Canadian Underwriter

AIG admits Gen Re transaction improperly accounted for

March 30, 2005   by Canadian Underwriter

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AIG admitted Wednesday that finite reinsurance transactions dating back to 2000-2001 with Berkshire Hathaway’s Gen Re was improperly documented, and at the same time said it would be even later in filing its 10-K annual financial reports.
AIG says it will not meet the March 31, 2005 extended due date for the 10-K filing as its completes an extensive review relating to investigations into non-traditional insurance products and assumed reinsurance transactions.
“Based on its review to date, AIG has concluded that the Gen Re transaction documentation was improper and, in light of the lack of evidence of risk transfer, these transactions should not have been recorded as insurance,” and AIG statement notes. AIG says its financial statements will record the transactions as deposits. While the change will “have virtually no impact on AIG’s financial condition as of December 31, 2004”, it will reduce reserves by US$250 million and increase other liabilities by US$245 million.
But the Gen Re transaction is not the only instance of improper accounting, the AIG statement goes on to say, with other transactions appearing “to have been structured for the sole or primary purpose of accomplishing a desired accounting result”. Other reinsurance transactions reviewed include those with Barbados-domiciled Union Excess and Capco Reinsurance Co., as well as Bermuda-based Richmond Insurance Co., certain “covered call” transactions; and certain receivables in AIG’s domestic general insurance operations.
The company may also adjust its accounting of deferred acquisition costs, certain items reported as net investment income and deferred compensation granted to certain AIG employees by Starr International Co. (SICO).
AIG says that while its investigation is ongoing so the ultimate impact on financial results for prior periods or unaudited fourth-quarter 2004 results is unknown, it expects the impact to be about a 2% decrease on previously reported shareholders’ equity of US$82.87 billion.
AIG says it will seek relief from the Securities Exchange Commission (SEC) to file its 10-K on or before April 30, but adds “there can be no assurance that relief will be granted”.