Risk Management

AIG: Just Subtract $1.7 Billion

Insurance giant concedes accounting practices may have substantially bloated its net worth.
Stephen TaubMarch 31, 2005

American International Group, Inc., whose accounting practices are being scrutinized by regulators, said it may reduce its shareholders equity by nearly $1.7 billion. The reason? Errors and changes in AIG’s accounting estimates and classifications.

The embattled insurance giant also said that documentation of a transaction with General Re “was improper” and “should not have been recorded as insurance.”

As a result, AIG said it will adjust its financial statements to recharacterize the transactions as deposits rather than as consolidated net premiums. Company management asserted that the rejiggering will have virtually no impact on AIG’s financial condition as of year-end 2004. The accounting change will reduce the reserve for losses and loss expenses, however, by $250 million. It will also increase other liabilities by $245 million.

The company’s management also conceded it incorrectly accounted for reinsurance arrangements with Union Excess over the past 14 years. That era alone will reduce shareholders equity by about $1.1 billion.

The press release announcing the changes offered the most detailed description yet of the company’s under-fire accounting practices. In the release, the insurer admitted that certain transactions “appear to have been structured for the sole or primary purpose of accomplishing a desired accounting result.”

As a result of these and other findings, AIG said it would not meet its March 31 due date to file its 2004 annual report (which was an extension of an earlier deadline). The insurer now expects to file its 10-K by April 30.

AIG also said it is reviewing its prior estimates relating to deferred acquisition costs and certain other accruals and allowances. These revisions could result in an aggregate after tax charge of approximately $370 million, according to company management.

“The depth and breadth of troubles and apparent lack of accounting controls at AIG is alarming,” Morgan Stanley analyst William Wilt told Bloomberg.

The latest stunner from AIG comes just one day after the company reported that Chairman Maurice “Hank” Greenberg will be resigning from the company’s board this week. Greenberg, 79, transformed AIG from a small insurance company into a global powerhouse with revenues close to $100 billion. He was forced out as CEO two weeks earlier, ending a 37-year career at the company.

Currently, the Securities and Exchange Commission and New York State Attorney General Eliot Spitzer are looking into financial deals AIG structured for customers. Those deals include transactions related to finite insurance products — a nontraditional insurance offering. Some observers have suggested that Greenberg’s ouster might help pave the way for AIG to reach a settlement with Spitzer’s office.