Capital Markets

Did AIG Cut Reserves for Earnings’ Sake?

''In D&O, where you have tens of millions of dollars in reserves, you could pick up $100 to $200 million in a heartbeat,'' a former AIG employee re...
Stephen TaubMay 9, 2005

American International Group Inc. frequently tinkered with its reserves so the insurer could meet earnings targets, a former AIG employee told The New York Times. The reserves that were most frequently altered were related to directors’ and officers’ liability insurance, the former employee reportedly added.

AIG spokesman Chris Winans declined comment to the Times.

Citing the former employee, the newspaper added that upper-level managers directed AIG workers to cut reserves on the D&O policies. “In D&O, where you have tens of millions of dollars in reserves, you could pick up $100 to $200 million in a heartbeat,” the former employee told the paper. “The end of quarter, end of year — that’s when it would happen.”

“This was done regularly and it was very distressing,” the ex-employee reportedly added.

Earlier this month, reported the Times, AIG made a vague reference to these reserve adjustments when it announced it would delay the release of its earnings and would cut its net worth by $2.7 billion.

“In some cases, expense deferrals were increased or reserves decreased, both having the effect of increasing reported earnings,” AIG stated at the time. Later in the same paragraph, the company added that it had determined that “certain entries appear to have been made at the direction of certain former members of senior management without appropriate support.”

Citing people briefed on the internal inquiry, the Times reported that the executives included former chief executive Maurice R. Greenberg and former chief financial officer Howard I. Smith. Lawyers for both individuals have asserted that current senior management, directors, and auditors found the accounting was proper, the paper noted.