American International Group Inc. (AIG), thought to be on the verge of being dismantled during the height of the economic meltdown, has survived and is pulsating strongly.
“At AIG, the crisis is over. We are well on our way to achieving a complete turnaround, a feat that many believed, even a year ago, was impossible. … Not bad for a company that some believed would sink quietly into U.S. business history,” said Robert H. Benmosche, president and CEO at AIG, in a February letter to shareholders.
In 2011, AIG paid the U.S. government about $45 billion. Benmosche stated in his letter that the U.S. government is no longer holding AIG debt, but continues to be AIG’s majority shareholder.
The U.S. government extended $182 billion to AIG, and of that amount, $21 billion was not used. To date, AIG still owes about $9 billion in interest payments, and U.S. taxpayers still hold 70 percent of AIG common stock, which amounts to about $36 billion.
AIG announced that it has paid the U.S. Treasury $1.5 billion one year earlier than required. “This $1.5 billion payment is a milestone—it retires the Treasury’s interest in the AIA SPV and it reduces total outstanding assistance more than 75 percent,” said Benmosche in a March 22 announcement.
In May 2011, AIG sold 100 million shares of AIG common stock for about $2.9 billion, and the U.S. Treasury sold 200 million shares, reducing taxpayers’ ownership in AIG to about 77 percent or 960 million shares of AIG common stock.
AIG paid $246 million in dividends and $165 million in fees to the U.S. government in 2011, with no payments made in 2010.
The Treasury, on behalf of U.S. taxpayers, sold the 200 million AIG shares for $5.8 billion or $29 per share, of which $3.8 billion was turned over to the Troubled Asset Relief Program (TARP) and $2 billion to the U.S. government general fund, the fund that consistently borrows from the Social Security Trust Fund instead of investing Social Security funds in a truly interest bearing account.
The break-even point for all AIG shares owned by the U.S. government is $28.73. Therefore, with the sale of the 200 million shares in 2011, the U.S. government earned $54 million.
“According to Treasury, it will need to sell its 1.455 billion shares in AIG at a price of $28.73 a share for taxpayers to break even on the investment. AIG stock has been volatile with a high in 2011 of $61.18 per share on January 7, 2011, and a low of $20.07 on November 25, 2011,” according to the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) Quarterly Report to Congress, dated Jan. 26.
As the future market value of AIG cannot be predicted, it is quite uncertain if taxpayers will lose out when the U.S. government sells the AIG stock.
“Even though Treasury and CBO [Congressional Budget Office] estimate a loss on these investments, we may not know for some time how much of a loss taxpayers will ultimately take,” according to the SIGTARP Quarterly Report.
AIG Still Shaky
“In the first half of last year, shares drifted down until the issue of shares to the government was completed in late May. Since then the shares have traded in a range of $19 to $29, and under performed the S&P 500 Index by a margin,” according to a February stock analysis on the Seeking Alpha website.
Since December 2011, the AIG stock price has been ebbing and flowing from $24.07 at the close on Jan. 3 to $29.70 on Mar. 28, with a high of $31.30 during the day on March 5 and a low of $23.40 during the day on Jan. 5.
In 2011, the AIG stock price hit a 52-week low of $19.18 and a high of $36.58, according to the Zacks Investment Research website.
AIG will continue to underperform in 2012, given government ownership. An article on the Seeking Alpha website suggests that as long as the government is a stakeholder, the AIG stock will underperform.
“Though still a major presence in property-casualty and life insurance, the new AIG will be a smaller insurance organization, having shed a good deal of its global growth potential. AIG has no economic moat, in our opinion, and the one-time insurance leader will have a difficult time returning to its former dominant position,” according to a statement on the website of stock analysis firm Morningstar.
Discovering the Truth of High 2011 Profits
“[AIG’s] CEO Bob Benmosche on Monday said the insurer will produce a profit of up to $10 billion for taxpayers,” according to a March 26 recap of one of Jim Cramer’s “Mad Money” broadcasts on the CNBC website.
However, an article on the InvestorPlace website claimed just the opposite in late February with the headline “AIG Takes Taxpayers to the Cleaners … Twice!”
The recap article of Cramer’s “Mad Money” broadcast argues that based on the interview with Benmosche, it is a win-win situation for the U.S. taxpayer, while the other article argues that based on financial statements, AIG continues to be a burden for the U.S. taxpayer.
AIG announced in a February press release that its fourth quarter 2011 net earnings amounted to $19.8 billion, which was $8.6 billion more than in the fourth quarter 2010.
On a closer look, AIG stated in the second paragraph of the announcement, “Net income reflected a U.S. consolidated income tax group deferred tax asset valuation allowance release of $17.7 billion for the quarter and $16.6 billion for full year 2011.”
Not everyone has blinders on when reading earning announcements, including the InvestorPlace staff: “If you dig into the numbers, roughly $17.7 billion of that profit is just a trick of the spreadsheet. As Andrew Ross Sorkin writes, it was ‘a tax benefit, er, gift, from the United States government.’ Furthermore, AIG won’t pay a penny in taxes in 2012—and by some estimates, won’t owe the government a dime until after 2020.”
The consolidated income statement dated Dec. 31, 2011, filed with the Security and Exchange Commission on Feb. 23, 2012, reported net income of $18.5 billion for fiscal year-end 2011, $10 billion for 2010, and a net loss of $12.3 billion for 2009.
In 2011, AIG’s net income would have been less than $1 billion were it not for income tax benefits of $18.0 billion. In 2010, AIG paid $5.9 billion in income tax, and in 2009, AIG utilized a $1.5 billion income tax benefit.
For the fiscal year (FY) 2011, AIG reported after-tax operating income of $1.8 billon and an after-tax operating loss of $898 million for FY 2010, according to their February earnings release.
“The fact that the company made $1.6 billion during the quarter is laudable on some level. It proves that restructuring the insurance giant and divesting some assets to pay creditors has ultimately saved this company from the junk heap. But the fact that a company of this size won’t pay a nickel to the IRS—even after accepting the largess of Uncle Sam via the 2008 TARP bailout—is a bit galling to many Americans,” the InvestorPlace article argues.