AIG acknowledges improper accounting

The investigators are looking to a number of reinsurance transactions, which involve insurance purchased 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 purchased 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 transactions with General Re “was improper and, in light of the lack of evidence of risk transfer, these transactions should not have been recorded as insurance.”

One of the transactions was unwound in November 2004, AIG said. For the other, AIG will adjust its financial statements to call the transactions deposits rather than consolidated net premiums.

“The recharacterization will have virtually no impact on AIG’s financial condition as of Dec. 31, 2004, but will reduce the reserve for losses and loss expenses by $250 million and increase other liabilities by $245 million,” the company said.

J. Edward Ketz, an associate professor of accounting at the Smeal Collage at The Pennsylvania State University, said AIG’s disclosures suggested the company was signaling to investigators “that they’re willing to talk and admit any problems they have and make the appropriate adjustments.”

He called it “a breath of fresh air” and contrary to some companies’ inclination “to circle the wagons when they’re under fire and give out very little information.”

Robert Bushman, a professor of forensic accounting at the University of North Carolina’s Kenan-Flagler Business School, said he thought the departure of Greenberg was a catalyst.

“When you have turnover at the top, it’s a good time to come clean,” Bushman said. “The bad falls on the previous guy, and that kind of lets you start over.”

Greenberg was replaced as CEO by Martin J. Sullivan, 50, who had served as vice chairman and co-chief operating officer. When named in mid-March to the post, he became just the third man to hold the post since AIG’s founding in 1919.

AIG’s statement also dealt with other accounting problems:

• It acknowledged that the Richmond Insurance Company Ltd. of Bermuda was not an independent entity but a subsidiary of AIG and said accountants were trying to determine if another company, Union Excess Reinsurance Co. Ltd. of Barbados, was also a “consolidated entity.”
• It said transactions with Capco Reinsurance Co. Ltd. of Barbados “involved an improper structure created to recharacterize underwriting losses as capital losses” and that $200 million would be recategorized.
• It plans to expense deferred compensation granted to certain AIG executives through Starr International Co. Inc., a private holding company that owns 12 percent of AIG’s common stock and whose board consists of current and former AIG managers.

General Re, which Berkshire Hathaway acquired in 1998, has been the object of several recent reinsurance investigations, including one in which a U.S. attorney’s office in Virginia has been probing Reciprocal of America, a former liability insurer of doctors, hospitals and lawyers.

Berkshire Hathaway, which is headquartered in Omaha, Neb., and General Re, which is based in Stamford, Conn., have been cooperating with the reinsurance investigations, the company said.

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