American International Group, Inc. — 2019 Form 10-K Summary
Business context and reporting period
AIG is a global insurance organization offering property casualty insurance, life insurance, retirement solutions and related financial services in more than 80 countries and jurisdictions. The filing covers the fiscal year ended December 31, 2019; it is an annual report rather than a quarterly filing. Core operations comprise General Insurance, Life and Retirement, Other Operations and a Legacy Portfolio.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenues | $49.746 billion | $47.389 billion | 5% |
| Income before tax from continuing operations | $5.287 billion | $257 million | Material increase |
| Net income | $4.169 billion | $61 million | Material increase |
| Net income attributable to AIG common shareholders | $3.326 billion | $(6) million | Material increase |
| Diluted EPS | $3.74 | $(0.01) | Improved |
| Adjusted after-tax income attributable to common shareholders | $4.084 billion | $1.064 billion | Material increase |
| Adjusted diluted EPS | $4.59 | $1.17 | Material increase |
| Adjusted return on common equity | 8.3% | 2.1% | Improved |
| Total assets | $525.064 billion | $491.984 billion | 7% |
| Total AIG shareholders’ equity | $65.675 billion | $56.361 billion | 17% |
| Long-term debt and debt of consolidated investment entities | $35.350 billion | $34.540 billion | 2% |
Net investment income increased 17% to $14.619 billion, while premiums were broadly unchanged at $30.561 billion. Net realized capital gains were $632 million versus a $130 million loss in 2018. Income before tax and net income margins were approximately 10.6% and 8.4%, respectively, based on reported total revenues.
General Insurance achieved underwriting profitability: underwriting income was $89 million versus a $3.137 billion loss in 2018, and the combined ratio improved to 99.6 from 111.4. The accident-year combined ratio, as adjusted, improved to 96.0 from 99.7. General Insurance adjusted pre-tax income was $3.533 billion versus a $469 million loss.
Life and Retirement adjusted pre-tax income increased 8% to $3.458 billion. Other Operations reported an adjusted pre-tax loss of $2.014 billion, compared with a $1.525 billion loss in 2018. Legacy Portfolio adjusted pre-tax income increased to $501 million from $213 million.
Operating cash flow was an outflow of $928 million, compared with $61 million of inflow in 2018. Investing cash flow was an outflow of $5.475 billion, while financing cash flow was an inflow of $6.379 billion. Cash and restricted cash ended the year at $3.287 billion.
AIG Parent reported liquidity sources of $12.081 billion, consisting of $7.581 billion of cash, short-term investments and unencumbered fixed-maturity securities plus $4.5 billion of available committed credit capacity. The company paid $1.114 billion of common dividends and $22 million of preferred dividends and did not repurchase common stock in 2019.
Material changes versus the prior comparable period
- General Insurance results improved substantially because of underwriting discipline, increased reinsurance, portfolio changes, lower catastrophe losses, favorable prior-year reserve development and lower operating expenses.
- Catastrophe losses declined to $1.278 billion from $2.885 billion.
- General Insurance recorded favorable prior-year development of $294 million, compared with unfavorable development of $362 million in 2018. However, unfavorable development remained in U.S. Financial Lines, U.S. Other Casualty and certain European casualty and financial lines.
- Net investment income benefited from stronger alternative investment returns, an initial public offering involving a private-equity holding and improved returns on certain fair-value-option securities.
- General operating and other expenses declined to $8.537 billion from $9.302 billion; restructuring and other costs were $218 million versus $395 million.
- Book value per common share increased to $74.93 from $65.04; adjusted book value per common share increased to $58.89 from $54.95. Accumulated other comprehensive income improved to $4.982 billion from a $(1.413) billion balance.
- Available-for-sale investment gains increased materially as lower interest rates and narrower credit spreads increased net unrealized gains to approximately $17.9 billion from $3.6 billion.
- AIG issued $485 million of Series A preferred stock and $600 million of 4.25% notes due 2029. It repaid or repurchased approximately $3.3 billion of debt during 2019.
Guidance, outlook, commentary and unusual items
Management’s 2020 priorities were targeted profitable growth, execution of the multi-year AIG 200 efficiency and modernization program, underwriting excellence, capital management, leadership and talent development, and continued risk reduction through reinsurance and the sale of the legacy portfolio.
Management cited persistent low interest rates, narrowing spreads, slowing global growth, trade tensions, foreign-exchange volatility, Brexit-related uncertainty and intense competition as key operating factors. Low rates pressure reinvestment yields, new-business pricing and spreads on annuity and life products; 65% of fixed account values in the Individual and Group Retirement annuity businesses were crediting at contractual minimum guarantees at year-end 2019.
AIG agreed to sell a controlling interest in Fortitude Holdings to Carlyle FRL and T&D. Upon closing, AIG expects to retain a 3.5% interest and contribute approximately $1.45 billion of proceeds to insurance subsidiaries for a period of time. Closing was expected in mid-2020, subject to regulatory approvals and other conditions. AIG disclosed potential additional loss of approximately $2.7 billion related to unamortized prepaid insurance assets and deferred acquisition costs, before any gain or loss on the sale.
AIG disclosed a potential payment of approximately $1.7 billion related to proposed settlements with the U.S. Treasury concerning foreign tax credits and cross-border financing transactions. The settlements were not final, and timing and amount remained uncertain. The company also reported $4.8 billion of unrecognized tax benefits and $2.4 billion of accrued interest and penalties.
Other significant risks include reserve inadequacy, reinsurance counterparty risk, catastrophe and climate-related losses, market and interest-rate volatility, policyholder behavior, guaranteed annuity benefits, regulatory changes, cybersecurity, litigation, ratings downgrades and restrictions on dividends from regulated subsidiaries. The filing states that all domestic and foreign insurance subsidiaries exceeded minimum statutory capital and surplus requirements at year-end.
Most important facts for investors to verify
- Whether General Insurance underwriting profitability and the 99.6 combined ratio are sustainable after excluding unusually favorable catastrophe and prior-year reserve effects.
- Development of long-tail reserves, particularly U.S. Financial Lines, excess casualty, other casualty, environmental and workers’ compensation exposures.
- Actual closing economics and regulatory approvals for the Fortitude Holdings sale, including the potential $2.7 billion incremental loss and the planned $1.45 billion capital contribution.
- Final resolution, payment timing and tax consequences of the proposed approximately $1.7 billion foreign-tax-credit settlement.
- Sensitivity of Life and Retirement earnings, DAC, guarantees and capital to low interest rates, equity markets, credit spreads, lapses, surrenders and mortality assumptions.
- Availability of parent liquidity after dividends, debt service, collateral requirements and potential support for regulated subsidiaries.
- Exposure to catastrophe events, reinsurance recoverability, litigation, regulatory investigations and cybersecurity incidents.
- Impact of the January 1, 2020 current expected credit loss standard and the scheduled 2022 adoption of long-duration insurance accounting changes; the filing does not provide a final quantified impact for the latter.