Accounting audit hurts AIG shares
The insurer was faulted over $4.88 billion in '07 losses - quadruple what it had disclosed.
Shares of American International Group Inc., the world's largest insurer by assets, fell 11.7 percent yesterday after its auditor found that faulty accounting may have understated losses on some holdings.
Credit-default swaps issued by AIG lost $4.88 billion in value in October and November, four times more than previously disclosed, AIG said yesterday in a filing with the Securities and Exchange Commission. AIG's auditor, PricewaterhouseCoopers L.L.P., found "material weakness" in the insurer's accounting for the contracts, according to the filing. AIG said it had no year-end price estimate for the obligations.
AIG chief executive officer Martin Sullivan has presided over a 30 percent decline in the company's shares since replacing Maurice Greenberg in March 2005. Investors have been concerned that losses tied to the U.S. housing slump might reduce earnings and the value of AIG's holdings. Sullivan assured investors Dec. 5 that write-downs from the U.S. housing market were "manageable."
"It raises the question about whether management is in control of what's going on with their derivatives," Edward Ketz, a Pennsylvania State University accounting professor, said in an interview. "The uncertainty as to whether additional losses are coming is as unsettling as anything."
AIG shares fell $5.94 to close at $44.74 yesterday in New York Stock Exchange trading.
The company "is still accumulating market data in order to update its valuation" of the portfolio, the insurer said in yesterday's filing. AIG said it believed it had "procedures to appropriately determine the fair value" of the holdings for the year-end financial statements.
Fitch Ratings may lower the insurer's AA credit rating because AIG's "weakness in internal controls," coupled with "current market conditions, contributes to uncertainty regarding the valuation" of the derivative portfolio, Fitch said in a statement yesterday.
AIG's third-quarter net income declined 27 percent from a year earlier to $3.09 billion on losses linked to the U.S. housing slump, including a $352 million reduction in value of the derivatives. AIG, which has units that originate, insure and invest in subprime mortgages or securities, is expected to announce fourth-quarter results this month.
AIG's residential mortgage-backed securities declined by $2.6 billion in October and November, the company said Dec. 7. The insurer has said it doesn't expect to sell mortgage-related assets at a loss while markets remain weak.
"It's likely that AIG wrote insurance contracts against securities it thought" had minimal risk, said Jim Grant, editor of Grant's Interest Rate Observer, in an interview with Bloomberg Television. "In reality, these securities were plenty risky."
Credit-default swaps, which rise when perceptions of credit quality worsen, protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.