AIG Misstated Its Worth By Up to $1.7b

American International Group, the world’s largest insurer, said it engaged in false accounting that may have inflated the company’s net worth by as much as 2%, or $1.7 billion, during the past 14 years.AIG, which ousted its chief executive, Maurice Greenberg, earlier this month, said in a statement yesterday that transactions with reinsurers, including Warren Buffett’s Berkshire Hathaway, were structured to manipulate the company’s accounts. AIG delayed filing its annual report for a second time and said correcting its finances may result in an earnings restatement or a cumulative expense booked in last year’s fourth quarter.“The depth and breadth of troubles and apparent lack of accounting controls at AIG is alarming,” said a Morgan Stanley analyst, William Wilt, who has an “equal-weight” rating on the New York-based company.AIG’s statement represents its most extensive disclosure of accounting irregularities since New York Attorney General Eliot Spitzer began probing the insurance industry last year, and underscores the challenges that confronts new-CEO Martin Sullivan in restoring investor confidence. Shares of AIG fell 22% in the past six weeks as Mr. Spitzer and the Securities and Exchange Commission expanded their accounting probes.Yesterday, the company’s stock declined 1.79% to $57.16 in New York Stock Exchange composite trading.Reinsurance contracts set up four years ago with Berkshire’s General Re Corporation were “improper” because they involved no risk and shouldn’t have been considered insurance, AIG said. Mr. Buffett has been “very cooperative” with the probe and his company doesn’t have the concerns found at AIG, said Mr. Spitzer’s spokesman Darren Dopp.Reinsurance contracts must contain some transfer of risk to qualify for beneficial insurance accounting. In transactions such as the General Re policies, AIG said it accounted for loans and deposits as insurance premiums. Investigators have evidence that suggests AIG sought to make its reserves for claims appear bigger with the Berkshire transactions, people familiar with the probe said Tuesday.AIG also said it inappropriately used offshore reinsurance companies to take advantage of accounting benefits. Reinsurance deals with Barbados based Union Excess Reinsurance Company may have inflated net worth by $1.1 billion since 1991, the company said in the statement.Previously undisclosed facts show that AIG may secretly control Union Excess and other offshore entities, the company said. Consolidating the affiliated companies’ results with AIG would result in AIG losing the offshore accounting treatment. Insurance regulations in Barbados allowed Union Excess to record fewer liabilities from claims than American rules, AIG said.PricewaterhouseCoopers LLC and its predecessor Coopers & Lybrand have been AIG’s auditor since at least 1993, according to SEC filings. A PricewaterhouseCoopers spokesman, Steven Silber, said he had no immediate comment.Other problematic transactions masked $200 million of insurance underwriting losses and inflated at least $300 million of investment income, such as interest and dividends, AIG said.Several transactions “appear to have been structured for the sole or primary purpose of accomplishing a desired accounting effect,” AIG said. Correcting the mistakes will result in a reduction of the company’s net worth, or shareholders’ equity, which was earlier reported as $82.9 billion.“Because AIG’s review isn’t yet complete, AIG isn’t yet able to determine whether the adjustments identified to date as a result of the review will require restatement of prior period results,” the company said in the statement. The company now plans to file its annual report by April 30.The errors may prompt Standard & Poor’s to cut AIG’s AAA credit rating, the highest possible, by at least one level, said Barclays Capital analyst Seth Glasser.“It’s the first time that the company has attempted to publicly quantify the potential impact of the ongoing investigation,” Mr. Glasser said in a research note. “The numbers involved look relatively moderate.”S&P said March 15 that it may lower AIG’s debt and financial strength ratings, measures of the insurer’s creditworthiness and ability to pay claims, pending the accounting review.A ratings downgrade would probably slow AIG’s earnings growth slightly, said an analyst at Lehman Brothers Holdings, Eric Berg, in a March 17 report. Mr. Berg forecast that lost reinsurance business and higher operating costs would lower annual earnings growth to 9.4% for the next five years, rather than 11.1%.AIG installed Mr. Sullivan, 50, the company’s co-chief operating officer, to replace Greenberg as CEO on March 14 after the SEC and Spitzer zeroed in on the insurance transaction with General Re. The probe has since expanded to offshore reinsurance.Since the shake-up, the company fired its chief financial officer, Howard Smith, and two other executives for failing to cooperate with regulators. Mr. Buffett, the 74-year-old billionaire chairman of Berkshire Hathaway, has agreed to be interviewed by investigators.Yesterday, the Wall Street Journal reported that Mr. Buffett had a “brief discussion” about the AIG contracts during a phone conversation in late 2000 with General Re’s then-CEO Ronald Ferguson. The phone call happened before the contracts were completed, the Journal said, citing an unidentified person familiar with the matter. Berkshire said yesterday in a statement that Buffett was unaware of the contracts’ ultimate structure or intent.Shares of Berkshire rose $600, or 0.7%, to $87,600 in NYSE trading.

AIG Misstated Its Worth By Up to $1.7b

AIG Misstated Its Worth By Up to $1.7b

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