AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q2 FY2014

AIG 10-Q Summary: Quarter Ended June 30, 2014

Business Context and Reporting Period

American International Group, Inc. is a global insurance organization serving commercial, institutional and individual customers in more than 130 countries and jurisdictions. The filing presents unaudited results for the three and six months ended June 30, 2014, compared with the corresponding 2013 periods, and reports two primary segments: AIG Property Casualty and AIG Life and Retirement. Other Operations includes Mortgage Guaranty, Global Capital Markets, the Direct Investment Book, Corporate & Other, and aircraft leasing through May 14, 2014.

Financial Performance and Key Metrics

Metric	Three Months Ended June 30, 2014	Three Months Ended June 30, 2013	Six Months Ended June 30, 2014	Six Months Ended June 30, 2013
Total revenues	$16.105 billion	$18.426 billion	$32.217 billion	$35.388 billion
Income from continuing operations	$3.006 billion	$2.740 billion	$4.665 billion	$4.898 billion
Net income attributable to AIG	$3.073 billion	$2.731 billion	$4.682 billion	$4.937 billion
Diluted EPS attributable to AIG	$2.10	$1.84	$3.19	$3.33
After-tax operating income attributable to AIG	$1.833 billion	$1.655 billion	$3.614 billion	$3.637 billion
Net cash provided by operating activities	Not separately provided for the quarter	Not separately provided for the quarter	$1.641 billion	$1.674 billion

Approximate margins were 27.8% pre-tax and 19.1% net for the second quarter; six-month pre-tax and net margins were approximately 21.0% and 14.4%, respectively.
Net investment income was $3.884 billion in the quarter and $8.080 billion year to date, up modestly from 2013 despite lower reinvestment yields and weaker alternative-investment returns.
Net realized capital gains were $101 million in the quarter versus $1.591 billion in the prior-year quarter, and a $112 million loss year to date versus a $1.891 billion gain in 2013.
Other comprehensive income attributable to AIG was $5.499 billion in the quarter and $9.833 billion year to date, primarily reflecting increases in unrealized investment values.
AIG Property Casualty’s combined ratio was 98.8% for the quarter and 99.9% year to date, compared with 102.6% and 100.0% in the comparable 2013 periods.
AIG Life and Retirement premiums and deposits were $7.360 billion in the quarter and $14.489 billion year to date, compared with $6.765 billion and $12.345 billion, respectively.
Assets under management in AIG Life and Retirement were $332.812 billion at June 30, 2014, versus $293.665 billion a year earlier.

Balance Sheet, Debt, Liquidity and Capital

Total assets were $529.109 billion at June 30, 2014, down from $541.329 billion at December 31, 2013, primarily reflecting completion of the ILFC sale.
Total AIG shareholders’ equity increased to $108.161 billion from $100.470 billion. Book value per common share was $75.71, versus $68.62 at year-end; book value excluding AOCI was $67.65 versus $64.28.
Total long-term debt was $38.414 billion, down from $41.693 billion at year-end. Total debt outstanding, including certain other debt categories, was $38.414 billion at June 30, 2014.
AIG Parent reported liquidity sources of $18.533 billion, consisting of $10.587 billion of cash and short-term investments, $3.499 billion of unencumbered fixed-maturity securities, $3.947 billion of available syndicated credit capacity and a $500 million contingent liquidity facility.
AIG Parent had approximately $4.4 billion of cash and short-term investments allocated to future maturities and contingent liquidity needs of the Direct Investment Book and Global Capital Markets.
During the first half of 2014, AIG repurchased approximately 36 million shares for $1.9 billion and paid $361 million of common-stock dividends. Approximately $1.5 billion remained under the repurchase authorization as of August 4, 2014.

Material Changes Versus the Prior Comparable Period

Quarterly net income attributable to AIG increased 13%, while six-month net income decreased 5%. The quarterly improvement reflected stronger insurance operating results and the ILFC sale gain.
Total revenue declined 13% for the quarter and 9% year to date, largely because ILFC was sold on May 14, 2014, and prior-year periods included substantially higher realized investment gains.
The ILFC sale generated approximately $7.6 billion of total consideration, including $2.4 billion of net cash proceeds and 97.6 million AerCap shares. AIG retained approximately a 46% interest in AerCap and recorded an approximately $2.2 billion pre-tax gain.
AIG Property Casualty quarterly pre-tax income rose to $1.490 billion from $1.205 billion, supported by lower catastrophe losses and favorable prior-year reserve development. Year-to-date pre-tax income declined slightly to $2.799 billion because of higher severe losses, catastrophe losses and adverse reserve development.
AIG Life and Retirement pre-tax operating income increased modestly to $1.180 billion for the quarter and $2.597 billion year to date, but reported pre-tax income fell because 2013 included significant investment-sale gains and legal settlement income.
Mortgage Guaranty pre-tax operating income increased to $210 million for the quarter and $286 million year to date, aided by favorable reserve development and improved claims experience, although new insurance written declined 20% and 23%, respectively.
Accumulated other comprehensive income rose to $11.511 billion from $6.360 billion, reflecting higher unrealized investment gains as interest rates declined and credit spreads narrowed.

Guidance, Outlook, Risks and Unusual Items

The filing does not provide formal consolidated earnings guidance. Management’s stated priorities are profitable growth in core insurance businesses, improved investment yield while maintaining credit quality, efficient capital redeployment, expense reduction and continued regulatory engagement.
Management expects historically low interest rates, currency volatility, global economic uncertainty and competition in property-casualty insurance to continue pressuring investment income and pricing.
AIG Life and Retirement remains exposed to low interest rates, reinvestment at lower yields, policyholder behavior, surrender activity and guarantees on variable annuity and universal-life products. Approximately 71% of relevant annuity and universal-life account values were at minimum crediting rates at June 30, 2014.
Insurance reserves remain subject to adverse development, particularly in long-tail casualty, asbestos, environmental, workers’ compensation and other legacy lines. Net loss reserves were $63.090 billion at June 30, 2014.
AIG’s derivatives and legacy portfolios create collateral and liquidity exposure. A one-notch downgrade to specified ratings levels could require approximately $59 million of additional collateral postings and termination payments; further downgrades could require approximately $152 million, based on the filing’s estimates.
At June 30, 2014, AIG had $14.688 billion of net notional super-senior credit default swap exposure, including $2.970 billion related to multi-sector CDOs and $11.718 billion related to corporate debt and CLOs.
AIG recorded $491 million of legal reserve increases in the quarter and $498 million year to date. A proposed $960 million settlement of the Consolidated 2008 Securities Litigation had been accrued but remained subject to definitive documentation, notice and court approval.
Subsequent events included July debt tender offers totaling $2.5 billion, an additional approximately $2.0 billion reduction in Direct Investment Book debt, a $2.5 billion debt issuance, a $650 million Bank of America mortgage-related settlement payment and termination of $8.8 billion of corporate-debt super-senior CDS notional.
Other notable contingencies include unresolved litigation, regulatory inquiries, tax matters, guarantees and $2.6 billion of investment commitments. The filing states that certain potential legal and indemnity exposures cannot be reasonably estimated.

Important Facts for Investors to Verify

Separate recurring insurance operating performance from the approximately $2.2 billion ILFC disposal gain, realized investment gains and other non-recurring items.
Review the sustainability of Property Casualty reserve adequacy, including adverse year-to-date development and exposure to severe, catastrophe, asbestos and environmental losses.
Assess sensitivity to low interest rates, reinvestment yields, variable-annuity guarantees, surrender behavior and the valuation of AOCI and deferred acquisition costs.
Confirm AIG Parent liquidity, debt maturities, collateral requirements and the effect of future credit-rating changes.
Monitor the final outcome and cash cost of the $960 million securities litigation settlement and other unresolved legal and regulatory matters.
Evaluate the liquidity, valuation and monetization restrictions associated with AIG’s approximately 46% AerCap interest and other alternative investments.
Reconcile GAAP net income with after-tax operating income and assess whether improvements are driven by recurring insurance operations rather than unusual items.