AIG Discloses Extensive Accounting Problems
American International Group Inc. on Wednesday acknowledged accounting errors that could stretch back 14 years, including its treatment of a deal with Berkshire Hathaway Inc. that is at the center of federal and state investigations.
AIG’s sweeping disclosures -- including the possibility that it will be forced to reduce the value of the company by $1.7 billion, or 2% -- were part of an effort to regain investor confidence. They came just days after Chairman Maurice “Hank” Greenberg said he would retire after almost 40 years leading the insurance powerhouse.
AIG, which has lost more than $40 billion in stock market value since mid-February, saw its shares sink $1.04, or 1.8%, to $57.16 in heavy trading on the New York Stock Exchange. Standard & Poor’s, meanwhile, cut AIG’s AAA debt ratings, potentially making it more costly for the insurer to borrow money.
AIG’s response follows a meeting this week between its attorneys and representatives from the Department of Justice, the Securities and Exchange Commission and New York Atty. Gen. Eliot Spitzer’s office.
The company now plans to delay filing its 2004 annual financial report -- its second delay -- until late April while it continues the review.
Among other transactions, authorities have looked at a 2000-01 reinsurance deal AIG struck with General Re Corp., a unit of Warren E. Buffett’s Berkshire Hathaway, that they believe AIG treated improperly in its accounting.
AIG acknowledged as much Wednesday, saying the deal should have been classified as a deposit, not as insurance. AIG said the new accounting should have little effect on its financial condition but would cut loss reserves and expenses by $250 million and raise other liabilities by $245 million.
The insurer also expects to take $670 million of after-tax charges related to its general insurance operations. But whether it restates more than just its fourth-quarter 2004 results remains to be determined.
A Spitzer spokesman declined to comment on specifics of AIG’s statement but called it “a welcome step toward transparency and accountability as our investigation proceeds.”
In addressing its accounting problems, AIG is attempting to restore credibility with investors who have watched the examination of its deal with General Re spread into probes of dozens of questionable transactions.
AIG recently fired three executives for failing to cooperate with authorities in their probes. The company has tightened security at its office in Hamilton, Bermuda. It has also hired two outside law firms to help with the investigation.
The company went even further Wednesday, disclosing possible accounting problems dating back to 1991 with the formation of Union Excess Reinsurance Co., a supposedly unaffiliated reinsurer based in Barbados.
But Union Excess has reinsured risks “emanating primarily or solely from AIG” since 1991 and instead of being independent it could potentially be considered a “corporate entity” of AIG, according to Wednesday’s statement.
The issue: If Union Excess should have been treated as an AIG unit, then AIG has overstated shareholder equity by $1.1 billion.
Two other reinsurers -- Richmond Insurance Co., based in Bermuda, and Capco Reinsurance Co., based in Barbados -- should also have been characterized as corporate entities when it came to accounting for deals with them, AIG said.