Business Context and Reporting Period
American International Group, Inc. (AIG) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2010. AIG operated through General Insurance, Domestic Life Insurance and Retirement Services, Foreign Life Insurance and Retirement Services, and Financial Services. The filing reflects AIG's continuing restructuring, asset-disposition program, reliance on U.S. government support, and wind-down of AIG Financial Products (AIGFP).
Key Financial Metrics
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Six months ended June 30, 2010 | Six months ended June 30, 2009 |
|---|---|---|---|---|
| Total revenues | $20.0 billion | $23.9 billion | $39.9 billion | $40.0 billion |
| Income from continuing operations | $1.3 billion | $586 million | $3.5 billion | $(4.9) billion |
| Net income (loss) | $(2.1) billion | $1.8 billion | $390 million | $(3.3) billion |
| Net income (loss) attributable to AIG | $(2.7) billion | $1.8 billion | $(799) million | $(2.5) billion |
| Net income (loss) attributable to common shareholders | $(538) million | $311 million | $(161) million | $(3.8) billion |
| Operating cash flow | Not separately presented for the quarter | $9.8 billion | $8.0 billion |
Second-quarter continuing-operations income before tax was $1.6 billion versus $171 million in the prior-year quarter. The improvement reflected stronger Mortgage Guaranty results, a $198 million net gain on divested businesses, and lower other-than-temporary impairment charges. These benefits were partly offset by a $500 million securities litigation charge and weaker Financial Services results.
- General Insurance reported second-quarter pre-tax income of $1.0 billion versus $977 million; the combined ratio deteriorated to 102.0% from 98.2%.
- Domestic Life Insurance and Retirement Services reported $88 million of second-quarter pre-tax income versus $200 million, primarily because of higher realized losses and embedded-derivative valuation losses.
- Foreign Life Insurance and Retirement Services reported $840 million versus $223 million, benefiting from improved Asia results and lower impairment losses.
- Financial Services reported $31 million versus $124 million; aircraft leasing and AIGFP remained pressured.
Balance Sheet, Debt and Liquidity
- Total assets were $850.5 billion at June 30, 2010, compared with $847.6 billion at December 31, 2009. Assets held for sale increased to $162.1 billion from $56.4 billion.
- Total liabilities were $745.9 billion and total equity was $102.7 billion. AIG shareholders' equity was $75.5 billion, up from $69.8 billion at year-end.
- Cash was $2.8 billion, down from $4.4 billion at December 31, 2009.
- The FRBNY Credit Facility balance was $26.5 billion, with approximately $13.3 billion remaining available at June 30. The Department of the Treasury Commitment had $22.3 billion remaining, after Series F drawdowns increased to $7.5 billion.
- Total debt was approximately $134.7 billion under the filing's debt rollforward, including debt issued or guaranteed by AIG and debt of subsidiaries. Contractual borrowings and FRBNY obligations were substantially larger when considering scheduled interest and other commitments.
- Six-month operating cash flow was $9.8 billion, while investing activities used $6.1 billion and financing activities used $4.5 billion. Ending cash was reduced by a $645 million reclassification related to assets held for sale.
- Parent-level liquidity was $35.9 billion at June 30, consisting of $371 million of cash and short-term investments, $13.3 billion of available FRBNY borrowing capacity, and $22.3 billion under the Treasury Commitment.
Material Changes Versus the Prior Comparable Period
- Continuing operations moved from a $4.9 billion loss in the first six months of 2009 to $3.5 billion of income in the first six months of 2010, although discontinued operations and noncontrolling interests still produced a net loss attributable to AIG.
- Net realized capital losses declined to $1.1 billion from $3.9 billion for the six-month period, while impairment charges in earnings declined to approximately $1.7 billion from $4.6 billion.
- Interest expense declined to $3.9 billion from $5.3 billion, primarily because of lower FRBNY facility balances and rates.
- AIGFP reduced its derivatives portfolio by approximately 36%, from $940.7 billion at December 31, 2009 to $602.4 billion at June 30, 2010. Super senior CDS net notional exposure declined to $89.5 billion from $183.5 billion.
- Goodwill impairment of $3.3 billion related to ALICO drove the majority of the second-quarter discontinued-operations loss.
- AIG recorded out-of-period adjustments that increased net loss attributable to AIG by $151 million for the quarter and $279 million for the six months. No restatement was required.
- Fuji Fire & Marine became controlled by AIG after a $145 million share purchase. Completion of purchase accounting resulted in a $406 million bargain purchase gain recorded in the first-half results.
Guidance, Outlook, Risks and Unusual Items
- Management stated that AIG expects adequate liquidity to operate, execute its disposition plan, and meet obligations for at least the next twelve months. Management also acknowledged that failure of planned transactions, additional market deterioration, or loss of government support could create substantial doubt about going-concern status.
- The ALICO sale to MetLife was expected to close in the fourth quarter of 2010 for approximately $15.5 billion, including $6.8 billion in cash and MetLife securities. Proceeds were expected to reduce FRBNY-related preferred interests and debt.
- The proposed Prudential acquisition of AIA was terminated on June 2, 2010. AIG received a $228 million termination fee and planned an AIA initial public offering in Hong Kong, subject to approvals and market conditions.
- The Nan Shan sale was expected to close in the fourth quarter, subject to regulatory approval. A $325 million escrow arrangement generated an additional $294 million loss accrual in the second quarter.
- AIG expected to continue winding down AIGFP through late 2010 or early 2011, but outcomes remained sensitive to market conditions, counterparty negotiations, liquidity, collateral requirements, and ratings.
- A one-notch downgrade was estimated to require up to approximately $1.7 billion of additional collateral postings and termination payments; further downgrades could require additional amounts. Actual requirements could differ materially.
- AIGFP's super senior CDS collateral postings were $4.0 billion at June 30, 2010. AIG stated that future collateral requirements could not be reasonably estimated.
- AIG had $14.4 billion of debt maturities scheduled over the four quarters following June 30, 2010. ILFC and AGF had made progress refinancing, but both remained dependent on market access, asset sales, and operating cash flows.
- ILFC had commitments to purchase 115 aircraft for approximately $13.5 billion through 2019. Aircraft-market weakness could require additional impairment charges or sale losses.
- Other significant exposures included $10.5 billion of guarantees and commercial commitments, $6.2 billion of investment commitments, $4.7 billion of unrecognized tax benefits, substantial insurance and investment contract liabilities, and unresolved litigation and regulatory matters.
- The July 2010 enactment of Dodd-Frank could subject AIG to additional federal supervision, capital, liquidity, derivatives, resolution, and risk-management requirements. The ultimate effect was not yet clear.
Most Important Facts an Investor Should Verify
- Whether ALICO, Nan Shan, and the planned AIA offering closed on expected terms and whether proceeds were applied to FRBNY obligations.
- Actual parent and subsidiary liquidity after asset sales, collateral calls, debt maturities, regulatory restrictions, and government-support changes.
- The pace and economics of the AIGFP wind-down, including super senior CDS valuations, collateral postings, termination payments, and rating-trigger exposure.
- Whether General Insurance reserves, mortgage-guaranty reserves, and long-tail asbestos, environmental, workers' compensation, and casualty reserves develop adversely.
- Whether the $3.3 billion ALICO goodwill impairment or the remaining Japan goodwill requires further impairment.
- The recoverability of deferred tax assets, including the $20.8 billion U.S. valuation allowance and dependence on asset-sale gains and tax-planning strategies.
- The effect of Dodd-Frank and other regulatory actions on capital requirements, organizational structure, derivatives activity, funding costs, and credit ratings.
- The status and potential financial impact of securities litigation, workers' compensation premium disputes, Caremark-related claims, Transatlantic arbitration, and other contingencies.