American International Group, Inc. — 2017 Q1 Form 10-Q Summary
Business context and reporting period
AIG is a global insurance organization serving customers in more than 80 countries and jurisdictions through Commercial Insurance, Consumer Insurance, Other Operations and a Legacy Portfolio. This unaudited Form 10-Q covers the three months ended March 31, 2017, with comparative results for the three months ended March 31, 2016 and balance-sheet comparisons to December 31, 2016.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenues | $12.632 billion | $11.779 billion | 7% |
| Income from continuing operations | $1.211 billion | $(156) million | Improved |
| Net income attributable to AIG | $1.185 billion | $(183) million | Improved |
| Diluted EPS attributable to AIG | $1.18 | $(0.16) | Improved |
| Pre-tax operating income | $2.041 billion | $945 million | 116% |
| After-tax operating income attributable to AIG | $1.367 billion | $765 million | 79% |
| Net cash used in operating activities | $(10.359) billion | $(968) million | Higher outflow |
| Net cash provided by investing activities | $14.487 billion | $385 million | Higher inflow |
| Net cash used in financing activities | $(4.048) billion | $453 million | Higher outflow |
| Cash at March 31 | $1.918 billion | $1.499 billion | Prior-year comparison |
| Total assets | $500.162 billion | $498.264 billion at Dec. 31, 2016 | Up $1.898 billion |
| Long-term debt | $30.747 billion | $30.912 billion at Dec. 31, 2016 | Down $165 million |
| AIG shareholders’ equity | $74.069 billion | $76.300 billion at Dec. 31, 2016 | Down $2.231 billion |
Total revenues benefited from higher net investment income and materially lower net realized capital losses. Net investment income increased 22% to $3.686 billion, while net realized capital losses declined to $115 million from $1.106 billion. General operating and other expenses declined 19% to $2.443 billion. The effective tax rate on continuing operations was 29.9%.
AIG declared a quarterly dividend of $0.32 per common share. It repurchased approximately 56 million shares for $3.585 billion during the quarter. Book value per common share was $78.59, compared with $76.66 at December 31, 2016; adjusted book value per common share was $59.10, compared with $58.57.
Segment performance and material changes
| Segment | Q1 2017 pre-tax operating income | Q1 2016 | Key change |
|---|---|---|---|
| Commercial Insurance | $849 million | $662 million | 28% increase |
| Consumer Insurance | $1.048 billion | $704 million | 49% increase |
| Other Operations | $(246) million | $(239) million | Loss broadly unchanged |
| Legacy Portfolio | $342 million | $(202) million | Improved materially |
- Commercial Insurance operating revenue declined 12% to $4.683 billion, primarily from portfolio optimization, reinsurance actions and reduced production. Its combined ratio deteriorated to 102.2% from 97.7%; Property and Special Risks improved to 97.7%, while Liability and Financial Lines worsened to 105.4%.
- Consumer Insurance operating revenue increased 1% to $5.942 billion. Results benefited from higher alternative-investment returns, lower expenses and improved equity-market performance. Individual Retirement deposits declined to $3.382 billion from $5.010 billion, reflecting lower sales and uncertainty surrounding the Department of Labor fiduciary rule.
- Legacy Portfolio income benefited from improved fair-value results and higher alternative-investment returns. Legacy Investments executed transactions totaling approximately $468 million and returned approximately $191 million to AIG Parent.
- General operating expenses declined as a result of divestitures, lower employee-related costs, reduced professional fees and the ongoing efficiency program. AIG expects approximately $1.44 billion of cumulative pre-tax restructuring and other costs, with approximately $1.37 billion recognized since the third quarter of 2015, and anticipates annualized savings of approximately $1.4 billion to $1.5 billion when fully implemented by 2018.
Liquidity, debt and unusual items
- Operating cash flow was substantially negative primarily because AIG funded a $10.2 billion adverse development reinsurance agreement with National Indemnity Company, a Berkshire Hathaway subsidiary. AIG sold investments to fund the transaction, producing $14.5 billion of investing cash inflow.
- Under the agreement, NICO assumed 80% of reserve risk on substantially all U.S. Commercial long-tail exposures for accident years 2015 and prior, subject to an aggregate NICO liability limit of $20 billion. Berkshire provided a parental guarantee.
- AIG Parent reported $11.768 billion of liquidity sources at March 31, 2017, consisting of $2.277 billion of cash and short-term investments, $4.991 billion of unencumbered fixed-maturity securities and $4.5 billion of available syndicated credit capacity.
- Total debt was $30.747 billion, including $25.600 billion issued or guaranteed by AIG and $5.147 billion of debt not guaranteed by AIG. AIG repaid approximately $630 million of debt and issued $151 million during the quarter.
- Available-for-sale investments totaled $232.797 billion at fair value, including $230.698 billion of bonds. Net unrealized gains in the available-for-sale portfolio were approximately $10.6 billion at quarter-end.
- Other-than-temporary impairment charges declined to $68 million from $204 million. Total investment impairments, including life settlements and real estate, were $161 million versus $363 million.
- Loss reserves were $76.050 billion, including $26.920 billion of reinsurance recoverables. The reserve balance reflected a $1.9 billion net loss-reserve discount after the NICO transaction.
Guidance, outlook, risks and contingencies
AIG did not provide a specific consolidated earnings or revenue forecast in the filing. Management’s 2017 priorities are to improve return on equity, provide innovative customer solutions, reduce general operating expenses and improve Commercial Insurance profitability through underwriting actions and accident-year loss-ratio improvement.
- Management expects continued pressure from historically low interest rates, including lower reinvestment yields, constrained annuity spreads and potential pressure on long-tail casualty pricing and reserves.
- Commercial Insurance remains exposed to excess capacity, rate pressure, elevated U.S. casualty loss trends, catastrophe losses and severe claims. AIG expects U.S. Casualty premiums to continue declining as it optimizes the portfolio.
- The Department of Labor fiduciary rule was delayed and remained subject to review. AIG expected increased compliance costs and potential litigation exposure if the rule became effective as promulgated.
- Brexit could affect AIG’s UK and European operations, currencies, regulation and market volatility. AIG planned to establish a new European subsidiary in Luxembourg, subject to regulatory approvals, with expected completion in the fourth quarter of 2018.
- Potential liquidity pressures include catastrophic losses, higher policy surrenders, reserve strengthening, investment-portfolio deterioration, collateral calls and credit-rating downgrades. A downgrade to specified BBB/Baa rating levels could result in collateral calls and termination payments of up to approximately $122 million based on March 31 exposures.
- Material judgments concern loss reserves, reinsurance recoverables, variable-annuity guaranteed benefits, deferred policy acquisition costs, fair values, impairments, legal contingencies and deferred tax assets. AIG reported $4.5 billion of unrecognized tax benefits and $1.3 billion of accrued interest and penalties.
- Businesses held for sale included United Guaranty Asia, certain insurance operations being sold to Fairfax and AIG Fuji Life. Fuji Life and certain Fairfax transactions closed on April 30, 2017; the remaining transactions were subject to customary approvals and conditions.
- Legal matters include remaining securities litigation related to AIG’s 2008 disclosures, the Starr International litigation and regulatory and class-action matters. AIG states that adverse outcomes could materially affect results, cash flow or financial condition, although current probable losses have been accrued where estimable.
Important facts for investors to verify
- Whether the $10.2 billion NICO reinsurance transaction produces the expected reserve-risk and capital benefits, and how future adverse development and deferred-gain amortization affect earnings.
- Commercial Insurance loss trends, particularly U.S. casualty, the 102.2% consolidated Commercial combined ratio and the effect of continued premium reductions.
- Sustainability of elevated alternative-investment returns and the sensitivity of earnings to equity markets, interest rates, credit spreads and foreign exchange.
- AIG Parent’s liquidity after share repurchases, debt repayments, dividends and the large reinsurance funding payment, including the availability and covenant requirements of the $4.5 billion credit facility.
- Progress and ultimate proceeds from pending divestitures, restructuring costs and targeted $1.4 billion to $1.5 billion of annualized savings.
- Reserve adequacy, reinsurance recoverability, variable-annuity guarantee exposures and the effect of changes in the Ogden discount rate and other actuarial assumptions.
- Regulatory developments involving the DOL fiduciary rule, Brexit-related restructuring, systemic-risk supervision and restrictions on dividends from insurance subsidiaries.