AIG 2010 Form 10-K Summary
Business context and reporting period
American International Group, Inc. is a global insurance and financial services organization operating in more than 130 countries. The filing covers the fiscal year ended December 31, 2010, including fourth-quarter results. Reportable segments were Chartis property-casualty insurance, SunAmerica life insurance and retirement services, and Financial Services, principally ILFC aircraft leasing and the wind-down of AIG Financial Products.
The filing reflects extensive asset dispositions and the January 14, 2011 recapitalization. The U.S. Department of the Treasury became AIG's controlling shareholder with approximately 92.2% ownership after exchanging preferred stock for common stock and related transactions.
Key financial metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenues | $77.3 billion | $75.4 billion |
| Income from continuing operations before tax | $17.9 billion | Loss of $14.3 billion |
| Income from continuing operations | $12.1 billion | Loss of $12.8 billion |
| Net income | $10.0 billion | Loss of $12.3 billion |
| Net income attributable to AIG | $7.8 billion | Loss of $10.9 billion |
| Income from discontinued operations, net of tax | Loss of $2.1 billion | Income of $505 million |
| Net cash provided by operating activities | $16.9 billion | $18.6 billion |
| Total assets | $683.4 billion | $847.6 billion |
| Total investments | $410.4 billion | $601.2 billion |
| Total debt | $106.5 billion | $141.5 billion |
| Total AIG shareholders' equity | $85.3 billion | $69.8 billion |
The reported continuing-operations pretax margin was approximately 23.2%, but it was substantially affected by a $17.8 billion gain on divested businesses and other unusual items; it is not representative of recurring operating profitability.
Segment performance and material changes
- Chartis: Net premiums written increased 3% to $31.6 billion, helped by the Fuji acquisition and international growth. Chartis reported a $116 million pretax loss versus $164 million of pretax income in 2009. The GAAP combined ratio deteriorated to 116.8% from 108.0%, driven by catastrophe losses and adverse prior-year reserve development.
- SunAmerica: Pretax income increased to $2.7 billion from a $1.2 billion loss. Operating income increased to $4.0 billion from $2.3 billion, supported by higher investment income, improved market conditions and lower realized investment losses. Sales and deposits rose 4% to $15.8 billion.
- Financial Services: The segment reported a $636 million pretax loss versus $2.0 billion of income. ILFC recorded approximately $1.6 billion of aircraft impairment and related charges. Capital Markets continued to reduce its derivatives portfolio; net notional exposure declined 62% to approximately $353 billion.
- Other operations: Pretax income was $15.7 billion versus a $14.5 billion loss, primarily due to the AIA IPO gain, lower FRBNY Credit Facility interest expense and improved Mortgage Guaranty results.
- Investment results: Net investment income increased 10% to $20.9 billion. Net realized capital losses declined to $279 million from $5.2 billion, while other-than-temporary impairment charges declined to $3.0 billion from $6.7 billion.
- Balance-sheet contraction: Assets and investments declined materially because of the AIA deconsolidation, ALICO sale and other divestitures. The comparability of 2010 with prior years is therefore limited.
Fourth-quarter results and unusual items
- Fourth-quarter 2010 continuing-operations pretax income was $14.5 billion, compared with an $8.1 billion loss in the fourth quarter of 2009. Fourth-quarter net income attributable to AIG was $11.2 billion versus an $8.9 billion loss.
- AIG recorded a $17.6 billion fourth-quarter gain on the sale of divested businesses and properties, principally the $16.3 billion pretax gain from the AIA initial public offering.
- Chartis recorded approximately $4.2 billion of fourth-quarter net reserve strengthening, primarily for asbestos, excess casualty, excess workers' compensation and primary workers' compensation. Approximately 80% related to those four classes, and most of the strengthening related to accident years 2005 and prior.
- Chartis catastrophe losses totaled $1.1 billion for 2010, compared with $53 million in 2009. The filing also notes expected claims from Australian floods occurring in 2011 and continuing uncertainty regarding Deepwater Horizon liabilities.
- AIG recorded $2.1 billion of net loss from discontinued operations, including $4.6 billion of goodwill impairment related to ALICO, AIG Star and AIG Edison.
- The filing discloses out-of-period adjustments that reduced 2010 net income attributable to AIG by $216 million. Management concluded that no restatement was required.
Liquidity, debt and capital resources
- Operating cash flow was positive at $16.9 billion, but consolidated cash declined to $1.6 billion from $4.4 billion because investing and financing activities used cash.
- At December 31, 2010, $21.0 billion was outstanding under the FRBNY Credit Facility, including $6.4 billion of accrued interest and fees. The facility was fully repaid and terminated on January 14, 2011.
- At February 16, 2011, AIG Parent reported $14.5 billion of actual and contingent liquidity, consisting principally of $9.0 billion of short-term investments, $3.0 billion of bank credit facilities, a $500 million contingent facility and a $2.0 billion Series G drawdown right.
- AIG Parent contributed $3.7 billion of capital to Chartis after February 16, 2011. Approximately 80% of the equity of consolidated subsidiaries was restricted from transfer to AIG Parent at year-end because of regulatory and other restrictions.
- Near-term 2011 maturities totaled approximately $10.3 billion, including $5.2 billion of ILFC maturities. ILFC also had commitments to purchase 115 aircraft through 2019 for an estimated $13.5 billion.
Guidance, outlook, risks and contingencies
- Management's 2011 priorities included strengthening core businesses, pursuing primary equity offerings, repaying SPV preferred interests, improving financial and operating systems, completing the AIGFP active unwind by June 30, 2011 and closing the Nan Shan sale.
- Chartis expected weak growth and continued pressure on commercial insurance rates in developed markets, while targeting higher-margin consumer and emerging-market growth, tighter underwriting and reduced long-tail exposure.
- SunAmerica expected improved variable-annuity sales and higher investment spreads if interest rates remained favorable, but low rates, surrender activity, guarantee costs and DAC amortization remained risks.
- Principal risks include adverse casualty reserve development, catastrophe losses, investment and municipal-bond concentration, credit-rating downgrades, collateral calls, reinsurance recoverability, illiquid assets, variable-annuity guarantees, regulatory changes under Dodd-Frank and Solvency II, tax-attribute utilization and unresolved litigation.
- A one-notch downgrade to the specified rating levels could have required approximately $700 million of additional collateral postings and termination payments; further downgrades could have added approximately $400 million and $200 million, respectively.
- AIG held approximately $46.6 billion of state and municipal bonds and had approximately $38.1 billion of net notional regulatory-capital CDS exposure. Management did not expect payments under the regulatory-capital CDS portfolio, but acknowledged valuation, collateral and maturity uncertainty.
- AIG had approximately $32.3 billion of U.S. federal net operating loss carryforwards, $27.8 billion of capital loss carryforwards and $4.6 billion of foreign tax credits. An ownership change after Treasury ownership falls below 50% could limit utilization of these tax attributes.
Most important facts for an investor to verify
- Whether the 2010 profit improvement remains after removing the AIA gain, other divestiture gains, reserve changes, impairment charges and other nonrecurring items.
- Subsequent development of Chartis's $71.5 billion net unpaid claims reserve, particularly asbestos, excess casualty and workers' compensation reserves.
- Actual post-recapitalization liquidity at AIG Parent and the ability to transfer cash from regulated subsidiaries.
- Progress and cash costs of the AIGFP and real-estate wind-downs, including collateral requirements and remaining CDS exposures.
- ILFC aircraft values, lease rates, lessee credit quality, debt maturities and the $13.5 billion aircraft purchase commitment.
- Effects of Treasury's 92.2% ownership, potential common-stock offerings and future Treasury share sales on dilution, control and market price.
- Resolution and funding requirements for litigation, indemnities, regulatory settlements and tax examinations, including matters for which the filing does not provide a clear maximum exposure.