American International Group, Inc. — FY2016 Form 10-K Summary
Business context and reporting period
AIG is a global insurance organization providing commercial property-casualty insurance, life insurance, retirement products and related financial services in more than 80 countries and jurisdictions. This Form 10-K covers the fiscal year ended December 31, 2016, with comparisons to 2015 and 2014. AIG reorganized its reporting in the fourth quarter into Commercial Insurance, Consumer Insurance, Other Operations and a Legacy Portfolio; prior periods were revised to conform.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenues | $52.4 billion | $58.3 billion | Down 10% |
| Net income attributable to AIG | $(849) million | $2.2 billion | Declined to a loss |
| After-tax operating income attributable to AIG | $406 million | $2.9 billion | Down substantially |
| Net cash from operating activities | $2.4 billion | $2.9 billion | Down $494 million |
| Total assets | $498.3 billion | $496.8 billion | Up modestly |
| Long-term debt | $30.9 billion | $29.2 billion | Up $1.7 billion |
| AIG shareholders’ equity | $76.3 billion | $89.7 billion | Down $13.4 billion |
| Return on equity | (1.0)% | 2.2% | Down 3.2 points |
- Premiums were $34.4 billion, down 6%; policy fees were $2.7 billion, down 1%; and net investment income was $14.1 billion, essentially flat.
- Net realized capital losses were $1.9 billion, compared with $776 million of gains in 2015. The 2016 losses primarily reflected foreign-exchange losses, derivative and hedge-accounting losses, impairments and life-settlement impairments.
- General operating and other expenses declined 13% to $11.0 billion. Operating-basis general expenses declined 11% to $10.0 billion.
- Commercial Insurance generated a $2.7 billion pre-tax operating loss, compared with $565 million of income in 2015. Its combined ratio increased to 133.1% from 114.5%.
- Consumer Insurance pre-tax operating income increased 31% to $3.8 billion. Personal Insurance improved to a 96.4% combined ratio from 102.3%; Individual Retirement income increased to $2.3 billion.
- Legacy Portfolio pre-tax operating income was $1.0 billion, down 11%, while Other Operations reported a $748 million pre-tax operating loss.
Material changes versus the prior comparable period
- Commercial Insurance recognized $5.8 billion of unfavorable prior-year reserve development in 2016, compared with $4.1 billion in total AIG prior-year unfavorable development and approximately $3.3 billion in Commercial Insurance development in 2015. The principal drivers were U.S. workers’ compensation, excess casualty, other casualty, financial lines and certain programs.
- Fourth-quarter 2016 included a $5.6 billion pre-tax property-casualty reserve strengthening charge, compared with $3.6 billion in the fourth quarter of 2015. Fourth-quarter net loss attributable to AIG was $3.0 billion.
- Commercial Insurance premiums and underwriting results declined because of portfolio remediation, risk selection, reduced casualty exposure and the Swiss Re quota-share arrangement. Personal Insurance benefited from expense reductions and underwriting actions.
- AIG completed sales of AIG Advisor Group, NSM, Ascot and United Guaranty, and monetized portions of its Legacy Investments. The United Guaranty transaction generated approximately $3.3 billion of consideration, including $2.2 billion of cash and approximately $1.1 billion of Arch preferred stock.
- AIG reduced its workforce to approximately 56,400 employees from 66,400 at year-end 2015.
- AIG repurchased approximately 201 million common shares for $11.5 billion and 17 million warrants for $309 million. It paid $1.4 billion of common-stock dividends, or $0.32 per share each quarter.
Cash flow, liquidity, debt and capital
- Net cash from operating activities was $2.4 billion; investing activities provided $4.7 billion; financing activities used $6.8 billion; and cash increased by $346 million to $1.9 billion.
- AIG Parent reported $12.9 billion of liquidity sources at December 31, 2016, consisting of $4.0 billion of cash and short-term investments, $4.5 billion of unencumbered fixed-maturity securities and $4.5 billion of available syndicated credit capacity.
- AIG issued approximately $6.0 billion of long-term debt and repaid approximately $4.2 billion during 2016. Approximately $2.2 billion of consolidated debt excluding consolidated investment borrowings was scheduled to mature in 2017.
- Insurance subsidiaries paid approximately $7.5 billion to AIG Parent in dividends and loan repayments, plus $1.6 billion of net tax-sharing payments. Transfers remain subject to regulatory, rating-agency and statutory-capital restrictions; approximately $45.1 billion of subsidiary statutory capital and surplus was restricted from transfer without prior regulatory approval.
- All domestic and foreign insurance subsidiaries exceeded minimum statutory capital and surplus requirements, and domestic insurers exceeded RBC minimums at year-end.
Guidance, outlook, commentary and unusual items
- Management’s 2017 priorities were to improve return on equity, reduce general operating expenses, improve Commercial Insurance profitability through underwriting actions and accident-year loss-ratio improvement, and focus on higher-value businesses.
- AIG expected restructuring and other costs of approximately $1.3 billion in total, of which approximately $1.2 billion had been recognized by year-end 2016, and expected annualized pre-tax savings of approximately $1.2 billion to $1.3 billion when fully implemented by 2018.
- Interest rates remained historically low despite increases late in 2016. Management cited pressure on investment yields, annuity spreads and product profitability, while warning that rapidly rising rates could increase surrenders and reduce investment values.
- In January 2017, AIG entered into adverse-development reinsurance with National Indemnity Company, transferring 80% of reserve risk on substantially all U.S. Commercial long-tail exposures for accident years 2015 and prior, above a $25 billion attachment point and subject to a $20 billion reinsurer liability limit. AIG paid $9.8 billion plus interest; the transaction is accounted for as retroactive reinsurance.
- Other significant risks include reserve inadequacy, catastrophe losses, reinsurance collectability, investment and interest-rate volatility, variable-annuity guarantee exposures, regulatory changes, Brexit-related operating effects, litigation, cyber and operational risks, and limitations on parent-company access to subsidiary capital.
- The filing reports a $174 million increase to 2016 net loss attributable to AIG from out-of-period adjustments, primarily related to income-tax liabilities and ceded loss-adjustment expenses. Management deemed the adjustments immaterial to prior periods.
- Management and the auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2016.
Most important facts for an investor to verify
- Whether the $5.8 billion of 2016 adverse prior-year development and the Commercial Insurance reserve assumptions have stabilized after the NICO transaction.
- The accounting, deferred-gain amortization and capital effects of the $9.8 billion NICO retroactive reinsurance agreement.
- Commercial Insurance’s accident-year loss ratio, combined ratio, premium volume and reserve development in subsequent periods.
- The sustainability of Consumer Insurance earnings, particularly actuarial assumption benefits, annuity spreads, surrender behavior and variable-annuity hedge effectiveness.
- AIG Parent liquidity after shareholder returns, debt maturities, collateral requirements and restricted subsidiary capital.
- The effect of pending divestitures, including Fuji Life and operations being sold to Fairfax, and any remaining indemnification or litigation exposure.
- Use and recoverability of tax attributes, including approximately $34.6 billion of U.S. federal net operating losses and $4.9 billion of foreign tax credits.