New audit says AIG worth $1 billion less
Insurer delays again filing of '04 annual report, but share price increases
Shareholders, apparently relieved that the New York insurer is dealing with problems that have drawn regulatory scrutiny, bid the company's shares up. AIG shares rose $2.59, or 5 percent, to close at $53.44 yesterday on the New York Stock Exchange. That's well above its 52-week low of $49.91.
Moody's Investors Service lowered AIG's long-term senior debt ratings to AA2 from AA1 and kept it on review for possible further downgrade. Fitch Ratings agency also downgraded AIG's rating, to AA from AA-Plus, and kept the company on its credit watch negative list.
Fitch analyst Julie A. Burke said the downgrade was a response to "the additional delay as well as the slightly higher number with regard to accounting restatements."
In a statement late Sunday, the company said it would restate its results for the years 2000 to 2003 and delay filing its 2004 annual report until "no later than May 31." The company had twice earlier delayed filing its Form 10-K, or annual report, with the Securities and Exchange Commission.
AIG said the review by a team of independent auditors as well as its outside auditor, PricewaterhouseCoopers LLP, was "nearing completion."
AIG said it expects PricewaterhouseCoopers to give it "unqualified audit opinions" on its revised, consolidated financial statements. But it said that the auditor would likely issue an "adverse opinion with respect to AIG's internal control over financial reporting."
The company admitted in its statement that some of the accounting problems were the result of mismanagement.
"As a result of its internal review, AIG management has identified certain control deficiencies, including the ability of certain former members of senior management to circumvent internal controls over financial reporting in certain instances," the statement said. It also acknowledged "ineffective controls" for accounting for certain transactions.
Although the reduction in shareholder value of $2.7 billion is among the highest ever recorded by a company, it represents just 3.3 percent of the insurance giant's $82.87 billion in shareholder equity as of Dec. 31.
And the reduction will be largely offset by a change in AIG's accounting for hedging activities related to interest rates and foreign currencies.
AIG said that it would bring accounting for its hedging activities in line with accepted standards, resulting in a $2.4 billion increase in shareholders' equity, leaving the company with a net $300 million reduction in shareholder equity.
John A. Hall, an analyst with the Prudential Equity Group, said in a research note yesterday that he believes the AIG statement "removes some of the uncertainty surrounding the status and strength of the company's balance sheet."
The latest statement expands on a previous report issued March 30, in which AIG delayed its annual report and acknowledged a series of accounting problems, including an admission it had improperly booked transactions with a unit of Berkshire Hathaway Inc. that artificially boosted its reserves.
That deal, with Berkshire Hathaway's General Re Corp., is at the center of an investigation led by Attorney General Eliot Spitzer and the SEC into specialized reinsurance contracts, also known as finite risk products.
Reinsurance traditionally has been used to spread 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.
AIG earlier said that its purchase of reinsurance from General Re in the fourth quarter of 2000 and the first quarter of 2001 was improperly booked as insurance.
The broadening investigation led AIG to oust longtime Chief Executive Officer Maurice R. "Hank" Greenberg earlier this year. Greenberg, who will be 80 this month, was called to testify before investigators from Spitzer's office as well as the SEC and the New York state Insurance Department last month. He declined to answer questions, based on his right against self-incrimination, saying he had not been given documents he had requested or sufficient time to prepare.
Martin J. Sullivan, named AIG's president and CEO after Greenberg's ouster, said in the Sunday statement that the company is "working diligently" to complete a new filing that will reflect "accurate financial statements, rigorous accounting, greater transparency and thorough disclosure."