AIG Second Quarter 2023 Form 10-Q Summary
Business context and reporting period
American International Group, Inc. is a global insurance organization operating through General Insurance, Life and Retirement, and Other Operations. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, with comparisons to the 2022 periods. AIG adopted the long-duration targeted improvements accounting standard (LDTI) effective January 1, 2023 and revised comparative periods accordingly.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenues | $13.2 billion | $13.7 billion | $24.2 billion | $28.6 billion |
| Income from continuing operations | $1.7 billion | $3.1 billion | $1.6 billion | $7.6 billion |
| Net income attributable to AIG common shareholders | $1.5 billion | $2.7 billion | $1.5 billion | $6.9 billion |
| Diluted EPS | $2.03 | $3.43 | $2.05 | $8.50 |
| Adjusted after-tax income attributable to common shareholders | $1.3 billion | $1.1 billion | $2.5 billion | $2.3 billion |
| Adjusted diluted EPS | $1.75 | $1.39 | $3.38 | $2.88 |
- Premiums increased 21% in the quarter and 20% year to date. Net investment income increased 37% in the quarter and 22% year to date, benefiting from higher yields and interest income.
- Reported pretax income was $1.9 billion in the quarter and $1.6 billion year to date. Reported pretax margins were approximately 14.1% and 6.8%, respectively, based on reported revenues.
- General Insurance adjusted pretax income was $1.3 billion in the quarter and $2.6 billion year to date. Underwriting income declined to $594 million in the quarter and $1.1 billion year to date; the consolidated combined ratio was 90.9% and 91.4%, respectively.
- Life and Retirement adjusted pretax income increased to $991 million in the quarter and $1.9 billion year to date. Individual Retirement benefited from higher investment spreads, while Life Insurance earnings declined.
- Total assets were $537.1 billion at June 30, 2023, compared with $522.2 billion at December 31, 2022. AIG shareholders’ equity was $42.5 billion, compared with $41.0 billion.
- Book value per common share was $58.49; adjusted book value per common share was $75.76. Adjusted return on common equity was 9.4% for the quarter and 9.1% year to date.
- Net cash provided by operating activities was $1.1 billion for the six months ended June 30, compared with $598 million in the prior-year period. Cash and restricted cash ended at $2.4 billion.
- Short- and long-term debt was $21.4 billion, compared with $21.3 billion at year-end. Debt of consolidated investment entities declined to $2.8 billion from $5.9 billion.
- AIG Parent and applicable intermediate holding companies had approximately $8.8 billion of liquidity sources, including a fully available $4.5 billion revolving credit facility. The filing states that management believes liquidity and capital resources are sufficient for reasonably foreseeable requirements.
Material changes versus the prior comparable period
- Reported earnings declined substantially because 2022 included large gains from the Fortitude Re funds withheld embedded derivative: $2.8 billion in Q2 2022 and $6.1 billion in the first half of 2022, compared with a $180 million gain in Q2 2023 and a $985 million loss year to date.
- Net realized gains and losses shifted to a $297 million loss in Q2 2023 and a $2.2 billion loss year to date, versus gains of $2.6 billion and $6.2 billion in the comparable 2022 periods.
- Underlying adjusted after-tax income improved, rising 15% in Q2 and 7% year to date, despite lower reported GAAP earnings.
- General Insurance premiums grew, but underwriting income was pressured by higher catastrophe losses and lower favorable prior-year reserve development. Catastrophe-related charges were $250 million in Q2 and $514 million year to date.
- Life and Retirement benefited from higher investment spreads and increased pension risk transfer activity. However, annuity surrenders increased materially; Individual Retirement fixed-annuity surrender rates were 15.9% in Q2 versus 7.9% in 2022, and Group Retirement surrender rates were 13.0% versus 7.7%.
- Corebridge Financial ownership declined to 65.3% after AIG sold 74.75 million Corebridge shares for approximately $1.2 billion gross proceeds and participated in a $180 million Corebridge share repurchase.
- AIG repurchased approximately 21 million common shares for about $1.2 billion during the first six months and declared a $7.5 billion common-stock repurchase authorization on August 1, 2023.
Guidance, outlook, risks, contingencies and unusual items
- The filing does not provide a specific full-year earnings or revenue guidance figure. Management expects higher interest rates to support investment yields and Life and Retirement spreads, but also notes potential pressure from higher crediting rates and policyholder surrenders.
- AIG agreed to sell Validus Re, including AlphaCat Managers and Talbot Treaty, to RenaissanceRe for $2.7 billion in cash and approximately 1.3 million RenaissanceRe shares. Closing was expected in the fourth quarter of 2023, subject to approvals and customary conditions. AIG will retain 95% of specified adverse reserve development following closing, creating contingent consideration.
- Crop Risk Services was sold for approximately $240 million; the transaction closed July 3, 2023.
- Key risks include catastrophe losses, inflation and social inflation, commercial real estate exposure, interest-rate and equity-market volatility, credit losses, reinsurance counterparty performance, foreign exchange, cyber risk, regulatory changes, tax matters, litigation, and execution of business disposals and the Corebridge separation.
- AIG held $222.5 billion of bonds available for sale, with $28.9 billion of gross unrealized losses at June 30, 2023. Management stated that these losses were primarily non-credit-related and that it did not intend, or expect to be required, to sell the securities before recovery.
- Reinsurance recoverables totaled approximately $72.5 billion; approximately 90% were classified as investment grade by AIG’s internal ratings framework. AIG remains liable to policyholders if reinsurers fail to perform.
- The company recognized a $915 million deferred tax asset valuation allowance for tax attributes and a $2.1 billion valuation allowance on deferred tax assets related to unrealized tax capital losses. AIG is subject to the 15% corporate alternative minimum tax for 2023, with details still subject to further guidance.
- AIG accrued its current estimate of probable loss in the Moriarty litigation concerning California life insurance lapse-notice requirements. The court proceedings remain ongoing, and the filing states that ultimate exposure cannot currently be quantified.
Most important facts for investors to verify
- Reconcile reported GAAP earnings with adjusted after-tax income and isolate the effects of Fortitude Re, derivatives, market risk benefits, realized investment results and other excluded items.
- Review General Insurance accident-year loss trends, catastrophe activity, reserve development and the sustainability of the combined ratio below 100%.
- Monitor annuity sales, surrender rates, net flows, guaranteed benefits and the sensitivity of market risk benefits to equity markets and interest rates.
- Assess the credit quality and unrealized-loss profile of the fixed-income portfolio, including commercial real estate and structured securities.
- Track the Validus Re transaction, the related reserve-development obligation, the Crop Risk Services transition and further reductions in AIG’s Corebridge ownership.
- Confirm the availability of parent-company liquidity, debt maturities, rating outlooks, collateral requirements and restrictions on dividends from regulated subsidiaries.
- Review the effects of LDTI adoption, tax valuation allowances, IRS examinations and material legal contingencies on future reported results and equity.