AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q1 FY2019

American International Group, Inc. — First-Quarter 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; comparative period is the three months ended March 31, 2018. AIG is a global insurer operating through General Insurance, Life and Retirement, Other Operations and a Legacy Portfolio. The financial statements are unaudited and prepared under U.S. GAAP.

Key Financial Metrics

Metric	Q1 2019	Q1 2018	Change
Total revenues	$12,456 million	$11,712 million	Up 6%
Income before tax	$1,154 million	$1,227 million	Down 6%
Income from continuing operations	$937 million	$950 million	Down 1%
Net income attributable to AIG	$654 million	$938 million	Down 30%
Diluted EPS attributable to AIG	$0.75	$1.01	Down $0.26
Adjusted pre-tax income	$1,847 million	$1,216 million	Up 52%
Adjusted after-tax income attributable to AIG	$1,388 million	$963 million	Up 44%
Net cash used in operating activities	$(976) million	$(938) million	Greater outflow
Cash and restricted cash, end of period	$3,179 million	$2,371 million	Up $808 million

Reported pre-tax margin was approximately 9.3%, compared with 10.5% in the prior-year quarter. Reported net income attributable to AIG margin was approximately 5.2%, compared with 8.0%. The effective tax rate on continuing operations was 18.8%, compared with 22.6%.

Balance Sheet, Debt and Liquidity

Total assets were $512.9 billion at March 31, 2019, compared with $492.0 billion at December 31, 2018.
Total AIG shareholders’ equity was $60.8 billion, compared with $56.4 billion at year-end 2018. Book value per common share was $69.33; adjusted book value per common share was $55.47.
Long-term debt was $35.8 billion, compared with $34.5 billion at December 31, 2018. Total debt, including debt of consolidated investment vehicles, was $35.8 billion as presented in the balance sheet and $35.8 billion in the debt rollforward; the rollforward separately identifies approximately $9.1 billion of consolidated-investment debt.
AIG issued $600 million of 4.250% notes due 2029 and repaid approximately $597 million of debt during the quarter.
AIG Parent reported approximately $9.7 billion of liquidity sources, comprising $1.6 billion of cash and short-term investments, $3.5 billion of unencumbered fixed-maturity securities and $4.5 billion of available committed credit capacity.
AIG paid $278 million of common dividends and issued $485 million of Series A 5.85% non-cumulative preferred stock. No common shares were repurchased during the quarter; approximately $2.0 billion remained under the repurchase authorization at March 31, 2019.

Material Changes Versus the Prior Comparable Period

Premiums increased 11% to $8.1 billion, while net investment income increased 19% to $3.9 billion.
Net realized capital losses increased to $446 million from $19 million, primarily reflecting losses from variable-annuity embedded derivatives and related hedging activity, higher derivative losses and other-than-temporary impairments.
General Insurance adjusted pre-tax income increased to $1.3 billion from $510 million. The combined ratio improved to 97.4% from 103.8%, reflecting lower catastrophe losses, improved accident-year performance and lower operating expenses.
General Insurance catastrophe-related charges declined to $175 million from $376 million. Favorable prior-year loss reserve development was $74 million, compared with $110 million in the prior-year quarter.
Life and Retirement adjusted pre-tax income increased modestly to $924 million from $892 million. Individual Retirement income increased to $508 million, while Group Retirement income declined to $232 million from $282 million. Life Insurance increased to $116 million from $52 million.
Other Operations’ adjusted pre-tax loss increased to $457 million from $331 million, mainly due to higher interest expense and consolidation-related items. Legacy Portfolio adjusted pre-tax income declined to $112 million from $145 million.
General operating and other expenses declined 10% to $2.1 billion, although restructuring and other costs increased to $47 million from $24 million. Results also reflected the Validus and Glatfelter acquisitions completed in 2018.
Comprehensive income attributable to AIG was $4.2 billion, compared with a $1.7 billion loss in the prior-year quarter, primarily because of a $3.5 billion improvement in other comprehensive income driven by higher fixed-maturity securities values.

Outlook, Management Commentary and Risks

Management emphasized underwriting discipline, improved risk selection, increased use of reinsurance, expense reduction, portfolio diversification and continued investment in technology. The filing does not provide a specific numerical earnings or revenue guidance range.

Low interest rates remain a significant risk to investment yields, annuity spreads, product pricing, reinvestment returns and reserve discounting. Approximately 63% of fixed account values in Individual and Group Retirement annuity products were crediting at contractual minimum guaranteed rates at March 31, 2019.
General Insurance remains exposed to catastrophic events, long-tail casualty claims, pricing competition, litigation trends, reserve development and reinsurance counterparty risk.
Life and Retirement results are sensitive to equity markets, interest rates, credit spreads, volatility, policyholder lapses, surrenders, mortality and utilization of guaranteed benefits. The GMWB embedded-derivative liability was $2.0 billion, and the economic hedge target liability was $2.0 billion at March 31, 2019.
AIG’s investment portfolio included $249.7 billion of fixed-maturity securities at fair value, including $32.6 billion rated below investment grade and $1.5 billion not rated. Available-for-sale securities had $2.0 billion of gross unrealized losses and $9.6 billion of net unrealized gains at quarter-end.
Potential collateral calls, early terminations and payments triggered by credit-rating downgrades could increase liquidity needs. A downgrade to specified BBB/Baa rating levels could have resulted in up to approximately $63 million of additional collateral calls and termination payments under derivative contracts based on quarter-end exposures.
AIG disclosed non-binding settlement agreements in principle concerning tax litigation related to foreign tax credits. The company currently estimated a potential payment of approximately $1.7 billion, potentially in early 2020, but emphasized that the settlement was not final and that amount and timing remained uncertain.
Other material exposures include $7.3 billion of investment commitments, significant legal and regulatory proceedings, guarantees, letters of credit and variable-interest-entity exposures. Management stated that unresolved litigation could materially affect an individual reporting period, although it did not expect currently known matters to materially affect the overall financial position.
AIG adopted the new lease standard on January 1, 2019, recognizing approximately $823 million of operating lease liabilities and $724 million of right-of-use assets. The filing states that the adoption did not materially affect results. A significant long-duration insurance-contract accounting standard is scheduled for adoption in 2021 and is expected to materially affect financial condition, results, cash flows, disclosures, systems and controls.

Investor Verification Checklist

Reconcile reported net income attributable to AIG with adjusted pre-tax and adjusted after-tax income, particularly the impact of realized capital losses, reserve discounting, Fortitude noncontrolling interests and restructuring costs.
Assess whether General Insurance’s 97.4% combined ratio and favorable reserve development are sustainable after adjusting for catastrophe losses, reinsurance and reserve discounting.
Monitor interest-rate, credit-spread and equity-market sensitivity in the annuity guarantee hedging program and related GMWB liabilities.
Review liquidity at AIG Parent separately from liquidity held by regulated insurance subsidiaries, including dividend restrictions and the $4.5 billion credit facility.
Track debt maturities, rating outlooks, collateral requirements and the effect of future financing or preferred-stock issuance.
Evaluate the potential cash and earnings impact of the unresolved tax litigation and the $1.7 billion estimated settlement exposure.
Review investment credit quality, unrealized losses, below-investment-grade exposure, alternative-investment liquidity and mortgage concentration.
Confirm the final outcome and implementation effects of the 2020 expected-credit-loss standard and the 2021 long-duration insurance-contract standard.