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Nothing Normal About AIG's "Normalized" Earnings

AIG's March 31 Quarterly Earnings Misleading Investors

AIG's reported "normalized earnings" for the quarter ending March 31, 2011 is anything but normal. Don't get me wrong. The company takes the same liberties as most others and defines normal however it wants. There are no specific accounting rules on how to determine that amount. In fact, the results can, and do in AIG's case, deviate significantly from what would have been reported under conventional generally accepted accounting principles (GAAP).  The differences are astounding. The reported net income attributable to AIG is $269 million (GAAP) whereas the after-tax operating income (normalized) is $2.030 billion. That is a 647 percent differential. How can that be?

Three Months Ended March 31,

% Inc.




Net Income Attributable to AIG





(84.9) %

Income from Discontinued Operations Attributable to AIG, net of tax




Net Loss on Sale of Divested Businesses, net of tax






Net Income from Divested Businesses, net of tax




Deferred Income Tax Valuation allowance (charge) / release





Amortization of FRBNY prepaid commitment fee asset, net of tax






Net Realized Capital Gains (Losses)






SunAmerica DAC offset related to Net Realized Capital Gains(Losses)




Non-qualifying Derivative Hedging Losses , net of tax






Bargain Purchase Gain




After-Tax Operating Income Attributable to AIG






The numbers above were reported by AIG in its March 31, 2011 Financial Supplement that alerts the reader to read the report in conjunction with AIG's Quarterly Report on Form 10-Q filed with the SEC. The reason is the 10-Q reports the GAAP numbers only. AIG's Financial Supplement shows the reconciliation between GAAP net income and normalized earnings as required by Regulation G.  The numbers were included in a press release sent to analysts in advance of a conference call. The following explains AIG's reasons for normalizing its earnings: "Throughout this press release, AIG presents its operations in the way it believes will be most meaningful and useful… as well as most transparent… to the investing public and others who use AIG’s financial information in evaluating the performance of AIG. That presentation includes the use of certain non-GAAP measures."

Are investors supposed to have faith in the numbers provided by a company that needed a $182 billion bailout from the U.S. government? If that doesn't make you skeptical, read the following additional explanation:

"In light of the company’s significant divestiture and restructuring-related activities, AIG revised its definition of after-tax operating income (loss) (formerly adjusted net income) in the fourth quarter of 2010. AIG revised the definition in order to present and discuss its financial information in a manner most meaningful to financial statement users. AIG’s definition of aftertax operating income (loss) was revised to exclude income (loss) from divested businesses that did not qualify for discontinued operations accounting treatment, amortization of the FRBNYprepaid commitment fee asset, goodwill impairment charges arising from divestiture-related activities, the DAC offset associated with net realized capital gains (losses) for SunAmerica, and deferred income tax valuation allowance charges and releases. AIG believes that this revised measure of after-tax operating income (loss) permits a better assessment and enhanced understanding of the operating performance of its businesses by highlighting the results from ongoing operations and the underlying profitability of its businesses, without the distortive effects of the highly unusual events that have affected AIG since 2008."

So, AIG not only uses a non-GAAP measure to explain its results on a quarterly basis in reports to financial analysts that purportedly are most useful to investors, but the company even changed the way it defines the measurement of after-tax operating income in the fourth quarter of 2010. It even changed the name of the reported statistic from adjusted net income. Not surprisingly, most of the excluded items increased GAAP earnings to higher normalized amount. In fact, the increase from $269 million to $2.0 billion is 647 percent! To make matters worse, it's GAAP income went down 84.9% on a March 31 year-to-year basis.

The concept of transparent financial results implies a level of ethics not present in AIG's reporting. These are not statements of high quality that are clear, easily understood, candid and frank. They mislead investors into thinking AIG has made a remarkable recovery from its financial doldrums. I looked at its Statement of Cash Flows in the 10-Q and the all-important cash flows from continuing operations went from a positive $1.52 billion at 3/31/10 to a negative $6.54 billion at 3/31/11, or a 535 percent decline! 

On a broader scale, AIG's use of normalized earnings highlights a larger problem with accounting standards. We've been down this road too many times and the profession's still fails to clean up its act. Companies like Enron and WorldCom manipulated reported earnings to make it look like the company was doing better than it really was. Other companies routinely put their own spin on the numbers reported to analysts and investors on a quarterly basis. The profession has failed to address this issue; therefore, it is complicit with those companies that use normalized earnings to imply future results. As such, it has failed to live up to its responsibilities to protect the public interest.

  Blog by Steven Mintz, aka Ethics Sage, May 9, 2011