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Updated with actual results, additional analyst commentary.



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(AIG) - Get American International Group, Inc. Report

posted a higher-than-expected fourth quarter profit on a huge tax gain, but in the long term shareholders' best bet for a boost will come from a much anticipated buyback plan.

The insurance giant reported a profit of $ 19.8 billion in the fourth quarter of 2011, compared to $11.176 billion in the year-ago quarter. The profit included a deferred tax asset valuation release of $17.7 billion.

The company said it expects to achieve a more or less consistent level of profitability in the future that would allow it to realize tax benefits associated with massive losses sustained during the financial crisis years.

After- tax operating income came in at $1.6 billion or 82 cents per share compared to a loss of $2.2 billion or $15.99 per diluted share in the year-ago quarter.

Analysts were expecting a profit of 63 cents per share according to

Thomson Reuters.

CEO Robert Benmosche sounded an upbeat note in his commentary on the results. "We have a high degree of confidence in our future earnings prospects, which is a critical element in our assessment supporting the release of the deferred tax asset valuation allowance. As we look to 2012 and beyond, we anticipate we'll continue to be competitive in all areas of our core insurance business," Mr. Benmosche said in a statement.

Shares were rising 5% following the beat in aftermarket hours. AIG holds its conference call on Friday morning.

Shares of AIG are up more than 20% in 2012 after a dismal 52% decline in 2011.

Still, the driver of near-term stock returns may not come from earnings performance, but rather from the removal of its biggest overhang- the prospect of future sales of stock by the U.S. Treasury.

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What will get investors really excited about AIG is any plans announced by management to use capital to buy back shares directly from the government, according to Josh Stirling, senior analyst at Sanford Bernstein.

Investors have been reluctant to build positions in the stock ahead of a big sale by the government for fear that it will pressure prices. Concerns that Uncle Sam, which still owns a 77% stake in AIG, may even consider selling shares at lower than $29 levels, roughly the price at which the Treasury breaks even on its investment in the company, has also weighed on the stock.

But the management recently indicated that it might be willing to buy back stock from the government and that the

Federal Reserve

appears to be comfortable with its capital position.

A decision to deploy capital towards buying back the government stake would be a win-win situation, according to Stirling. "While it's never easy to handicap political decisions, we could see this playing out in the coming months, for a share repurchase would be accretive to shareholder value even were it priced above the current market and a sale to AIG at even a modest gain from current levels could offer the Treasury a timely pre-election political win," he wrote in a note Wednesday.

The analyst believes the Treasury could bundle a small secondary share sale with a more material sale directly to AIG. Any technical pressure from investors selling into the secondary market ahead of the sale could be offset by the immediate accretion to book value and the reduction of the otherwise continuing overhang.

Paul Newsome, analyst at Sandler O' Neill agrees that there is a possibility that AIG will explore this alternative and believes it is an avenue the company must pursue strongly.

Of course, the win-win outcome is dependent on a continued strength in financials and the Fed and rating agencies being comfortable with the use of capital to buy back Treasury's shares, Stirling cautions.

The stock does suffer from other issues of course and Stirling believes it must be treated like something of a "special opportunity".

Sandler O' Neill's Newsome expects shares will continue to suffer a material discount to its book value given expectations of low return on equity in 2012. Sandler expects the insurer to deliver a return on equity of 4.5% compared to large-cap property-casualty and life insurance peers at 8.8% and 10.2% respectively.

AIG trades at about 13 times its expected 2012 earnings per share, according to Sandler O' Neill estimates, a premium to

Hartford Financial

(HIG) - Get Hartford Financial Services Group, Inc. Report

, which trades at 6 times its 2012 earnings per share. Hartford has been in the news lately, with hedge fund titan John Paulson pushing the company to split its life insurance and property and casualty operations.

While the management has been credited with rebuilding the company from one that was overleveraged and highly complex to one that is centered on core insurance markets and far more derisked, the volatility in AIG's non insurance business which are subject to market fluctuations have only increased investor apathy for the stock.

Still, analysts will be watching out for commentary on the company's plans to sell its airplane leasing business and any other plans it may have for some of its non-core businesses such as

United Guaranty


Benmosche already alluded to the strengthening in the property0-casualty business in his statement and that would likely get some attention from analysts in the conference call tomorrow. Analysts will also be looking for broad commentary on its investment outlook amid a prolonged low interest rate environment.

--Written by Shanthi Bharatwaj in New York

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Shanthi Bharatwaj


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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.