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AIG Reports Second Quarter 2020 Results

AIG Reports Second Quarter 2020 Results

Impacts from COVID-19 Remain Manageable

Continued Improvement in General Insurance Accident Year Underwriting Profitability, Adjusted for Catastrophe Losses (CATs)

Sale of Fortitude Group Holdings LLC (Fortitude) De-risks Balance Sheet and Sharpens Focus on Core Businesses; Transaction Accounting Reflected in GAAP Results

Strong Financial and Capital Flexibility; $10.7 billion in Parent Liquidity at June 30, 2020; $71.68 of Book Value per Common Share, an increase of 3.4% from March 31, 2020

  • General Insurance reported $674 million of pre-tax CATs, net of reinsurance, or 11.9 combined ratio points, which included $458 million of estimated COVID-19 losses, $126 million of civil unrest related losses and $90 million of natural CATs resulting in a General Insurance combined ratio of 106.0, in the second quarter of 2020.
  • The General Insurance accident year combined ratio, as adjusted*, was 94.9, a 120 bps improvement from the prior year quarter, driven by improved Commercial Lines performance and continued expense discipline.
  • Life and Retirement reported adjusted pre-tax income (APTI) of $881 million, a decrease of $168 million compared to the prior year quarter driven by private equity losses, continued spread compression and elevated mortality related to COVID-19. Adjusted return on attributed common equity (Adjusted ROCE) – Life and Retirement* for the second quarter was 13.2%.
  • On June 2, 2020, AIG completed the sale of a 76.6% stake in Fortitude for $2.2 billion of proceeds, significantly improving AIG’s risk profile and reducing exposure to long-tail runoff liabilities and related interest rate risk.
  • Net loss attributable to AIG common shareholders was $7.9 billion, or $9.15 per common share, for the second quarter of 2020, compared to income of $1.1 billion, or $1.24 per diluted common share in the prior year quarter. The loss was primarily driven by a $6.7 billion after-tax loss from the sale and deconsolidation of Fortitude and $1.8 billion of after-tax net realized capital losses primarily related to mark-to-market losses from variable annuity and interest rate hedges including the impact of AIG’s non-economic non-performance risk adjustment, per GAAP, on the fair value of AIG’s associated liabilities. The after-tax reduction to total AIG shareholders’ equity resulting from the sale and deconsolidation of Fortitude was $4.3 billion, or $2.5 billion on an Adjusted common shareholders’ equity* basis.
  • Adjusted after-tax income attributable to AIG common shareholders (AATI)* was $571 million, or $0.66 per diluted common share, for the second quarter of 2020, compared to $1.3 billion, or $1.43 per diluted common share in the prior year quarter. The decrease was primarily due to higher CATs and lower net investment income including private equity losses which are generally recorded on a one-quarter lag.

* Refers to financial measure not calculated in accordance with generally accepted accounting principles (non-GAAP); definitions of non-GAAP measures and reconciliations to their closest GAAP measures can be found in this news release under the heading Comment on Regulation G and Non-GAAP Financial Measures.

AIG Reports Second Quarter 2020 Results

NEW YORK–(BUSINESS WIRE)–American International Group, Inc. (NYSE: AIG) today reported financial results for the quarter ended June 30, 2020.

Brian Duperreault, AIG’s Chief Executive Officer, said: “We are effectively navigating the current complex environment due to the strong foundation we built over the last three years. While unprecedented and on-going, COVID-19 remains an earnings, not a capital, event for AIG. We also increased our financial flexibility ending the second quarter with over $10 billion in liquidity.

“Our core businesses performed well in the second quarter. In General Insurance, the underlying underwriting profitability improvement was driven by our focus on portfolio remediation and expense discipline. Life and Retirement benefited from its diversification and agility, and continues to meet client needs despite an uncertain economic environment.

“We also executed two important transactions in the second quarter that significantly enhanced our risk profile and helped to position our core businesses for growth. The sale of our majority stake in Fortitude Holdings de-risks our balance sheet and reduces our exposure to long-tail runoff liabilities and interest rate risk. Our Personal Insurance high net worth portfolio benefited from the formation of Syndicate 2019 and new quota share reinsurance agreements, which will enable us to unlock the strategic value and growth opportunities of this business through a new, innovative capital model.

“I am proud of the many ways we are managing through this challenging period in time. Our colleagues continue to show strength and resiliency as we remain focused on supporting our clients, each other and our communities. I remain confident that AIG is well-positioned for the future as we make progress toward becoming a top-performing company and leading insurance franchise.”

FINANCIAL SUMMARY

 

Three Months Ended

June 30,

 

($ in millions, except per common share amounts)

 

2020

 

2019

 

Net income (loss) attributable to AIG common shareholders

$

(7,936)

$

1,102

 

Net income (loss) per diluted share attributable to AIG common shareholders (a)

$

(9.15)

$

1.24

 

 

 

 

 

 

 

Weighted average common shares outstanding – diluted (a)

 

867.0

 

888.3

 

 

 

 

 

 

 

Adjusted pre-tax income (loss):

 

 

 

 

 

General Insurance

$

175

$

980

 

Life and Retirement

 

881

 

1,049

 

Other Operations

 

(510)

 

(471)

 

Legacy

 

257

 

119

 

Total

$

803

$

1,677

 

 

 

 

 

 

 

Adjusted after-tax income attributable to AIG common shareholders

$

571

$

1,272

 

Adjusted after-tax income per diluted share attributable to AIG common shareholders

$

0.66

$

1.43

 

 

 

 

 

 

 

Return on common equity

 

NM

 

7.1

%

Return on tangible common equity*

 

NM

 

7.8

%

Adjusted return on common equity*

 

4.6

%

10.4

%

Adjusted return on tangible common equity*

 

5.1

%

11.7

%

Adjusted return on attributed common equity – Core*

 

3.5

%

11.6

%

 

 

 

 

 

 

Common shares outstanding

 

861.4

 

869.9

 

Book value per common share

$

71.68

$

73.63

 

Tangible book value per common share*

 

65.94

 

67.47

 

Book value per common share, excluding AOCI adjusted for the cumulative unrealized

 

 

 

 

 

gains and losses related to Fortitude Re’s Funds Withheld Assets*

 

65.93

 

67.90

 

Adjusted book value per common share

 

55.90

 

56.89

 

Adjusted tangible book value per common share*

 

50.16

 

50.72

 

 

 

 

 

 

 

General Insurance Combined ratio

 

106.0

 

97.8

 

General Insurance Accident year combined ratio, as adjusted

 

94.9

 

96.1

 

 

 

 

 

 

 

Adjusted return on attributed common equity – Life and Retirement

 

13.2

%

17.3

%

(a) For periods reporting a loss, basic average common shares outstanding are used to calculate net income (loss) per diluted share attributable to AIG common shareholders. Diluted shares represent basic shares for the three-month period ended June 30, 2020 because we reported a net loss attributable to AIG common shareholders from continuing operations in that period.

All comparisons are against the second quarter of 2019, unless otherwise indicated. Refer to the AIG Second Quarter 2020 Financial Supplement, which is posted on AIG’s website in the Investors section, for further information.

SECOND QUARTER 2020 HIGHLIGHTS

General Insurance – Second quarter APTI of $175 million was comprised of an underwriting loss of $343 million and net investment income of $518 million. The underwriting loss included $674 million of CATs, net of reinsurance, reflecting $458 million of estimated COVID-19 losses, $126 million of civil unrest related losses and $90 million of natural CATs compared to $174 million of CATs, net of reinsurance, in the prior year quarter. Favorable net prior year loss reserve development, net of reinsurance, totaled $74 million, and was primarily due to $53 million of amortization from the Adverse Development Cover (ADC).

The General Insurance combined ratio was 106.0, including 11.9 points of CATs and reinstatement premiums, of which 8.2 points related to COVID-19 losses. Commercial Lines in both North America and International continued to show strong improvement due to underwriting and reinsurance actions taken to improve business mix, loss performance, and rate adequacy. The accident year combined ratio, as adjusted, was 94.9, comprised of a 61.5 accident year loss ratio, as adjusted* and an expense ratio of 33.4. The accident year combined ratio, as adjusted, reflected a change in Personal Insurance business mix driven by a series of new quota share reinsurance agreements including participation by our newly formed Syndicate 2019, a Lloyd’s Syndicate managed by Talbot, to reinsure risks related to AIG’s Private Client Group and the impact of COVID-19 on the Travel business. General Insurance general operating expenses (GOE) decreased by 9% to $766 million compared to the prior year quarter.

Life and Retirement – Second quarter APTI was $881 million compared to $1.0 billion in the prior year quarter. The decrease reflected private equity losses, continued spread compression and elevated mortality due to COVID-19, partially offset by higher other yield enhancements investment income and lower deferred policy acquisition costs (DAC) amortization and Variable Annuities reserves resulting from higher equity markets in the second quarter. Net flows were negative for the quarter and unfavorable to the prior year driven by lower Fixed and Index Annuity sales. Adjusted ROCE – Life and Retirement for the second quarter of 2020 was 13.2%.

Other Operations – Second quarter adjusted pre-tax loss (APTL) was $510 million compared to $471 million in the prior year quarter. The increase in pre-tax loss was primarily due to lower net investment income on consolidated investments and increased interest expense related to $4.1 billion of notes issued by AIG Parent during the quarter.

Legacy – Fortitude – On June 2, 2020, AIG completed the sale of a 76.6% ownership interest in Fortitude for approximately $2.2 billion, resulting in The Carlyle Group, Inc. (Carlyle) and T&D United Capital Co., Ltd owning 96.5% of Fortitude and AIG retaining a 3.5% ownership interest. AIG established Fortitude Reinsurance Ltd. (Fortitude Re), a wholly owned subsidiary of Fortitude, in 2018 in connection with a series of affiliated reinsurance transactions related to AIG’s Legacy Portfolio and has accounted for Fortitude as part of AIG’s Legacy segment. As of June 30, 2020, approximately $30.5 billion of reserves from AIG’s Legacy Life and Retirement Run-Off Lines and approximately $4.1 billion of reserves from AIG’s Legacy General Insurance Run-Off Lines, related to business written by multiple wholly-owned AIG subsidiaries, had been ceded to Fortitude Re under these reinsurance transactions. Fortitude Re reinsures the majority of AIG’s Legacy portfolio making it one of AIG’s largest reinsurance counterparties. As these reinsurance transactions are structured as modified coinsurance and loss portfolio transfers with funds withheld, AIG continues to reflect the invested assets supporting Fortitude Re’s obligations in AIG’s financial statements. As a result of the sale, AIG updated its Non-GAAP measures this quarter to adjust for the modified coinsurance and funds withheld assets, as the associated investment income is owed to Fortitude under the reinsurance agreements.

Resulting from the sale of the majority interest in and deconsolidation of Fortitude, AIG recorded an after-tax reduction to total AIG shareholders’ equity of $4.3 billion. The corresponding reduction to Adjusted common shareholders’ equity which excludes accumulated other comprehensive income (AOCI), adjusted for the cumulative unrealized gains and losses related to Fortitude Re’s funds withheld assets, and deferred tax assets (DTA), was $2.5 billion. The impact to AIG shareholders’ equity is primarily due to a $6.7 billion after-tax loss partially offset by a $2.4 billion increase in AOCI due to the release of shadow adjustments primarily related to future policy benefits. The $6.7 billion after-tax loss is comprised of (i) a $2.7 billion loss related to the write-off of prepaid insurance assets and DAC upon deconsolidation of Fortitude and (ii) $4.0 billion related to the loss on the sale primarily as a result of increases in Fortitude’s GAAP equity principally related to mark-to-market movements since December 31, 2018. The transaction did not negatively impact the statutory capital of AIG’s insurance subsidiaries.

Legacy Portfolio Results – Second quarter APTI was $257 million compared to APTI of $119 million in the prior year quarter; through the date of closing of the Fortitude transaction, both of these amounts are reduced in AATI for AIG due to Carlyle’s 19.9% minority interest in Fortitude. The change was primarily due to an increase in net investment income. In addition, the current quarter includes two months of Fortitude APTI compared to three months in the prior year quarter.

Net Investment Income – Total consolidated net investment income was $3.4 billion in the second quarter of 2020 compared to $3.7 billion in the prior year quarter. Net investment income on an APTI basis* decreased approximately $537 million to $3.2 billion in the second quarter of 2020. The decrease reflected private equity losses of $276 million compared to private equity income of $238 million in the prior year quarter which included a large IPO gain from a private equity holding. As the Fortitude sale closed on June 2, 2020, net investment income on an APTI basis included $378 million related to two months of investment income on Fortitude assets compared to $498 million in the prior year quarter.

Liquidity and Capital – As of June 30, 2020, AIG Parent liquidity stood at approximately $10.7 billion. In May, AIG Parent issued three tranches of senior notes in an aggregate principal amount of $4.1 billion. In June, AIG Parent repaid the $1.3 billion that it had borrowed in March 2020 under its $4.5 billion committed, revolving syndicated credit facility.

Also, in June 2020, AIG Parent made a prepayment of approximately $548 million to the U.S. Treasury in connection with proposed tax settlement agreements that were previously announced and related to the disallowance of foreign tax credits associated with cross border financing transactions. AIG currently expects to make, as early as the fourth quarter of 2020, additional payments on this settlement of approximately $1.2 billion dependent upon the final calculation of accrued interest.

Book Value per Common Share – As of June 30, 2020, book value per common share was $71.68 compared to $73.63 at June 30, 2019, primarily driven by a net loss attributable to the sale and deconsolidation of Fortitude, partially offset by net unrealized capital gains. Adjusted book value per common share, which excludes AOCI, adjusted for the cumulative unrealized gains and losses related to Fortitude Re’s funds withheld assets, and DTA, decreased to $55.90 compared to $56.89 at June 30, 2019.

Adjusted tangible book value per common share, which is Adjusted book value per common share excluding Goodwill, Value of Business Acquired, Value of Distribution Channel Acquired and Other Intangible Assets was $50.16 compared to $50.72 at June 30, 2019.

GENERAL INSURANCE

 

Three Months Ended June 30,

 

 

 

($ in millions)

 

2020

 

2019

 

Change

 

Total General Insurance

 

 

 

 

 

 

 

Gross premiums written

$

8,474

$

8,654

 

(2)

%

Net premiums written

$

5,549

$

6,581

 

(16)

 

Underwriting income (loss)

$

(343)

$

147

 

NM

 

Adjusted pre-tax income

$

175

$

980

 

(82)

 

 

 

 

 

 

 

 

 

Underwriting ratios:

 

 

 

 

 

 

 

Loss ratio

 

72.6

 

63.0

 

9.6

pts

Less: impact on loss ratio

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(11.9)

 

(2.6)

 

(9.3)

 

Prior year development

 

0.8

 

0.9

 

(0.1)

 

Accident year loss ratio, as adjusted

 

61.5

 

61.3

 

0.2

 

Expense ratio

 

33.4

 

34.8

 

(1.4)

 

Combined ratio

 

106.0

 

97.8

 

8.2

 

Accident year combined ratio, as adjusted

 

94.9

 

96.1

 

(1.2)

 

General Insurance – North America

 

Three Months Ended June 30,

 

 

 

($ in millions)

 

2020

 

2019

 

Change

 

North America

 

 

 

 

 

 

 

Net premiums written

$

2,347

$

3,307

 

(29)

%

Commercial Lines

 

2,497

 

2,364

 

6

 

Personal Insurance

 

(150)

 

943

 

NM

 

 

 

 

 

 

 

 

 

Underwriting income (loss)

$

(419)

$

(5)

 

NM

 

Commercial Lines

 

(385)

 

(36)

 

NM

 

Personal Insurance

 

(34)

 

31

 

NM

 

 

 

 

 

 

 

 

 

Adjusted pre-tax income

$

5

$

718

 

(99)

 

 

 

 

 

 

 

 

 

Underwriting ratios:

 

 

 

 

 

 

 

North America

 

 

 

 

 

 

 

Loss ratio

 

87.9

 

69.2

 

18.7

pts

Less: impact on loss ratio

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(19.6)

 

(5.0)

 

(14.6)

 

Prior year development

 

1.2

 

1.7

 

(0.5)

 

Accident year loss ratio, as adjusted

 

69.5

 

65.9

 

3.6

 

Expense ratio

 

27.8

 

30.9

 

(3.1)

 

Combined ratio

 

115.7

 

100.1

 

15.6

 

Accident year combined ratio, as adjusted

 

97.3

 

96.8

 

0.5

 

 

 

 

 

 

 

 

 

North America Commercial Lines

 

 

 

 

 

 

 

Loss ratio

 

91.8

 

74.8

 

17.0

pts

Less: impact on loss ratio

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(22.6)

 

(5.4)

 

(17.2)

 

Prior year development

 

1.6

 

3.1

 

(1.5)

 

Accident year loss ratio, as adjusted

 

70.8

 

72.5

 

(1.7)

 

Expense ratio

 

25.2

 

26.7

 

(1.5)

 

Combined ratio

 

117.0

 

101.5

 

15.5

 

Accident year combined ratio, as adjusted

 

96.0

 

99.2

 

(3.2)

 

 

 

 

 

 

 

 

 

North America Personal Insurance

 

 

 

 

 

 

 

Loss ratio

 

65.6

 

53.0

 

12.6

pts

Less: impact on loss ratio

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(2.6)

 

(3.9)

 

1.3

 

Prior year development

 

(1.3)

 

(2.4)

 

1.1

 

Accident year loss ratio, as adjusted

 

61.7

 

46.7

 

15.0

 

Expense ratio

 

43.1

 

43.4

 

(0.3)

 

Combined ratio

 

108.7

 

96.4

 

12.3

 

Accident year combined ratio, as adjusted

 

104.8

 

90.1

 

14.7

 

General Insurance North America – Commentary

  • Net premiums written decreased by 29% to $2.3 billion. Net premiums written in Personal Insurance decreased by $1.1 billion primarily as a result of $725 million in cessions pursuant to a series of new quota share reinsurance agreements including participation by our newly formed Syndicate 2019, a Lloyd’s Syndicate managed by Talbot, to reinsure risks related to AIG’s Private Client Group and the impact of COVID-19 on the Travel business. This was partially offset by 6% growth in our Commercial business driven by improved rate and retention in our Core lines including Retail Property, Lexington and AIG Re.
  • Pre-tax underwriting loss of $419 million included $519 million of CATs, net of reinsurance, of which $364 million related to COVID-19, $81 million related to civil unrest and $74 million related to natural CATs. The North America combined ratio was 115.7, compared to 100.1 in the prior year quarter, reflecting 19.6 points of CATs and reinstatement premiums of which 13.7 points related to COVID-19. The accident year combined ratio, as adjusted, was 97.3 compared to 96.8 in the prior year quarter.
  • The North America Commercial Lines accident year combined ratio, as adjusted, was 96.0, a 3.2 point improvement compared to the prior year quarter driven by improved mix of business, significant rate increases, benefits from underwriting actions in 2019 and improvement in the expense ratio due to changes in the business mix.
  • The North America Personal Insurance accident year combined ratio, as adjusted, increased 14.7 points to 104.8 compared to the prior year quarter. The increase in the accident year combined ratio, as adjusted, was in part driven by the impact of the reduction of net premiums earned on the GOE ratio. In addition, the change in business mix resulting from lower Travel business due to COVID-19 and the cessions under the series of new quota share reinsurance agreements, including participation by our newly formed Syndicate 2019, resulted in a higher accident year loss ratio, as adjusted, offset in part by a lower acquisition ratio.
  • Favorable net prior year loss reserve development was $39 million, with favorable net prior year loss reserve development of $46 million for North America Commercial Lines partially offset by unfavorable net prior year loss reserve development of $7 million for North America Personal Insurance. North America Commercial Lines favorable net prior loss reserve development included $53 million of amortization from the ADC compared to $58 million in the prior year quarter.

General Insurance – International

 

Three Months Ended June 30,

 

 

 

($ in millions)

 

2020

 

2019

 

Change

 

International

 

 

 

 

 

 

 

Net premiums written

$

3,202

$

3,274

 

(2)

%

Commercial Lines

 

1,575

 

1,516

 

4

 

Personal Insurance

 

1,627

 

1,758

 

(7)

 

 

 

 

 

 

 

 

 

Underwriting income (loss)

$

76

$

152

 

(50)

 

Commercial Lines

 

(13)

 

51

 

NM

 

Personal Insurance

 

89

 

101

 

(12)

 

 

 

 

 

 

 

 

 

Adjusted pre-tax income

$

170

$

262

 

(35)

 

 

 

 

 

 

 

 

 

Underwriting ratios:

 

 

 

 

 

 

 

International

 

 

 

 

 

 

 

Loss ratio

 

59.5

 

56.9

 

2.6

pts

Less: impact on loss ratio

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(5.4)

 

(0.1)

 

(5.3)

 

Prior year development

 

0.6

 

0.1

 

0.5

 

Accident year loss ratio, as adjusted

 

54.7

 

56.9

 

(2.2)

 

Expense ratio

 

38.1

 

38.6

 

(0.5)

 

Combined ratio

 

97.6

 

95.5

 

2.1

 

Accident year combined ratio, as adjusted

 

92.8

 

95.5

 

(2.7)

 

 

 

 

 

 

 

 

 

International Commercial Lines

 

 

 

 

 

 

 

Loss ratio

 

66.3

 

61.5

 

4.8

pts

Less: impact on loss ratio

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

(11.3)

 

(0.3)

 

(11.0)

 

Prior year development

 

2.4

 

0.4

 

2.0

 

Accident year loss ratio, as adjusted

 

57.4

 

61.6

 

(4.2)

 

Expense ratio

 

34.5

 

35.3

 

(0.8)

 

Combined ratio

 

100.8

 

96.8

 

4.0

 

Accident year combined ratio, as adjusted

 

91.9

 

96.9

 

(5.0)

 

 

 

 

 

 

 

 

 

International Personal Insurance

 

 

 

 

 

 

 

Loss ratio

 

52.9

 

52.9

 

pts

Less: impact on loss ratio

 

 

 

 

 

 

 

Catastrophe losses and reinstatement premiums

 

0.4

 

 

0.4

 

Prior year development

 

(1.2)

 

(0.1)

 

(1.1)

 

Accident year loss ratio, as adjusted

 

52.1

 

52.8

 

(0.7)

 

Expense ratio

 

41.4

 

41.6

 

(0.2)

 

Combined ratio

 

94.3

 

94.5

 

(0.2)

 

Accident year combined ratio, as adjusted

 

93.5

 

94.4

 

(0.9)

 

General Insurance International – Commentary

  • Net premiums written decreased 2% on a reported basis and 1% on a constant dollar basis. International Commercial’s net premiums written increased by 7% on a constant dollar basis driven by strong rate improvement and higher retention across most commercial lines. This was offset by the decline in net premiums written in Personal Insurance, in part as a result of the impact of COVID-19 on Travel and other lines of business.
  • Pre-tax underwriting income of $76 million included $155 million of CATs, net of reinsurance, of which $94 million related to COVID-19 and $45 million related to civil unrest. The International combined ratio was 97.6, compared to 95.5 in the prior year quarter, reflecting 5.4 points of CATs and reinstatement premiums of which 3.4 points related to COVID-19. The accident year combined ratio, as adjusted, was 92.8 compared to 95.5 in the prior year quarter, reflecting improvements in both Commercial Lines and Personal Insurance.
  • The International Commercial Lines accident year combined ratio, as adjusted, was 91.9, a 5.0 point improvement driven by premium rate increases, benefits from underwriting action, portfolio optimization and ongoing expense discipline.
  • The International Personal Insurance accident year combined ratio, as adjusted, improved by 0.9 points to 93.5, reflecting lower attritional losses in Japan and Asia Pacific Personal Auto.
  • Favorable net prior year loss reserve development was $35 million, with $46 million of favorable net prior year loss reserve development in International Commercial Lines, partially offset by $11 million of unfavorable net prior year loss reserve development in International Personal Insurance.

Contacts

Sabra Purtill (Investors): sabra.purtill@aig.com
Shelley Singh (Investors): shelley.singh@aig.com
Claire Talcott (Media): claire.talcott@aig.com

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