To What Degree Were AIG’s Operating Insurance Subsidiaries Sound? (7)

Deferred Tax Assets

Here is a table of deferred tax assets by OIS, for those having more than 10% of surplus in DTAs. Deferred tax assets are only valuable to the degree that you can earn income adequate to use them. The column “DTA payback” indicates the number of years of 2007 earnings (a relatively good year) that it would take to fully use the DTAs.

Now, it may no longer matter whether AIG ever pays taxes or not. It is largely “in one pocket, out of the other” with the government. But it does have some solvency and profit implications for the subsidiaries.

Subsidiary

DTAs/ Surplus

2008YE Surplus

DTA payback

American General L&A IC

152%

488

6.24

Am Int LIC of NY

133%

371

13.22

AIG LIC

131%

360

11.91

AIG Annuity IC

117%

3,045

15.53

First SunAmerica LIC

85%

544

17.37

The Variable Annuity LIC

70%

2,841

7.08

UG Residential IC of NC

61%

200

NA

American General LIC

50%

5,185

6.66

American Life IC

43%

3,900

2.93

AIG Premier IC

37%

144

151.43

SunAmerica LIC

35%

4,653

4.94

Hartford Steam Boiler IAIC

29%

443

1.65

AIG Centennial IC

24%

305

NA

AIG Hawaii IC

23%

64

NA

AIG SunAmerica LAC

20%

1,271

4.26

United Guaranty IC

19%

52

2.60

American Home Assurance Co

19%

5,702

1.81

AIU IC

18%

726

3.66

AIG National IC

12%

17

NA

Merit LIC

12%

406

2.00

DTAs as assets earn no income, and there is nothing that can be tapped for cash in a crisis. In insolvency, they are not very useful, because acquirers can only use them in very limited ways. Therefore, having a long DTA payback period, or a high amount of DTAs as a fraction of surplus is a negative for profitability and solvency.

This will prove to be more of a difficulty if prior profitability levels are not regained, which could be particularly difficult for the equity-sensitive OISs, where fees from variable products will likely be down for a while. Also, consider that the OISs as a whole may find that 2007 was an exceptionally good year for investments and underwriting, and may not be achievable any time soon.