Print

Mail

wiki links

US insurer finds more evidence of improprieties

The American International Group (AIG), the embattled insurance giant, said Sunday night that an in-depth examination of its operations had turned up additional accounting improprieties going back to 2000 that would reduce its net worth by US$2.7 billion, or US$1 billion more than it had previously estimated.

The company also said that the improper transactions or accounting entries, which appeared to have been designed to achieve results "that would enhance measures important to the financial community," in certain cases involved misrepresentations to AIG's regulators and independent auditors as well as some of its own management.

In addition, AIG said that its internal controls were deficient and that, as a result, its auditor, PricewaterhouseCoopers, would issue an adverse opinion on its internal controls over financial reporting.

AIG clearly hopes that its itemized review will convince investors that it has identified all the problems in its operations and corrected them.

AIG has been under a cloud since mid-February, when it disclosed that Eliot Spitzer, the New York attorney general, had subpoenaed documents relating to its use of a complex type of insurance that can artificially burnish insurers' financial results.

In March, Maurice Greenberg, the company's former chief executive, resigned under pressure from its board shortly before he was scheduled to testify under oath to regulators.

Half a dozen problem areas turned up as a result of AIG's review, the company said. One major area involved insufficient risk transfer in certain insurance transactions.

For a company to realize the accounting benefits of insurance, risk must be transferred between an insurer and reinsurer, a company with which it is sharing its potential for losses.

But AIG acknowledged that this standard was not met in some transactions, and that the premiums that were previously recorded in the deals will now be accounted for as loans. This change will reduce AIG's net worth by US$1.2 billion.

AIG also said that it had failed to value some assets properly. For instance, its allowance for doubtful accounts in its domestic brokerage group was incorrect; correcting it will result in a US$300 million drop in net worth.

The company's investment income was also affected by the improprieties, which included converting capital gains in some of its assets into income. AIG's investments in synthetic fuel producers, for instance, resulted in income tax credits.

But rather than use these credits to reduce its income tax expense, AIG improperly recorded them as investment income or revenues.

In transactions with an offshore subsidiary, AIG said it improperly characterized underwriting losses from insurance policies as capital losses. Capital losses for the years 2000 through 2003 will be shifted into underwriting losses.

The company also said that its accounting for derivatives was improper and that adjustments in those entries would result in an increase of about US$2.4 billion in its net worth.
This story has been viewed 1627 times.