Corrected results to cut AIG’s net worth by $3.7b

WASHINGTON - American International Group, the world's largest insurer, will correct five years of results for reinsurance and other transactions that inflated net worth by about US$2.7 billion ($3.7 billion), US$1 billion more than an earlier estimate.

AIG delayed its 2004 annual report for the third time in six weeks, saying yesterday that a review of its books might not be finished until May 31.

PricewaterhouseCoopers, its auditor, was expected to sign off once the report was done, the New York-based company said.

The accounting review was triggered by regulatory probes of reinsurance transactions and has since uncovered misleading or improper representations of asset writedowns, hedge-fund proceeds, and underwriting results.

AIG said decisions might have been made to satisfy Wall Street estimates, and in some cases former senior managers ordered changes and circumvented controls.

"We know how difficult these last several months have been for those who put their trust in AIG," said chief Executive Martin Sullivan. "We are taking actions that will enable AIG to reinforce its credibility and the trust and confidence of our stakeholders."

AIG ousted Maurice "Hank" Greenberg as chief executive and its shares have lost more than US$58 billion in market value since probes by New York Attorney-General Eliot Spitzer and the Securities and Exchange Commission became public in February.

Bloomberg reported on April 29 that AIG planned to delay the filing again, citing people familiar with the matter. The stock fell 29 cents to US$50.85 in New York Stock Exchange composite trading.

AIG said it would restate results from 2000 when it filed its 10K with regulators this month.

It said $2 billion of the book value overstatement stemmed from accounting errors and the remaining $700 million would adjust the company's booking of tax accruals, acquisition costs and other items.

The company, which had a net worth, or book value, of US$82.9 billion at year end, separately said it would correct how it reflected the fair-market value of derivatives, an adjustment that would simultaneously increase book value by US$2.4 billion.

The change in derivatives accounting would add "significantly" to earnings swings, the company said, without specifying the net book value impact of all the changes.

AIG said PricewaterhouseCoopers would issue an "adverse opinion" on AIG's internal controls after the former managers were found to have skirted systems.

AIG spokesman Chris Winans wouldn't identify the former managers and declined to say how much the decrease in book value might affect the company's earnings once the 2004 10K filing was made.

"The company will have guidelines that will no longer permit some of the steps that were used to doctor the reported numbers," said Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which manages US$2 billion including AIG shares.

Some of the improper accounting inflated AIG's book value and net income, while other transactions pumped up the company's profit from operations, the measure of income most used by Wall Street analysts.

AIG overstated its income from investments, while underreporting insurance claims, the company said.

AIG used at least three types of transactions to inflate its net investment income, which contributes to earnings examined by analysts.

The company credited itself with hedge fund proceeds that were immediately reinvested, used complicated securities transactions to generate income from bonds, and misrepresented investments in synthetic fuel production facilities.

- BLOOMBERG