AIG: $850M shortfall in reserves for claims
Elliot Blair Smith
June 1, 2005
Insurance giant American International Group said Tuesday that it will seek an outside review of its loss reserves after new management found the company had underestimated its exposure to asbestos- and environmental-liability claims by about $850 million.
The disclosure added to Wall Street's uncertainty about AIG's aggressive accounting practices on the day the company hoped to allay concerns by releasing its delayed annual financial statement for 2004.
CEO Martin Sullivan, who took the top job at AIG in March amid state and federal investigations, said, "We're comfortable that our reserves are (adequate)."
In a conference call with securities analysts, Sullivan said a "massive effort" went into scouring AIG's books, resulting in the restatement of its financial statements for the past five years and the erasure of $3.9 billion in profits. That resulted in a smaller-than-expected $2.3billion, or 2.7%, reduction in its net worth. Last week, the New York attorney general's office filed a fraud lawsuit against AIG, former CEO Maurice Greenberg and former chief financial officer Howard Smith, accusing them of padding profits by deceptive accounting. The Justice Department and the Securities and Exchange Commission also are investigating.
The former executives deny wrongdoing. And Greenberg's attorney, David Boies, issued a statement Tuesday characterizing the accounting questions as complicated "judgment" calls made by AIG's auditor, PricewaterhouseCoopers, and senior management, including many executives "still employed there."
However, the adequacy of AIG's reserves has been questioned by insurance analysts because its claims payments have exceeded reserves each year since at least 1995, according to insurance rater A.M. Best. Last year, the gap was $1.8 billion. Reserves cut directly into profits. It's unclear how AIG funded the gap.
A.M. Best insurance analyst Joyce Sharaf said the unexpected additions to AIG's asbestos and environmental liability raise new doubts about the company. "A lot of people held them up as infallible," Sharaf said. "This revelation proves they are not."
Fairleigh Dickinson University accounting professor Jonathan Schiff compared AIG's past accounting to "cosmetic surgery" designed to satisfy shareholders and regulators rather than deliver reliable results.
AIG's 10-K filing also revealed:
*Former CEO Greenberg, 80, began drawing $1.6million in retirement benefits from AIG last October while also collecting $2.1 million in pay and bonuses from the company. He resigned under pressure in March. The insurer had no comment on his dual pay.
*Several AIG officials received big compensation packages and investment returns from two private affiliates the insurer did business with -- C.V. Starr and Starr International -- under relationships the company now says it is "unwinding and resolving."
Greenberg earned $3.2 million in salary, bonuses and fees from the Starr entities last year and $2.8 million in dividends. During that time, AIG paid C.V. Starr $205 million for insurance business, and Starr International $4 million in rent on Tokyo office space, resorts in Hong Kong and New York and a yacht.
Sullivan was paid $350,000 by the two Starrs and collected $393,375 in dividends from C.V. Starr while seeing his stake in the brokerage grow to $10 million.
"We're not going to comment on that right now," AIG spokesman Chris Winans said. "It's something that's going to be dealt with later."
*Former comptroller Michael Castelli, who had been on leave, was fired for his alleged failure to cooperate with state and federal investigators. He was identified by title, not name, in the report. Previously, AIG had disclosed that its former CFO, Smith, who supervised Castelli, was fired for the same reason.
*PricewaterhouseCoopers, which audited AIG's books and did other work for the insurer during the five years for which its financial statements now have been restated, was paid $77.7 million in fees by AIG last year. That was up from $44.6 million the prior year.
*Downgrades in AIG's credit rating have forced it to add $1.2 billion in collateral on some investments. It may have to put up another $2.3 billion.