American International Group Inc. reported profit of $19.8 billion in the fourth quarter, thanks to a large tax benefit the insurer booked after predicting it can keep generating profits in coming years.
AIG recognized $17.7 billion in tax benefits in the last three months of 2011, an amount that dwarfed the roughly $1.6 billion in operating income from its insurance businesses and other units during the period. Still, the operating profit of 82 cents a share beat analysts' consensus estimate of a 63 cents a share.
Shares of the insurer closed regular New York Stock Exchange trading at $27.99, their highest level in over six months, before the results were released Thursday afternoon. The shares jumped in after-hours trading, rising above $29, the level at which the U.S. Treasury last sold part of its majority stake in AIG in May 2011. The Treasury still owns 77% of AIG and is expected to wind down its ownership as market conditions allow.
AIG's tax boost came about from the reversal of write-downs it had taken to lower the value of its deferred-tax assets, which are unused tax credits and deductions that can be used to defray future tax bills. The insurer had taken those write-downs starting in 2008, when it suffered huge losses during the financial crisis.
What changed, AIG said, is that it expects to report sustainable future profits that will enable it to use its deferred tax assets after all. A key accounting rule of thumb is that write-downs of the tax assets are warranted if a company has had a cumulative loss for the previous three years, and that has been true for AIG since 2008. But with the latest quarter, the fourth quarter of 2008—when the company posted an enormous loss—is no longer part of the three-year trailing period. So with the fourth quarter, AIG has now swung to a total pretax profit of $2.6 billion for the past three years—making it easier for the company to justify reversing the write-down.
Chief Executive Robert Benmosche said in an interview that the accounting benefit reflects AIG's "high degree of confidence" that it will be able to produce substantial profits in the coming years. Based on its earnings over the past three years, he said AIG can show this is "cash we'll receive by not having to pay taxes on what we earn."
For the full year 2011, AIG reported operating income of $1.8 billion, versus a loss of $898 previously.
AIG's shares are still trading well below the company's book value, a measure of its net worth, which was $55.33 per share at year end. During the fourth quarter, AIG bought back around $70 million in stock at an average of $22.75 apiece, as part of a $1 billion stock-repurchase program. Mr. Benmosche said the company is likely to buy back more shares as Treasury winds down its stake, though the timing of that is unknown.
In the fourth quarter, the insurer's domestic life insurance and retirement services business posted $931 million in operating profit before taxes, down 11% from a year ago, while AIG's company's property-casualty arm reversed to a $348 million operating profit from a massive $3.97 billion loss in the fourth quarter of 2010.
Results were helped by a $1 billion increase in the value of the company's ownership of one-third of Asian life insurer AIA Group Ltd., whose Hong Kong-listed shares rose during the quarter. It was a reversal from the third quarter, when the stake put a $2.3 billion dent in results. AIG's plane-leasing unit, International Lease Finance Corp., swung to a pre-tax operating profit of $119 million, while the company's mortgage-insurance operation lost $23 million.
AIG's interest in Maiden Lane III, a bailout-era facility designed to remove some mortgage-linked instruments from the insurer's books, added $208 million to operating profit before taxes. It had added $382 million in the same period a year earlier.
Operating income at AIG's property-casualty unit, Chartis, included a $13 million benefit from an adjustment to reserves. The positive mark stands in stark contrast to the fourth quarter of 2010, when Chartis took a $4.2 billion net reserve charge to reflect sharply higher claims estimates for insurance policies sold in previous years.
Chartis suffered from $467 million in catastrophe losses, with the bulk of that cost coming from severe flooding that plagued Thailand in the quarter. Last year, the company paid $203 million. For the full year, AIG had $3.3 billion in catastrophe losses, a record.
The combined ratio at Chartis was 107.3, meaning the company spent $1.07 on claims and expenses for every dollar it collected in premiums. A year ago, the combined ratio was 160.5, reflecting the massive reserve charge.
Profit fell at SunAmerica Financial Group, AIG's domestic life insurance and retirement services business, because of a decline in policy fees and reduced investment income. The company blamed lower returns from its hedge-fund and private equity investments
Additionally, AIG's SunAmerica unit increased its life-insurance claims reserves by $105 million, on top of a roughly $100 million boost in the second quarter, as it adopted more aggressive procedures to identify if policyholders have died and benefits are due their heirs.
For more than a year, the insurance industry has been under intense scrutiny from state insurance regulators, attorneys general and other officials to ferret out overdue policies through the use of database technology, rather than falling back on contract terms calling for beneficiaries to file death claims.
AIG said the additional charge reflects "enhancing procedures" to identify potential deceased policyholders further back in time.
Other insurers have been adopting enhanced procedures which can include techniques such as assuming misspellings of names or inaccurate Social Security numbers when using the databases.
AIG's plane-leasing unit, International Lease Finance Corp., had a $119 million operating profit before taxes, reversing from a year-earlier loss of $606 million. Earlier Thursday, ILFC said it closed on a $900 million senior secured term loan. Some of the proceeds will be used to prepay a credit facility that contained a provision concerning ILFC's change of ownership. Benmosche said last week that the long-planned initial public offering for ILFC could happen in "a few" months.
AIG's mortgage-insurance operation lost $23 million, compared to a $154 million profit in the same period a year earlier. The unit has been grabbing market share in a sector where some rivals have been forced to stop selling new coverage when their capital ran short. While AIG and others are still feeling the effects of policies they sold in the run-up to the housing crisis, industry observers say the new business the remaining players are now selling should prove highly profitable over time.