KT, I think you keep the score of remaining AAA companies.
AIG Accounting May Have Overstated Worth by $1.7 Bln (Update8) Listen
March 30 (Bloomberg) -- American International Group Inc., the world's largest insurer, said it engaged in improper accounting 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 quarter.
``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 company.
AIG's statement prompted Standard & Poor's to lower the company's AAA senior 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 shares declined $1.04, or 1.8 percent, to $57.16 in New York Stock Exchange composite trading and have fallen 22 percent in the past six weeks as Spitzer and the U.S. Securities and Exchange Commission expanded their accounting probes.
General Re Transactions
S&P said it may lower AIG's rating further when the company files its annual report. The company had $64 billion of long-term borrowings as of Sept. 30, according to data compiled by Bloomberg. S&P also dropped by one level AIG's financial strength rating, which measures the insurer's ability to pay claims. AIG's 4.25 percent notes maturing in 2013 were little traded immediately after the downgrade.
Reinsurance policies 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 yesterday.
`Undisclosed Facts'
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.
Masking Losses
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.
Biggest Shareholder
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.
The S&P downgrade leaves only seven companies with the highest credit rating from both S&P and Moody's Investors Service: General Electric Co., Automatic Data Processing Inc., Exxon Mobil Corp., Johnson & Johnson, Pfizer Inc., United Parcel Service Inc. and Berkshire Hathaway.
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.
Buffett
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 were little changed at $87,000.10 in NYSE trading. |
