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AIG Accounting May Have
Overstated Worth by $1.7 Billion
By David Plumb and Jesse Westbrook
Bloomberg News Service
Wednesday, March 31, 2005
American International Group Inc., the world's largest insurer, said
it engaged in false accounting practices that may have inflated the
company's net worth by as much as 2 percent, or $1.7 billion, during
the past 14 years.
AIG, which ousted Chief Executive Officer Maurice Greenberg earlier
this month, structured transactions with reinsurers, including
Warren Buffett's Berkshire Hathaway Inc., to manipulate the
company's accounts, the company said in a statement today. AIG
delayed filing its annual report for a second time and said it may
restate earnings or book a cumulative expense in last year's fourth
"The depth and breadth of troubles and apparent lack of accounting
controls at AIG is alarming," said Morgan Stanley analyst William
Wilt, who has an "equal-weight" rating on the New York-based
AIG's statement prompted Standard & Poor's to lower the company's
AAA debt rating to AA+. It's the 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 confront new-CEO Martin Sullivan in
restoring investor confidence.
The company's stock declined $1.18, or 2 percent, to $57.02 at 3:38
p.m. in New York Stock Exchange composite trading. The shares have
fallen 22 percent in the past six weeks as Spitzer and the U.S.
Securities and Exchange Commission expanded their accounting probes.
S&P also dropped AIG's financial strength rating, which measures the
ability to pay claims, one level to AA+.
Reinsurance contracts set up four years ago with Berkshire's General
Re Corp. were "improper" because they involved no risk and shouldn't
have been considered insurance, AIG said. Buffett has been "very
cooperative" with the probe and his company doesn't have the
concerns found at AIG, said 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
AIG also said it inappropriately used offshore reinsurance companies
to take advantage of accounting benefits. Reinsurance deals with
Barbados-based Union Excess Reinsurance Co. may have inflated net
worth by $1.1 billion since 1991, the company said in the statement.
AIG may secretly control Union Excess and other offshore entities,
the company said, citing "previously undisclosed facts."
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 U.S. rules, AIG said.
PricewaterhouseCoopers LLC and its predecessor Coopers & Lybrand
have been AIG's auditor since at least 1993, according to SEC
filings. PricewaterhouseCoopers spokesman Steven Silber said he had
no immediate comment.
Other transactions masked $200 million of insurance underwriting
losses and overstated 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.
The company is still performing an internal review led by law firm
Paul Weiss Rifkind Wharton & Garrison LLP, and plans to file its
annual report by April 30.
AIG today took a step today toward resolving potential conflicts of
interest with Starr International Co., a company owned and run by
AIG executives that pays out millions of dollars each year in
deferred compensation. AIG said it will start treating Starr's
payments as compensation expenses. Starr paid $234.7 million of
executive compensation from 2001 through 2003, according to AIG's
2003 annual report.
The new compensation accounting won't affect the cost of paying
executives, because Starr will contribute an equal amount of funds
to AIG to make the payments, AIG said. Starr is AIG's biggest
shareholder and its main assets are its AIG shares.
Starr also served as a mechanism that may have given AIG control
over Union Excess, AIG said today. Starr had agreements with the
owners of Union Excess that "protected" their investment, AIG said.
AIG had never previously disclosed that Starr had insurance
transactions related to AIG.
AIG installed 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 General Re transaction, which Greenberg
initiated, people familiar with the probe said.
Since the shakeup, the company fired Chief Financial Officer Howard
Smith and two other executives for failing to cooperate with
regulators. Buffett, the 74-year-old billionaire chairman of
Berkshire Hathaway, has agreed to be interviewed by investigators.
Earlier today, the Wall Street Journal reported that 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 percent, to $87,600 in NYSE
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