AMERICAN INTERNATIONAL GROUP, INC. quarterly report, Q3 FY2012

American International Group, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2012. The financial statements are unaudited. AIG is a global insurer operating through AIG Property Casualty, AIG Life and Retirement, Aircraft Leasing and Other Operations.

Financial performance and position

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Total revenues	$17.648 billion	$12.719 billion	$53.214 billion	$46.838 billion
Pre-tax income from continuing operations	$2.595 billion	$(4.270) billion	$8.930 billion	$(3.786) billion
Income from continuing operations	$1.860 billion	$(3.605) billion	$7.640 billion	$(2.599) billion
Net income attributable to AIG	$1.856 billion	$(3.990) billion	$7.396 billion	$(857) million
Diluted EPS from continuing operations	$1.13	$(1.99)	$4.21	$(2.25)
Operating cash flow	Not separately provided	Not separately provided	$2.839 billion	$(1.201) billion

Calculated net margins were approximately 10.5% for Q3 and 13.9% for the first nine months, based on net income attributable to AIG divided by total revenues. Results were materially affected by fair-value gains, investment activity, catastrophe comparisons and other unusual items.

Balance sheet: Total assets were $550.723 billion versus $552.360 billion at December 31, 2011. Total liabilities were $448.150 billion versus $441.444 billion, and total equity was $102.414 billion versus $102.393 billion.
Investments and cash: Total investments were $410.115 billion; cash was $1.608 billion. Available-for-sale bonds had a fair value of $269.914 billion and gross unrealized gains of $25.060 billion, partially offset by $1.836 billion of gross unrealized losses.
Debt: Long-term debt was $73.748 billion, down from $75.253 billion at year-end. Total debt, including debt not guaranteed by AIG, was $73.748 billion at September 30, 2012. Nine-month debt issuances were $7.985 billion and repayments were $10.126 billion.
Parent liquidity: AIG Parent reported $7.059 billion of cash and short-term investments, $3.537 billion of available syndicated credit facilities and $1.000 billion of contingent liquidity facilities, for total stated liquidity sources of $11.596 billion.
Near-term obligations: Debt maturities for the fourth quarter of 2012 through the third quarter of 2013 totaled $6.841 billion. Total contractual obligations were $468.697 billion, including insurance and investment contract liabilities, loss reserves, borrowings, interest and aircraft purchase commitments.

Material changes versus the prior comparable period

Revenue increased 39% in Q3 and 14% for the first nine months, while expenses declined 11% and 13%, respectively.
Net investment income increased to $4.650 billion in Q3 from $128 million and to $16.236 billion for nine months from $10.161 billion. The improvement included fair-value gains on AIA securities and Maiden Lane III, higher fixed-maturity income and favorable alternative-investment results.
Insurance operations improved substantially. AIG Property Casualty pre-tax income rose to $949 million in Q3 from $551 million and to $2.820 billion for nine months from $1.003 billion. Its combined ratio improved to 105.0% from 105.9% in Q3 and to 103.2% from 109.3% for nine months, although the adjusted accident-year combined ratio worsened modestly.
AIG Life and Retirement pre-tax income increased to $889 million in Q3 from $346 million and to $2.528 billion for nine months from $2.079 billion. Retirement Services benefited from market performance and lower DAC amortization, but fixed-annuity deposits declined sharply in the low-rate environment.
Aircraft Leasing returned to pre-tax income of $40 million in Q3 and $246 million for nine months, compared with losses of $1.329 billion and $1.122 billion. Aircraft impairment, fair-value and lease-related charges fell to $98 million in Q3 and $228 million for nine months, versus $1.518 billion and $1.673 billion.
Other Operations generated pre-tax income of $891 million in Q3 and $3.511 billion for nine months, versus losses of $3.945 billion and $5.855 billion. The improvement was driven primarily by AIA and Maiden Lane III fair-value gains and the absence of the prior-year $3.3 billion debt-extinguishment charge.
AIG repurchased approximately 421 million common shares for $13.0 billion in Treasury offerings. Treasury ownership declined to approximately 15.9% from approximately 92% before the 2011 offerings.
AIG paid down the remaining $8.6 billion of AIA SPV preferred interests in March 2012 and reduced its AIA ownership from approximately 33% to approximately 14%, with a September 30 carrying value of approximately $6.1 billion.
AIG retrospectively adopted revised insurance acquisition-cost accounting. The adoption reduced beginning 2011 shareholders’ equity by $3.413 billion and reduced beginning DAC by approximately $5.1 billion.

Outlook, risks and unusual items

Hurricane Sandy: The hurricane made landfall on October 29, 2012. AIG stated that it could not yet estimate its losses.
Low interest rates: Management expects continued pressure on investment income, fixed-annuity sales, investment spreads, DAC recoverability and long-term insurance profitability. Approximately 61% of relevant annuity and universal-life account values were at minimum crediting rates.
ILFC: Management continued to pursue an IPO or sale. Airline bankruptcies and lease returns remained material risks; nine lessees had ceased operations or filed for bankruptcy during the first nine months, returning 54 aircraft. ILFC had commitments to purchase 233 new aircraft with approximately $17.7 billion of remaining payments.
Insurance reserves: AIG recorded $329 million of net prior-year adverse development in AIG Property Casualty for the first nine months. Management considered reserves adequate but warned that adverse development could materially affect an individual reporting period.
Legal and regulatory contingencies: AIG increased its estimated litigation liability by approximately $742 million for the first nine months. Several securities, ERISA, workers’ compensation, employment, False Claims Act and insurance-related matters remained unresolved, and some potential losses could not be reasonably estimated.
Regulatory capital: AIG became subject to Federal Reserve supervision as a savings and loan holding company after Treasury ceased to own a majority of its common stock. AIG was also under consideration for designation as a systemically important financial institution, which could result in higher capital, liquidity, stress-testing, resolution-planning and other requirements.
Derivatives and collateral: AIG reported gross derivative assets of $7.872 billion and gross derivative liabilities of $10.959 billion before netting and collateral. A one-notch or further downgrade could trigger additional collateral postings and termination payments; the filing estimates potential additional amounts ranging from negligible to approximately $165 million under specified downgrade scenarios.
Tax assets: AIG released approximately $1.7 billion of life-insurance capital-loss deferred-tax-asset valuation allowance during the first nine months. Future market conditions could require re-establishment of valuation allowances.
Accounting estimates and valuation: Significant judgment remains concentrated in insurance reserves, DAC and aircraft recoverability, deferred taxes, investment impairments, legal contingencies and Level 3 fair values. Level 3 assets totaled $41.7 billion at September 30, 2012.

Investor verification checklist

Verify the impact of Hurricane Sandy on fourth-quarter catastrophe losses, reserves, earnings and capital.
Assess whether AIG’s improved results are recurring or primarily driven by AIA, Maiden Lane III, tax valuation allowance releases, fair-value gains, catastrophe comparisons and reduced aircraft impairments.
Review AIG Property Casualty reserve development, particularly environmental, asbestos, workers’ compensation and excess casualty exposures.
Monitor low-rate effects on AIG Life and Retirement spreads, fixed-annuity sales, DAC, policyholder guarantees and loss recognition.
Evaluate ILFC aircraft values, lessee credit quality, lease expirations, aircraft purchase commitments and the feasibility of a sale or IPO.
Track litigation, workers’ compensation settlement appeals, regulatory examinations and unresolved claims for which AIG could not estimate a loss range.
Confirm the final Federal Reserve, SIFI, capital, liquidity and Volcker Rule requirements and their effect on dividends, repurchases and capital deployment.
Reconcile parent liquidity with debt maturities, collateral requirements, subsidiary dividend restrictions and potential downgrade-related funding needs.