AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q2 FY2019

Business Context and Reporting Period

American International Group, Inc. (AIG) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. AIG is a global insurance organization operating in more than 80 countries, with core businesses in General Insurance and Life and Retirement, plus Other Operations and a Legacy Portfolio. The comparison periods are the three and six months ended June 30, 2018.

Key Financial Metrics

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Total revenues	$12.561 billion	$11.631 billion	$25.017 billion	$23.343 billion
Income from continuing operations	$1.391 billion	$931 million	$2.328 billion	$1.881 billion
Net income attributable to AIG common shareholders	$1.102 billion	$937 million	$1.756 billion	$1.875 billion
Diluted EPS	$1.24	$1.02	$1.99	$2.04
Adjusted pre-tax income	$1.677 billion	$1.278 billion	$3.524 billion	$2.494 billion
Net investment income	$3.745 billion	$3.065 billion	$7.624 billion	$6.326 billion
Net realized capital gains (losses)	$404 million	$165 million	$(42) million	$146 million
Net cash used in operating activities	Not separately provided for the quarter	Not separately provided for the quarter	$(1.272) billion	$(340) million

Q2 adjusted pre-tax income increased 31 percent to $1.677 billion, while six-month adjusted pre-tax income increased 41 percent to $3.524 billion. Adjusted return on common equity was 10.4 percent for the quarter and 11.0 percent for the first six months, compared with 7.6 percent and 7.7 percent, respectively, in the prior-year periods.

General Insurance reported a 97.8 percent combined ratio in Q2 and 97.5 percent for the first six months, compared with 101.3 percent and 102.5 percent, respectively, in 2018. Life and Retirement adjusted pre-tax income was $1.049 billion in Q2 and $1.973 billion year to date.

Financial Position, Debt and Liquidity

Total assets were $522.269 billion at June 30, 2019, up from $491.984 billion at December 31, 2018.
Total AIG shareholders’ equity was $64.539 billion, compared with $56.361 billion at year-end 2018. Book value per common share was $73.63, versus $65.04; adjusted book value per common share was $56.89, versus $54.95.
Long-term debt was $36.291 billion, compared with $34.540 billion at December 31, 2018. Total debt, including debt of consolidated investment vehicles, was $36.291 billion.
Cash and restricted cash totaled $3.185 billion at June 30, 2019, compared with $2.380 billion at June 30, 2018.
AIG Parent reported $6.030 billion of immediately available liquidity and $4.500 billion of unused capacity under its committed revolving credit facility, for total liquidity sources of $10.530 billion.
Financing activities provided $5.218 billion during the first six months, including $2.199 billion of debt issuance and $485 million of preferred-stock proceeds. AIG paid $557 million of common dividends and $7 million of preferred dividends.

Material Changes Versus the Prior Comparable Period

Quarterly net income attributable to common shareholders increased 18 percent, driven by stronger General Insurance underwriting, higher investment returns, lower operating expenses and higher realized gains.
Six-month net income attributable to common shareholders declined 6 percent despite higher operating earnings. The decline reflected a shift to net realized capital losses, a $685 million net loss-reserve discount charge versus a $219 million benefit in 2018, and higher noncontrolling interests associated with Fortitude Holdings.
Premiums increased 3 percent in Q2 and 7 percent year to date. Net investment income increased 22 percent in Q2 and 21 percent year to date.
General Insurance adjusted pre-tax income increased 73 percent in Q2 and 109 percent year to date. The improvement reflected lower accident-year losses, lower catastrophe losses, underwriting discipline, increased reinsurance and expense reductions.
Life and Retirement adjusted pre-tax income increased 9 percent in Q2 and 6 percent year to date. Individual Retirement improved, while Life Insurance declined due partly to prior-year favorable actuarial and reinsurance adjustments.
Other Operations produced an adjusted pre-tax loss of $471 million in Q2 and $928 million year to date, primarily reflecting corporate expenses and interest expense.
Accumulated other comprehensive income increased to $4.991 billion from a $1.413 billion accumulated loss at year-end 2018, principally because of investment-market appreciation.
AIG issued Series A 5.85 percent non-cumulative preferred stock for net proceeds of approximately $485 million and made no common-stock repurchases during the first six months. Approximately $2.0 billion remained under the repurchase authorization.

Outlook, Commentary, Risks and Unusual Items

Management did not provide a specific earnings forecast in the filing. Its outlook emphasizes profitable growth, underwriting discipline, reinsurance optimization, expense reduction, balance-sheet management and continued investment in technology and distribution.

Management cited historically low interest rates, declining reinvestment yields, pressure on annuity spreads, potential changes in surrender behavior and increased competition as material risks.
Other identified risks include catastrophic events, global economic and trade uncertainty, Brexit-related currency volatility, changing regulation, cybersecurity and information-technology disruptions, legal proceedings, rating-agency actions and adverse insurance-reserve development.
The net loss-reserve discount was $1.782 billion at June 30, 2019. Lower interest rates caused a $685 million discount charge in the first six months, compared with a $219 million benefit in 2018.
AIG’s adverse-development reinsurance agreement with National Indemnity Company covers 80 percent of specified U.S. commercial long-tail reserve risk above a $25 billion attachment point, subject to a $20 billion NICO liability limit. Covered paid losses remained below the attachment point at June 30, 2019.
Legal and tax matters remain contingencies. AIG disclosed pending tax litigation involving foreign tax credits and estimated a potential payment of approximately $1.7 billion if non-binding settlement terms are finalized; timing and final amount remain uncertain.
Unrecognized tax benefits were $4.7 billion, with accrued interest and penalties of $2.3 billion. The filing states that unrecognized tax benefits could decrease by as much as $3.9 billion within 12 months, principally from potential resolutions or settlements.
Total consolidated contractual obligations were $386.013 billion, including $84.127 billion of undiscounted loss reserves and $259.112 billion of insurance and investment contract liabilities. Off-balance-sheet commitments totaled $12.263 billion.
The filing identifies adoption of the current expected credit loss standard in 2020 and the long-duration insurance-contract accounting standard in 2021. Management expects the latter to have a significant effect on financial condition, results, systems, processes and controls.

Most Important Facts for Investors to Verify

Whether General Insurance’s combined-ratio improvement is sustainable after adjusting for catastrophe losses, prior-year development, discounting and reinsurance effects.
The sensitivity of earnings, book value and capital to interest rates, credit spreads, equity markets and valuation changes in variable-annuity guarantees.
The quality, liquidity and credit performance of AIG’s $245.561 billion available-for-sale bond portfolio, including $28.8 billion below investment grade or unrated securities.
The timing and potential cash impact of the pending tax litigation and related settlement discussions.
The adequacy of loss reserves, reinsurance recoverables and the collateral supporting deductible recoverables and reinsurance arrangements.
Whether negative operating cash flow, debt growth and future policyholder withdrawals could pressure parent-company liquidity or capital distributions.
The effects of the Validus acquisition, Fortitude’s 19.9 percent noncontrolling interest and the continuing run-off of Legacy Portfolio exposures.