American International Group, Inc. 2012 Form 10-K Summary
Business context and reporting period
AIG filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2012. The filing covers a global insurance company operating in more than 130 countries through AIG Property Casualty, AIG Life and Retirement, Mortgage Guaranty, Global Capital Markets, the Direct Investment book, and Corporate and Other operations. The source text is an annual filing, not a standalone fourth-quarter filing.
Beginning in the third quarter of 2012, the former Chartis segment was renamed AIG Property Casualty and SunAmerica was renamed AIG Life and Retirement. ILFC was classified as held for sale and discontinued operations following the December 2012 agreement to sell up to 90 percent of the business.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenues | $65.656 billion | $59.812 billion | Up 10% |
| Income from continuing operations | $7.752 billion | $19.540 billion | Down 60% |
| Net income attributable to AIG | $3.438 billion | $20.622 billion | Down 83% |
| Net income attributable to AIG common shareholders | $3.438 billion | $19.810 billion | Down 83% |
| EPS from continuing operations | $4.44 | $10.03 | Down 56% |
| Net investment income | $20.343 billion | $14.755 billion | Up 38% |
| Net cash provided by operating activities | $3.676 billion | $(81) million | Improved |
| Total assets | $548.633 billion | $553.054 billion | Down 1% |
| Long-term debt | $48.500 billion | $75.253 billion | Down 36% |
| AIG shareholders' equity | $98.002 billion | $101.538 billion | Down 3% |
| Book value per share | $66.38 | $53.53 | Up 24% |
| AIG Property Casualty combined ratio | 108.6% | 108.8% | Improved 0.2 points |
Reported net income was reduced by a $4.052 billion after-tax loss from discontinued operations, including a $4.4 billion after-tax loss associated with the planned ILFC sale. After-tax operating income, a non-GAAP measure, increased to $6.635 billion from $2.086 billion.
Total comprehensive income attributable to AIG was $9.531 billion, supported by $10.710 billion of unrealized investment appreciation, primarily reflecting lower interest rates and narrower credit spreads.
Segment performance and material changes
- AIG Property Casualty: Pre-tax income increased modestly to $1.837 billion from $1.820 billion. Operating income increased 49% to $1.820 billion. Net premiums written declined 1% to $34.436 billion as management reduced underperforming commercial casualty business, while Consumer Insurance premiums grew 3%. The combined ratio improved to 108.6%, but remained above the 100% underwriting break-even level.
- Catastrophe and reserve activity: Catastrophe-related charges declined to $2.652 billion from $3.307 billion, although Storm Sandy produced approximately $2.013 billion of charges. Prior-year adverse development increased to $421 million from $195 million, including environmental and excess casualty reserve strengthening. Net loss reserves declined to $68.782 billion from $70.825 billion.
- AIG Life and Retirement: Pre-tax income rose 28% to $3.780 billion and operating income rose 27% to $4.160 billion. Results benefited from improved investment spreads, lower interest credited, favorable separate-account performance, and higher investment income. Total retirement services balances increased to $173.756 billion from $164.323 billion, although overall net flows were negative because individual fixed-annuity deposits fell sharply.
- Mortgage Guaranty: Operating income improved to $9 million from a $97 million loss. New insurance written increased to approximately $37.5 billion from $18.8 billion, while the domestic first-lien 60-plus-day delinquency ratio improved to 8.9% from 13.9%.
- Other Operations: Pre-tax income was $3.899 billion versus a $4.703 billion loss. Results included fair-value gains of $2.069 billion on AIA securities and $2.888 billion on Maiden Lane III interests, partly offset by higher legal reserves.
- Asset dispositions: AIG sold its remaining AIA interest for approximately $14.5 billion and received approximately $10.1 billion from final Maiden Lane II and III distributions. The company agreed to sell 80.1% of ILFC for approximately $4.2 billion in cash, with an option for an additional 9.9%.
- Government support and capital management: AIG fully repaid its remaining $8.6 billion AIA SPV preferred interests and completed repayment of governmental financial support. AIG purchased approximately 421 million common shares for $13.0 billion in four 2012 Treasury offerings. No common dividends were paid.
Cash flow, liquidity and debt
Operating cash flow was $3.676 billion, consisting of $748 million from continuing operations and $2.928 billion from discontinued operations. Investing activities provided $16.612 billion, while financing activities used $20.564 billion. Cash decreased by $260 million to $1.151 billion.
AIG Parent reported $16.123 billion of liquidity resources at December 31, 2012, consisting of $12.586 billion of cash and short-term investments, $3.037 billion of available syndicated credit capacity, and a $500 million contingent liquidity facility. AIG Property Casualty and AIG Life and Retirement reported cash and short-term investments of $8.6 billion and $7.8 billion, respectively.
Total long-term debt declined primarily because of $7.7 billion of debt repayments and the reclassification of approximately $24.3 billion of ILFC debt to liabilities held for sale. The Four-Year Facility provided $4.0 billion of commitments, of which $3.037 billion was available at year-end.
Guidance, outlook, commentary and risks
- Management's 2013 priorities were to improve core operating performance, complete the ILFC sale, increase investment yields while preserving credit quality, redeploy excess capital, cooperate with the Federal Reserve, and reduce recurring expenses.
- Management expected low interest rates, weak economic growth, European market uncertainty, and excess property-casualty capacity to continue pressuring investment income and sales through at least 2013.
- AIG Life and Retirement expected fixed-annuity sales to remain weak and noted that approximately 63% of annuity and universal-life account values were at contractual minimum crediting rates at year-end 2012.
- The filing states that the effect of interest rates remaining near year-end 2012 levels through 2013 on AIG Life and Retirement pre-tax operating income was expected to be immaterial, but potentially more significant in 2014.
- The ILFC transaction remained subject to regulatory approvals and other closing conditions. Failure or delay could reduce proceeds, require alternative monetization strategies, and adversely affect results.
- Major risks include adverse development of long-tail casualty, asbestos and environmental reserves; catastrophe losses; reinsurer credit and collectability risk; low interest rates; equity-market declines; policy surrenders; derivative collateral requirements; credit-rating downgrades; regulatory changes under Dodd-Frank and potential SIFI designation; tax-attribute limitations; litigation; and operational or cybersecurity failures.
- AIG reported approximately $40.9 billion of U.S. federal net operating loss carryforwards, $17.3 billion of life-insurance-business capital loss carryforwards, and $5.5 billion of foreign tax credits. Use of these attributes could be limited by an ownership change.
- Management reported that U.S. insurance subsidiaries exceeded minimum required risk-based-capital levels and that disclosure controls and internal control over financial reporting were effective at December 31, 2012.
Most important facts for investors to verify
- Whether the ILFC sale closed on the stated terms and how the retained interest, sale proceeds, debt, and aircraft commitments were ultimately treated.
- Subsequent development of AIG Property Casualty reserves, especially excess casualty, environmental, workers' compensation, and asbestos exposures.
- Actual improvement or deterioration in the combined ratio and accident-year loss ratio, excluding catastrophe and prior-year effects.
- Sustainability of AIG Life and Retirement investment spreads, annuity surrender rates, variable-annuity guarantee liabilities, DAC recoverability, and minimum-crediting-rate exposure.
- Availability of parent-company liquidity after subsidiary dividends, regulatory restrictions, capital-maintenance obligations, debt maturities, and potential collateral calls.
- Impact of SIFI designation, Federal Reserve supervision, Dodd-Frank capital rules, the Volcker Rule, and other regulatory developments.
- Resolution and ultimate cost of material litigation, regulatory inquiries, tax examinations, indemnities, and workers' compensation-related settlements.
- Extent to which 2012 earnings benefited from fair-value gains, AIA and Maiden Lane monetizations, tax valuation allowance releases, and other non-recurring or non-GAAP items.