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AIG Comes Clean on Gen Re

Updated from 11:02 a.m. EST

American International Group (AIG) conceded Wednesday that a five-year-old contract with Warren Buffett's Berkshire Hathaway (BRKA) did not encompass enough risk-transfer to be considered an insurance transaction, and will be reclassified as a loan as part of a broad financial restatement.

Formal recognition of that accounting mistake and several others, including a concession that AIG had effective control over two offshore insurance vehicles with which it did ostensibly arm's-length transactions, was contained in a press release in which the insurance company said it would delay filing its 10-K with the SEC.

AIG, whose business practices are being probed by the SEC, the New York attorney general, the Justice Department and the New York insurance commissioner, said it remained unable to codify the full effect of the restatement. It said, however, that preliminary estimates suggest its previously reported shareholder equity of $82.87 billion as of Dec. 31 will fall by about 2%, or $1.66 billion.

AIG hopes to file its 10-K by April 30. The stock, which has given up about one-third of its value this year, was down $1.29, or 2.2%, to $56.91.

The news cost AIG its coveted triple-A credit rating at Standard & Poor's. The agency cut AIG's long-term counterparty and senior debt rating to double-A-plus Wednesday afternoon.

Of most significance is the admission regarding General Re, which Berkshire acquired in 1998. Investigators are currently preparing to interview Buffett, one of the most admired businessmen in the world, over what he knew about the 2000 deal, which had the effect of bolstering AIG's reserves by several hundred million dollars.

"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," AIG said Wednesday. The company will adjust its financial statements to recharacterize the deals as deposits rather than as consolidated net premiums, reducing the reserve for losses and loss expenses by $250 million and increasing other liabilities by $245 million.

The General Re transactions were carried out in two tranches in the fourth quarter of 2000 and the first quarter of 2001. The first tranche was closed out in November 2004, with a corresponding reduction in premiums and loss reserves totaling about $250 million. The other tranche remains on AIG's books as previously recorded.

To see a column about Buffett's defense of the transactions by Real Money's Peter Eavis, click here.

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