American International Group, Inc. — 2016 Second-Quarter Form 10-Q Summary
Business context and reporting period
AIG is a global insurance organization operating in more than 100 countries and jurisdictions. Its reportable segments are Commercial Insurance and Consumer Insurance, with Corporate and Other including parent-company activities, run-off insurance lines, corporate expenses and other unallocated items. This unaudited Form 10-Q covers the three and six months ended June 30, 2016; comparable periods are June 30, 2015, and the balance-sheet comparison is December 31, 2015.
Key financial metrics
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|
| Total revenues | $14.724 billion | $15.699 billion | $26.503 billion | $31.674 billion |
| Income from continuing operations | $1.934 billion | $1.775 billion | $1.778 billion | $4.251 billion |
| Net income attributable to AIG | $1.913 billion | $1.800 billion | $1.730 billion | $4.268 billion |
| Diluted EPS attributable to AIG | $1.68 | $1.32 | $1.49 | $3.10 |
| After-tax operating income attributable to AIG | $1.113 billion | $1.893 billion | $1.886 billion | $3.584 billion |
| Pre-tax operating income | $1.620 billion | $2.868 billion | $2.574 billion | $5.395 billion |
| Net cash provided by operating activities | Not presented for the quarter | $571 million | $493 million |
- Second-quarter net income attributable to AIG increased 6 percent, while six-month net income declined 59 percent, largely because the prior-year period benefited from substantially higher realized capital gains and other favorable items.
- Second-quarter revenue declined 6 percent and six-month revenue declined 16 percent. Premiums decreased 8 percent in the quarter and 4 percent year to date; net investment income decreased 4 percent and 13 percent, respectively.
- Second-quarter net realized capital gains were $1.042 billion versus $126 million in the prior year, primarily reflecting gains on sales of investments, including a portion of the PICC Investment. Six-month net realized capital losses were $64 million versus gains of $1.467 billion in 2015.
- General operating and other expenses declined 16 percent in the quarter and 7 percent year to date. Loss on extinguishment of debt declined to $7 million in the quarter and $90 million year to date, compared with $342 million and $410 million, respectively, in the prior-year periods.
- The reported second-quarter net income margin was approximately 13.0 percent, compared with approximately 11.5 percent in the prior-year quarter. The six-month margin was approximately 6.5 percent, compared with approximately 13.5 percent in the prior-year period.
Segment performance and material changes
| Pre-tax operating income | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|
| Commercial Insurance | $1.088 billion | $1.500 billion | $1.977 billion | $2.962 billion |
| Consumer Insurance | $1.104 billion | $1.023 billion | $1.892 billion | $1.968 billion |
| Corporate and Other | $(544) million | $372 million | $(1.277) billion | $534 million |
- Commercial Insurance: Results fell because Property Casualty produced a $100 million underwriting loss versus $61 million of underwriting income in the prior-year quarter. Catastrophe losses increased to $353 million from $209 million, and the net loss-reserve discount charge was $191 million versus a $270 million benefit. These factors were partly offset by improved accident-year loss ratios, lower prior-year adverse development and lower operating expenses. Mortgage Guaranty improved materially, with six-month pre-tax operating income rising 16 percent to $350 million, supported by fewer delinquencies and higher cure rates.
- Property Casualty net premiums written declined 21 percent in the quarter and 18 percent year to date as AIG exited or did not renew underperforming business, increased reinsurance usage and maintained underwriting discipline. The reported combined ratio was 102.1 percent in the quarter and 99.6 percent year to date; the adjusted accident-year combined ratios were 89.5 percent and 91.4 percent.
- Consumer Insurance: Quarterly results improved 8 percent, led by Personal Insurance underwriting improvements and better Life mortality experience. Year-to-date results declined 4 percent because lower alternative-investment income outweighed underwriting and expense improvements. Personal Insurance’s combined ratio improved to 95.7 percent in the quarter and 94.8 percent year to date.
- Corporate and Other: The loss reflected lower earnings on fair-value-option investments, losses on the PICC Investment, the absence of AerCap equity earnings after its 2015 divestiture, run-off insurance losses and restructuring costs. Run-off insurance results also included an $86 million out-of-period charge reducing earned premium.
Balance sheet, capital, debt and liquidity
- Total assets were $510.349 billion at June 30, 2016, up from $496.842 billion at December 31, 2015. Total AIG shareholders’ equity was $89.946 billion versus $89.658 billion; accumulated other comprehensive income rose to $8.259 billion from $2.537 billion, primarily because of investment-market gains.
- Investments totaled $350.667 billion, including $262.089 billion of bonds available for sale. Net unrealized gains in the available-for-sale portfolio increased to approximately $18.0 billion from approximately $8.8 billion at year-end, mainly because of lower interest rates and narrower credit spreads.
- Long-term debt increased to $33.329 billion from $29.249 billion. AIG issued $6.688 billion of long-term debt and repaid $2.919 billion during the first six months. Debt issued or guaranteed by AIG totaled $26.942 billion; total debt, including debt of consolidated investments and other subsidiaries, was $33.329 billion.
- AIG Parent reported $11.189 billion of liquidity sources at June 30, 2016, consisting of $6.689 billion of cash, short-term investments and unencumbered fixed-maturity securities plus $4.5 billion of available syndicated credit capacity. The filing states that AIG believes liquidity and capital resources are sufficient for reasonably foreseeable requirements.
- Operating cash flow was $571 million versus $493 million in the prior-year first half. Investing cash flow was $(264) million versus $5.286 billion provided in 2015, which included AerCap sale proceeds. Financing cash flow was $(190) million versus $(5.566) billion used in 2015.
- AIG repurchased approximately 113 million common shares for $6.248 billion and 15 million warrants for $263 million during the first six months. It paid $713 million of common-stock dividends, including quarterly dividends of $0.32 per share. On August 2, 2016, the board authorized an additional $3.0 billion of repurchases, leaving approximately $4.0 billion authorized.
Guidance, outlook, risks and unusual items
- Management did not provide a conventional consolidated earnings forecast in the filing. It expects approximately $1.0 billion of cumulative pre-tax restructuring and other costs, of which approximately $0.8 billion had been recognized, and annualized pre-tax savings of approximately $0.8 billion to $0.9 billion when initiatives are fully implemented.
- AIG is reorganizing into more modular business units and creating a Legacy Portfolio to manage non-strategic run-off assets, improve transparency, release capital and improve return on equity. It also planned an initial public offering of up to 19.9 percent of Mortgage Guaranty, subject to regulatory and GSE approvals.
- Management expects low interest rates to pressure investment yields, insurance spreads, annuity profitability, long-duration casualty pricing and workers’ compensation reserve discounting. A rapid rise in rates could increase surrenders and reduce the fair value of fixed-maturity investments.
- Alternative-investment performance weakened, particularly in hedge funds, and AIG intends to reduce hedge-fund and private-equity exposure. Foreign-exchange volatility and Brexit could affect reported premiums, investment values, operations and the structure or cost of AIG’s U.K. and European businesses.
- Market-sensitive exposures include a potential $17.608 billion reduction in estimated balance-sheet value from a 100-basis-point parallel rate increase, a $5.109 billion reduction from a 20 percent decline in equity and alternative investments, and a $991 million reduction from a 10 percent depreciation of foreign currencies against the U.S. dollar. These are illustrative sensitivities, not forecasts.
- Derivative contracts with credit-related contingent features could require up to approximately $137 million of additional collateral postings and termination payments under specified ratings downgrades, based on conditions at June 30, 2016.
- Material contingencies include ongoing litigation, regulatory matters, tax disputes, guarantees, commitments and indemnification arrangements. AIG reported $4.5 billion of unrecognized tax benefits and $1.2 billion of accrued interest and penalties at June 30, 2016. The filing states that ultimate litigation exposure cannot currently be quantified and could materially affect an individual reporting period.
Most important facts for investors to verify
- Whether the improvement in quarterly GAAP earnings is sustainable after excluding the $1.042 billion of realized capital gains, the $225 million gain on the AIG Advisor Group sale and other unusual items.
- Progress toward the stated restructuring cost target and $0.8 billion to $0.9 billion annualized savings objective.
- Property Casualty reserve adequacy, catastrophe losses, Florida workers’ compensation developments and the effect of reserve discounting under continued low rates.
- The durability of Consumer Insurance underwriting improvements and the effect of declining investment yields, alternative-investment volatility and annuity guarantees.
- AIG’s debt reduction and refinancing plans, parent liquidity after share repurchases and dividends, and the effect of future ratings changes on collateral requirements.
- The outcome of pending litigation, tax examinations, regulatory proceedings, Brexit-related restructuring and the proposed Mortgage Guaranty separation.
