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Life Health > Life Insurance

Effects Of Accounting Woes Could Linger At AIG

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Regulatory investigations and actuarial reviews could continue to cause headaches for American International Group Inc. in coming months.

When AIG, New York, filed its long-delayed, much-revised Form 10-K annual report with the U.S. Securities and Exchange Commission last week, AIG President Martin Sullivan emphasized the fundamental strength of the company. “AIG’s financial position is sound, our insurance cash flow is strong and our global franchise is unmatched,” he said.

Moody’s Investors Service, New York, reacted to the 10-K by confirming the Aa2 rating the firm has assigned to AIG’s long-term senior debt. “Moody’s believes that AIG will continue to distinguish itself as the leading global insurance enterprise, in terms of business breadth, consolidated revenues and earnings, and market capitalization.”

AIG’s financial restatements focused mainly on accounting for property-casualty operations and other non-life operations. The only life-related business affected by major accounting changes was the life settlement business.

But AIG says rating agencies’ decisions to take away its AAA credit ratings already have forced it to post about $1.2 billion in additional collateral with counterparties to municipal guaranteed investment contracts and financial derivatives transactions.

If Moody’s cut AIG’s long-term senior debt ratings by one notch or Standard & Poor’s Ratings Services, New York, cut AIG’s ratings by two notches, counterparties to derivatives transactions and municipal GIC transactions could ask AIG to supply $2.3 billion in additional collateral, AIG says.

“Further,” AIG says, “additional downgrades could result in requirements for substantial additional collateral, which could have a material effect on how AIG manages its liquidity.”

AIG also is ordering an independent actuarial review of its property-casualty loss reserves that could require it to come up with cash to beef up the loss reserves.

Meanwhile, AIG says efforts to address weaknesses in internal financial controls could lead to delays in future SEC filings. AIG now has more than enough cash, but the company “does not expect to be able to access the public capital markets until all of its filings with the SEC are up to date,” the company says.

Because of all the regulatory problems, securing SEC approval of updated registration statements could take several months, AIG says.

As a result of the current restatement, AIG is reporting $9.7 billion in net income for 2004 on $98 billion in revenue, up from $8 billion in net income on $79 billion in 2003.

On Feb. 9, when AIG released unaudited 2004 results and its original, unrevised 2003 results, it said its net income had increased to $11 billion in 2004 on $99 billion in revenue, up from $9.3 billion in net income on $81 billion in revenue in 2003.

AIG’s life and retirement businesses continue to report $7.9 billion in operating income for 2004 on $43 billion in revenue, up from $6.4 billion in operating income on $36 billion in revenue for 2003. The restatements have not affected those figures.

In notes about the life settlement business, AIG says it had been treating the business as an insurance business.

Now, AIG says, it has discovered it must comply with Financial Accounting Standards Board Technical Bulletin 85-4, a 1985 bulletin that advises companies to treat life insurance policy purchases as investments rather than as insurance transactions. Under FASB Technical Bulletin 85-4, the carrying value of the policy is equal to its cash surrender value.

As a result of the change, AIG will record any payments for policies as losses at the time the payments are made. The company will record income on life settlement deals only when life insurers pay policy death benefits, AIG says.

The change in life settlement accounting cut $915 million from AIG’s premium revenue figure for 2004, $129 million from AIG’s 2004 net income and $396 million from shareholders’ equity, AIG says.

Kicker: Old and New

AIG’s Filings



May 31, 10-K


$98 billion

$79 billion

Net Income

$9.7 billion

$8 billion

Feb. 9 Preliminary Results


$99 billion

$81 billion

Net Income

$11 billion

$9.3 billion


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