American International Group, Inc. — Form 10-Q Summary
Business context and reporting period
AIG is a global insurance and financial services company operating through General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management. The unaudited filing covers the three and nine months ended September 30, 2009, compared primarily with the same periods in 2008; balance-sheet comparisons are with December 31, 2008.
The company remained dependent on U.S. government support and an extensive restructuring and asset-disposition program following the 2008 liquidity crisis. AIG reported that its disclosure controls and procedures were effective as of September 30, 2009.
Key financial metrics
| Metric | Three months ended September 30, 2009 | Three months ended September 30, 2008 | Nine months ended September 30, 2009 | Nine months ended September 30, 2008 |
|---|---|---|---|---|
| Total revenues | $26,049 million | $898 million | $76,032 million | $34,862 million |
| Premiums and other considerations | $16,041 million | $21,082 million | $52,630 million | $63,489 million |
| Net investment income | $8,656 million | $2,946 million | $19,724 million | $14,628 million |
| Net realized capital losses | $(2,937) million | $(18,312) million | $(7,338) million | $(30,482) million |
| Loss before income tax benefit | $(207) million | $(28,185) million | $(5,256) million | $(48,205) million |
| Net income (loss) attributable to AIG | $455 million | $(24,468) million | $(2,076) million | $(37,630) million |
| Net income (loss) attributable to common shareholders | $92 million | $(24,468) million | $(3,371) million | $(37,630) million |
| Basic and diluted EPS | $0.68 | $(181.02) | $(24.92) | $(287.99) |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $11,974 million | $888 million |
At September 30, 2009, total assets were $844,344 million, total liabilities were $766,649 million, and total equity was $76,537 million, including $72,712 million attributable to AIG shareholders. Cash was $4,957 million, compared with $8,642 million at December 31, 2008.
Total debt was $172,813 million at September 30, 2009, down from $193,203 million at year-end 2008. This included $41,009 million outstanding under the Federal Reserve Bank of New York facility and $9,607 million under the Commercial Paper Funding Facility. AIG had $24,200 million of remaining FRBNY facility capacity and $26,629 million remaining under the Department of the Treasury commitment at September 30, 2009.
Operating cash flow was $11,974 million, investing activities provided $9,149 million, and financing activities used $25,003 million. Cash declined by $3,685 million during the nine months.
Material changes versus the prior comparable period
- Third-quarter revenue increased sharply from the exceptionally weak 2008 period, largely because 2008 included severe valuation losses on AIGFP’s super senior credit default swap portfolio. The portfolio produced a $959 million valuation gain in the third quarter of 2009 versus a $7,054 million loss in 2008.
- Nine-month revenue increased 118 percent to $76,032 million, while AIG’s attributable net loss narrowed to $2,076 million from $37,630 million.
- Premiums and other considerations declined 24 percent in the quarter and 17 percent year to date, reflecting dispositions, foreign-exchange effects, lower production, customer de-risking and weaker economic conditions.
- Net realized capital losses improved substantially, but remained $2,937 million in the quarter and $7,338 million year to date. Other-than-temporary impairment charges recognized in earnings were $1,786 million in the quarter and $6,756 million year to date, versus $19,876 million and $32,246 million, respectively, in 2008.
- General Insurance produced operating income of $814 million in the quarter and $1,908 million year to date, but its combined ratio was 105.2 percent for the quarter and 100.0 percent year to date, indicating underwriting losses before investment income and other items.
- Life Insurance & Retirement Services reported operating income of $1,281 million in the quarter and $1,214 million year to date, versus significant losses in 2008. Improvement was driven mainly by lower investment impairments and better market-related results, partly offset by lower sales, surrender activity and restructuring charges.
- Financial Services reported operating income of $900 million in the quarter but an operating loss of $311 million year to date. The improvement was heavily influenced by fair-value gains and credit-spread movements at AIGFP.
- Asset Management reported operating losses of $2,235 million in the quarter and $3,090 million year to date, including substantial goodwill, real estate and private-equity impairments.
- AIG’s shareholders’ equity increased to $72,712 million from $52,710 million at year-end 2008, primarily due to the adoption of new impairment accounting, preferred-stock transactions and accumulated other comprehensive income.
Guidance, outlook, management commentary and unusual items
- Management concluded that AIG would have adequate liquidity to operate, execute its asset-disposition plan and meet obligations for at least the next twelve months, but stated that failure of planned transactions or additional deterioration could require further U.S. government support and create substantial doubt about going-concern status.
- The proposed AIA and ALICO transactions were expected to reduce the FRBNY facility by preferred-equity liquidation preferences of $16 billion and $9 billion, respectively. AIG expected accelerated amortization of the prepaid commitment asset and an aggregate pre-tax charge of approximately $5 billion upon completion.
- AIG expected approximately $5.6 billion of net cash proceeds from completed or agreed dispositions through October 30, 2009, generally to be used to repay borrowings and reduce the FRBNY facility. The company also agreed after the quarter to sell Nan Shan for approximately $2.15 billion and expected a fourth-quarter after-tax loss of approximately $1.4 billion.
- AIGFP continued an orderly wind-down and entered into new derivatives primarily to hedge existing exposures or reduce risk. The super senior CDS portfolio had net notional exposure of $205,959 million and a fair-value derivative liability of $5,029 million at September 30, 2009.
- Restructuring and separation expenses were $371 million in the quarter and $1,076 million year to date. Total reasonably estimable restructuring and separation costs were approximately $2.6 billion, with additional expenses possible.
- AIG recorded out-of-period adjustments that reduced third-quarter net income attributable to AIG by $188 million and reduced nine-month net loss attributable to AIG by $361 million. Management concluded that no restatement was required.
- AIG adopted new other-than-temporary impairment guidance on April 1, 2009. The adoption increased AIG shareholders’ equity by approximately $2.5 billion and shifted certain non-credit impairment amounts to accumulated other comprehensive income.
- Key risks included credit-market deterioration, derivative valuation uncertainty, collateral calls and rating downgrades, inability to complete dispositions, policyholder surrenders, insurance reserve development, asset impairments, litigation and regulatory investigations, compensation restrictions, and the ability to retain key personnel.
- A one-notch downgrade, based on September 30 exposures, was estimated to create up to approximately $2.5 billion of additional collateral postings and termination payments; actual amounts could differ materially.
- AIG disclosed material commitments and contingencies, including $14.0 billion of aircraft purchase commitments, $7.6 billion of investment commitments, $13.6 billion of guarantees and other commercial commitments, and significant unresolved litigation and regulatory matters.
Most important facts for investors to verify
- Completion, timing and actual proceeds of the AIA, ALICO, Nan Shan and other planned dispositions, including the effect on FRBNY borrowings and the expected approximately $5 billion amortization charge.
- Actual collateral requirements, terminations, losses and fair-value changes in AIGFP’s remaining CDS portfolio, especially the $171.7 billion regulatory-capital portfolio and $30.8 billion arbitrage portfolio.
- Availability and terms of government liquidity support, CPFF access, debt maturities and AIG’s ability to refinance or repay approximately $23.2 billion of debt due in the next four quarters.
- Development of insurance reserves, including the $526 million adverse prior-year reserve development recorded in the first nine months and exposure to long-tail casualty, asbestos, environmental and mortgage-guaranty claims.
- Recoverability of the $6.8 billion net deferred tax asset, which depends substantially on future taxable income and successful divestitures, and the potential for additional goodwill, DAC or investment impairments.
- Material legal and regulatory proceedings, including securities, derivative, workers’ compensation and antitrust matters, for which ultimate liabilities were not clearly quantifiable.
- Whether reported earnings improvements are sustainable operating results or primarily reflect fair-value gains, credit-spread movements, reduced impairment charges, government support and other unusual items.