Simplification of balance sheet
During the second quarter of 2015, AIG (AIG) took further actions to simplify its balance sheet and reduce risk. The continued active wind-down of the direct investment book and substantial termination of credit default swap (or CDS) in global capital markets has eliminated the need for the company to separately report these results.
Its exposure to super senior multi-sector collateralized debt obligations, or CDOs, has reduced to a notional amount of $1.2 billion in 2Q15, compared with $2.6 billion as of December 31, 2014.
The company’s exposure to super senior corporate debt and collateralized loan obligations (or CLOs) was reduced to zero, compared with $2.5 billion as of December 31, 2014. These and other measures have led to AIG’s five-year CDS rate declining to 60 basis points as compared to 130 basis points in 2012.
Impact of AerCap and China’s holdings
AIG reported after-tax operating income of $1.9 billion, or $1.39 billion for the second quarter of 2015, compared with $1.8 billion in 2Q14. This growth was mainly helped by higher pre-tax operating earnings of AerCap Holdings, the fair value of PICC Property & Casualty Company Limited, and People’s Insurance Company of China Limited investments.
AIG has taken several actions in the second quarter to exit non-core businesses and streamline businesses that have resulted in improved balance sheet strength, risk profile, and sustainability of returns. The company’s de-risking measures led to flexibility in its capital structure, as well as the increased ability to pursue profitable growth, provide services and products that best meet its customers’ needs, and deploy capital in new strategies.
The company started taking these steps in 2012, and the current structure doesn’t violate non-bank SIFI (systemically important financial institution) regulations. Its balance sheet size, leverage, and capital in non-insurance activities is comparatively low relative to peers like ACE (ACE), Allstate (ALL), and Chubb (CB). Together, these companies form 2.91% of the Financial Select Sector SPDR ETF (XLF).