American International Group Inc. (AIG), the insurer under fire from regulators for improper accounting, on Tuesday said it had overstated net income for the past five years by $3.9 billion, or 10 percent, as it struggles to clean up past errors.

Following an extensive internal review, the world's largest insurer by market value in a regulatory filing also said it cut its net worth through the end of 2004 by $2.26 billion, or 2.7 percent, less than it previously warned.

The $3.9 billion reduction in net income for the five years through 2004 included an increase in AIG's asbestos reserve of $850 million for the fourth-quarter of 2004, AIG said in its 10-K annual report filed with the Securities and Exchange Commission (search).

The thrice-delayed report was filed with the SEC one week after New York authorities filed a civil lawsuit against AIG, its former chief executive, Maurice "Hank" Greenberg (search), and its former financial chief, saying they committed fraud and manipulated the books.

"There is both good and bad news," said Michael Chren, senior portfolio manager of National City Investment Management Co. He said investors were pleased to finally see the filing and called the smaller-than-expected reduction in net worth a positive.

"But the big negative from our perspective is the asbestos reserve review. That will leave a cloud over the shares," Chren said.

AIG shares fell 52 cents, or 0.9 percent, to $55.99 in early trading on the New York Stock Exchange. The stock had lost as much as $57 billion of market value in recent months.

AIG in early May had said that a planned restatement of more than four years of financial reports would slash $2.7 billion from its net worth, a reduction of 3.3 percent. The insurer in March had originally estimated its net worth would be cut by $1.7 billion.

The New York state lawsuit said Greenberg and former CFO Howard Smith, who were ousted when the investigation first picked up steam, took part in numerous fraudulent business deals that exaggerated the strength of the company's core underwriting business and propped up its stock price.

The insurer's press statement and securities filing on Tuesday followed several releases by the company laying out numerous accounting errors going back more than a decade.

"We are embarking on a new era for AIG that will be marked by changes in the way we operate -- including greater responsiveness and transparency...," said AIG President and Chief Executive Officer Martin Sullivan in a statement.

In its latest filing, which ran to over 400 printed pages, AIG said its management identified material weaknesses in its internal control over financial reporting.

It now expects to file its 10-Q report for the first quarter of 2005 by the end of June.

Until AIG is up to date with securities regulators, the insurer said it will not be able to sell securities to the public.

The company said it will also commission an independent actuarial review of loss reserves of its main property and casualty insurance operations.

Though a civil complaint has been filed, authorities including New York Attorney General Eliot Spitzer and New York's Insurance Department have not stopped investigating the company and Sullivan said AIG is cooperating fully with regulators.

One notable aspect of the company that authorities studied is its relationship to Starr International Co., which owns 12 percent of AIG's outstanding stock and serves as a deferred compensation plan for AIG executives.

AIG said it is unwinding this relationship.