AIG's Art Of The Deal
In addition to finding "improper" accounting in its finite reinsurance deal with Berkshire Hathaway's General Re, American International Group also discovered several other problems that might require adjustments in its books.
AIG said these irregularities, combined with the Gen Re deal, could knock off up to 2 percent from AIG's GAAP shareholders equity of $82.87 billion as of Dec. 31, 2004, representing a book-value loss of $1.657 billion. Among the deals being reviewed:
Union Excess: AIG, which bought reinsurance from this Barbados-domiciled reinsurer, may in fact be effectively controlling Union Excess because a big portion of ownership interests of Union Excess shareholders are protected under financial arrangements with Starr International Company, an entity that owns some 12 percent of AIG stock.
Additionally, since its inception in 1991, most of Union Excess reinsurance business came from AIG, which could invite undue influence from the insurer. The dealings with Union Excess allowed AIG to discount reserves, with a net benefit to shareholders equity.
AIG is considering whether Union Excess should be accounted for as a consolidated entity in AIG's financial statements, and whether the financial statement benefits from cessions to Union Excess should be adjusted.
AIG estimated that if Union Excess is treated as a consolidated entity, it could mean a reduction of up to $1.1 billion in AIG shareholders' equity.
Richmond: AIG, which bought reinsurance from this Bermuda-based reinsurer, holds a 19.9 percent ownership interest in the company but said it didn't treat Richmond as a consolidated entity in AIG's financial statements because its ownership only represents a minority stake.
However, AIG said it has recently discovered "significant previously undisclosed evidence of AIG control." (A call from National Underwriter to the Richmond office was answered with the greeting "AIG," which perhaps illustrates AIG's close involvement with the reinsurer.)
AIG said it will now treat Richmond as a consolidated entity, which will have a small impact on equity.
Capco: AIG, which bought reinsurance from this Barbados-domiciled reinsurer, said the transaction involved an "improper structure created to re-characterize underwriting losses as capital losses."
AIG said some $200 million of capital losses may now be re-classified as underwriting losses. Analysts said such structures were designed to burnish companies operating results.
"Transactions such as this seem emblematic of a culture that focused too much on operating earnings," said a Morgan Stanley analyst, William Wilt.
Covered calls, receivables and deferred acquisition costs: AIG used these items to characterize certain income as "operating income" even when they were not, to burnish operating earnings.
Overstatement of net investment income: AIG may reclassify up to 4 percent of property-casualty net investment income. The net effect would be to shave around 3 cents off AIG's reported per-share operating income from 2000 to 2004, according to a Morgan Stanley calculation.
Reproduced from National Underwriter Edition, April 1, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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