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AIG’s problems continue

AIG is still in trouble. The latest announcement indicates the firm is still unable to unravel the complex financial transactions that are causing distress in Mr. Spitzer’s offices, and thus will be unable to report their audited results (as previously promised) on Monday.
Instead, AIG will report unaudited results and indicate where they have found potential problems. So far, those problems “only” amount to $2.7 billion in overstated reserves, a figure that is a mere fraction of the company’s total assets. I do wonder why they would run the risk of publishing unaudited results, as they may well be wrong, and perhaps significantly so. If the unaudited results are in fact significantly different from the final, audited results, this premature disclosure will cast further doubt on management’s grasp on the fundamentals. A pretty scary thought.
On another, seemingly-unrelated topic, the burgeoning issue of AIG’s apparent willful decision to mis-report WC premium as liability premium in several states has led to possible investigations in NY and California. Simply put, AIG knew they were mis-representing some portion of their WC premiums as liability as far back as 1992, yet by 1997 they had not completely resolved the issue.
This is not just a meaningless accounting error. In many states, WC insurers pay a percentage of their earned premium into a guarantee fund that sets aside reserves to cover potential losses from insurers that go bankrupt. Thus, mis-representing WC premiums as liability saved AIG a lot of money.
I find it hard to believe that a company like AIG that is so numbers-oriented, that constantly measures and monitors its’ financial results, and that is so creative and innovative in all things financial, could take five years to resolve what is really nothing more than an accounting problem. Yes, it is possible, it just strains credibility.
As noted before, AIG is a very well run company with a lot of innovative, hard-working, extremely intelligent people. There is nothing more damaging to their productivity than constantly waiting for the next bad news.

Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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