Bailed-out insurer American International Group (AIG) has reported a $19.8 billion profit for the fourth quarter, after an accounting change that allowed the company to record an enormous one-time benefit.
The move, which sent the company’s shares up by about 6 per cent, essentially means AIG will not pay tax on tens of billions of dollars in income in the coming years, thanks to benefits that stem from its financial crisis-era losses.
AIG said in the third quarter that its results in the fourth quarter would determine whether it could release a so-called valuation allowance against the tax assets.
Having determined it is more likely than not to be consistently profitable in the future, it released most of the allowance, nearly $17.7 billion, in the quarter.
Some of the allowance, related to the company’s life insurance business, was not released, a determination that future profits are not as immediately certain there. It may still be released in the future, though, which would again add to the company’s bottom line.
The future of the tax assets has been a key question for investors, with some analysts suggesting the value of the assets made up as much as a fifth of AIG’s stock price. Fund manager Bruce Berkowitz, AIG’s largest non-government shareholder, has said the value of the assets was underestimated by the market.
AIG shares rose to $29.70 in after-market trading from a $27.99 close in regular trading on the New York Stock Exchange. At that after-hours price the stock is now above the US Treasury’s breakeven point on its 77 per cent stake in the company.
There is no time table for the government to sell the remainder of that stake, the last vestige of its $182 billion bailout of what had been the world’s largest insurer.
Net income was $19.8 billion, or $10.43 per share, compared with a year-earlier profit of $11.18 billion, or $16.60 per share.
AIG’s share count rose year over year, explaining the earnings-per-share discrepancy. In the year-earlier period the company recorded a huge one-time gain on asset sales that inflated results.
On an operating basis, the company earned 82 cents per share. Analysts polled by Thomson Reuters on average expected 63 cents.
AIG’s global property insurance unit, Chartis, returned to profitability in the quarter. It earned $348 million, despite $368 million in catastrophe losses related to the flooding in Thailand. AIG said Chartis experienced stronger pricing, and premiums written increased on growth in its consumer business.
SunAmerica, AIG’s US life insurer, reported a smaller profit of $931 million in the quarter, as net investment income declined.
SunAmerica also reported a $105 million increase in reserves in the quarter, like other life insurers have of late, for death benefits that may be due to policyholders but have not been claimed yet. Various states have been probing whether insurers were doing enough to ensure that such claims are paid. AIG also benefited in the quarter from a rise in AIA Group’s share price, booking a $1 billion gain.
AIG spun AIA off in a Hong Kong IPO in late 2010 but still owns one-third of the company. When AIA is up AIG profits, though the opposite is also true. To stem that volatility, top AIG executives have recently floated the idea of buying back a majority stake in AIA, though they have also said it would not happen anytime soon.
ILFC, the airplane leasing business AIG is planning to take public, returned to profitability in the fourth quarter, even with a $40 million charge related to recent airline bankruptcies. United Guaranty, AIG’s mortgage insurer, posted a loss as new delinquencies remained elevated. AIG’s biggest unit, property-casualty insurer Chartis, and its plane-leasing business swung to operating profits in the period, the New York-based company said in a statement yesterday as it posted net income of $19.8 billion.
The insurer is projecting that it will generate enough profit to use tax assets, tied to prior losses, that can limit future payments to the government. Shares rose above $30 in extended trading yesterday, surpassing the average price at which the government would need to sell a majority stake to recoup its investment. The stock has closed below the break-even price on the New York Stock Exchange every day since late July.