NEW YORK – American International Group Inc. (AIG) on Wednesday acknowledged accounting errors that could stretch back 14 years, including its treatment of a deal with Berkshire Hathaway that is at the center of federal and state investigations.
AIG's sweeping disclosures — which included the possibility that it may be forced to reduce the value of the company by $1.7 billion, or 2 percent — were part of an effort to regain investor confidence. They came just days after Chairman Maurice "Hank" Greenberg (search) said he would retire following almost 40 years at the helm of the global insurance powerhouse.
AIG, which has lost more than $40 billion in stock market value since the investigations picked up steam in mid-February, saw its shares sink 2 percent to $57.05 on the New York Stock Exchange.
"It doesn't clear the decks," Michael Chren, senior portfolio manager at National City Investment Management Co. in Cleveland, said of the disclosure. "I don't think we have bottomed out on the (bad) news, but I do think we've bottomed out on the stock price."
AIG's response follows a meeting earlier this week between its attorneys and representatives from the U.S. Department of Justice, the U.S. Securities and Exchange Commission and New York Attorney General Eliot Spitzer's (search) office in which the results of an internal company review were discussed.
The company now plans to delay filing its 2004 annual financial report — its second delay — until late April while it continues the review of various transactions.
Among other transactions, authorities have been investigating a 2000-2001 reinsurance deal AIG struck with General Re Corp. — a unit of Warren Buffett's (search) Berkshire Hathaway Inc. — that they believe AIG treated improperly in its accounting.
AIG admitted as much on Wednesday, saying the transaction should have been classified as a deposit, not as insurance. The company said the revised accounting treatment should have little impact on its financial condition, but would reduce loss reserves and expenses by $250 million and increase other liabilities by $245 million.
AIG, one of the world's largest insurers, also expects to take $670 million of after-tax charges related to its general insurance operations, while possibly reducing shareholder value by the $1.66 billion from the $82.87 billion it reported as of Dec. 31, 2004.
Whether the adjustments will result in a restatement of more than just its fourth-quarter 2004 results remains to be determined, AIG said.
In addressing its accounting problems, AIG is attempting to restore credibility with investors who have watched the examination of its deal with General Re spread into investigations of dozens of questionable transactions.
AIG recently fired three executives for failing to cooperate with authorities in their probes; has tightened security at its office in Hamilton, Bermuda; and hired two outside law firms to help with the investigation. The company went even further on Wednesday, disclosing possible accounting problems dating back to 1991 with the formation of Union Excess Reinsurance Company, Ltd., a supposedly unaffiliated reinsurer based in Barbados.
But Union Excess has reinsured risks "emanating primarily or solely from AIG" since 1991 and instead of being independent it could potentially be considered a "corporate entity" of AIG, according to Wednesday's statement.
The issue: If Union Excess should have been treated as a unit of AIG, then AIG has overstated its shareholder equity by $1.1 billion.
Two other reinsurers — Richmond Insurance Co, Ltd., based in Bermuda, and Capco Reinsurance Co., based in Barbados — should also have been characterized as a corporate entities when it came to accounting for deals with them, AIG said.
"Certain but not all of the original characterizations resulted from transactions which appear to have been structured for the sole or primary purpose of accomplishing a desired accounting result," AIG said, referring to its review of the deals.
The company, which said the review is continuing, also disclosed it had looked into a series of transactions involving call options it sold on bonds. What's more, AIG said it could possibly take another $300 million in charges due to "the recoverability of certain balances, consisting mainly of receivables."
Given its review and a management shuffle that included Martin Sullivan replacing Greenberg as CEO, AIG now expects to file its 10-K by April 30 — originally due March 16.
AIG will also ask the SEC for permission to continue to file registration statements that allow it to raise money by offering securities to the public.