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AIG Says Corrections to Cut Worth By $2.7 Billion (Update2)

AIG Says Corrections to Cut Worth By $2.7 Billion

May 1 (Bloomberg) -- American International Group Inc., the world's largest insurer, prolonged a review of improper accounting and said corrections will lower its net worth by about $2.7 billion, $1 billion more than an earlier estimate.

The company will restate its results from 2000 and delay filing its 2004 annual 10-K report with regulators for the third time in six weeks, New York-based AIG said today in a statement.

The probe began with an examination of a type of reinsurance that can be misused to understate losses and AIG today said it also improperly accounted for items including asset writedowns and hedge fund transactions. The delay may add concern that another layer of abuses could be discovered as New York Attorney General Eliot Spitzer and the Securities and Exchange Commission investigate.

``They need to file the K,'' said Jay Gelb, an analyst at Lehman Brothers Holdings Inc. who has an ``overweight'' rating on AIG's stock, before the announcement was made. ``Then they need to settle with the New York attorney general.''

The $2.7 billion overstatement represents about 3.3 percent of the company's $82.9 billion in net worth, or book value, as of yearend. AIG said incorrect accounting on derivatives will separately increase book value by an estimated $2.4 billion and significantly increase quarter-to-quarter earnings volatility.

AIG said some former members of senior management circumvented rules and its auditor, PricewaterhouseCoopers, will issue an adverse opinion on AIG's internal control over financial reporting. The company does expect the auditor to sign off on its financial statements and aims to file the 10K by May 31.

Offshore Reinsurers

The company ousted Maurice ``Hank'' Greenberg as chief executive and has lost more than $58 billion in market value since the probes began in February. Bloomberg reported April 29 that AIG planned to delay the filing again, citing people familiar with the matter. The stock fell 29 cents to $50.85 in New York Stock Exchange composite trading.

``We are disappointed that we have not yet been able to file our Form 10-K,'' Chief Executive Martin Sullivan said in the statement. ``We are working diligently to complete the filing, at the same time assuring that we have accurate financial statements, rigorous accounting, greater transparency and thorough disclosure.''

AIG, which should have filed its report by March 15, first disclosed accounting improprieties March 30, saying contracts with offshore reinsurers including Union Excess Reinsurance Co. and Capco Reinsurance Co. understated its losses from claims.

AIG also admitted to improperly classifying a transaction with Warren Buffett's Berkshire Hathaway Inc. as an insurance deal. In fact, it should have been deemed a deposit since there wasn't enough risk transferred, the company said.

`Still Stuck'

Spitzer and the SEC are investigating instances when a type of reinsurance known as finite really amounts to loans, allowing companies to mask losses even though little or no risk is transferred.

MBIA Inc., the world's biggest bond insurer, said it would lower profit from the past seven years by $54 million to correct accounting on such transactions and Berkshire is among at least eight other companies that have received subpoenas.

AIG was stripped of its AAA credit rating in March and has fired or suspended at least five executives, including former Chief Financial Officer Howard Smith, in the probe. Greenberg, 79, invoked his Fifth Amendment right against self-incrimination during a deposition on April 12.

``It's clearly more positive that they say something, but you are still stuck with uncertainty,'' said Stuart Quint, an analyst who helps manage $74 billion at Gartmore Global Investments in West Conshohocken, Pennsylvania, including more than 780,000 AIG shares as of December. ``The question gets answered with a full 10K disclosure.''


To contact the reporter on this story:
Jesse Westbrook in Washington at [e-mail]


LINK: http://www.bloomberg.com/apps/news?pid=10000103&refer=us&sid=ay7dw6GjAkC0