Exiting structured bets
In 2015, American International Group (AIG) continued its simplification process for its balance sheet. The continued active wind-down of the direct investment book and the substantial termination of the credit default swap (or CDS) in global capital markets has eliminated the need for the company to separately report these results. The company’s exposure to super senior corporate debt and collateralized loan obligations was reduced to zero compared to $2.5 billion as of December 31, 2014. These and other measures have led to AIG’s five-year CDS rate falling to 60 basis points compared to 130 basis points in 2012.
In 2016, AIG is expected to strengthen its balance sheet by generating higher operating cash flows.
As of December 31, 2015, the weighted average coupon on AIG’s financial debt stood at less than 5%, and the maturity profile improved significantly. AIG’s book value, excluding other comprehensive income and deferred tax assets, declined to $75.10 in 4Q15 compared to $77.70 in the corresponding quarter last year.
AIG’s total debt to total capital ratio increased marginally to 17.6% in 4Q15 compared to 15.1% in 4Q14. This was due mainly to a reduction in the capital on losses. Its total outstanding debt at the end of 4Q15 was $29.4 billion, down from $31.2 billion in 4Q14.
The company’s leverage was on the lower side of the target range, according to AIG management. AIG’s operating return on equity stood at -7.8% for the fourth quarter, whereas normalized return on equity was 6.7%.
AIG, ACE (ACE), Allstate (ALL), and Chubb (CB) together form 0.88% of the Vanguard Dividend Appreciation ETF (VIG). These companies need to maintain capital in the form of liquid assets for payments of unexpected large claims. The capital requirement for an insurance company is stipulated by regulatory bodies.
In the United States, insurers are required to maintain risk-based capital. Risk-based capital ratios are calculated as the ratio of capital available to an insurer to required capital.
AIG is adequately capitalized with a risk-based capital ratio of 490% for its life insurance subsidiaries and 440% for its non-life-insurance subsidiaries.
In the next part, we’ll look at the rationale behind AIG’s heavy repurchases.