American International Group Inc.’s biggest quarterly loss since 2009 casts doubt on the bailed-out insurer’s ability to benefit from more than $25 billion in assets that can be used to lower future tax bills. Shares declined as much as 6 percent.
The fourth quarter will be “very important” in determining whether AIG can lower a so-called valuation allowance that has restricted the company’s use of the tax assets, the insurer said in a regulatory filing late yesterday. AIG posted a $4.11 billion third-quarter loss that wiped out profit from the first six months of the year.
“If investors were having qualms about this and were stepping back a little, management is saying, basically, ‘You better step back a lot,’” said Charles Mulford, an accounting professor at Georgia Institute of Technology in Atlanta. “The profit visibility is very murky.”
AIG’s loss was driven by impairments of aircraft in its plane-leasing unit and declines in mortgage-related investments and the value of its stake in a former Asian subsidiary, the insurer said in a statement yesterday. The company is counting on the tax assets as a “source of funds” when it’s prepared to repurchase stock, Chief Executive Officer Robert Benmosche, 67, said in May.
AIG’s board authorized a $1 billion stock repurchase program, its first since a 2008 bailout that made the U.S. Treasury Department the company’s majority shareholder, the insurer said yesterday. The priority is to cut the government’s stake before buying back stock in the open market, Benmosche said today on a conference call with analysts.
The insurer may use the authorization to take advantage of “certain anomalies” in markets, Benmosche said. He didn’t give a timetable for completing the repurchase.
AIG fell 5.8 percent to $23.20 at 9:41 a.m. in New York. The shares have declined 52 percent this year, compared with the drop of less than 1 percent in the Standard & Poor’s 500 Index.
The insurer said in yesterday’s filing that “the level of profitability in the fourth quarter will be very important in demonstrating sustainable operating profit” that can be used as evidence to reduce the valuation allowance. AIG had said in an August filing that profits this year could help make a case for lowering the allowance in the fourth quarter. Mark Herr, a spokesman for AIG, declined to comment on the allowance.
Some of the assets that contributed to AIG’s near collapse in 2008 hurt third-quarter results. Stakes in Federal Reserve investment facilities holding the mortgage-linked assets turned over in AIG’s bailout fell by $974 million.
The operating loss at the plane unit, International Lease Finance Corp., widened to $1.3 billion from $218 million a year earlier, as it incurred a non-cash charge related to aircraft impairments. AIG’s results also included a $2.3 billion change in the fair value of its holdings in AIA Group Ltd., a Hong Kong-based insurer. Benmosche sold two-thirds of the company in an initial public offering last year.
The third-quarter loss “damages any momentum” AIG had in demonstrating sustained profits that could be used to conclude that it no longer needs to have a valuation allowance, said Robert Willens, a tax consultant in New York.
“At this point, their only hope of eating into the valuation allowance is their ability to project future taxable income,” he said in an e-mail. “By definition, projections of future taxable income are the least credible method of reducing a valuation allowance because of the inherent uncertainty of this source of taxable income.”
The insurer had $25.6 billion in so-called net operating loss carryforwards, capital loss carryforwards and foreign tax credits as of Dec. 31, according to a presentation on its website. The tax assets may be worth $5 to $6 a share to AIG, according to a note today from Jimmy Bhullar, an analyst at JPMorgan Chase & Co.
AIG’s government rescue swelled to $182.3 billion after bets tied to the housing market soured. The insurer paid back the remaining $21 billion it owed on a Federal Reserve Bank of New York credit line in January. In May, AIG and the Treasury sold 300 million shares for $29 apiece, reducing the Treasury’s stake to 77 percent from 92 percent.
The insurer had been prohibited from buying back stock before the public offering, Benmosche said today. The company’s prospects for purchasing shares from the Treasury may be limited by the government’s desire to sell its stake at or above the break-even price of about $29, he said.
“If they want to sell it to us below that price, we’d be happy to buy it,” he said. “Their goal and our goal is to make sure that the American taxpayer gets back all their money plus a profit.”
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