AIG to Correct Accounting That Inflated Worth By $2.7 Billion

Jesse Westbrook and David Plumb, Reporters
Bloomberg
May 2, 2005


May 2 (Bloomberg) -- American International Group Inc., the world's largest insurer, will correct five years of results for reinsurance and other transactions that inflated net worth by about $2.7 billion, $1 billion more than an earlier estimate.

AIG delayed its 2004 annual report for the third time in six weeks, saying in a statement yesterday that a review of its books may not be finished until May 31. PricewaterhouseCoopers, its auditor, is expected to sign off once the report is done, the New York-based company said.

The accounting review was triggered by regulatory probes of reinsurance transactions and has since uncovered misleading or improper representations of asset writedowns, hedge-fund proceeds, and underwriting results. AIG said decisions may have been made to satisfy Wall Street estimates, and in some cases former senior managers ordered changes and circumvented controls.

"We know how difficult these last several months have been for those who put their trust in AIG," said Chief Executive Martin Sullivan, in the statement. "We are taking actions that will enable AIG to reinforce its credibility and the trust and confidence of our stakeholders."

AIG ousted Maurice "Hank" Greenberg as chief executive and its shares have lost more than $58 billion in market value since probes by New York Attorney General Eliot Spitzer and the Securities and Exchange Commission became public in February. Bloomberg reported April 29 that AIG planned to delay the filing again, citing people familiar with the matter. The stock fell 29 cents to $50.85 in New York Stock Exchange composite trading.

AIG said it would restate results from 2000 when it files its 10K with regulators later this month. AIG said $2 billion of the book value overstatement stems from accounting errors and the remaining $700 million will adjust the company's booking of tax accruals, acquisition costs and other items.

Derivatives Correction

The company, which had a net worth, or book value, of $82.9 billion at yearend, separately said it would correct how it reflects the fair-market value of derivatives, an adjustment that would simultaneously increase book value by $2.4 billion.

The change in derivatives accounting would add "significantly" to earnings swings, the company said, without specifying the net book value impact of all the changes.

AIG said PricewaterhouseCoopers will issue an "adverse opinion" on AIG's internal controls after the former managers were found to have skirted systems. AIG spokesman Chris Winans wouldn't identify the former managers and declined to say how much the decrease in book value may affect the company's earnings once the 2004 10K filing is made.

"The company will have guidelines that will no longer permit some of the steps that were used to doctor the reported numbers," said Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which manages $2 billion including AIG shares.

Wall Street Estimates

Some of the improper accounting inflated AIG's book value and net income, while other transactions pumped up the company's profit from operations, the measure of income most used by Wall Street analysts. AIG overstated its income from investments, while underreporting insurance claims, the company said.

AIG used at least three types of transactions to inflate its net investment income, which contributes to earnings examined by analysts. The company credited itself with hedge fund proceeds that were immediately reinvested, used complicated securities transactions to generate income from bonds, and misrepresented investments in synthetic fuel production facilities.

AIG, which should have filed its report by March 15, first disclosed accounting improprieties March 30, saying contracts with offshore reinsurers including Union Excess Reinsurance Co. and Capco Reinsurance Co. understated its losses from claims.

AIG earlier admitted to improperly classifying a transaction with Warren Buffett's Berkshire Hathaway Inc. as an insurance deal. In fact, it should have been deemed a deposit since there wasn't enough risk transferred, the company said.

`Still Stuck'

Spitzer and the SEC are investigating instances when a type of reinsurance known as finite really amounts to loans, allowing companies to mask losses even though little or no risk is transferred.

MBIA Inc., the world's biggest bond insurer, said it would lower profit from the past seven years by $54 million to correct accounting on such transactions and Berkshire is among at least eight other companies that have received subpoenas.

AIG was stripped of its AAA credit rating in March and has fired or suspended at least five executives, including former Chief Financial Officer Howard Smith, in the probe. Greenberg, 79, invoked his Fifth Amendment right against self-incrimination during a deposition on April 12.

"It's clearly more positive that they say something, but you are still stuck with uncertainty," said Stuart Quint, an analyst who helps manage $74 billion at Gartmore Global Investments in West Conshohocken, Pennsylvania, including more than 780,000 AIG shares as of December. "The question gets answered with a full 10K disclosure."

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; David Plumb in New York at hstock@bloomberg.net

Copyright © 2005 Bloomberg.com




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