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Insurer admits errors in reports

AIG says it will delay its annual report and discloses accounting problems that would reduce its capital.

NEW YORK - Amid widening government probes into its financial practices, insurance giant American International Group Inc. acknowledged Wednesday it had improperly booked transactions with a unit of Berkshire Hathaway Inc. that artificially boosted its reserves.

AIG also said that it had not completed an inhouse review of its accounting and would have to delay filing its annual report until April 30. AIG earlier had said it expected to file the report on March 31.

The disclosures came as the Securities and Exchange Commission and New York Attorney General Eliot Spitzer were preparing to question AIG's former chief executive officer, Maurice "Hank" Greenberg, and Berkshire Hathaway's chairman and CEO, billionaire investor Warren Buffett, next month about the controversial reinsurance deal. Buffett is to speak with investigators on April 11 and Greenberg the next day.

Berkshire Hathaway has said Buffett was not aware of how the transactions were structured "or on any improper use or purpose" of the transactions.

Greenberg, who is 79 and led AIG for nearly 40 years, was forced out as CEO by the board this month and has said he will resign shortly as chairman of the company.

In a detailed four-page statement, AIG also disclosed a number of other accounting problems, including the way it booked deals with Caribbean insurance companies.

AIG said, however, "the maximum aggregate effect" of known errors and changes in accounting would reduce the company's $82.87-billion in capital by about $1.7-billion, or 2 percent.

Howard Mills, acting superintendent of New York state's insurance department, which is participating in the investigation, called AIG's statement "pretty significant" and added: "These are very serious issues, and their own admission that they misled this department, we take very seriously."

Mills said that AIG needs to continue "to get their house in order, and we believe they will do so."

Analysts at Morgan Stanley said that "some investors may take comfort that details are beginning to emerge" on AIG's side. They added, however, that "the depth and breadth of troubles and apparent lack of accounting controls at AIG is alarming, in our view."

The investigators are looking to a number of reinsurance transactions, which involve insurance bought by insurance companies like AIG. Reinsurance traditionally has been used to spread out risk among insurers but, in some cases, it has been used for the questionable purpose of polishing a company's financial statements. If there is no risk transfer, the deal shouldn't be booked as insurance.

In the case under review, AIG bought reinsurance from Berkshire Hathaway's General Re Corp. in the fourth quarter of 2000 and first quarter of 2001. Investigators have said that AIG used the deals to pump up its reserves when markets were uneasy about the company's outstanding liabilities.

AIG said Wednesday that its accounting for the General Re transactions "was improper and, in light of the lack of evidence of risk transfer, these transactions should not have been recorded as insurance."

[Last modified March 31, 2005, 01:27:20]