updated 3/16/2006 6:53:51 PM ET 2006-03-16T23:53:51

American International Group Inc., one of the world’s largest insurers, reported a sharp drop in fourth-quarter profit Thursday as it took after-tax charges of more than $2 billion to cover a settlement with state and federal regulators and an increase in its reserves. It also took a hit from hurricane payouts.

AIG, which is based in New York, said net income for the October-December period was $444 million, or 17 cents a share, down more than 70 percent from $1.6 billion, or 62 cents a share, a year earlier.

After adjustments for capital and accounting changes, net income was $376 million, or 14 cents a share. Analysts surveyed by Thomson Financial had expected profit of 24 cents a share.

The results were released after the close of regular trading. AIG shares rose 58 cents, or nearly 1 percent, to $69.24 in regular trading on the New York Stock Exchange. In after-hours trading, they were down $1.24, or nearly 2 percent, at $68.00. AIG shares have traded in a range of $49.91 to $71.09 over the past 52 weeks.

AIG said its fourth-quarter results included a $1.15 billion after-tax charge to cover the settlement announced in February with the Securities and Exchange Commission, New York state Attorney General Eliot Spitzer’s office and other regulators to resolve allegations of deceptive accounting practices.

AIG on Thursday also filed its third restatement of earnings back to 2000. The accounting changes were triggered by the regulators’ investigation.

The company’s fourth-quarter results also included a $1.19 billion after-tax charge “related to an increase ... to AIG’s net reserve for losses and loss expenses.”

And, the company said, it had after-tax catastrophe losses of $217 million in the quarter from Hurricane Wilma and spillover from Hurricane Katrina, which hit last August.

AIG’s president and chief executive officer, Martin J. Sullivan, noted in a statement that the company’s profit was up for the full year, despite the difficult final quarter.

“In what was a most challenging year for the company, AIG demonstrated its true resilience by generating net income of $10.48 billion for the full year and $444 million for the fourth quarter, after taking charges to settle legal and regulatory issues, increasing general insurance loss reserves and sustaining record catastrophe losses, all while initiating significant change throughout the organization,” he said.

Sullivan said the settlement “was an important step forward” in resolving the company’s legal and regulatory issues “and will allow us to focus intently on our business going forward.”

He added: “There is every reason for us to be optimistic about our future. AIG today is a better company for all that we have been through.”

Donald Light, a senior analyst at Celent LLC, a financial research and consulting firm based in Boston, said AIG’s results were “mostly an it-could-have-been-worse story.”

He added: “In terms of business segments, the big news is that AIG suffered a rare underwriting loss on its property-casualty business in 2005.”

Still, Light concluded, “we see a new AIG slowly emerging — wounded in 2005 but possibly returning to part of its old glory in 2006.”

AIG’s general insurance division reported an operating loss of $1.16 billion in the fourth quarter as it absorbed $775 million in catastrophe losses, an increase in loss reserve charges and other adjustments.

Its life insurance and retirement services unit registered an operating gain of $2.3 billion, and its financial services and asset management divisions also reported profits.

For the full year, AIG’s net income totaled $10.48 billion, or $3.99 a share, up 6.5 percent from profit of $9.84 billion, or $3.73 a share, in 2004. Analysts had projected full-year earnings of $3.40 a share.

Revenue for all of 2005 was nearly $109 billion, above the $101 billion expected by analysts. In 2004, the company recorded $97.7 billion in revenue.

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