AIG 2011 Q3 Form 10-Q Summary
Business context and reporting period
American International Group, Inc. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. AIG reported through Chartis, SunAmerica Financial Group, Aircraft Leasing and Other Operations. The company had substantially completed its recapitalization and asset-disposition plan, with prior-period amounts reclassified for segment and presentation changes.
Financial performance and position
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Total revenues | $12.716 billion, down 35% | $46.828 billion, down 17% |
| Loss from continuing operations | $3.724 billion | $2.810 billion |
| Net loss attributable to AIG | $4.109 billion | $2.000 billion |
| Net loss attributable to common shareholders | $4.109 billion | $2.812 billion |
| EPS from continuing operations | $(2.05) | $(2.37) |
| Net cash from operating activities | Not separately provided for the quarter | $(1.083) billion |
- September 30, 2011 total assets were $544.257 billion, total liabilities were $448.047 billion and total equity was $86.802 billion.
- Consolidated cash was $1.542 billion. AIG Parent reported $15.315 billion of liquidity sources, including $165 million of cash, $11.468 billion of short-term investments, $3.182 billion of syndicated-facility capacity and $500 million of contingent liquidity capacity.
- Total debt was $77.389 billion, compared with $106.461 billion at December 31, 2010. The Federal Reserve Bank of New York credit facility was fully repaid and terminated in January 2011.
- Available-for-sale bonds had a fair value of $259.829 billion, including $49.206 billion in securities with unrealized losses. Level 3 recurring fair-value assets totaled $39.925 billion.
- Chartis reported nine-month pre-tax income of $910 million, down from $3.226 billion, and a nine-month combined ratio of 109.6%, versus 101.2%.
- SunAmerica reported nine-month pre-tax income of $2.024 billion, up from $1.413 billion, while third-quarter pre-tax income fell to $309 million from $998 million.
- Aircraft Leasing reported a nine-month pre-tax loss of $1.122 billion, including $1.673 billion of impairment, fair-value and lease-related charges.
Material changes versus the prior comparable period
- Third-quarter continuing-operations losses increased primarily because of Chartis catastrophe losses, weaker SunAmerica investment results, aircraft impairments, a $2.315 billion decline in the fair value of retained AIA shares and a $931 million decline in the fair value of the Maiden Lane III interest.
- Chartis catastrophe-related charges increased to $574 million in the third quarter and $2.840 billion for the first nine months, compared with $72 million and $873 million, respectively, in 2010. Hurricane Irene accounted for $372 million of third-quarter losses.
- Net investment income declined 98% in the third quarter to $128 million and 34% for the nine months to $10.161 billion, driven by AIA and Maiden Lane valuation losses, lower fixed-maturity investment income and market effects.
- Interest expense declined substantially following repayment of the FRBNY facility. The nine-month period included a $3.392 billion loss on debt extinguishment, primarily accelerated amortization of the prepaid commitment fee.
- Nine-month discontinued operations generated $1.395 billion of income, compared with a $4.101 billion loss in 2010, including a $2.0 billion pre-tax gain on the sale of AIG Star and AIG Edison.
- AIG completed the sale of Nan Shan for $2.15 billion in August 2011 and used proceeds to reduce the Department of the Treasury’s AIA SPV preferred interests. AIG also completed a $2.9 billion net common-stock offering in May and issued $2.0 billion of senior notes in September.
Guidance, outlook, commentary and risks
- Management stated that Chartis would face challenging conditions through late 2011 and early 2012, although U.S. commercial pricing and certain growth economies were improving. Chartis expected continued growth in Consumer Insurance and planned to emphasize higher-margin, less capital-intensive business.
- Chartis ceased writing Excess Workers’ Compensation as a stand-alone product and restructured certain loss-sensitive commercial programs. These actions reduced third-quarter net written premiums by approximately $323 million but were intended to improve capital efficiency and returns.
- Thailand flooding in the fourth quarter was expected to generate additional Chartis claims, but the filing stated that the potential liability could not yet be quantified.
- SunAmerica expected variable-annuity sales to improve but warned that continued low interest rates could reduce fixed-annuity sales and pressure interest spreads. Approximately 41% of relevant annuity and universal-life account values were at contractual minimum crediting rates.
- ILFC’s aircraft values remained exposed to fuel prices, newer aircraft technology, lower lease rates and weak demand for older aircraft. ILFC had commitments to purchase 236 aircraft for approximately $17.5 billion through 2019 and was pursuing a possible initial public offering.
- AIG identified material sensitivity to market conditions, catastrophe losses, reserve development, investment impairments, credit-rating downgrades, collateral calls, tax-asset recoverability, aircraft valuations, regulatory restrictions and litigation.
- AIG estimated that specified credit-rating downgrades could require approximately $290 million, and then an additional approximately $193 million, of collateral postings and termination payments, although actual amounts could differ materially.
- Management concluded that liquidity was sufficient for foreseeable requirements, but noted that additional collateral calls, reserve strengthening, higher policy surrenders, catastrophic losses, rating downgrades or restrictions on subsidiary distributions could create significant additional cash needs.
- After quarter-end, AIG entered into new $1.5 billion 364-day and $3.0 billion four-year syndicated facilities, commenced a debt exchange offer, received a $918 million escrow release, and authorized up to $1 billion of common-stock repurchases.
Most important facts for investors to verify
- Whether Chartis catastrophe losses, reserve development and the 109.6% combined ratio normalize or require additional reserve strengthening.
- Whether ILFC aircraft impairments and the proposed ILFC strategic transaction or IPO produce further losses, funding needs or proceeds.
- The valuation and sensitivity of AIA shares, Maiden Lane II and III interests, Level 3 assets and AIGFP credit-default-swap liabilities.
- AIG Parent liquidity, subsidiary dividend capacity, debt maturities and collateral requirements under potential rating downgrades.
- The recoverability of AIG’s large deferred tax asset and any potential fourth-quarter valuation-allowance release.
- Pending litigation, regulatory matters and settlements, including workers’ compensation matters, securities litigation, Transatlantic arbitration and other unresolved claims for which the filing states that losses cannot be reasonably estimated.
- The effect of the 2012 insurance acquisition-cost accounting standard, for which a retrospective adoption could reduce deferred acquisition costs by an estimated pre-tax $4.6 billion to $5.1 billion.