AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q1 FY2011

Business Context and Reporting Period

American International Group, Inc. (AIG) filed this unaudited Form 10-Q for the three months ended March 31, 2011. AIG reported through Chartis, SunAmerica Financial Group, Financial Services, and Other Operations. The quarter followed completion of AIG’s January 14, 2011 recapitalization and substantial completion of its asset disposition plan.

The filing reflects the January 2011 repayment and termination of the Federal Reserve Bank of New York credit facility, major business sales, continued wind-down of AIG Financial Products, and the deconsolidation of AIA from prior periods.

Key Financial Metrics

Metric	Q1 2011	Q1 2010	Change
Total revenues	$17.436 billion	$18.555 billion	Down 6%
Income from continuing operations	$(1.180) billion	$2.088 billion	Declined to a loss
Net income	$473 million	$2.431 billion	Down 81%
Net income attributable to AIG	$269 million	$1.783 billion	Down 85%
Net income attributable to common shareholders	$(543) million	$359 million	Declined to a loss
Basic and diluted EPS from continuing operations	$(1.41)	$2.16	Declined to a loss
Net cash from operating activities	$(5.312) billion	$3.195 billion	Outflow in 2011
Cash and cash equivalents, period-end	$1.801 billion	$2.133 billion	Down 16%

Continuing-operations revenue was pressured by lower premiums following the AIA deconsolidation and by net realized capital losses. Net investment income increased 7% to $5.569 billion, while net realized capital losses widened to $651 million from $334 million.

Total benefits, claims and expenses rose 11% to $18.816 billion, including a $3.313 billion loss on extinguishment of debt. The effective tax rate on the pretax loss from continuing operations was 14.5%; AIG maintained a full valuation allowance against U.S. consolidated deferred tax assets.

Balance Sheet, Debt and Liquidity

• Total assets were $611.247 billion, down from $683.443 billion at December 31, 2010, primarily reflecting asset sales and deconsolidation.
• Total liabilities were $513.800 billion, compared with $569.770 billion at year-end 2010.
• Total equity was $85.845 billion, compared with $113.239 billion at year-end 2010. AIG shareholders’ equity was $85.026 billion.
• Other long-term debt was $82.166 billion at March 31, 2011. Total debt, including debt of subsidiaries and consolidated investments, was $82.166 billion, compared with $106.461 billion at December 31, 2010.
• The FRBNY credit facility was fully repaid and terminated. AIG recognized a $3.3 billion pretax extinguishment charge, primarily from accelerated amortization of the prepaid commitment fee asset.
• AIG Parent reported liquidity sources of $12.227 billion, consisting of $42 million of cash, $6.685 billion of short-term investments, $3.0 billion of syndicated facilities, $500 million of contingent liquidity capacity, and $2.0 billion of remaining Series G commitment capacity.
• Management stated that AIG had sufficient liquidity for future requirements and reasonably foreseeable contingencies, but identified catastrophe losses, reserve strengthening, investment declines, higher policy surrenders, rating downgrades, collateral calls, and regulatory restrictions as potential sources of pressure.

Material Changes Versus the Prior Comparable Period

• Recapitalization: AIG exchanged Series C, E, and F preferred stock for common stock and other consideration. The Department of the Treasury held approximately 92.2% of AIG common stock at March 31, 2011.
• Dispositions: AIG completed the sale of AIG Star and AIG Edison for $4.8 billion and the sale of MetLife securities for $9.6 billion. The Star/Edison transaction produced a $1.9 billion pretax gain included in discontinued operations.
• Discontinued operations: Income from discontinued operations increased to $1.653 billion from $343 million, primarily due to the Star/Edison sale gain.
• Chartis deterioration: Chartis pretax results declined to a $416 million loss from $1.348 billion of income. Its combined ratio increased to 119.0 from 102.5, principally because of catastrophe losses.
• SunAmerica improvement: SunAmerica pretax income increased to $940 million from $327 million, supported by lower realized losses and improved investment results, although operating income was broadly stable.
• Financial Services improvement: Financial Services pretax income increased to $325 million from a $202 million loss, helped by lower aircraft impairment charges and gains in the AIGFP portfolio wind-down.
• Cash flow shift: Operating cash flow moved from an inflow of $3.195 billion to an outflow of $5.312 billion, largely because AIG paid $6.363 billion of accrued FRBNY interest and fees in the first quarter of 2011.

Guidance, Outlook, Risks and Unusual Items

• AIG established long-term aspirational goals of at least 10% operating ROE by 2015 and mid-teens average annual operating EPS growth through 2015. These goals are expressly dependent on significant assumptions and are not guarantees.
• AIG targeted approximately $4 billion to $5 billion of incremental pretax operating income by 2015, approximately $1 billion of annual general and administrative expense reductions, and $25 billion to $30 billion of deployable capital through 2015.
• Management expected a challenging 2011 for Chartis because of weak developed-market growth and soft commercial insurance pricing, while anticipating better growth in selected emerging markets.
• AIG expected to complete the active unwind of AIGFP’s derivatives portfolio by June 30, 2011. The remaining portfolio’s liquidity requirements depend on market conditions, counterparty access, collateral needs, and rating actions.
• The Tohoku earthquake and tsunami generated $1.337 billion of Chartis catastrophe-related charges, including $864 million in Chartis International. Business interruption claims and reserve development could differ materially from current estimates.
• Chartis announced a proposed retroactive reinsurance transaction with National Indemnity Company covering most U.S. asbestos liabilities. Subject to approvals and closing conditions, AIG expected to pay approximately $1.65 billion, with an anticipated deferred gain of approximately $200 million in Q2 2011.
• Material legal and regulatory exposures remained unresolved, including securities litigation, workers’ compensation premium reporting matters, the Brookfield swap dispute, securities-lending arbitration, and other legacy regulatory claims. Several matters could not be reasonably quantified.
• ILFC had commitments to purchase 236 aircraft for approximately $17.6 billion, with deliveries scheduled through 2019.
• AIG’s investment and valuation risks remained significant. Recurring Level 3 assets were $37.0 billion, and Capital Markets super senior CDS had $56.7 billion of net notional exposure and $3.2 billion of fair-value derivative liabilities at March 31, 2011.

Most Important Facts for Investors to Verify

• Whether AIG can convert its stated liquidity sources into sustainable parent-level cash flow while meeting debt maturities, subsidiary capital needs, and collateral requirements.
• The ultimate cost and timing of catastrophe claims, asbestos liabilities, insurance reserve development, and other long-tail claims.
• The closing, accounting treatment, and economic effect of the National Indemnity asbestos reinsurance transaction.
• The pace and realized gains or losses from the AIGFP derivatives wind-down, including future collateral calls and counterparty actions.
• The sustainability of SunAmerica’s improved earnings and the effect of interest rates, surrender behavior, and DAC/VOBA/SIA unlocking.
• The effect of Treasury ownership, potential equity offerings, Series G preferred terms, and related dilution or capital-allocation restrictions.
• The recoverability of U.S. deferred tax assets and the potential for future valuation-allowance releases or additional tax charges.
• The status and potential exposure of material litigation, regulatory settlements, indemnities, guarantees, and aircraft purchase commitments.