Business Context and Reporting Period
American International Group, Inc. (AIG) filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. AIG is a global insurance organization operating primarily through General Insurance, Life and Retirement, Other Operations and a Legacy Portfolio. Results are compared with the corresponding 2018 periods.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total revenues | $12.9 billion, versus $11.5 billion | $37.9 billion, versus $34.8 billion |
| Income from continuing operations | $973 million, versus a $1.2 billion loss | $3.3 billion, versus $661 million |
| Net income attributable to AIG common shareholders | $648 million, versus a $1.3 billion loss | $2.4 billion, versus $616 million |
| Diluted EPS | $0.72, versus $(1.41) | $2.71, versus $0.67 |
| Pre-tax margin | Approximately 9.8% | Approximately 11.2% |
| Net margin | Approximately 7.5% | Approximately 8.7% |
| Adjusted pre-tax income | $746 million, versus $(416) million | $4.27 billion, versus $2.08 billion |
- Net investment income was $3.4 billion in the quarter and $11.0 billion year to date, broadly flat quarterly and up 13% year to date.
- Net realized capital gains were $929 million in the quarter and $887 million year to date, compared with losses of $511 million and $365 million, respectively, in 2018.
- General operating and other expenses declined 6% in the quarter and 8% year to date, reflecting lower employee-related and professional-fee costs, partly offset by acquisition-related expenses.
- General Insurance reported a combined ratio of 103.7% for the quarter and 99.6% year to date, improving from 124.4% and 110.2% in the comparable 2018 periods.
- Life and Retirement adjusted pre-tax income was $646 million in the quarter, down 9%, and $2.62 billion year to date, up 2%.
- At September 30, 2019, total assets were $525.1 billion, total AIG shareholders’ equity was $65.6 billion, and total equity was $67.4 billion. Book value per common share was $74.85; adjusted book value per common share was $57.60.
- Long-term debt was $35.3 billion, compared with $34.5 billion at December 31, 2018. Total debt, including debt of consolidated investments, was $35.3 billion on the consolidated balance sheet and $35.3 billion as reported in the debt rollforward.
- AIG Parent liquidity sources were approximately $11.7 billion, consisting of $7.2 billion of cash, short-term investments and unencumbered fixed maturity securities, plus $4.5 billion of available committed credit capacity.
- For the nine months, operating cash flow was $(789) million, investing cash flow was $(4.8) billion, and financing cash flow was $6.0 billion. Cash and restricted cash ended at $3.8 billion.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially, driven by better General Insurance underwriting, lower catastrophe losses, favorable prior-year reserve development, realized capital gains and lower operating expenses.
- General Insurance adjusted pre-tax income improved to $507 million in the quarter and $2.76 billion year to date, from losses or substantially lower income in 2018. Net premiums written declined 3% quarterly and 4% year to date, reflecting underwriting discipline, higher ceded premiums and international declines, partly offset by Validus and Glatfelter.
- Catastrophe losses declined to $497 million in the quarter and $846 million year to date, compared with $1.57 billion and $2.09 billion in 2018.
- Prior-year reserve development was favorable by $4 million in the quarter and $141 million year to date, compared with unfavorable development of $170 million in the 2018 quarter and favorable development of $3 million year to date.
- Accumulated other comprehensive income increased to $5.6 billion from a loss position of $1.4 billion at year-end 2018, principally due to higher fixed-maturity securities values as interest rates declined and credit spreads narrowed.
- AIG issued $485 million of Series A 5.85% non-cumulative preferred stock and $600 million of 4.25% notes due 2029. No common shares were repurchased during the nine months, although approximately $2.0 billion remained available under the repurchase authorization.
Outlook, Commentary, Risks and Unusual Items
- Management highlighted historically low interest rates, reinvestment and spread pressure, currency volatility, slowing global growth, trade tensions, Brexit uncertainty and evolving annuity sales regulations as significant industry factors.
- Low rates may reduce investment yields, pressure annuity and life insurance margins, increase workers’ compensation reserve requirements and affect the valuation of guaranteed living benefit obligations. Approximately 64% of fixed account values in Individual and Group Retirement annuities were crediting at contractual minimum guarantees.
- Management continues to emphasize underwriting discipline, risk selection, reinsurance optimization, expense reduction, technology investment and profitable growth in selected General Insurance and Life and Retirement markets.
- Results included out-of-period adjustments that reduced net income attributable to AIG common shareholders by $134 million in the quarter and $138 million year to date. The adjustments primarily reflected updated actuarial assumptions and were deemed immaterial to current and prior periods.
- AIG expects to adopt the current expected credit loss standard on January 1, 2020. Its preliminary estimate was an approximately $625 million pre-tax reduction to opening retained earnings, subject to potentially material changes.
- AIG estimated that a potential settlement of tax litigation regarding foreign tax credits could require payment of approximately $1.7 billion, although the non-binding settlement terms were not final and timing remained uncertain.
- Legal, regulatory and governmental proceedings remain a risk, including investigations concerning sales and compensation practices related to financial planning and retirement products. The filing states that potential liabilities may exceed recorded amounts in some matters.
- Downgrades in AIG’s debt ratings could trigger collateral calls or early termination rights. The filing estimated up to approximately $65 million of additional collateral or termination payments under specified derivative downgrade scenarios.
- The filing provides no formal quantitative earnings guidance. Subsequent to quarter-end, AIG declared a $0.32 common-stock dividend and a Series A preferred dividend of $365.625 per share.
Facts Investors Should Verify
- Whether General Insurance’s improved combined ratio, favorable reserve development and lower catastrophe losses are sustainable rather than primarily timing- or event-driven.
- The effect of sustained low interest rates on reinvestment yields, annuity spreads, policyholder behavior, reserve discounting and guaranteed living benefit valuations.
- The final January 1, 2020 CECL adjustment and its effect on equity, retained earnings and credit-loss allowances.
- The status, amount and timing of any settlement or payment related to the foreign-tax-credit litigation.
- AIG Parent’s ability to receive dividends from regulated subsidiaries and maintain liquidity under catastrophe, market-disruption, downgrade or higher-surrender scenarios.
- The effect of Fortitude Re’s noncontrolling interest and any future change in AIG’s ownership or control, including the potential recognition of approximately $2.8 billion of related after-tax prepaid insurance and deferred acquisition cost balances.
- Reconciliations between GAAP results and non-GAAP adjusted pre-tax income, adjusted after-tax income and adjusted book value per share.