AIG Posts Huge Q4 Profit on Tax Benefit; Chartis Reports $348M Income

By | February 23, 2012

Bailed-out insurer American International Group 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 percent, 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 U.S. Treasury’s breakeven point on its 77 percent 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 SOARS

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 I/B/E/S 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 U.S. 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.

[CHARTIS: $348M Q4 INCOME, BUT $655M UNDERWRITING LOSS

Chartis reported fourth quarter operating income of $348 million, a vast improvement from an operating loss of $3.97 billion one year ago, which had reflected a reserve strengthening charge of $4.2 billion in the prior year period.

However, Chartis continued to see underwriting losses — though these losses were much smaller compared to one year ago. The fourth quarter 2011 combined ratio for Chartis was 107.3 percent (74.5 loss ratio and 32.8 expense ratio), improving from 160.5 percent in the fourth quarter of 2010, which had included 49.2 points from the reserve strengthening in the prior year period. Chartis had an underwriting loss of $655 million in the fourth quarter 2011, while earning $1.0 billion in investment income. It also had net realized capital gains of $444 million. In comparison, Chartis suffered $5.18 billion in underwriting loss during the fourth quarter in 2010.

Chartis 2011 fourth-quarter results were also impacted by $467 million of catastrophe losses, including $368 million related to the Thailand floods, compared to $203 million of catastrophe losses in the fourth quarter of 2010.

For the full-year 2011, Chartis had an underwriting loss of $3.23 billion, compared with an underwriting loss of $5.46 billion for the full-year 2010.

The full-year 2011 combined ratio was 109.0 percent (78.3 loss ratio and 30.7 expense ratio), improving from 116.8 percent for 2010.

CHARTIS Q4 NET PREMIUMS WRITTEN $7.85B, UP 3.6%

Fourth quarter 2011 net premiums written were $7.85 billion, up 3.6 percent from $7.58 billion reported during the prior-year period. Consumer insurance accounted for 2.4 percent of the increase — $3.3 billion in net premiums written, up from $3.0 billion one year ago — as the business was helped by growth in personal lines. However, the commercial insurance segment saw net premiums written fall 0.6 percent — to $4.51 billion from $4.53 billion one year ago — primarily from capital management initiatives in the casualty business, including the restructuring of certain aspects of loss sensitive businesses.

The commercial insurance segment reported fourth quarter 2011 operating income of $202 million with a combined ratio of 111.6 percent ($635 million underwriting loss). The net investment income for the segment was $837 million. AIG said Chartis continued to grow its commercial business in growth economy nations.

The consumer insurance segment reported fourth quarter 2011 operating income of $174 million with a combined ratio of 97.6 ($85 million underwriting profit). Net investment income for the segment was $89 million.

AIG stated that overall, Chartis continued to benefit from positive pricing trends in the quarter. The insurer said Chartis also continued to make progress on strategic initiatives, including business mix changes, loss ratio improvement, expense discipline, and risk selection, to improve the quality of its insurance portfolio.

UNITED GUARANTY POSTS OPERATING LOSS

United Guaranty Corp., AIG’s residential mortgage guaranty operations, reported an operating loss of $23 million for the quarter, in contrast to operating income of $154 million during the prior-year period.

For the fourth quarter of 2011, results continued to be hurt by a general weakness in the housing market as new delinquencies remained at elevated levels, AIG said.

Net premiums written were $200 million for the quarter, up from $167 million one year ago. Domestic first lien new insurance written totaled $7.1 billion for the quarter. Quality remained high, with an average FICO score of 757 and an average loan to value ratio of 91 percent on new business for the fourth quarter of 2011, AIG said.

SUNAMERICA POSTS $931M Q4 OPERATING INCOME

SunAmerica reported operating income of $931 million in the fourth quarter 2011, compared to operating income of $1.0 billion one year ago. It benefited from the reinvestment of excess cash in the first nine months of 2011 and receipt of $213 million from a favorable litigation settlement.

Additionally, SunAmerica reported an increase in estimated reserves in the quarter for incurred but not reported death claims of $105 million in conjunction with recent industry disclosures involving insurers enhancing procedures to identify potential deceased policyholders where a valid death claim has not been filed by looking further back in time.

Net investment income in the quarter was lower than the prior year period because of lower returns from hedge funds and private equity investments and lower call and tender income.

The base investment yield was 5.44 percent for the quarter, compared to 5.30 percent one year ago, reflecting the redeployment of excess cash during 2011. This yield improvement combined with SunAmerica’s management of interest crediting rates resulted in improved base net investment spreads for group retirement products and individual fixed annuities, AIG said.

Premiums, deposits, and other considerations totaled $5.7 billion for the quarter, compared to $4.9 billion one year ago, as group retirement products and individual variable annuities showed significant improvements.]

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