.497 billion |
| Income from continuing operations | $2.138 billion | $3.385 billion |
| Net income attributable to AIG | $2.206 billion | $3.208 billion |
| Basic and diluted EPS | $1.49 | $1.71 |
| After-tax operating income attributable to AIG | $1.982 billion | $3.046 billion |
| Net cash provided by or used in operating activities | $(149) million | $94 million |
| Cash at period end | $1.227 billion | $1.315 billion |
- Reported revenue declined 9 percent, while net income attributable to AIG declined 31 percent. The filing attributes much of the comparison to substantial 2012 gains from AIA, Maiden Lane II and Maiden Lane III investments that did not recur.
- Continuing-operations pre-tax income was $2.832 billion, implying a reported pre-tax margin of approximately 17.8 percent, compared with approximately 25.5 percent in Q1 2012. Net income attributable to AIG represented approximately 13.9 percent of revenue, compared with approximately 18.3 percent in the prior-year quarter.
- AIG Property Casualty pre-tax income increased 76 percent to $1.604 billion. Its combined ratio improved to 97.3 from 102.1, and its adjusted accident-year combined ratio improved to 97.2 from 100.4.
- AIG Life and Retirement pre-tax income increased 82 percent to $1.570 billion. Premiums and deposits were approximately unchanged at $5.580 billion, while operating income increased 6 percent to $1.394 billion.
- Mortgage Guaranty new insurance written increased to $10.626 billion from $6.563 billion; the primary-loan 60-plus-day delinquency ratio improved to 7.9 percent from 11.4 percent.
- Total assets were $548.880 billion at March 31, 2013, broadly unchanged from $548.633 billion at December 31, 2012. AIG shareholders’ equity increased to $99.520 billion from $98.002 billion.
- Book value per common share increased to $67.41 from $66.38; book value per share excluding accumulated other comprehensive income increased to $59.39 from $57.87.
- Total debt declined to $45.266 billion from $48.500 billion, excluding $24.1 billion of ILFC borrowings classified with assets held for sale. AIG repaid approximately $2.9 billion of debt during the quarter.
- AIG Parent reported approximately $14.987 billion of liquidity sources, including $9.121 billion of cash and short-term investments, $2.329 billion of unencumbered fixed-maturity securities, $3.037 billion of syndicated-facility capacity and $500 million of contingent facility capacity.
Material Changes Versus the Prior Comparable Period
- Net investment income fell 42 percent to $4.164 billion, primarily because Q1 2012 included significant fair-value gains on AIA, Maiden Lane II and Maiden Lane III interests. Excluding those items, management stated that investment performance improved through yield enhancement and stronger partnership income.
- Net realized capital gains improved to $300 million from a $251 million loss, driven by lower other-than-temporary impairments and foreign-exchange gains.
- Other-than-temporary impairment charges declined to $74 million from $618 million for the relevant investment categories.
- Other Operations shifted to a $414 million pre-tax loss from $2.736 billion of pre-tax income, primarily reflecting the absence of 2012 retained-interest gains and a $340 million loss on extinguishment of debt.
- Other comprehensive income changed to a $735 million loss from $1.725 billion of income, mainly because of declines in the fair value of fixed-maturity investments and unfavorable foreign-currency translation.
- Continuing operations used $777 million of cash, compared with $494 million used in Q1 2012. Consolidated operating cash flow was $(149) million after $628 million of operating cash flow from discontinued operations.
- AIG completed reporting-structure changes within Life and Retirement, presenting Retail and Institutional as its operating segments; prior periods were conformed without changing previously reported consolidated pre-tax income.
Guidance, Outlook, Risks and Unusual Items
- Management’s 2013 priorities were to improve core operating performance, complete the sale of up to 90 percent of ILFC, enhance investment yields while maintaining credit quality, improve capital efficiency, work with the Federal Reserve, and reduce expenses.
- Management expects low interest rates, global economic uncertainty and property-casualty industry overcapacity to continue challenging investment income and growth. AIG Property Casualty is emphasizing pricing discipline, risk selection, claims improvements and a shift toward higher-value business.
- AIG Life and Retirement remains exposed to spread compression, lower fixed-annuity sales, equity-market volatility and potential reserve or deferred-acquisition-cost effects. Approximately 73 percent of annuity and universal-life account values were at contractual minimum crediting rates at March 31, 2013.
- The ILFC sale remained subject to regulatory approvals and other closing conditions. AIG recognized a $553 million pre-tax additional loss on the sale in Q1 2013; ILFC contributed $93 million of after-tax discontinued-operation income after that loss and an additional $117 million pre-tax gain related to a tax refund from the prior ALICO sale.
- ILFC had approximately $17.7 billion of remaining aircraft purchase commitments, which were expected not to remain with AIG after closing.
- AIG’s financial results remain sensitive to interest rates, credit spreads, equity and foreign-exchange markets, catastrophe losses, insurance reserve development, policyholder surrenders, collateral calls and credit-rating changes. A further downgrade could require additional collateral postings and termination payments under derivative agreements.
- The filing identifies significant legal and regulatory matters, including securities and ERISA litigation, the Starr International litigation, the Caremark-related proceedings, regulatory inquiries and workers’ compensation matters. Certain potential losses cannot be reasonably estimated.
- AIG had approximately $4.9 billion of unrecognized tax benefits and $1.1 billion of accrued interest and penalties at March 31, 2013. It released $836 million of the life-insurance-business capital-loss valuation allowance during the quarter.
- Controls and procedures were assessed as effective as of March 31, 2013, with no reported material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the ILFC transaction closed on the expected terms and how final proceeds, retained ownership and remaining commitments affected AIG.
- How much of the Q1 earnings improvement in Property Casualty and Life and Retirement is recurring versus driven by favorable reserve development, investment gains, tax items or settlements.
- The sustainability of investment income and book value amid low interest rates, unrealized investment losses and substantial structured-product exposure.
- Development of long-tail casualty, asbestos, environmental and mortgage-guaranty reserves.
- Potential liquidity effects from policyholder surrenders, derivative collateral requirements, credit-rating changes and debt maturities.
- Resolution and financial exposure from disclosed litigation, regulatory matters, tax examinations and indemnification obligations.