Business Context and Reporting Period
American International Group, Inc. filed its Form 10-K for the fiscal year ended December 31, 2011. AIG is a global insurance organization operating in more than 130 countries through Chartis property-casualty insurance, SunAmerica life and retirement services, Aircraft Leasing through ILFC, and Other Operations.
The filing reflects a major post-crisis restructuring year. AIG completed its January 2011 recapitalization, repaid and terminated the Federal Reserve Bank of New York credit facility, continued asset sales, wound down AIG Financial Products’ active derivatives portfolio, and became majority-owned by the U.S. Department of the Treasury.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenues | $64.2 billion | $77.5 billion | Down 17% |
| Income before tax from continuing operations | $(1.1) billion | $17.9 billion | Declined materially |
| Income from continuing operations | $17.0 billion | $12.1 billion | Up 41% |
| Net income attributable to AIG | $17.8 billion | $7.8 billion | Up 129% |
| Net income attributable to common shareholders | $17.0 billion | $1.6 billion | Higher primarily due to recapitalization and tax items |
| Basic EPS attributable to common shareholders | $9.44 | $11.60 | Down from 2010 |
| Net cash from operating activities | $35 million | $16.9 billion | Down substantially |
| Total assets | $555.8 billion | $683.4 billion | Down 19% |
| Total investments | $410.4 billion | $410.4 billion | Essentially unchanged |
| Long-term debt | $75.3 billion | $106.5 billion | Down 29% |
| Total liabilities | $441.4 billion | $569.8 billion | Down 23% |
| Total equity | $105.8 billion | $113.2 billion | Down 7% |
The reported net income was substantially affected by a $16.6 billion release of the U.S. deferred tax asset valuation allowance. Consequently, the 2011 effective tax rate was not meaningful. Continuing operations produced a pretax loss, despite the reported after-tax profit.
Segment Performance
- Chartis: Revenue was $40.7 billion and pretax income was $1.7 billion, compared with a $116 million pretax loss in 2010. Net premiums written increased 10% to $34.8 billion. The combined ratio improved to 109.0 from 116.8, and the adjusted combined ratio was 99.4.
- SunAmerica: Revenue was $15.3 billion and pretax income was $2.9 billion, up 7%. Operating income declined 19% to $3.3 billion, reflecting lower investment income, higher variable-annuity benefit costs and DAC amortization.
- Aircraft Leasing: Revenue was $4.5 billion and pretax loss was $1.0 billion, compared with a $729 million loss in 2010. ILFC recorded approximately $1.7 billion of impairment, fair-value and lease-related charges.
- Other Operations: Pretax loss was $4.7 billion versus $15.9 billion of pretax income in 2010, primarily because 2010 included the $16.3 billion gain on the AIA IPO and other divestiture gains.
Liquidity, Debt and Capital
- AIG repaid approximately $20.7 billion outstanding under the FRBNY Credit Facility on January 14, 2011; the facility was terminated.
- Total debt declined to $75.3 billion from $106.5 billion. AIG issued approximately $2.0 billion of senior unsecured notes and exchanged $2.4 billion of junior subordinated debt for $1.8 billion of senior notes, generating a $484 million pretax gain.
- AIG Parent reported liquidity sources of approximately $14.0 billion at December 31, 2011, consisting of $176 million of cash, $9.6 billion of short-term investments, $3.2 billion of available syndicated credit capacity and $1.0 billion of contingent liquidity facilities.
- Parent-level cash flow was pressured by debt service, capital contributions and the $6.4 billion cash payment of accrued FRBNY interest and fees. Operating cash flow was only $35 million for the year.
- AIG paid or received approximately $3.3 billion from subsidiaries, including $1.5 billion of Chartis dividends and $1.4 billion of SunAmerica note repayments funded by subsidiary dividends.
- Approximately 86% of the equity of AIG’s consolidated insurance operations was restricted from transfer to AIG Parent by regulatory or other restrictions.
Material Changes Versus the Prior Comparable Period
- Reported earnings improved largely because of the $16.6 billion deferred tax valuation allowance release, lower interest expense following repayment of the FRBNY facility, lower prior-year reserve development and discontinued-operation gains.
- Revenue declined mainly because AIA was deconsolidated in late 2010 and several foreign life businesses were sold. Net investment income decreased 30% to $14.8 billion, reflecting the AIA deconsolidation, lower Maiden Lane valuation results and weaker investment-market conditions.
- Chartis catastrophe losses rose to $3.3 billion from $1.1 billion, including losses from the Tohoku earthquake and tsunami, New Zealand earthquakes, U.S. tornadoes, Hurricane Irene and Thailand floods.
- Chartis prior-year adverse loss development fell sharply to $211 million gross, or $72 million net of premium adjustments, from $4.3 billion net in 2010. However, primary workers’ compensation and environmental reserves continued to develop adversely.
- Net loss reserves declined modestly to $70.8 billion from $71.5 billion, including the $1.7 billion cession of domestic asbestos reserves to National Indemnity Company.
- SunAmerica’s premiums, deposits and other considerations increased 25% to $23.8 billion, while retirement-services account values increased to $164.3 billion from $161.3 billion.
- Cash flow from operating activities deteriorated sharply, while investing cash flow was positive $36.3 billion, primarily because of recapitalization-related restricted cash releases, asset sales and investment maturities.
Guidance, Outlook, Risks and Unusual Items
- Management’s 2012 priorities were to strengthen core businesses, repay the Department of the Treasury’s AIA SPV preferred interests, pursue an IPO or sale of ILFC, reduce capital and interest costs, improve systems and controls, and restructure AIG for its smaller post-divestiture footprint.
- Management expected Chartis conditions to remain challenging but noted improving U.S. commercial pricing and growth opportunities in emerging markets. Chartis planned further reductions in capital-intensive casualty lines, including excess workers’ compensation.
- SunAmerica expected continued pressure from low interest rates and equity-market volatility. Approximately 45% of SunAmerica annuity and universal-life account values were at contractual minimum crediting rates at year-end, creating spread compression risk.
- ILFC faced airline credit risk, aircraft obsolescence, residual-value risk and significant purchase commitments. ILFC had approximately $19.0 billion of remaining aircraft purchase commitments through 2019 and reported additional lessee bankruptcies after year-end.
- AIG expected to adopt the revised insurance acquisition-cost standard retrospectively on January 1, 2012. The adoption was expected to reduce DAC by approximately $4.9 billion and AIG shareholders’ equity by approximately $3.3 billion after tax.
- Potential designation as a non-bank systemically important financial institution and possible Federal Reserve supervision under Dodd-Frank could impose additional capital, liquidity, stress-testing, leverage and governance requirements.
- Key risks include catastrophe losses, adverse casualty reserve development, low interest rates, investment impairments, municipal and European exposures, reinsurance counterparty risk, credit-rating downgrades, regulatory restrictions on dividends, litigation and tax-attribute limitations.
- The filing states that a further two-notch downgrade of AIG’s long-term senior debt ratings could require approximately $267 million of additional collateral and permit certain counterparties to terminate contracts.
- AIG’s 33% interest in AIA was valued at approximately $12.4 billion at year-end. A one Hong Kong dollar change in AIA’s share price would have changed pretax income by approximately $500 million.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the $16.6 billion deferred tax valuation allowance release and other nonrecurring recapitalization, divestiture and fair-value items.
- Reconcile the continuing-operations pretax loss with reported net income and assess the sustainability of future tax-attribute utilization.
- Review Chartis reserve sensitivity, especially excess casualty, primary and excess workers’ compensation, environmental and asbestos exposures.
- Assess whether AIG Parent liquidity is sufficient after debt maturities, collateral calls, capital-maintenance obligations and restricted access to insurance-subsidiary cash.
- Monitor AIG’s ability to monetize AIA and ILFC, including Treasury consent rights and the potential May 2013 right to compel an ILFC sale.
- Evaluate ILFC aircraft purchase commitments, aircraft impairments, lessee defaults and refinancing requirements.
- Track Dodd-Frank implementation, potential SIFI or Federal Reserve designation, and related capital, liquidity and dividend restrictions.
- Review unresolved litigation, regulatory investigations, proposed settlements and indemnification obligations, for which the filing indicates that maximum exposure is not always reasonably estimable.