American International Group Inc. (AIG) reported fourth quarter operating loss of $2.21 billion or $16.20 per share, slightly below the Zacks Consensus Estimate of a loss of $16.98 per share but higher than the net loss of $1.34 billion or $9.88 per share in the year-ago quarter.
On a GAAP basis, AIG reported a net income of $11.18 billion or $16.60 per share as compared with a net loss of $8.87 billion or $65.51 per share in the year-ago quarter.
The reported quarter included deferred income tax valuation allowance charge, FRBNY total amortization and net realized capital losses on SunAmerica DAC, marginally offset by gain from divested businesses and discontinued operations along with non-qualifying derivative hedging and net realized capital gains.
Although results appeared sluggish due to AIG’s ongoing business restructuring process, stability was retained in insurance operations that drove the book value per share during the quarter. AIG’s ALICO, Nan Shan, American General Finance Inc. (AGF), AIG Star and AIG Edison are reported as discontinued operations post the sale of these units.
Further, divestiture of assets and focus on core life and property-casualty business has helped it become the top life insurer position in the US. However, growth prospects are expected to remain weak in the upcoming quarters based on intense competition and a dull economy. AIG incurred a tax expense of $4.8 billion in the quarter, primarily resulting from the gains related to ALICO, AIA and the sale of the Otemachi Building in Japan.
Business Details
AIG’s General Insurance (Chartis) business significantly incurred operating loss of $4.0 billion compared with $1.8 billion in the year-ago quarter based on reserve additions net of discounts and loss sensitive premium adjustments of $4.2 billion. The loss was also attributable to higher claim and claim adjustment expenses and higher underwriting expenses.
Consequently, combined ratio deteriorated to 160.5% compared with 132.5% in the prior-year period. However, it is notable that both premiums written and premiums earned increased 9.4% and 6.5%, year over year, to $7.6 billion and $8.6 billion, respectively.
Operating income at Domestic Life & Retirement Services (SunAmerica) decreased to $1.0 million from $1.1 billion in the year-ago quarter. Assets under management (AUM) grew to $248.5 billion as of December 30, 2010, up 8% year over year. Unrealized gains totaled $3.3 billion at the end of 2010 compared to losses at the end of 2009.
However, premiums and other considerations were down 6.0% year over year at $4.9 billion, primarily driven by lower sales of individual fixed annuities due to the low interest rate environment witnessed in 2010.
Financial Services — conducted through International Lease Finance Corp. (ILFC) and AIG Financial Products Corp (AIGFP) — recorded operating loss of $326 million from an income of $468 million in the year-ago quarter. ILFC reported an operating loss of $606 million as compared with operating income of $344 million in the year-ago quarter.
As of December 31, 2010, ILFC had committed to purchase 115 new aircraft deliverable from 2011 through 2019, at an estimated purchase price of $13.5 billion. Operating earnings from capital markets increased to $292 million from $154 million in the year-ago quarter, driven by changes in the credit spreads on the valuation of derivatives. AIGFP continues to unwind portfolios.
In Other Operations, the United Guaranty Corporation (UGC) reported operating income of $154 million, compared with a loss of $241 million in the year-ago period. The growth reflects improved market conditions, lower levels of newly reported delinquencies in first-lien products, decline in claims and claim adjustment expenses along with commutations of certain blocks of business, which resulted in favorable prior year loss development.
AIG’s Direct Investment business recorded operating income of $470 million compared with a loss of $18 million in the year-ago period, primarily due to reduced impairment losses.
However, interest expense on the Federal Reserve Bank of New York (FRBNY) Facility remained almost flat year over year at $1.2 billion. The fair value on AIG’s interest in Maiden Lane III increased by $382 million compared to an increase of $196 million in the prior-year period.
Highlights of 2010
For full year 2010, AIG reported operating loss of $898 million or $6.57 per share, substantially lower than the Zacks Consensus Estimate loss of $15.98 per share, and a net loss of $781 million or $15.30 per share in 2009.
On a GAAP basis, AIG reported a net income of $7.79 billion or $11.60 per share in 2010 as compared with a net loss of $10.95 billion or $90.48 per share in 2009.
As of December 31, 2010, AIG reported a $15.1 billion increase in total equity from year-end 2009 to $113.2 billion. Pro forma book value per common share on AIG shareholders’ equity increased 11.1% year over year to $46.80 in 2010.
Government Loan and Financial Update
On January 14, 2011, AIG completed its recapitalization, which included full repayment of the FRBNY Credit Facility by utilizing a portion of the proceeds from the American International Assurance Co. Ltd (AIA) and ALICO transactions, partially repaying the government’s ownership interests in special purpose vehicles that hold interests in AIA and ALICO, and exchanging preferred stock held by the U.S. Treasury and the AIG Credit Facility Trust, which will ultimately be sold to public investors.
This appears to be an essential step for restoring AIG’s stability. However, AIG expects to incur a $3.3 billion charge in the first quarter of 2011, primarily representing the accelerated amortization of the prepaid commitment fee asset.
During the reported quarter, AIG raised more than $5.5 billion of new, non-government debt through a debt offering, a contingent capital facility and new bank facilities.
Business Update
On February 1, 2011 AIG also sold Japan-based AIG Star and AIG Edison to Prudential Financial Inc. (PRU) for $4.8 billion.
On January 12, 2011, AIG agreed to sell its 97.57% stake in Nan Shan Life Insurance Co. Ltd. to Taiwan-based Ruen Chen Investment Holding Co., Ltd. for $2.16 billion in cash.
On November 30, AIG vended 80% of AGF for $125 million to Fortress Investment Group LLC (FIG).
On November 1, AIG also closed the sale of its ALICO unit to MetLife Inc. (MET) for approximately $16.2 billion. AIG recognized a $15.5 billion gain (net of tax) on ALICO and AIA transactions.
On October 29, AIG completed an initial public offering of 8.08 billion shares of AIA for aggregate gross proceeds of approximately $20.51 billion. Upon completion of the initial public offering (IPO), AIG owned approximately 33% of AIA’s outstanding shares.
AMER INTL GRP (AIG): Free Stock Analysis Report
FORTRESS INVEST (FIG): Free Stock Analysis Report
METLIFE INC (MET): Free Stock Analysis Report
PRUDENTIAL FINL (PRU): Free Stock Analysis Report
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