Business Context and Reporting Period
American International Group, Inc. (AIG) is a global insurer operating through Commercial Insurance, Consumer Insurance, and Corporate and Other. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared primarily with the three months ended March 31, 2015 and, for balance-sheet items, December 31, 2015.
Financial Results and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues | $11.779 billion | $15.975 billion | Down 26% |
| Income from continuing operations | $(156) million | $2.476 billion | Declined |
| Net income attributable to AIG | $(183) million | $2.468 billion | Declined |
| Diluted EPS attributable to AIG | $(0.16) | $1.78 | Declined |
| After-tax operating income attributable to AIG | $773 million | $1.691 billion | Down 54% |
| Net cash from operating activities | $(968) million | $388 million | Declined |
| Total assets at period end | $502.777 billion | $496.842 billion at Dec. 31, 2015 | Up 1% |
| Long-term debt at period end | $31.952 billion | $29.249 billion at Dec. 31, 2015 | Up 9% |
| AIG shareholders’ equity at period end | $88.518 billion | $89.658 billion at Dec. 31, 2015 | Down 1% |
Premiums were broadly stable at $8.806 billion versus $8.822 billion. Policy fees increased to $687 million from $677 million. Net investment income decreased 21% to $3.013 billion, primarily because of negative alternative-investment performance, especially hedge funds, and lower reinvestment yields. Net realized capital losses were $1.106 billion versus gains of $1.341 billion in the prior-year quarter, reflecting investment-sale losses, higher impairments, foreign-exchange losses and derivative losses.
Total benefits, losses and expenses were $11.993 billion, compared with $12.199 billion. The reported pretax loss was $214 million versus pretax income of $3.776 billion. The effective tax rate on the loss from continuing operations was 27.1%.
Other comprehensive income was $2.988 billion, driven primarily by a $3.427 billion increase in unrealized appreciation of investments. Accumulated other comprehensive income increased to $5.525 billion from $2.537 billion at year-end 2015. Book value per common share was $78.28, compared with $75.10 at December 31, 2015; book value excluding AOCI was $73.40, compared with $72.97.
Segment Performance
| Segment | Q1 2016 pretax operating income | Q1 2015 | Change |
|---|---|---|---|
| Commercial Insurance | $889 million | $1.462 billion | Down 39% |
| Consumer Insurance | $788 million | $945 million | Down 17% |
| Corporate and Other | $(733) million | $162 million | Unfavorable change |
| Consolidated | $954 million | $2.527 billion | Down 62% |
Commercial Property Casualty produced a 96.9% combined ratio versus 97.1%, while its adjusted accident-year combined ratio improved to 93.2% from 93.4%. Personal Insurance improved materially, with a 93.9% combined ratio versus 103.2% and an adjusted accident-year combined ratio of 94.6% versus 100.8%. Mortgage Guaranty’s combined ratio improved to 43.6% from 51.7%.
Material Changes Versus the Prior Comparable Period
- Reported earnings shifted from substantial profitability to a net loss, largely because investment results reversed from gains to losses.
- After-tax operating income fell primarily because of lower investment income and lower income from assets held by AIG Parent.
- Corporate and Other moved to a $733 million pretax operating loss, reflecting fair-value losses on ABS CDOs, PICC investments and other assets, as well as the absence of prior-year AerCap equity-method income.
- Commercial Property Casualty net premiums written declined 15% to $4.307 billion, reflecting portfolio optimization, the Swiss Re proportional reinsurance arrangement, foreign exchange and the absence of a prior-year multiyear policy renewal.
- Personal Insurance underwriting improved because of lower accident-year losses, favorable prior-year reserve development, lower catastrophe losses and expense reductions.
- Net favorable prior-year loss reserve development was $66 million, compared with $24 million of adverse development in the prior-year quarter. Net loss reserves decreased to $59.734 billion from $60.603 billion at year-end 2015.
- Share repurchases increased to approximately $3.5 billion for 63 million shares, versus approximately $1.4 billion for 29 million shares in Q1 2015. AIG also repurchased 10 million warrants for $173 million.
- AIG issued $3.0 billion of notes during the quarter and repaid or repurchased approximately $1.0 billion of debt. Total debt increased to $31.952 billion.
Liquidity, Capital and Cash Flow
Cash decreased $130 million during the quarter to $1.499 billion. Investing activities provided $385 million and financing activities provided $453 million, but operating activities used $968 million. AIG Parent reported $11.578 billion of liquidity sources at March 31, 2016, consisting of $3.007 billion of cash and short-term investments, $4.071 billion of unencumbered fixed-maturity securities and $4.5 billion of available syndicated credit capacity.
AIG Parent received approximately $1.2 billion of dividends and loan repayments from subsidiaries and $491 million of tax-sharing payments. It contributed approximately $2.9 billion to Non-Life Insurance Companies following prior-year reserve strengthening. Management stated that liquidity and capital resources were sufficient for reasonably foreseeable requirements, while noting that catastrophe losses, reserve strengthening, collateral calls, policy surrenders, ratings downgrades and regulatory restrictions could create additional needs.
Guidance, Outlook, Commentary and Risks
- Management is reorganizing AIG into more self-contained “modular” business units and creating a Legacy Portfolio for non-strategic run-off assets.
- Restructuring and other costs were approximately $200 million pretax in Q1 2016. Total expected costs were approximately $900 million, of which approximately $700 million had been recognized; expected annualized pretax savings were approximately $700 million to $800 million when fully implemented.
- Management expects low interest rates, currency volatility, equity-market instability, energy-market volatility and slower global growth to continue pressuring investment income and profitability.
- AIG intends to reduce hedge-fund and private-equity exposure. Alternative-investment volatility remains a material earnings risk.
- Mortgage Guaranty met PMIERs requirements at March 31, 2016; estimated available assets were $3.3 billion versus $3.0 billion of minimum required assets. AIG planned an initial public offering of up to 19.9% of Mortgage Guaranty, subject to approvals.
- AIG announced the planned sale of AIG Advisor Group, expected to close in the second quarter of 2016 subject to regulatory approvals.
- The DOL fiduciary rule could require changes to annuity and investment-product distribution, product design and compensation practices. Initial compliance was scheduled for April 10, 2017, with full compliance by January 1, 2018.
- AIG disclosed substantial litigation, tax and regulatory exposures. The Caremark litigation sought $3.2 billion plus punitive damages, although the parties had reached a settlement in principle subject to documentation and court approval. The SICO litigation remained subject to appeal and potential indemnification claims.
- Unrecognized tax benefits were $4.5 billion at March 31, 2016, with $1.2 billion accrued for related interest and penalties. AIG released an $800 million deferred-tax valuation allowance related to unrealized tax losses into other comprehensive income.
- A downgrade to specified senior debt ratings could trigger up to approximately $148 million of additional collateral postings and termination payments based on conditions at March 31, 2016; actual amounts could differ.
Subsequent to quarter-end, AIG declared a $0.32 per-share dividend and announced the sale of 740 million PICC P&C shares, expected to generate approximately $1.25 billion of gross proceeds and a pretax realized gain of approximately $900 million, subject to closing conditions.
Most Important Facts for Investors to Verify
- Whether the deterioration in reported and operating earnings is temporary investment-market volatility or reflects persistent pressure on investment yields and insurance profitability.
- The sustainability of reserve adequacy, particularly for long-tail casualty, workers’ compensation, asbestos and environmental exposures.
- The effect of low interest rates on annuity spreads, guaranteed benefits, DAC amortization, shadow loss reserves and future investment income.
- The remaining restructuring costs, realized savings and the financial effects of the modular operating model and Legacy Portfolio.
- The effect of share repurchases and dividends on capital, liquidity and regulatory capital requirements.
- Actual proceeds and gains from the PICC P&C disposition, the AIG Advisor Group sale and any Mortgage Guaranty separation or IPO.
- Developments in litigation, tax examinations, regulatory investigations and the DOL fiduciary rule.
- Exposure to credit, equity, interest-rate, foreign-exchange, energy, real-estate and catastrophe risks, including the sensitivity of assets to a 100-basis-point rate increase or a 20% decline in equity and alternative-investment values.